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. 12 [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 12 [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
( ) On (date) pursuant to paragraph (b) of Rule 485
( ) 75 days after filing pursuant to paragraph (a) of Rule 485
(X) on May 1, 2000 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
Prospectus
May 1, 2000
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Equity
V.A. Core Equity Fund
V.A. 500 Index Fund
V.A. Large Cap Growth Fund
V.A. Mid Cap Growth Fund
V.A. Relative Value Fund
(formerly V.A. Large Cap Value Fund)
V.A. Small Cap Growth Fund
V.A. Sovereign Investors Fund
International
V.A. International Fund
Sector
V.A. Financial Industries Fund
V.A. Regional Bank Fund
Income
V.A. Bond Fund
V.A. High Yield Bond Fund
V.A. Money Market Fund
V.A. Strategic Income Fund
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these funds or determined whether the information in
this prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
Contents
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General information about the Overview 3
Declaration funds.
A fund-by-fund summary of Equity
goals, strategies, risks, V.A. Core Equity Fund 4
performance and financial V.A. 500 Index Fund 6
highlights. V.A. Large Cap Growth Fund 8
V.A. Mid Cap Growth Fund 10
V.A. Relative Value Fund 12
V.A. Small Cap Growth Fund 14
V.A. Sovereign Investors Fund 16
International
V.A. International Fund 18
Sector
V.A. Financial Industries Fund 20
V.A. Regional Bank Fund 22
Income
V.A. Bond Fund 24
V.A. High Yield Bond Fund 26
V.A. Money Market Fund 28
V.A. Strategic Income Fund 30
Transaction policies and other Account information
information affecting your Buying and selling fund shares 32
fund investment. Valuing fund shares 32
Fund expenses 32
Dividends and taxes 32
Further information on the Fund details
Declaration funds. Business structure 33
For more information back cover
<PAGE>
Overview
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JOHN HANCOCK DECLARATION FUNDS
These funds offer investment choices for the variable annuity and variable life
insurance contracts 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 Federal Deposit Insurance Corporation 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 Financial Services, Inc. and manages more than $30 billion in assets.
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Clip Art] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clip Art] Main risks The major risk factors associated with the fund.
[Clip Art] Past performance The fund's total return, measured year-by-year and
over time.
[Clip Art] Financial highlights A table showing the fund's financial performance
for up to five years.
3
<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 normally invests at least 65% of assets
in a diversified portfolio of equities which are primarily large-capitalization
stocks. The portfolio's risk profile is similar to that of the Standard & Poor's
500 Stock 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 Standard & Poor's 500 Stock 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 use this in-house research to rank the stocks according to their
combination of:
o value, meaning they appear to be underpriced
o improving fundamentals, meaning they show potential for strong growth
This process, together with a risk/return analysis against the Standard & Poor's
500 Stock Index, results in a portfolio of approximately 100 to 130 of the
stocks from the top 60% of the menu. The fund generally sells 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 invest in dollar-denominated foreign securities and 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
Financial Services, Inc.
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
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1997 1998 1999
30.68% 28.42% 13.89%
2000 total return as of March 31: 2.34%
Best quarter: Q4 '98, 23.16% Worst quarter: Q3 '98, -13.01%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
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Fund Index
1 year 13.89% 21.03%
Life of fund - began 8/29/96 25.52% 28.79%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
4
<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 has a significant influence on fund performance.
If the investment research team's earnings estimates or projections turn out to
be inaccurate, or if the proprietary computer models do 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 losses and are generally
considered more risky than direct investments.
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 potentially inadequate
or inaccurate financial information and social or political instability.
================================================================================
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 12/99
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $11.11 $14.11 $17.74
Net investment income (loss)(2) 0.06 0.16 0.10 0.09
Net realized and unrealized gain (loss) on investments 1.12 3.23 3.90 2.36
Total from investment operations 1.18 3.39 4.00 2.45
Less distributions:
Dividends from net investment income (0.06) (0.14) (0.10) (0.09)
Distributions in excess of net investment income -- -- -- (0.00)(3)
Distributions from net realized gain on investments sold (0.01) (0.25) (0.27) (0.40)
Total distributions (0.07) (0.39) (0.37) (0.49)
Net asset value, end of period $11.11 $14.11 $17.74 $19.70
Total investment return at net asset value(4) (%) 11.78(5) 30.68 28.42 13.89
Total adjusted investment return at net asset value(4,6) (%) 10.66(5) 30.04 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,149 8,719 26,691 44,991
Ratio of expenses to average net assets (%) 0.95(7) 0.95 0.95 0.83
Ratio of adjusted expenses to average net assets(8) (%) 4.23(7) 1.59 -- --
Ratio of net investment income (loss) to average net assets (%) 1.60(7) 1.24 0.65 0.47
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (1.68)(7) 0.60 -- --
Portfolio turnover rate (%) 24 53 55 77
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) 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.
5
<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 business 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.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
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1997 1998 1999
29.51% 28.44% 20.81%
2000 total return as of March 31: 2.26%
Best quarter: Q4 '98, 21.39% Worst quarter: Q3 '98, -10.01%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 20.81% 21.03%
Life of fund - began 8/29/96 27.32% 28.79%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
6
<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 losses and are generally
considered more risky than direct investments.
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.
Other factors may affect performance, such as the liquidity of S&P 500 stocks
and the timing of the fund's cash flows. You could lose money by investing in
the fund.
Note: "Standard & Poor's(R)" and "S&P 500(R)" are trademarks of The McGraw-Hill
Companies, Inc. and have been licensed for use by the adviser. Standard & Poor's
does not sell or promote the fund or advise whether you should invest in the
fund. 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>
- -----------------------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98 12/99
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.44 $12.62 $15.23
Net investment income (loss)(2) 0.17 0.30 0.20 0.17
Net realized and unrealized gain (loss) on investments and
financial futures contracts 0.98 2.72 3.37 2.98
Total from investment operations 1.15 3.02 3.57 3.15
Less distributions:
Dividends from net investment income (0.16) (0.30) (0.20) (0.17)
Distributions from net realized gain on investments sold and
financial futures contracts (0.55) (0.54) (0.76) (0.11)
Distributions in excess of net realized gain on investments
sold and financial futures contracts -- -- -- (0.01)
Total distributions (0.71) (0.84) (0.96) (0.29)
Net asset value, end of period $10.44 $12.62 $15.23 $18.09
Total investment return at net asset value(3) (%) 11.49(4) 29.51 28.44 20.81
Total adjusted investment return at net asset value(3,5) (%) 11.25(4) 29.04 27.87 20.41
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,049 20,008 26,457 37,953
Ratio of expenses to average net assets (%) 0.60(6) 0.36 0.35 0.35
Ratio of adjusted expenses to average net assets(7) (%) 1.31(6) 0.83 0.92 0.75
Ratio of net investment income (loss) to average net assets (%) 4.57(6) 2.45 1.44 1.06
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 3.86(6) 1.98 0.87 0.66
Portfolio turnover rate (%) -- 9 47 5
Fee reduction per share(2) ($) 0.03 0.06 0.07 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) 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.
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 at least 65% of assets in stocks of
large-capitalization companies (companies in the capitalization range of the
Standard & Poor's 500 Stock Index, which was $316 million to $553.02 billion as
of March 31, 2000).
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 fund generally invests in 30 to 60 U.S. companies 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.
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 an above-average growth rate.
The fund may invest in preferred stocks and other types of equities, and may
invest up to 15% of assets in foreign securities. 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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
PORTFOLIO MANAGERS
Team responsible for day-to-day
investment management
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 1999
14.27% 24.60% 20.71%
2000 total return as of March 31: 1.20%
Best quarter: Q3 '97, 22.53% Worst quarter: Q1 '97, -15.55%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 20.71% 21.03%
Life of fund - began 8/29/96 15.41% 28.79%
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 in response to stock
market movements.
The fund's management strategy has a significant influence on fund performance.
Large-capitalization stocks as a group could fall out of favor with the market,
causing the fund to underperform investments that focus on small- or medium-
capitalization stocks. Similarly, growth stocks could underperform value stocks.
To the extent the fund invests in a given industry, its performance will be hurt
if that industry performs poorly. In addition, if the managers' security
selection strategies do not perform as expected, the fund could underperform its
peers or lose money.
To the extent that the fund makes investments with additional risks, these risks
could increase volatility or reduce performance:
o Certain derivatives could produce disproportionate losses and are generally
considered more risky than direct investments.
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 potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
================================================================================
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 12/99
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $9.39 $10.73 $13.37
Net investment income (loss)(2) (0.01) (0.04) (0.00)(3) (0.04)
Net realized and unrealized gain (loss) on investments (0.60) 1.38 2.64 2.80
Total from investment operations (0.61) 1.34 2.64 2.76
Less distributions:
Distributions from net realized gain on investments sold -- -- -- (0.36)
Net asset value, end of period $9.39 $10.73 $13.37 $15.77
Total investment return at net asset value(4) (%) (6.10)(5) 14.27 24.60 20.71
Total adjusted investment return at net asset value(4,6) (%) (7.39)(5) 12.90 24.27 20.69
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 994 3,733 10,372 21,872
Ratio of expenses to average net assets (%) 1.00(7) 1.00 1.00 1.00
Ratio of adjusted expenses to average net assets(8) (%) 4.76(7) 2.37 1.33 1.02
Ratio of net investment income (loss) to average net assets (%) (0.23)(7) (0.39) (0.00) (0.25)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (3.99)(7) (1.76) (0.33) (0.27)
Portfolio turnover rate (%) 68 136 176 172
Fee reduction per share(2) ($) 0.13 0.13 0.04 0.00(3)
</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 80% of assets in stocks of
medium-capitalization companies (companies in the capitalization range of the
Russell Midcap Growth Index, which was $171 million to $66.54 billion as of
March 31, 2000).
The manager conducts fundamental financial analysis to identify companies with
above-average earnings growth.
In choosing individual securities, the manager looks for companies with growth
stemming from a combination of gains in market share and increasing operating
efficiency. Before investing, the manager identifies 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 manager considers broad economic trends, demographic factors, technological
changes, consolidation trends and legislative initiatives.
The fund generally invests in more than 100 companies. The fund may not invest
more than 5% of assets in any one security.
The fund may invest up to 10% of assets in foreign securities. The fund may also
make limited use of certain derivatives (investments whose value is based on
indices or currencies).
In abnormal conditions, the fund may temporarily invest in U.S. government
securities with maturities of up to three years and more than 10% of assets in
cash or cash equivalents. 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 MANAGER
Barbara C. Friedman, CFA
- -------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began business career in 1973
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
- --------------------------------------------------------------------------------
1998 1999
10.35% 56.18%
2000 total return as of March 31: 13.02%
Best quarter: Q4 '99, 41.78% Worst quarter: Q3 '98, -19.74%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index 1 Index 2
1 year 56.18% 21.03% 51.29%
Life of fund - began 1/7/98 31.63% 25.23% 20.08%
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] The value of your investment will go up and down in response to stock
market movements.
The fund's management strategy has a significant influence on fund performance.
Medium-capitalization stocks tend to be more volatile than stocks of larger
companies, and as a group could fall out of favor with the market, causing the
fund to underperform investments that focus either on small- or
large-capitalization stocks. Similarly, growth stocks could underperform value
stocks. To the extent the fund invests in a given industry, its performance will
be hurt if that industry performs poorly. In addition, if the managers' security
selection strategies do not perform as expected, the fund could underperform its
peers or lose money.
To the extent that the fund makes investments with additional risks, these risks
could increase volatility or reduce performance:
o Certain derivatives could produce disproportionate losses and are generally
considered more risky than direct investments.
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 potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
================================================================================
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: 12/98(1) 12/99
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $11.03
Net investment income (loss)(2) 0.01 (0.03)
Net realized and unrealized gain (loss) on investments 1.03 6.23
Total from investment operations 1.04 6.20
Less distributions:
Dividends from net investment income (0.01) --
Distributions from net realized gain on investments sold -- (0.02)
Tax return of capital (0.00)(3) --
Total distributions (0.01) (0.02)
Net asset value, end of period $11.03 $17.21
Total investment return at net asset value(4) (%) 10.35(6) 56.18
Total adjusted investment return at net asset value(4,5) (%) 7.17(6) 54.82
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,779 6,363
Ratio of expenses to average net assets (%) 1.00(7) 1.00
Ratio of adjusted expenses to average net assets(8) (%) 4.23(7) 2.36
Ratio of net investment income (loss) to average net assets (%) 0.06(7) (0.23)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (3.17)(7) (1.59)
Portfolio turnover rate (%) 103 136
Fee reduction per share(2) ($) 0.33 0.17
</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. Relative 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 manager looks 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. Quinlisk, CFA
- -----------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began business career in 1985
R. Scott Mayo, CFA
- -----------------------------------
Joined team in 2000
Joined adviser in 1998
Began business career in 1993
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
- --------------------------------------------------------------------------------
1998 1999
56.65% 21.39%
2000 total return as of March 31: 7.29%
Best quarter: Q4 '99, 43.25% Worst quarter: Q3 '98, -16.61%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 56.65% 21.03%
Life of fund - began 1/6/98 38.26% 24.54%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
12
<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 has a significant
influence on fund performance. Large-capitalization stocks as a group could fall
out of favor with the market, causing the fund to underperform investments that
focus on small- or medium-capitalization stocks. Similarly, value stocks could
underperform growth stocks. In addition, if the managers' securities selection
strategies do 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 losses and are generally
considered more risky than direct investments.
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 potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
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.
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 each year.
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Period ended: 12/98(1) 12/99
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $12.03
Net investment income (loss)(2) 0.11 0.10
Net realized and unrealized gain (loss) on investments, financial
futures contracts and foreign currency transactions 2.02 6.65
Total from investment operations 2.13 6.75
Less distributions:
Dividends from net investment income (0.10) (0.10)
Distributions from net realized gain on investments sold, financial
futures contracts and foreign currency transactions -- (0.65)
Total distributions (0.10) (0.75)
Net asset value, end of period $12.03 $18.03
Total investment return at net asset value(3) (%) 21.39(4) 56.65
Total adjusted investment return at net asset value(3,5) (%) 21.21(4) --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 17,368 38,766
Ratio of expenses to average net assets (%) 0.85(6) 0.77
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) 0.66
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 0.99(6) --
Portfolio turnover rate (%) 242 166
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.
13
<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
small-capitalization companies (companies in the capitalization range of the
Russell 2000 Growth Index, which was $23 million to $10.45 billion as of March
31, 2000).
The managers look for companies in the emerging growth phase of development that
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.
To manage risk, the fund typically invests in 150 to 220 companies across many
industries, and does not invest more than 5% of assets in any one security.
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 in preferred stocks and other types of equities, and may
invest up to 10% of assets in foreign securities. The fund may also make limited
use of certain derivatives (investments whose value is based on indices or
currencies).
In abnormal conditions, the fund may temporarily invest in U.S. government
securities with maturities of up to three years and more than 10% of assets in
cash and cash equivalents. 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 business career in 1986
Laura J. Allen, CFA
- ----------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began business career in 1981
Anurag Pandit, CFA
- ----------------------------------
Vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began business 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 1999
11.06% 15.94% 68.52%
2000 total return as of March 31: 12.96%
Best quarter: Q4 '99, 44.55% Worst quarter: Q3 '98, -21.42%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index 1 Index 2
1 year 68.52% 21.26% 43.09%
Life of fund - began 8/29/96 23.55% 14.51% 17.53%
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.
14
<PAGE>
MAIN RISKS
[Clip Art] The value of your investment will go up and down in response to stock
market movements.
The fund's management strategy has a significant influence on fund performance.
Small-capitalization stocks as a group could fall out of favor with the market,
causing the fund to underperform investments that focus on medium- or
large-capitalization stocks. Similarly, growth stocks could underperform value
stocks. To the extent the fund invests in a given industry, its performance will
be hurt if that industry performs poorly. In addition, if the managers' security
selection strategies do not perform as expected, the fund could underperform its
peers or lose money.
Stocks of smaller companies are more volatile than stocks of larger companies.
Many smaller companies have short track records, narrow product lines or niche
markets, making them highly vulnerable to isolated business setbacks.
To the extent that the fund makes investments with additional risks, these risks
could increase volatility or reduce performance:
o Certain derivatives could produce disproportionate losses and are generally
considered more risky than direct investments.
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price; this risk could also affect
small-capitalization stocks, especially those with low trading volumes.
o Foreign investments carry additional risks, including potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
================================================================================
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 12/99
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $9.32 $10.35 $12.00
Net investment income (loss)(2) 0.02 (0.02) (0.06) (0.10)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions (0.68) 1.05 1.71 8.29
Total from investment operations (0.66) 1.03 1.65 8.19
Less distributions:
Dividends from net investment income (0.02) (0.00)(3) -- --
Distributions from net realized gain on investments sold -- -- -- (0.43)
Total distributions (0.02) (0.00)(3) -- (0.43)
Net asset value, end of period $9.32 $10.35 $12.00 $19.76
Total investment return at net asset value(4) (%) (6.62)(5) 11.06 15.94 68.52
Total adjusted investment return at net asset value(4,6) (%) (8.05)(5) 9.34 15.31 68.14
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 975 3,841 8,232 20,867
Ratio of expenses to average net assets (%) 1.00(7) 1.00 1.00 1.00
Ratio of adjusted expenses to average net assets(8) (%) 5.19(7) 2.72 1.63 1.38
Ratio of net investment income (loss) to average net assets (%) 0.62(7) (0.16) (0.59) (0.76)
Ratio of adjusted net investment income (loss) to average
net assets(8) (%) (3.57)(7) (1.88) (1.22) (1.14)
Portfolio turnover rate (%) 31 79 93 120
Fee reduction per share(2) ($) 0.14 0.17 0.07 0.05
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) 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.
15
<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 at
least 80% of its stock investments in a diversified portfolio of companies with
market capitalizations within the range of the Standard & Poor's 500 Stock
Index. On March 31, 2000, that range was $316 million to $553.02 billion.
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 industry-wide
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 market capitalizations.
The fund may not invest more than 5% of assets in any one security. 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).
Under normal conditions, the fund may not invest more than 10% of assets in cash
or cash equivalents.
In abnormal market conditions, the fund may temporarily invest extensively in
investment-grade short-term securities. In these and other cases, the fund might
not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
John F. Snyder III
- --------------------------------------
Executive vice president of adviser
Joined team in 1996
Joined adviser in 1991
Began business career in 1971
Barry H. Evans, CFA
- --------------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1986
Began business career in 1986
Peter M. Schofield, CFA
- --------------------------------------
Vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began business 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 1999
28.43% 16.88% 3.84%
2000 total return as of March 31: -5.06%
Best quarter: Q4 '98, 15.75% Worst quarter: Q3 '99, -7.43%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 3.84% 21.03%
Life of fund - began 8/29/96 16.97% 28.79%
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-
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. In addition, if the managers' securities selection
strategies do 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 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 losses and are generally
considered more risky than direct investments.
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 instability.
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 each year.
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98 12/99
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.74 $13.59 $15.61
Net investment income (loss)(2) 0.07 0.22 0.27 0.24
Net realized and unrealized gain (loss) on investments 0.76 2.82 2.00 0.35
Total from investment operations 0.83 3.04 2.27 0.59
Less distributions:
Dividends from net investment income (0.07) (0.18) (0.25) (0.24)
Distributions in excess of net investment income -- -- -- (0.00)(3)
Distributions from net realized gain on investments sold (0.02) (0.01) -- --
Tax return of capital -- -- -- (0.00)(3)
Total distributions (0.09) (0.19) (0.25) (0.24)
Net asset value, end of period $10.74 $13.59 $15.61 $15.96
Total investment return at net asset value(4) (%) 8.30(5) 28.43 16.88 3.84
Total adjusted investment return at net asset value(4,6) (%) 7.30(5) 28.12 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,111 12,187 34,170 50,254
Ratio of expenses to average net assets (%) 0.85(7) 0.85 0.74 0.70
Ratio of adjusted expenses to average net assets(8) (%) 3.78(7) 1.16 -- --
Ratio of net investment income (loss) to average net assets (%) 1.90(7) 1.81 1.88 1.57
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (1.03)(7) 1.50 -- --
Portfolio turnover rate (%) 17 11 19 26
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) 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.
17
<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 80% of assets in stocks of foreign companies. The
fund may invest up to 30% of assets in emerging markets as classified by Morgan
Stanley Capital International (MSCI). The fund does not maintain a fixed
allocation of assets, either with respect to securities type or geography.
In managing the portfolio, the managers focus 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 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 gathers research
from Indocam strategists and analysts in Europe and Asia and generally conducts
on-site visits. To manage risk, the fund does not invest more than 5% of assets
in any one security.
The fund may use certain derivatives (investments whose value is based on
indices, securities or currencies).
In abnormal conditions, the fund may temporarily invest in U.S.
government securities with maturities of up to three years and more than 10% of
assets in cash or cash equivalents. 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
Indocam International
Investment Services
- -----------------------------------
Paris-based team responsible for
day-to-day investment management
Founded in 1979
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 1999
-0.54% 16.75% 31.55%
2000 total return as of March 31: 1.29%
Best quarter: Q4 '99, 25.38% Worst quarter: Q3 '98, -17.11%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 31.55% 30.91%
Life of fund - began 8/29/96 17.68% 14.97%
Index: MSCI All Country World-Ex U.S. Free Index, an unmanaged index of freely
traded stocks of foreign companies.
18
<PAGE>
MAIN RISKS
[Clip Art] 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 instability
and political actions ranging from tax code changes to governmental collapse.
These risks are more significant in emerging markets.
The fund's management strategy has a significant influence on fund performance.
If the fund invests in countries or regions that experience economic downturns,
performance could suffer. In addition, if certain investments or industries do
not perform as expected, or if the managers' security selection strategies do
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 In a down market, emerging market securities, other higher-risk securities
and derivatives could become harder to value or to sell at a fair price.
o Certain derivatives could produce disproportionate losses and are generally
considered more risky than direct investments.
================================================================================
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 12/99
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $11.23 $10.50 $12.18
Net investment income (loss)(2) 0.07 0.05 0.07 0.07
Net realized and unrealized gain (loss) on investments and
foreign currency transactions 1.20 (0.13) 1.69 3.75
Total from investment operations 1.27 (0.08) 1.76 3.82
Less distributions:
Dividends from net investment income (0.04) (0.01) (0.07) (0.08)
Dividends in excess of net investment income -- -- (0.01) (0.02)
Distributions from net realized gain on investments sold and
foreign currency transactions -- (0.64) -- (0.45)
Total distributions (0.04) (0.65) (0.08) (0.55)
Net asset value, end of period $11.23 $10.50 $12.18 $15.45
Total investment return at net asset value(3) (%) 12.75(4) (0.54) 16.75 31.55
Total adjusted investment return at net asset value(3,5) (%) 12.07(4) (1.43) 14.77 30.19
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,267 3,792 7,201 9,375
Ratio of expenses to average net assets (%) 1.15(6) 1.15 1.15 1.15
Ratio of adjusted expenses to average net assets(7) (%) 3.13(6) 2.04 3.13 2.51
Ratio of net investment income (loss) to average net assets (%) 2.03(6) 0.43 0.59 0.52
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 0.05(6) (0.46) (1.39) (0.84)
Portfolio turnover rate (%) 14 273 89 116
Fee reduction per share(2) ($) 0.07 0.10 0.22 0.17
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation 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. 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 stocks of U.S. and foreign financial
services companies of any size. These companies include banks, thrifts, finance
companies, brokerage and advisory firms, real estate-related firms, insurance
companies and financial holding companies. At least 25% of assets will be in the
banking industry.
In managing the portfolio, the managers focus primarily on stock selection
rather than industry allocation.
In choosing individual stocks, the managers use fundamental financial analysis
to identify securities that appear comparatively undervalued. Given the
industry-wide trend toward consolidation, the managers also invest in 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 business career in 1979
Thomas M. Finucane
- ---------------------------------------
Vice president of adviser
Joined team in 1997
Joined adviser in 1990
Began business career in 1990
Thomas C. Goggins
- ---------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began business career in 1981
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
- --------------------------------------------------------------------------------
1998 1999
8.55% 1.23%
2000 total return as of March 31: 5.05%
Best quarter: Q4 '98, 16.08% Worst quarter: Q3 '98, -16.76%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 1.23% 21.03%
Life of fund - began 4/30/97 15.95% 27.76%
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. The fund's management strategy has a significant influence on
fund performance. Because the fund focuses on a single sector of the economy,
its performance depends in large part on the performance of that sector. As a
result, the value of your investment may fluctuate more widely than it would in
a fund that is diversified across sectors. For instance, when interest rates
fall or economic conditions deteriorate, the stocks of banks and financial
services companies could suffer losses. Also, rising interest rates can reduce
profits by narrowing the difference between these companies' borrowing and
lending rates.
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. In addition, 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 losses and are generally
considered more risky than direct investments.
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 potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
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. This risk is
greater for longer maturity bonds. Junk bond prices can fall on bad news
about the economy, an industry or a company.
================================================================================
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 12/99
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $13.44 $14.45
Net investment income (loss)(2) 0.11 0.18 0.11
Net realized and unrealized gain (loss) on investments and
foreign currency transactions 3.39 0.97 0.06
Total from investment operations 3.50 1.15 0.17
Less distributions:
Dividends from net investment income (0.05) (0.14) (0.10)
Distributions from net realized gain on investments sold and
foreign currency transactions (0.01) (0.00)(3) (0.05)
Tax return of capital -- -- (0.01)
Total distributions (0.06) (0.14) (0.16)
Net asset value, end of period $13.44 $14.45 $14.46
Total investment return at net asset value(4) (%) 35.05(5) 8.55 1.23
Total adjusted investment return at net asset value(4,6) (%) 34.71(5) -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 18,465 54,569 49,312
Ratio of expenses to average net assets (%) 1.05(7) 0.92 0.90
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 0.77
Ratio of adjusted net investment income (loss) to average net assets(8) (%) 0.98(7) -- --
Portfolio turnover rate (%) 11 38 72
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.
21
<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 stocks of regional banks and
lending companies, including commercial and industrial banks, savings and loan
associations and bank holding companies. Typically, these companies provide
full-service banking, have primarily domestic assets and are based outside of
money centers such as New York City and Chicago.
In managing the portfolio, the managers focus 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 industry-wide trend toward consolidation, the managers also
invest in companies that appear to be positioned for a merger. The fund's
portfolio may be concentrated in geographic regions where consolidation activity
is high. The managers generally gather firsthand information about companies
from interviews and company visits.
The fund may also invest in other U.S. and foreign financial services companies,
such as lending companies and money center banks. The fund may invest up to 5%
of net assets in stocks of companies outside the financial services sector and
up to 5% of net assets in junk bonds (those rated below BBB/Baa and their
unrated equivalents).
The fund may make limited use of certain derivatives (investments whose value is
based on indices, securities or currencies).
In abnormal market conditions, the fund may temporarily invest up to 80% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
James K. Schmidt, CFA
- ----------------------------------------
Executive vice president of adviser
Joined team in 1998
Joined adviser in 1985
Began business career in 1979
Thomas M. Finucane
- ----------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1990
Began business career in 1990
Thomas C. Goggins
- ----------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began business 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
- --------------------------------------------------------------------------------
1999
-4.86%
2000 total return as of March 31: -9.64%
Best quarter: Q4 '98, 16.10% Worst quarter: Q3 '98, -15.94%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year -4.86% 21.03%
Life of fund - began 5/1/98 -6.74% 19.84%
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
market movements. The fund's management strategy has a significant influence on
fund performance. Because the fund focuses on a single sector of the economy,
its performance depends in large part on the performance of that sector.
For instance, when interest rates fall or economic conditions deteriorate,
regional bank stocks could suffer losses. Also, rising interest rates can reduce
profits by narrowing the difference between these companies' borrowing and
lending rates.
A decline in a region's economy could hurt the banks in that region. 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. In addition, if the
managers' security selection strategies do 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 losses and are generally
considered more risky than direct investments.
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 potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
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. This risk is
greater for longer maturity bonds. Junk bond prices can fall on bad news
about the economy, an industry or a company.
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) 12/99
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $9.28
Net investment income (loss)(2) 0.09 0.12
Net realized and unrealized gain (loss) on investments (0.74) (0.57)
Total from investment operations (0.65) (0.45)
Less distributions:
Dividends from net investment income (0.07) (0.12)
Distributions from net realized gain on investments sold (0.00)(3) (0.15)
Total distributions (0.07) (0.27)
Net asset value, end of period $9.28 $8.56
Total investment return at net asset value(4) (%) (6.43)(6) (4.86)
Total adjusted investment return at net asset value(4,5) (%) (6.49)(6) --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 20,256 20,295
Ratio of expenses to average net assets (%) 1.05(7) 1.00
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) 1.30
Ratio of adjusted net investment income (loss) to average net assets(8) (%) 1.30(7) --
Portfolio turnover rate (%) 28 49
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.
23
<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
at least 65% of assets 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.
Under normal conditions, the fund may not invest more than 10% of assets in cash
or cash equivalents.
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
James K. Ho, CFA
- --------------------------------------
Executive vice president of adviser
Joined team in 1996
Joined adviser in 1985
Began business career in 1977
Anthony A. Goodchild
- --------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1994
Began business career in 1968
Benjamin Matthews
- --------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began business career in 1970
Triet M. Nguyen
- --------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began business 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.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998 1999
9.30% 9.41% -0.51%
2000 total return as of March 31: 2.60%
Best quarter: Q3 '98, 4.76% Worst quarter: Q1 '97, -0.96%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year -0.51% -5.78%
Life of fund - began 8/29/96 6.72% 6.67%
Index: Lehman Brothers Corporate Bond Index, an unmanaged index of corporate
bonds and Yankee bonds.
24
<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 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 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 Foreign investments carry additional risks, including potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
o Certain derivatives could produce disproportionate losses and are generally
considered more risky than direct investments.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to fund shares.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[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 12/99
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.19 $10.36 $10.51
Net investment income (loss)(2) 0.23 0.68 0.63 0.64
Net realized and unrealized gain (loss) on investments 0.21 0.24 0.32 (0.70)
Total from investment operations 0.44 0.92 0.95 (0.06)
Less distributions:
Dividends from net investment income (0.23) (0.68) (0.63) (0.64)
Distributions from net realized gain on investments sold (0.02) (0.07) (0.17) --
Total distributions (0.25) (0.75) (0.80) (0.64)
Net asset value, end of period $10.19 $10.36 $10.51 $9.81
Total investment return at net asset value(3) (%) 4.42(4) 9.30 9.41 (0.51)
Total adjusted investment return at net asset value(3,5) (%) 3.25(4) 7.52 8.82 (0.77)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,056 3,682 10,669 12,531
Ratio of expenses to average net assets (%) 0.75(6) 0.75 0.75 0.75
Ratio of adjusted expenses to average net assets(7) (%) 4.15(6) 2.53 1.34 1.01
Ratio of net investment income (loss) to average net assets (%) 6.69(6) 6.57 5.93 6.39
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 3.29(6) 4.79 5.34 6.13
Portfolio turnover rate (%) 45 193 367 3.07
Fee reduction per share(2) ($) 0.12 0.18 0.06 0.03
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation 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. 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.
================================================================================
PORTFOLIO MANAGERS
Arthur N. Calavritinos, CFA
- ----------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1988
Began business career in 1986
Frederick L. Cavanaugh, Jr.
- ----------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1986
Began business career in 1975
Janet L. Clay, CFA
- ----------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began business career in 1990
Daniel S. Janis
- ----------------------------------
Second vice president of adviser
Joined team in 1999
Joined adviser in 1999
Began business 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
- --------------------------------------------------------------------------------
1998 1999
-9.80% 13.12%
2000 total return as of March 31: 1.15%
Best quarter: Q2 '99, 4.51% Worst quarter: Q3 '98, -14.84%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 13.12% 2.39%
Life of fund - began 1/6/98 1.02% 2.13%
Index: Lehman Brothers High Yield Bond Index, an unmanaged index of high yield
bonds.
26
<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 instability.
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 losses and are generally
considered more risky than direct investments.
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) 12/99
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $8.22
Net investment income (loss)(2) 0.90 0.88
Net realized and unrealized gain (loss) on investments and
foreign currency transactions (1.82) 0.16
Total from investment operations (0.92) 1.04
Less distributions:
Dividends from net investment income (0.84) (0.88)
Distributions from net realized gain on investments sold and
foreign currency transactions -- (0.07)
Tax return of capital (0.02) --
Total distributions (0.86) (0.95)
Net asset value, end of period $8.22 $8.31
Total investment return at net asset value(3) (%) (9.80)(4) 13.12
Total adjusted investment return at net asset value(3,5) (%) (10.10)(4) 12.94
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 8,120 9,287
Ratio of expenses to average net assets (%) 0.85(6) 0.85
Ratio of adjusted expenses to average net assets(7) (%) 1.15(6) 1.03
Ratio of net investment income (loss) to average net assets (%) 9.85(6) 10.56
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 9.55(6) 10.38
Portfolio turnover rate (%) 102 122
Fee reduction per share(2) ($) 0.03 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.
27
<PAGE>
V.A. Money Market Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks the maximum current income that is consistent with
maintaining liquidity and preserving capital. The fund intends to maintain a
stable $1 share price.
The fund invests only in dollar-denominated securities rated within the two
highest short-term credit categories and their unrated equivalents. These
securities 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, and
does not invest in securities with remaining maturities of more than 13 months.
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 1999
4.88% 4.87% 4.58%
2000 total return as of March 31: 1.30%
Best quarter: Q1 '98, 1.25% Worst quarter: Q1 '99, 1.06%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund
1 year 4.58%
Life of fund - began 8/29/96 4.72%
28
<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 instability.
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 12/99
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00
Net investment income (loss)(2) 0.02 0.05 0.05 0.05
Less distributions:
Dividends from net investment income (0.02) (0.05) (0.05) (0.05)
Net asset value, end of period $1.00 $1.00 $1.00 $1.00
Total investment return at net asset value(3) (%) 1.61(4) 4.88 4.87 4.58
Total adjusted investment return at net asset value(3,5) (%) (7.55)(4) 4.36 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 207 8,377 16,519 32,952
Ratio of expenses to average net assets (%) 0.75(6) 0.75 0.74 0.66
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 4.55
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.
29
<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 categories 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
In managing the portfolio, the managers allocate assets among the three major
categories based on analysis of economic factors such as projected international
interest rate movements, industry cycles and political trends. However, the
managers may invest up to 100% of assets in any one category.
Within each category, 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.
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.
The fund may also invest in preferred stock and other types of debt securities.
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 business career in 1975
Arthur N. Calavritinos, CFA
- ---------------------------------
Vice president of adviser
Joined team in 1996
Joined adviser in 1988
Began business career in 1986
Janet L. Clay, CFA
- ---------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began business career in 1990
Daniel S. Janis
- ---------------------------------
Second vice president of adviser
Joined team in 1999
Joined adviser in 1999
Began business 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 1999
11.77% 4.92% 4.82%
2000 total return as of March 31: 0.59%
Best quarter: Q2 '97, 6.28% Worst quarter: Q3 '98, -2.79%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 4.82% -2.15%
Life of fund - began 8/29/96 8.39% 6.49%
Index: Lehman Brothers Government/Corporate Bond Index, an unmanaged index of
U.S. government, U.S. corporate and Yankee bonds.
30
<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 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 instability. 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 losses and are generally
considered more risky than direct investments.
================================================================================
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 12/99
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.30 $10.47 $10.10
Net investment income (loss)(2) 0.27 0.91 0.85 0.80
Net realized and unrealized gain (loss) on investments and
foreign currency transactions 0.36 0.26 (0.35) (0.33)
Total from investment operations 0.63 1.17 0.50 0.47
Less distributions:
Dividends from net investment income (0.27) (0.91) (0.85) (0.80)
Distributions from net realized gain on investments sold,
financial futures contracts and foreign currency transactions (0.06) (0.09) (0.02) --
Total distributions (0.33) (1.00) (0.87) (0.80)
Net asset value, end of period $10.30 $10.47 $10.10 $9.77
Total investment return at net asset value(3) (%) 6.45(4) 11.77 4.92 4.82
Total adjusted investment return at net asset value(3,5) (%) 5.96(4) 11.25 4.84 4.80
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,131 5,540 15,019 22,282
Ratio of expenses to average net assets (%) 0.85(6) 0.85 0.85 0.85
Ratio of adjusted expenses to average net assets(7) (%) 2.28(6) 1.37 0.93 0.87
Ratio of net investment income (loss) to average net assets (%) 7.89(6) 8.77 8.19 8.06
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 6.46(6) 8.25 8.11 8.04
Portfolio turnover rate (%) 73 110 92 53(8)
Fee reduction per share(2) ($) 0.05 0.05 0.01 0.00(9)
</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) Porfolio turnover rate excludes merger activity.
(9) Less than $0.01 per share.
31
<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
funds 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 funds' board of trustees. If
a 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:
- ----------------------------------------------------------
Equity Funds % of net assets
- ----------------------------------------------------------
V.A. Core Equity Fund 0.70%
V.A. 500 Index Fund 0.10%
V.A. Large Cap Growth Fund 0.75%
V.A. Mid Cap Growth Fund 0.75%
V.A. Relative Value Fund 0.60%
V.A. Small Cap Growth Fund 0.75%
V.A. Sovereign Investors Fund 0.60%
- ----------------------------------------------------------
International Funds
- ----------------------------------------------------------
V.A. International Fund 0.90%
- ----------------------------------------------------------
Sector Funds
- ----------------------------------------------------------
V.A. Financial Industries Fund 0.80%
V.A. Regional Bank Fund 0.80%
- ----------------------------------------------------------
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 management fees, at least until April 30,
2001. 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.
32 ACCOUNT INFORMATION
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
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.
------------------
Variable
contract holders
------------------
-------------------
Insurance company
separate accounts
-------------------
-------------
Declaration
funds
-------------
------------------------------------------
Subadvisers
Independence Investment Associates, Inc.
53 State Street
Boston, MA 02109
Indocam International
Investment Services
90 Boulevard Pasteur
Paris, France 75015
Provide portfolio management
to certain funds.
------------------------------------------
---------------------------------
Invesment 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 & 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 33
<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, as well as the
auditors' report (in 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 Annuity Servicing Office
529 Main St. (X-4)
Charlestown, MA02129
By phone: 1-800-824-0335
On the Internet: www.jhfunds.com
Or you may view or obtain these documents from the SEC:
In person: at the SEC's Public
Reference Room in Washington, DC.
For access to the Reference Room call
1-202-942-8090
By mail: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-0102
(duplicating fee required)
By electronic request:
[email protected]
(duplicating fee required)
On the Internet: www.sec.gov
SEC file number 811-07437
[LOGO] JOHN HANCOCK FUNDS John Hancock Funds, Inc.
A Global Investment Management Firm 101 Huntington Avenue
Boston MA 02199-7603
(C)2000 John Hancock Funds, Inc.
VA00P 5/00
<PAGE>
John Hancock
Declaration Funds
Prospectus
May 1, 2000
- --------------------------------------------------------------------------------
V.A. Bond Fund
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved this fund or determined whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
Contents
- --------------------------------------------------------------------------------
A summary of the fund's goals, V.A. Bond Fund 4
strategies, risks, performance
and financial highlights.
Transaction policies and Account information
other information affecting
your fund investment. Buying and selling fund shares 6
Valuing fund shares 6
Fund expenses 6
Dividends and taxes 6
Further information on the Fund details
fund.
Business structure 7
For more information back cover
3
<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
at least 65% of assets 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.
Under normal conditions, the fund may not invest more than 10% of assets in cash
or cash equivalents.
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
Portfolio Managers
James K. Ho, CFA
- --------------------------------------------------------------------------------
Executive vice president of adviser
Joined team in 1996
Joined adviser in 1985
Began business career in 1977
Anthony A. Goodchild
- --------------------------------------------------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1994
Began business career in 1968
Benjamin Matthews
- --------------------------------------------------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began business career in 1970
Triet M. Nguyen
- --------------------------------------------------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began business 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.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998 1999
9.30% 9.41% -0.51%
2000 total return as of March 31: 2.60%
Best quarter: Q3 '98, 4.76% Worst quarter: Q1 '97, -0.96%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year -0.51% -5.78%
Life of fund - began 8/29/96 6.72% 6.67%
Index: Lehman Brothers Corporate Bond Index, an unmanaged index of corporate
bonds and Yankee bonds.
4
<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 do not perform as the fund expects, it could
under-perform 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 Foreign investments carry additional risks, including potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
o Certain derivatives could produce disproportionate losses and are
generally considered more risky than direct investments.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to fund shares.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
Investments in the fund are not bank deposits and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency. You
could lose money by investing in this 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 12/99
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.19 $10.36 $10.51
Net investment income (loss)(2) 0.23 0.68 0.63 0.64
Net realized and unrealized gain (loss) on investments 0.21 0.24 0.32 (0.70)
Total from investment operations 0.44 0.92 0.95 (0.06)
Less distributions:
Dividends from net investment income (0.23) (0.68) (0.63) (0.64)
Distributions from net realized gain on investments sold (0.02) (0.07) (0.17) --
Total distributions (0.25) (0.75) (0.80) (0.64)
Net asset value, end of period $10.19 $10.36 $10.51 $ 9.81
Total investment return at net asset value(3)(%) 4.42(4) 9.30 9.41 (0.51)
Total adjusted investment return at net asset value(3,5)(%) 3.25(4) 7.52 8.82 (0.77)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,056 3,682 10,669 12,531
Ratio of expenses to average net assets (%) 0.75(6) 0.75 0.75 0.75
Ratio of adjusted expenses to average net assets(7)(%) 4.15(6) 2.53 1.34 1.01
Ratio of net investment income (loss) to average net assets (%) 6.69(6) 6.57 5.93 6.39
Ratio of adjusted net investment income (loss) to average net assets(7)(%) 3.29(6) 4.79 5.34 6.13
Portfolio turnover rate (%) 45 193 367 3.07
Fee reduction per share(2)($) 0.12 0.18 0.06 0.03
</TABLE>
- ----------
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
5
<PAGE>
Account information
- --------------------------------------------------------------------------------
BUYING AND SELLING FUND SHARES
When you invest in the 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, the fund may refuse a purchase order, especially when the adviser
believes the order might be large enough to disrupt the fund's management. The
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 the 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.
Securities in the 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 For the period ended December 31, 1999, the fund paid the
investment adviser management fees at an annual rate of 0.50% of average net
assets.
Expense limitation 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 agreed to limit temporarily the fund's expenses to 0.25% of
average net assets, excluding management fees, at least until April 30, 2001. If
annual expenses fall below this limitation at the end of the 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.
6 ACCOUNT INFORMATION
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
The diagram below shows the basic business structure used by the fund. The
fund's board of trustees oversees the fund's business activities and retains the
services of the various firms that carry out the fund's operations.
The trustees of the fund have the power to change the fund's investment goals
without shareholderor contract holder approval.
The management firm The fund is managed by John Hancock Advisers, Inc. Founded
in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock
Financial Services, Inc. and manages more than $30 billion in assets.
------------------------------------------
Variable
contract holders
------------------------------------------
------------------------------------------
Insurance company
separate accounts
------------------------------------------
------------------------------------------
Declaration
funds
------------------------------------------
------------------------------------------
Investment adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Manages the fund's business and
investment activities.
------------------------------------------
------------------------------------------
Custodian
Investors Bank & Trust Co.
Hold the fund's assets, settles all
portfolio trades and collect most of
the valuation data required for
calculating each fund's NAV.
------------------------------------------
------------------------------------------
Trustees
Oversee the fund's activies.
------------------------------------------
FUND DETAILS 7
<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 V.A. Bond Fund:
Annual/Semiannual Report to Shareholders
Includes financial statements, a discussion of the market conditions and
investment strategies that significantly affected performance, as well as the
auditors' report (in annual report only).
Statement of Additional Information (SAI)
The SAI contains more detailed information on all aspects of the fund. 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 Annuity Servicing Office
529 Main St. (X-4)
Charlestown, MA02129
By phone: 1-800-824-0335
On the Internet: www.jhfunds.com
Or you may view or obtain these documents from the SEC:
In person: at the SEC's Public Reference Room in Washington, DC. For access to
the Reference Room call 1-202-942-8090
By mail: Public Reference Section Securities and Exchange Commission Washington,
DC 20549-0102 (duplicating fee required)
By electronic request: [email protected] (duplicating fee required)
On the Internet: www.sec.gov
SEC file number: 811-07437
[LOGO] JOHN HANCOCK FUNDS John Hancock Funds, Inc.
A Global Investment Management Firm 101 Huntington Avenue
Boston MA 02199-7603
(C)2000 John Hancock Funds, Inc.
VA21PN 5/00
<PAGE>
John Hancock
Declaration Funds
Prospectus
May 1, 2000
- --------------------------------------------------------------------------------
V.A. Relative Value Fund
(formerly V.A. Large Cap Value Fund)
V.A. Technology Fund
IVA00P 5/00
Draft 4/18/00
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these funds or determined whether the information in
this prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
Contents
- --------------------------------------------------------------------------------
General information about the Overview 3
Declaration funds.
A fund-by-fund summary of V.A. Relative Value Fund 4
goals, strategies, risks,
performance and financial V.A. Technology Fund 6
highlights.
Transaction policies and other Account information
information affecting your
fund investment. Buying and selling fund shares 8
Valuing fund shares 8
Fund expenses 8
Dividends and taxes 8
Further information on the Fund details
Declaration funds.
Business structure 9
For more information back cover
<PAGE>
Overview
- --------------------------------------------------------------------------------
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. 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] Main risks The major risk factors associated with the fund.
[Clip Art] Past performance The fund's total return, measured year-by-year and
over time.
[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 and variable life
insurance contracts 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
Federal Deposit Insurance Corporation 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 Financial Services, Inc. and manages more than $30 billion in assets.
3
<PAGE>
V.A. Relative 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 manager looks 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. Quinlisk, CFA
- ----------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began business career in 1985
R. Scott Mayo, CFA
- ----------------------------------
Joined team in 2000
Joined adviser in 1998
Began business career in 1993
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
- --------------------------------------------------------------------------------
1998 1999
21.39% 56.65%
2000 total return as of March 31: 7.29%
Best quarter: Q4 '99, 43.25% Worst quarter: Q3 '98, -16.61%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 56.65% 21.03%
Life of fund - began 1/6/98 38.26% 24.54%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
4
<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 has a significant
influence on fund performance. Large-capitalization stocks as a group could fall
out of favor with the market, causing the fund to underperform investments that
focus on small- or medium-capitalization stocks. Similarly, value stocks could
under-perform growth stocks. In addition, if the managers' securities selection
strategies do 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 losses and are
generally considered more risky than direct investments.
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 potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
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.
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 each year.
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Period ended: 12/98(1) 12/99
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $12.03
Net investment income (loss)(2) 0.11 0.10
Net realized and unrealized gain (loss) on investments, financial futures
contracts and foreign currency transactions 2.02 6.65
Total from investment operations 2.13 6.75
Less distributions:
Dividends from net investment income (0.10) (0.10)
Distributions from net realized gain on investments sold, financial futures
contracts and foreign currency transactions -- (0.65)
Total distributions (0.10) (0.75)
Net asset value, end of period $12.03 $18.03
Total investment return at net asset value(3) (%) 21.39(4) 56.65
Total adjusted investment return at net asset value(3,5) (%) 21.21(4) --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 17,368 38,766
Ratio of expenses to average net assets (%) 0.85(6) 0.77
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) 0.66
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 0.99(6) --
Portfolio turnover rate (%) 242 166
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.
5
<PAGE>
V.A. Technology 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 U.S. and foreign companies that
rely extensively on technology in their product development or operations. These
companies are typically in fields such as: computer software, hardware and
Internet services; telecommunications; electronics; data management and storage.
In managing the portfolio, the managers focus primarily on stock selection
rather than industry allocation. The managers invest in companies of any size
whose stocks appear to be trading below their true value, as determined by
fundamental financial analysis of their business models and balance sheets as
well as interviews with senior management. The fund focuses on companies that
are undergoing a business change that appears to signal accelerated growth or
higher earnings.
The fund may invest up to 10% of assets in debt securities of any maturity,
including bonds rated as low as CC/Ca and their unrated equivalents. (Bonds
rated below BBB/Baa are considered junk bonds.)
It may also invest in certain higher-risk securities, including securities that
are not publicly offered or traded, called restricted securities.
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.
================================================================================
SUBADVISER
American Fund Advisors, Inc.
- ----------------------------------------
Responsible for day-to-day investments
Founded in 1978
Supervised by the adviser
Portfolio Managers
Barry J. Gordon
- ----------------------------------------
President of subadviser
Joined team in 1983
Began business career in 1971
Marc H. Klee, CFA
- ----------------------------------------
Senior vice president of subadviser
Joined team in 1983
Began business career in 1977
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.
6
<PAGE>
MAIN RISKS
[Clip Art] The value of your investment will go up and down in response to stock
market movements. The fund's management strategy has a significant influence on
fund performance. The value of your investment may fluctuate more widely than it
would in a fund that is diversified across sectors.
Technology companies face special risks, and could be hurt by factors such as
market saturation, price competition and competing technologies. In addition,
their products may become obsolete quickly. Many technology companies are
smaller companies that may have limited product lines and financial and
managerial resources, making them more vulnerable to isolated business setbacks.
Stocks of technology 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. In addition, if the managers' security selection strategies do 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 losses and are generally
considered more risky than direct investments.
o Foreign investments carry additional risks, including potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
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. This risk is
greater for longer maturity bonds. Junk bond prices can fall on bad news
about the economy, an industry or a company.
================================================================================
FINANCIAL HIGHLIGHTS
[Clip Art] This section normally 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. Because this is a new fund, there are no
financial highlights to report.
7
<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.
Securities in a fund's portfolio are generally valued on the basis of market
quotations and valuations provided by independent pricing services. The funds
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 funds' board of trustees. If a 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:
- --------------------------------------------------------------------------------
Fund % of net assets
- --------------------------------------------------------------------------------
V.A. Relative Value Fund 0.60%
V.A. Technology Fund N/A*
*Fund began operations May 1, 2000.
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 management fees, at least until April 30,
2001. 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.
8 ACCOUNT INFORMATION
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
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.
[The following information was represented as a flow chart in the printed
material.]
---------------------
Variable
contract holders
---------------------
-------------------------------------
Insurance company
separate accounts
-------------------------------------
------------------------------
Declaration
funds
------------------------------
------------------------------------
Subadviser
American Fund Advisors, Inc.
1415 Kellum Place
Garden City, NY 11530
Provides portfolio
management to
V.A. Technology Fund.
------------------------------------
------------------------------------
Investment adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Manages the funds' business and
investment activities.
------------------------------------
------------------------------------
Custodian
Investors Bank & Trust Co.
Hold the funds' assets, settles all
portfolio trades and collects most of
the valuation data required for
calculating each fund's NAV.
------------------------------------
------------------------------------
Trustees
Oversee the funds' activities.
------------------------------------
FUND DETAILS 9
<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, as well as the
auditors' report (in 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 Annuity Servicing Office
529 Main St. (X-4)
Charlestown, MA 02129
By phone: 1-800-824-0335
On the Internet: www.jhfunds.com
Or you may view or obtain these documents from the SEC:
In person: at the SEC's Public Reference Room in Washington, DC. For access to
the Reference Room call 1-202-942-8090
By mail: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-0102
(duplicating fee required)
By electronic request:
[email protected]
(duplicating fee required)
On the Internet: www.sec.gov
SEC file number 811-07437
[LOGO] JOHN HANCOCK FUNDS John Hancock Funds, Inc.
A Global Investment Management Firm 101 Huntington Avenue
Boston MA 02199-7603
(C)2000 John Hancock Funds, Inc.
IVA00P 5/00
<PAGE>
John Hancock
Declaration Funds
Prospectus
May 1, 2000
- --------------------------------------------------------------------------------
Equity
V.A. Core Equity Fund
V.A. Relative Value Fund
(formerly V.A. Large Cap Value Fund)
V.A. Sovereign Investors Fund
Sector
V.A. Financial Industries Fund
V.A. Technology Fund
Income
V.A. Bond Fund
V.A. Money Market Fund
V.A. Strategic Income Fund
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these funds or determined whether the information in
this prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
Contents
- --------------------------------------------------------------------------------
General information about the Overview 3
Declaration funds.
A fund-by-fund summary of Equity
goals, strategies, risks, V.A. Core Equity Fund 4
performance and financial V.A. Relative Value Fund 6
highlights. V.A. Sovereign Investors Fund 8
Sector
V.A. Financial Industries Fund 10
V.A. Technology Fund 12
Income
V.A. Bond Fund 14
V.A. Money Market Fund 16
V.A. Strategic Income Fund 18
Transaction policies and other Account information
information affecting your
fund investment. Buying and selling fund shares 20
Valuing fund shares 20
Fund expenses 20
Dividends and taxes 20
Further information on the Fund details
Declaration funds.
Business structure 21
For more information back cover
<PAGE>
Overview
- --------------------------------------------------------------------------------
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. 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] Main risks The major risk factors associated with the fund.
[Clip Art] Past performance The fund's total return, measured year-by-year and
over time.
[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 and variable life
insurance contracts 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
Federal Deposit Insurance Corporation 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 Financial Services, Inc. and manages more than $30 billion in assets.
3
<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 normally invests at least 65% of assets
in a diversified portfolio of equities which are primarily large-capitalization
stocks. The portfolio's risk profile is similar to that of the Standard & Poor's
500 Stock 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 Standard & Poor's 500 Stock 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 use this in-house research to rank the stocks according to their
combination of:
o value, meaning they appear to be underpriced
o improving fundamentals, meaning they show potential for strong growth
This process, together with a risk/ return analysis against the Standard &
Poor's 500 Stock Index, results in a portfolio of approximately 100 to 130 of
the stocks from the top 60% of the menu. The fund generally sells 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 invest in dollar-denominated foreign securities and 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 Financial Services, Inc.
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 1999
30.68% 28.42% 13.89%
2000 total return as of March 31: 2.34%
Best quarter: Q4 '98, 23.16% Worst quarter: Q3 '98, -13.01%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 13.89% 21.03%
Life of fund - began 8/29/96 25.52% 28.79%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
4
<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 has a significant influence on fund performance.
If the investment research team's earnings estimates or projections turn out to
be inaccurate, or if the proprietary computer models do 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 losses and are generally
considered more risky than direct investments.
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 potentially inadequate
or inaccurate financial information and social or political instability.
================================================================================
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 12/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $11.11 $14.11 $17.74
Net investment income (loss)(2) 0.06 0.16 0.10 0.09
Net realized and unrealized gain (loss) on investments 1.12 3.23 3.90 2.36
Total from investment operations 1.18 3.39 4.00 2.45
Less distributions:
Dividends from net investment income (0.06) (0.14) (0.10) (0.09)
Distributions in excess of net investment income -- -- -- (0.00)(3)
Distributions from net realized gain on investments sold (0.01) (0.25) (0.27) (0.40)
Total distributions (0.07) (0.39) (0.37) (0.49)
Net asset value, end of period $11.11 $14.11 $17.74 $19.70
Total investment return at net asset value(4) (%) 11.78(5) 30.68 28.42 13.89
Total adjusted investment return at net asset value(4,6) (%) 10.66(5) 30.04 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,149 8,719 26,691 44,991
Ratio of expenses to average net assets (%) 0.95(7) 0.95 0.95 0.83
Ratio of adjusted expenses to average net assets(8) (%) 4.23(7) 1.59 -- --
Ratio of net investment income (loss) to average net assets (%) 1.60(7) 1.24 0.65 0.47
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (1.68)(7) 0.60 -- --
Portfolio turnover rate (%) 24 53 55 77
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) 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.
5
<PAGE>
V.A. Relative 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 manager looks 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. Quinlisk, CFA
- ----------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began business career in 1985
R. Scott Mayo, CFA
- ----------------------------------
Joined team in 2000
Joined adviser in 1998
Began business career in 1993
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
- --------------------------------------------------------------------------------
1998 1999
21.39% 56.65%
2000 total return as of March 31: 7.29%
Best quarter: Q4 '99, 43.25% Worst quarter: Q3 '98, -16.61%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 56.65% 21.03%
Life of fund - began 1/6/98 38.26% 24.54%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
6
<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 has a significant
influence on fund performance. Large-capitalization stocks as a group could fall
out of favor with the market, causing the fund to underperform investments that
focus on small- or medium-capitalization stocks. Similarly, value stocks could
under-perform growth stocks. In addition, if the managers' securities selection
strategies do 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 losses and are generally
considered more risky than direct investments.
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 potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
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.
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 each year.
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Period ended: 12/98(1) 12/99
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $12.03
Net investment income (loss)(2) 0.11 0.10
Net realized and unrealized gain (loss) on investments, financial futures
contracts and foreign currency transactions 2.02 6.65
Total from investment operations 2.13 6.75
Less distributions:
Dividends from net investment income (0.10) (0.10)
Distributions from net realized gain on investments sold, financial futures
contracts and foreign currency transactions -- (0.65)
Total distributions (0.10) (0.75)
Net asset value, end of period $12.03 $18.03
Total investment return at net asset value(3) (%) 21.39(4) 56.65
Total adjusted investment return at net asset value(3,5) (%) 21.21(4) --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 17,368 38,766
Ratio of expenses to average net assets (%) 0.85(6) 0.77
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) 0.66
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 0.99(6) --
Portfolio turnover rate (%) 242 166
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.
7
<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 at
least 80% of its stock investments in a diversified portfolio of companies with
market capitalizations within the range of the Standard & Poor's 500 Stock
Index. On March 31, 2000, that range was $316 million to $553.02 billion.
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 industry-wide
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 market capitalizations.
The fund may not invest more than 5% of assets in any one security. 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).
Under normal conditions, the fund may not invest more than 10% of assets in cash
or cash equivalents.
In abnormal market conditions, the fund may temporarily invest extensively in
investment-grade short-term securities. In these and other cases, the fund might
not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
John F. Snyder III
- --------------------------------------
Executive vice president of adviser
Joined team in 1996
Joined adviser in 1991
Began business career in 1971
Barry H. Evans, CFA
- --------------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1986
Began business career in 1986
Peter M. Schofield, CFA
- --------------------------------------
Vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began business 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 1999
28.43% 16.88% 3.84%
2000 total return as of March 31: -5.06%
Best quarter: Q4 '98, 15.75% Worst quarter: Q3 '99, -7.43%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 3.84% 21.03%
Life of fund - began 8/29/96 16.97% 28.79%
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 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. In addition, if the managers' securities selection
strategies do 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 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 losses and are generally
considered more risky than direct investments.
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 instability.
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 each year.
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98 12/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.74 $13.59 $15.61
Net investment income (loss)(2) 0.07 0.22 0.27 0.24
Net realized and unrealized gain (loss) on investments 0.76 2.82 2.00 0.35
Total from investment operations 0.83 3.04 2.27 0.59
Less distributions:
Dividends from net investment income (0.07) (0.18) (0.25) (0.24)
Distributions in excess of net investment income -- -- -- (0.00)(3)
Distributions from net realized gain on investments sold (0.02) (0.01) -- --
Tax return of capital -- -- -- (0.00)(3)
Total distributions (0.09) (0.19) (0.25) (0.24)
Net asset value, end of period $10.74 $13.59 $15.61 $15.96
Total investment return at net asset value(4) (%) 8.30(5) 28.43 16.88 3.84
Total adjusted investment return at net asset value(4,6) (%) 7.30(5) 28.12 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,111 12,187 34,170 50,254
Ratio of expenses to average net assets (%) 0.85(7) 0.85 0.74 0.70
Ratio of adjusted expenses to average net assets(8) (%) 3.78(7) 1.16 -- --
Ratio of net investment income (loss) to average net assets (%) 1.90(7) 1.81 1.88 1.57
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (1.03)(7) 1.50 -- --
Portfolio turnover rate (%) 17 11 19 26
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) 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. 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 stocks of U.S. and foreign financial
services companies of any size. These companies include banks, thrifts, finance
companies, brokerage and advisory firms, real estate-related firms, insurance
companies and financial holding companies. At least 25% of assets will be in the
banking industry.
In managing the portfolio, the managers focus primarily on stock selection
rather than industry allocation.
In choosing individual stocks, the managers use fundamental financial analysis
to identify securities that appear comparatively undervalued. Given the
industry-wide trend toward consolidation, the managers also invest in 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 business career in 1979
Thomas M. Finucane
- -------------------------------------
Vice president of adviser
Joined team in 1997
Joined adviser in 1990
Began business career in 1990
Thomas C. Goggins
- -------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began business career in 1981
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
- --------------------------------------------------------------------------------
1998 1999
8.55% 1.23%
2000 total return as of March 31: 5.05%
Best quarter: Q4 '98, 16.08% Worst quarter: Q3 '98, -16.76%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 1.23% 21.03%
Life of fund - began 4/30/97 15.95% 27.76%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
10
<PAGE>
MAIN RISKS
[Clip Art] The value of your investment will go up and down in response to stock
market movements. The fund's management strategy has a significant influence on
fund performance. Because the fund focuses on a single sector of the economy,
its performance depends in large part on the performance of that sector. As a
result, the value of your investment may fluctuate more widely than it would in
a fund that is diversified across sectors. For instance, when interest rates
fall or economic conditions deteriorate, the stocks of banks and financial
services companies could suffer losses. Also, rising interest rates can reduce
profits by narrowing the difference between these companies' borrowing and
lending rates.
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. In addition, 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 losses and are generally
considered more risky than direct investments.
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 potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
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. This risk is
greater for longer maturity bonds. Junk bond prices can fall on bad news
about the economy, an industry or a company.
================================================================================
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 12/99
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $13.44 $14.45
Net investment income (loss)(2) 0.11 0.18 0.11
Net realized and unrealized gain (loss) on investments and
foreign currency transactions 3.39 0.97 0.06
Total from investment operations 3.50 1.15 0.17
Less distributions:
Dividends from net investment income (0.05) (0.14) (0.10)
Distributions from net realized gain on investments sold and
foreign currency transactions (0.01) (0.00)(3) (0.05)
Tax return of capital -- -- (0.01)
Total distributions (0.06) (0.14) (0.16)
Net asset value, end of period $13.44 $14.45 $14.46
Total investment return at net asset value(4) (%) 35.05(5) 8.55 1.23
Total adjusted investment return at net asset value(4,6) (%) 34.71(5) -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 18,465 54,569 49,312
Ratio of expenses to average net assets (%) 1.05(7) 0.92 0.90
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 0.77
Ratio of adjusted net investment income (loss) to average net assets(8) (%) 0.98(7) -- --
Portfolio turnover rate (%) 11 38 72
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.
11
<PAGE>
V.A. Technology 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 U.S. and foreign companies that
rely extensively on technology in their product development or operations. These
companies are typically in fields such as: computer software, hardware and
Internet services; telecommunications; electronics; data management and storage.
In managing the portfolio, the managers focus primarily on stock selection
rather than industry allocation. The managers invest in companies of any size
whose stocks appear to be trading below their true value, as determined by
fundamental financial analysis of their business models and balance sheets as
well as interviews with senior management. The fund focuses on companies that
are undergoing a business change that appears to signal accelerated growth or
higher earnings.
The fund may invest up to 10% of assets in debt securities of any maturity,
including bonds rated as low as CC/Ca and their unrated equivalents. (Bonds
rated below BBB/Baa are considered junk bonds.)
It may also invest in certain higher-risk securities, including securities that
are not publicly offered or traded, called restricted securities.
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.
================================================================================
SUBADVISER
American Fund Advisors, Inc.
- ----------------------------------------
Responsible for day-to-day investments
Founded in 1978
Supervised by the adviser
PORTFOLIO MANAGERS
Barry J. Gordon
- ----------------------------------------
President of subadviser
Joined team in 1983
Began business career in 1971
Marc H. Klee, CFA
- ----------------------------------------
Senior vice president of subadviser
Joined team in 1983
Began business career in 1977
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.
12
<PAGE>
MAIN RISKS
[Clip Art] The value of your investment will go up and down in response to stock
market movements. The fund's management strategy has a significant influence on
fund performance. The value of your investment may fluctuate more widely than it
would in a fund that is diversified across sectors.
Technology companies face special risks, and could be hurt by factors such as
market saturation, price competition and competing technologies. In addition,
their products may become obsolete quickly. Many technology companies are
smaller companies that may have limited product lines and financial and
managerial resources, making them more vulnerable to isolated business setbacks.
Stocks of technology 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. In addition, if the managers' security selection strategies do not
perform as expected, the fund could under-perform 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 losses and are generally
considered more risky than direct investments.
o Foreign investments carry additional risks, including potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
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. This risk is
greater for longer maturity bonds. Junk bond prices can fall on bad news
about the economy, an industry or a company.
================================================================================
Financial highlights
[Clip Art] This section normally 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. Because this is a new fund, there are no
financial highlights to report.
13
<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
at least 65% of assets 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.
Under normal conditions, the fund may not invest more than 10% of assets in cash
or cash equivalents.
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
James K. Ho, CFA
- -------------------------------------
Executive vice president of adviser
Joined team in 1996
Joined adviser in 1985
Began business career in 1977
Anthony A. Goodchild
- -------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1994
Began business career in 1968
Benjamin Matthews
- -------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began business career in 1970
Triet M. Nguyen
- -------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began business 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.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998 1999
9.30% 9.41% -0.51%
2000 total return as of March 31: 2.60%
Best quarter: Q3 '98, 4.76% Worst quarter: Q1 '97, -0.96%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year -0.51% -5.78%
Life of fund - began 8/29/96 6.72% 6.67%
Index: Lehman Brothers Corporate Bond Index, an unmanaged index of corporate
bonds and Yankee bonds.
14
<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 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 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 Foreign investments carry additional risks, including potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
o Certain derivatives could produce disproportionate losses and are generally
considered more risky than direct investments.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to fund shares.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[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 12/99
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.19 $10.36 $10.51
Net investment income (loss)(2) 0.23 0.68 0.63 0.64
Net realized and unrealized gain (loss) on investments 0.21 0.24 0.32 (0.70)
Total from investment operations 0.44 0.92 0.95 (0.06)
Less distributions:
Dividends from net investment income (0.23) (0.68) (0.63) (0.64)
Distributions from net realized gain on investments sold (0.02) (0.07) (0.17) --
Total distributions (0.25) (0.75) (0.80) (0.64)
Net asset value, end of period $10.19 $10.36 $10.51 $9.81
Total investment return at net asset value(3) (%) 4.42(4) 9.30 9.41 (0.51)
Total adjusted investment return at net asset value(3,5) (%) 3.25(4) 7.52 8.82 (0.77)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,056 3,682 10,669 12,531
Ratio of expenses to average net assets (%) 0.75(6) 0.75 0.75 0.75
Ratio of adjusted expenses to average net assets(7) (%) 4.15(6) 2.53 1.34 1.01
Ratio of net investment income (loss) to average net assets (%) 6.69(6) 6.57 5.93 6.39
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 3.29(6) 4.79 5.34 6.13
Portfolio turnover rate (%) 45 193 367 3.07
Fee reduction per share(2) ($) 0.12 0.18 0.06 0.03
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation 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. Money Market Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks the maximum current income that is consistent with
maintaining liquidity and preserving capital. The fund intends to maintain a
stable $1 share price.
The fund invests only in dollar-denominated securities rated within the two
highest short-term credit categories and their unrated equivalents. These
securities 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, and
does not invest in securities with remaining maturities of more than 13 months.
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 1999
4.88% 4.87% 4.58%
2000 total return as of March 31: 1.30%
Best quarter: Q1 '98, 1.25% Worst quarter: Q1 '99, 1.06%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund
1 year 4.58%
Life of fund - began 8/29/96 4.72%
16
<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 instability.
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 12/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00
Net investment income (loss)(2) 0.02 0.05 0.05 0.05
Less distributions:
Dividends from net investment income (0.02) (0.05) (0.05) (0.05)
Net asset value, end of period $1.00 $1.00 $1.00 $1.00
Total investment return at net asset value(3) (%) 1.61(4) 4.88 4.87 4.58
Total adjusted investment return at net asset value(3,5) (%) (7.55)(4) 4.36 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 207 8,377 16,519 32,952
Ratio of expenses to average net assets (%) 0.75(6) 0.75 0.74 0.66
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 4.55
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.
17
<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 categories 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
In managing the portfolio, the managers allocate assets among the three major
categories based on analysis of economic factors such as projected international
interest rate movements, industry cycles and political trends. However, the
managers may invest up to 100% of assets in any one category.
Within each category, 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.
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.
The fund may also invest in preferred stock and other types of debt securities.
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 business career in 1975
Arthur N. Calavritinos, CFA
- ----------------------------------
Vice president of adviser
Joined team in 1996
Joined adviser in 1988
Began business career in 1986
Janet L. Clay, CFA
- ----------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began business career in 1990
Daniel S. Janis
- ----------------------------------
Second vice president of adviser
Joined team in 1999
Joined adviser in 1999
Began business 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 1999
11.77% 4.92% 4.82%
2000 total return as of March 31: 0.59%
Best quarter: Q2 '97, 6.28% Worst quarter: Q3 '98, -2.79%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 4.82% -2.15%
Life of fund - began 8/29/96 8.39% 6.49%
Index: Lehman Brothers Government/Corporate Bond Index, an unmanaged index of
U.S. government, U.S. corporate and Yankee bonds.
18
<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 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 instability. 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 losses and are generally
considered more risky than direct investments.
================================================================================
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 12/99
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.30 $10.47 $10.10
Net investment income (loss)(2) 0.27 0.91 0.85 0.80
Net realized and unrealized gain (loss) on investments and foreign
currency transactions 0.36 0.26 (0.35) (0.33)
Total from investment operations 0.63 1.17 0.50 0.47
Less distributions:
Dividends from net investment income (0.27) (0.91) (0.85) (0.80)
Distributions from net realized gain on investments sold,
financial futures contracts and foreign currency transactions (0.06) (0.09) (0.02) --
Total distributions (0.33) (1.00) (0.87) (0.80)
Net asset value, end of period $10.30 $10.47 $10.10 $9.77
Total investment return at net asset value(3) (%) 6.45(4) 11.77 4.92 4.82
Total adjusted investment return at net asset value(3,5) (%) 5.96(4) 11.25 4.84 4.80
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,131 5,540 15,019 22,282
Ratio of expenses to average net assets (%) 0.85(6) 0.85 0.85 0.85
Ratio of adjusted expenses to average net assets(7) (%) 2.28(6) 1.37 0.93 0.87
Ratio of net investment income (loss) to average net assets (%) 7.89(6) 8.77 8.19 8.06
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 6.46(6) 8.25 8.11 8.04
Portfolio turnover rate (%) 73 110 92 53(8)
Fee reduction per share(2) ($) 0.05 0.05 0.01 0.00(9)
</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) Porfolio turnover rate excludes merger activity.
(9) Less than $0.01 per share.
19
<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
funds 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 funds' board of trustees. If
a 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:
- --------------------------------------------------------------------------------
Equity Funds % of net assets
- --------------------------------------------------------------------------------
V.A. Core Equity Fund 0.70%
V.A. Relative Value Fund 0.60%
V.A. Sovereign Investors Fund 0.60%
- --------------------------------------------------------------------------------
Sector Funds
- --------------------------------------------------------------------------------
V.A. Financial Industries Fund 0.80%
V.A. Technology Fund N/A*
- --------------------------------------------------------------------------------
Income Funds
- --------------------------------------------------------------------------------
V.A. Bond Fund 0.50%
V.A. Money Market Fund 0.50%
V.A. Strategic Income Fund 0.60%
*Fund began operations May 1, 2000.
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 management fees, at least until April 30,
2001. 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.
20 ACCOUNT INFORMATION
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
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.
[The following information was represented as a flow chart in the printed
material.]
---------------------
Variable
contract holders
---------------------
-------------------------------------
Insurance company
separate accounts
-------------------------------------
------------------------------
Declaration
funds
------------------------------
------------------------------------
Subadvisers
Independence Investment
Associates, Inc.
53 State Street
Boston, MA 02109
American Fund Advisors, Inc.
1415 Kellum Place
Garden City, NY 11530
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 the fund's NAV.
------------------------------------
------------------------------------
Trustees
Oversee the funds' activities.
------------------------------------
FUND DETAILS 21
<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, as well as the
auditors' report (in 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 Annuity Servicing Office
529 Main St. (X-4)
Charlestown, MA 02129
By phone: 1-800-824-0335
On the Internet: www.jhfunds.com
Or you may view or obtain these documents from the SEC:
In person: at the SEC's Public Reference Room in Washington, DC. For access to
the Reference Room call 1-202-942-8090
By mail: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-0102
(duplicating fee required)
By electronic request:
[email protected]
(duplicating fee required)
On the Internet: www.sec.gov
SEC file number 811-07437
[LOGO] JOHN HANCOCK FUNDS John Hancock Funds, Inc.
A Global Investment Management Firm 101 Huntington Avenue
Boston MA 02199-7603
(C)2000 John Hancock Funds, Inc.
RVA00P 5/00
<PAGE>
John Hancock
Declaration Funds
Prospectus
May 1, 2000
- --------------------------------------------------------------------------------
Equity
V.A. Core Equity Fund
V.A. Large Cap Growth Fund
V.A. Mid Cap Growth Fund
V.A. Relative Value Fund
(formerly V.A. Large Cap Value Fund)
V.A. Small Cap Growth Fund
V.A. Sovereign Investors Fund
Sector
V.A. Financial Industries Fund
Income
V.A. Bond Fund
V.A. High Yield Bond Fund
V.A. Money Market Fund
V.A. Strategic Income Fund
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these funds or determined whether the information in
this prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<PAGE>
Contents
- --------------------------------------------------------------------------------
General information about Overview 3
the Declaration funds.
A fund-by-fund summary Equity
of goals, strategies, risks, V.A. Core Equity Fund 4
performance and financial V.A. Large Cap Growth Fund 6
highlights. V.A. Mid Cap Growth Fund 8
V.A. Relative Value Fund 10
V.A. Small Cap Growth Fund 12
V.A. Sovereign Investors Fund 14
Sector
V.A. Financial Industries Fund 16
Income
V.A. Bond Fund 18
V.A. High Yield Bond Fund 20
V.A. Money Market Fund 22
V.A. Strategic Income Fund 24
Transaction policies and Account information
other information affecting Buying and selling fund shares 26
your fund investment. Valuing fund shares 26
Fund expenses 26
Dividends and taxes 26
Further information on the Fund details
Declaration funds. Business structure 27
For more information back cover
2
<PAGE>
Overview
- --------------------------------------------------------------------------------
JOHN HANCOCK DECLARATION FUNDS
These funds offer investment choices for the variable annuity and variable life
insurance contracts 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 Federal Deposit Insurance Corporation 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 Financial Services, Inc. and manages more than $30 billion in assets.
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Clip Art] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clip Art] Main risks The major risk factors associated with the fund.
[Clip Art] Past performance The fund's total return, measured year-by-year and
over time.
[Clip Art] Financial highlights A table showing the fund's financial performance
for up to five years.
3
<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 normally invests at least 65% of assets
in a diversified portfolio of equities which are primarily large-capitalization
stocks. The portfolio's risk profile is similar to that of the Standard & Poor's
500 Stock 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 Standard & Poor's 500 Stock 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 use this in-house research to rank the stocks according to their
combination of:
o value, meaning they appear to be underpriced
o improving fundamentals, meaning they show potential for strong growth
This process, together with a risk/return analysis against the Standard &
Poor's 500 Stock Index, results in a portfolio of approximately 100 to 130 of
the stocks from the top 60% of the menu. The fund generally sells 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 invest in dollar-denominated foreign securities and 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
Financial Services, Inc.
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 1999
30.68% 28.42% 13.89%
2000 total return as of March 31: 2.34%
Best quarter: Q4 '98, 23.16% Worst quarter: Q3 '98, -13.01%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 13.89% 21.03%
Life of fund - began 8/29/96 25.52% 28.79%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
4
<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 has a significant influence on fund performance.
If the investment research team's earnings estimates or projections turn out to
be inaccurate, or if the proprietary computer models do 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 losses and are
generally considered more risky than direct investments.
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 potentially
inadequate or inaccurate financial information and social or political
instability.
================================================================================
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 12/99
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $11.11 $14.11 $17.74
Net investment income (loss)(2) 0.06 0.16 0.10 0.09
Net realized and unrealized gain (loss) on investments 1.12 3.23 3.90 2.36
Total from investment operations 1.18 3.39 4.00 2.45
Less distributions:
Dividends from net investment income (0.06) (0.14) (0.10) (0.09)
Distributions in excess of net investment income -- -- -- (0.00)(3)
Distributions from net realized gain on investments sold (0.01) (0.25) (0.27) (0.40)
Total distributions (0.07) (0.39) (0.37) (0.49)
Net asset value, end of period $11.11 $14.11 $17.74 $19.70
Total investment return at net asset value(4) (%) 11.78(5) 30.68 28.42 13.89
Total adjusted investment return at net asset value(4,6) (%) 10.66(5) 30.04 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,149 8,719 26,691 44,991
Ratio of expenses to average net assets (%) 0.95(7) 0.95 0.95 0.83
Ratio of adjusted expenses to average net assets(8) (%) 4.23(7) 1.59 -- --
Ratio of net investment income (loss) to average net assets (%) 1.60(7) 1.24 0.65 0.47
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (1.68)(7) 0.60 -- --
Portfolio turnover rate (%) 24 53 55 77
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) 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.
5
<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 at least 65% of assets in stocks of
large-capitalization companies (companies in the capitalization range of the
Standard & Poor's 500 Stock Index, which was $316 million to $553.02 billion as
of March 31, 2000).
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 fund generally invests in 30 to 60 U.S. companies 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.
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 an above-average growth rate.
The fund may invest in preferred stocks and other types of equities, and may
invest up to 15% of assets in foreign securities. 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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
PORTFOLIO MANAGER
Team responsible for day-to-day
investment management
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 1999
14.27% 24.60% 20.71%
2000 total return as of March 31: 1.20%
Best quarter: Q3 '97, 22.53% Worst quarter: Q1 '97, -15.55%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 20.71% 21.03%
Life of fund - began 8/29/96 15.41% 28.79%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
6
<PAGE>
MAIN RISKS
[Clip Art] The value of your investment will go up and down in response to stock
market movements.
The fund's management strategy has a significant influence on fund performance.
Large-capitalization stocks as a group could fall out of favor with the market,
causing the fund to underperform investments that focus on small- or
medium-capitalization stocks. Similarly, growth stocks could underperform value
stocks. To the extent the fund invests in a given industry, its performance will
be hurt if that industry performs poorly. In addition, if the managers' security
selection strategies do not perform as expected, the fund could underperform its
peers or lose money.
To the extent that the fund makes investments with additional risks, these risks
could increase volatility or reduce performance:
o Certain derivatives could produce disproportionate losses and are
generally considered more risky than direct investments.
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 potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
================================================================================
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 12/99
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $9.39 $10.73 $13.37
Net investment income (loss)(2) (0.01) (0.04) (0.00)(3) (0.04)
Net realized and unrealized gain (loss) on investments (0.60) 1.38 2.64 2.80
Total from investment operations (0.61) 1.34 2.64 2.76
Less distributions:
Distributions from net realized gain on investments sold -- -- -- (0.36)
Net asset value, end of period $9.39 $10.73 $13.37 $15.77
Total investment return at net asset value(4) (%) (6.10)(5) 14.27 24.60 20.71
Total adjusted investment return at net asset value(4,6) (%) (7.39)(5) 12.90 24.27 20.69
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 994 3,733 10,372 21,872
Ratio of expenses to average net assets (%) 1.00(7) 1.00 1.00 1.00
Ratio of adjusted expenses to average net assets(8) (%) 4.76(7) 2.37 1.33 1.02
Ratio of net investment income (loss) to average net assets (%) (0.23)(7) (0.39) (0.00) (0.25)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (3.99)(7) (1.76) (0.33) (0.27)
Portfolio turnover rate (%) 68 136 176 172
Fee reduction per share(2) ($) 0.13 0.13 0.04 0.00(3)
</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.
7
<PAGE>
V.A. Mid Cap Growth Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term capital apprec- iation. To pursue this goal,
the fund normally invests at least 80% of assets in stocks of
medium-capitalization companies (companies in the capitalization range of the
Russell Midcap Growth Index, which was $171 million to $66.54 billion as of
March 31, 2000).
The manager conducts fundamental financial analysis to identify companies with
above-average earnings growth.
In choosing individual securities, the manager looks for companies with growth
stemming from a combination of gains in market share and increasing operating
efficiency. Before investing, the manager identifies 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 manager considers broad economic trends, demographic factors, technological
changes, consolidation trends and legislative initiatives.
The fund generally invests in more than 100 companies. The fund may not invest
more than 5% of assets in any one security.
The fund may invest up to 10% of assets in foreign securities. The fund may also
make limited use of certain derivatives (investments whose value is based on
indices or currencies).
In abnormal conditions, the fund may temporarily invest in U.S. government
securities with maturities of up to three years and more than 10% of assets in
cash or cash equivalents. 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 MANAGER
Barbara C. Friedman, CFA
- ---------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began business career in 1973
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
- --------------------------------------------------------------------------------
1998 1999
10.35% 56.18%
2000 total return as of March 31: 13.02%
Best quarter: Q4 '99, 41.78% Worst quarter: Q3 '98, -19.74%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index 1 Index 2
1 year 56.18% 21.03% 51.29%
Life of fund - began 1/7/98 31.63% 25.23% 20.08%
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.
8
<PAGE>
MAIN RISKS
[Clip Art] The value of your investment will go up and down in response to stock
market movements.
The fund's management strategy has a significant influence on fund performance.
Medium-capitalization stocks tend to be more volatile than stocks of larger
companies, and as a group could fall out of favor with the market, causing the
fund to underperform investments that focus either on small- or
large-capitalization stocks. Similarly, growth stocks could underperform value
stocks. To the extent the fund invests in a given industry, its performance will
be hurt if that industry performs poorly. In addition, if the managers' security
selection strategies do not perform as expected, the fund could underperform its
peers or lose money.
To the extent that the fund makes investments with additional risks, these risks
could increase volatility or reduce performance:
o Certain derivatives could produce disproportionate losses and are
generally considered more risky than direct investments.
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 potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
================================================================================
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: 12/98(1) 12/99
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $11.03
Net investment income (loss)(2) 0.01 (0.03)
Net realized and unrealized gain (loss) on investments 1.03 6.23
Total from investment operations 1.04 6.20
Less distributions:
Dividends from net investment income (0.01) --
Distributions from net realized gain on investments sold -- (0.02)
Tax return of capital (0.00)(3) --
Total distributions (0.01) (0.02)
Net asset value, end of period $11.03 $17.21
Total investment return at net asset value(4) (%) 10.35(6) 56.18
Total adjusted investment return at net asset value(4,5) (%) 7.17(6) 54.82
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,779 6,363
Ratio of expenses to average net assets (%) 1.00(7) 1.00
Ratio of adjusted expenses to average net assets(8) (%) 4.23(7) 2.36
Ratio of net investment income (loss) to average net assets (%) 0.06(7) (0.23)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (3.17)(7) (1.59)
Portfolio turnover rate (%) 103 136
Fee reduction per share(2) ($) 0.33 0.17
</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.
9
<PAGE>
V.A. Relative 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 manager looks 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. Quinlisk, CFA
- ---------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began business career in 1985
R. Scott Mayo, CFA
- ---------------------------------------
Joined team in 2000
Joined adviser in 1998
Began business career in 1993
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
- --------------------------------------------------------------------------------
1998 1999
21.39% 56.65%
2000 total return as of March 31: 7.29%
Best quarter: Q4 '99, 43.25% Worst quarter: Q3 '98, -16.61%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 56.65% 21.03%
Life of fund - began 1/6/98 38.26% 24.54%
Index: Standard & Poor's 500 Stock Index, an unmanaged index of 500 stocks.
10
<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 has a significant
influence on fund performance. Large-capitalization stocks as a group could fall
out of favor with the market, causing the fund to under-perform investments
that focus on small- or medium-capitalization stocks. Similarly, value stocks
could underperform growth stocks. In addition, if the managers' securities
selection strategies do 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 losses and are
generally considered more risky than direct investments.
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 potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
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.
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 each year.
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Period ended: 12/98(1) 12/99
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $12.03
Net investment income (loss)(2) 0.11 0.10
Net realized and unrealized gain (loss) on investments, financial
futures contracts and foreign currency transactions 2.02 6.65
Total from investment operations 2.13 6.75
Less distributions:
Dividends from net investment income (0.10) (0.10)
Distributions from net realized gain on investments sold, financial
futures contracts and foreign currency transactions -- (0.65)
Total distributions (0.10) (0.75)
Net asset value, end of period $12.03 $18.03
Total investment return at net asset value(3) (%) 21.39(4) 56.65
Total adjusted investment return at net asset value(3,5) (%) 21.21(4) --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 17,368 38,766
Ratio of expenses to average net assets (%) 0.85(6) 0.77
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) 0.66
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 0.99(6) --
Portfolio turnover rate (%) 242 166
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.
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
small-capitalization companies (companies in the capitalization range of the
Russell 2000 Growth Index, which was $23 million to $10.45 billion as of March
31, 2000).
The managers look for companies in the emerging growth phase of development that
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.
To manage risk, the fund typically invests in 150 to 220 companies across many
industries, and does not invest more than 5% of assetsin any one security.
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 in preferred stocks and other types of equities, and may
invest up to 10% of assets in foreign securities. The fund may also make limited
use of certain derivatives (investments whose value is based on indices or
currencies).
In abnormal conditions, the fund may temporarily invest in U.S. government
securities with maturities of up to three years and more than 10% of assets in
cash and cash equivalents. 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 business career in 1986
Laura J. Allen, CFA
- ---------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began business career in 1981
Anurag Pandit, CFA
- ---------------------------------------
Vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began business 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 1999
11.06% 15.94% 68.52%
2000 total return as of March 31: 12.96%
Best quarter: Q4 '99, 44.55% Worst quarter: Q3 '98, -21.42%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index 1 Index 2
1 year 68.52% 21.26% 43.09%
Life of fund - began 8/29/96 23.55% 14.51% 17.53%
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] The value of your investment will go up and down in response to stock
market movements.
The fund's management strategy has a significant influence on fund performance.
Small-capitalization stocks as a group could fall out of favor with the market,
causing the fund to underperform investments that focus on medium- or
large-capitalization stocks. Similarly, growth stocks could underperform value
stocks. To the extent the fund invests in a given industry, its performance will
be hurt if that industry performs poorly. In addition, if the managers' security
selection strategies do not perform as expected, the fund could underperform its
peers or lose money.
Stocks of smaller companies are more volatile than stocks of larger companies.
Many smaller companies have short track records, narrow product lines or niche
markets, making them highly vulnerable to isolated business setbacks.
To the extent that the fund makes investments with additional risks, these risks
could increase volatility or reduce performance:
o Certain derivatives could produce disproportionate losses and are
generally considered more risky than direct investments.
o In a down market, higher-risk securities and derivatives could become
harder to value or to sell at a fair price; this risk could also affect
small-capitalization stocks, especially those with low trading volumes.
o Foreign investments carry additional risks, including potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
================================================================================
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 12/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $9.32 $10.35 $12.00
Net investment income (loss)(2) 0.02 (0.02) (0.06) (0.10)
Net realized and unrealized gain (loss) on investments and foreign
currency transactions (0.68) 1.05 1.71 8.29
Total from investment operations (0.66) 1.03 1.65 8.19
Less distributions:
Dividends from net investment income (0.02) (0.00)(3) -- --
Distributions from net realized gain on investments sold -- -- -- (0.43)
Total distributions (0.02) (0.00)(3) -- (0.43)
Net asset value, end of period $9.32 $10.35 $12.00 $19.76
Total investment return at net asset value(4) (%) (6.62)(5) 11.06 15.94 68.52
Total adjusted investment return at net asset value(4,6) (%) (8.05)(5) 9.34 15.31 68.14
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 975 3,841 8,232 20,867
Ratio of expenses to average net assets (%) 1.00(7) 1.00 1.00 1.00
Ratio of adjusted expenses to average net assets(8) (%) 5.19(7) 2.72 1.63 1.38
Ratio of net investment income (loss) to average net assets (%) 0.62(7) (0.16) (0.59) (0.76)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (3.57)(7) (1.88) (1.22) (1.14)
Portfolio turnover rate (%) 31 79 93 120
Fee reduction per share(2) ($) 0.14 0.17 0.07 0.05
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) 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. 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 at
least 80% of its stock investments in a diversified portfolio of companies with
market capitalizations within the range of the Standard & Poor's 500 Stock
Index. On March 31, 2000, that range was $316 million to $553.02 billion.
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 industry-wide
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 market capitalizations.
The fund may not invest more than 5% of assets in any one security. 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).
Under normal conditions, the fund may not invest more than 10% of assets in cash
or cash equivalents.
In abnormal market conditions, the fund may temporarily invest extensively in
investment-grade short-term securities. In these and other cases, the fund might
not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
John F. Snyder III
- ---------------------------------------
Executive vice president of adviser
Joined team in 1996
Joined adviser in 1991
Began business career in 1971
Barry H. Evans, CFA
- ---------------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1986
Began business career in 1986
Peter M. Schofield, CFA
- ---------------------------------------
Vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began business 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 1999
28.43% 16.88% 3.84%
2000 total return as of March 31: -5.06%
Best quarter: Q4 '98, 15.75% Worst quarter: Q3 '99, -7.43%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 3.84% 21.03%
Life of fund - began 8/29/96 16.97% 28.79%
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
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. In addition, if the managers' securities selection
strategies do 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 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 losses and are
generally considered more risky than direct investments.
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 instability.
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 each year.
Figures audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Period ended: 12/96(1) 12/97 12/98 12/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.74 $13.59 $15.61
Net investment income (loss)(2) 0.07 0.22 0.27 0.24
Net realized and unrealized gain (loss) on investments 0.76 2.82 2.00 0.35
Total from investment operations 0.83 3.04 2.27 0.59
Less distributions:
Dividends from net investment income (0.07) (0.18) (0.25) (0.24)
Distributions in excess of net investment income -- -- -- (0.00)(3)
Distributions from net realized gain on investments sold (0.02) (0.01) -- --
Tax return of capital -- -- -- (0.00)(3)
Total distributions (0.09) (0.19) (0.25) (0.24)
Net asset value, end of period $10.74 $13.59 $15.61 $15.96
Total investment return at net asset value(4) (%) 8.30(5) 28.43 16.88 3.84
Total adjusted investment return at net asset value(4,6) (%) 7.30(5) 28.12 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,111 12,187 34,170 50,254
Ratio of expenses to average net assets (%) 0.85(7) 0.85 0.74 0.70
Ratio of adjusted expenses to average net assets(8) (%) 3.78(7) 1.16 -- --
Ratio of net investment income (loss) to average net assets (%) 1.90(7) 1.81 1.88 1.57
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (1.03)(7) 1.50 -- --
Portfolio turnover rate (%) 17 11 19 26
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) 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.
15
<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 stocks of U.S. and foreign financial
services companies of any size. These companies include banks, thrifts, finance
companies, brokerage and advisory firms, real estate-related firms, insurance
companies and financial holding companies. At least 25% of assets will be in the
banking industry.
In managing the portfolio, the managers focus primarily on stock selection
rather than industry allocation.
In choosing individual stocks, the managers use fundamental financial analysis
to identify securities that appear comparatively undervalued. Given the
industry-wide trend toward consolidation, the managers also invest in 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 business career in 1979
Thomas M. Finucane
- ---------------------------------------
Vice president of adviser
Joined team in 1997
Joined adviser in 1990
Began business career in 1990
Thomas C. Goggins
- ---------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began business career in 1981
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
- --------------------------------------------------------------------------------
1998 1999
8.55% 1.23%
2000 total return as of March 31: 5.05%
Best quarter: Q4 '98, 16.08% Worst quarter: Q3 '98, -16.75%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 1.23% 21.03%
Life of fund - began 4/30/97 15.95% 27.76%
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
market movements. The fund's management strategy has a significant influence on
fund performance. Because the fund focuses on a single sector of the economy,
its performance depends in large part on the performance of that sector. As a
result, the value of your investment may fluctuate more widely than it would in
a fund that is diversified across sectors. For instance, when interest rates
fall or economic conditions deteriorate, the stocks of banks and financial
services companies could suffer losses. Also, rising interest rates can reduce
profits by narrowing the difference between these companies' borrowing and
lending rates.
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. In addition, 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 losses and are
generally considered more risky than direct investments.
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 potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
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. This risk is
greater for longer maturity bonds. Junk bond prices can fall on bad news
about the economy, an industry or a company.
================================================================================
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 12/99
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $13.44 $14.45
Net investment income (loss)(2) 0.11 0.18 0.11
Net realized and unrealized gain (loss) on investments and foreign
currency transactions 3.39 0.97 0.06
Total from investment operations 3.50 1.15 0.17
Less distributions:
Dividends from net investment income (0.05) (0.14) (0.10)
Distributions from net realized gain on investments sold and
foreign currency transactions (0.01) (0.00)(3) (0.05)
Tax return of capital -- -- (0.01)
Total distributions (0.06) (0.14) (0.16)
Net asset value, end of period $13.44 $14.45 $14.46
Total investment return at net asset value(4) (%) 35.05(5) 8.55 1.23
Total adjusted investment return at net asset value(4,6) (%) 34.71(5) -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 18,465 54,569 49,312
Ratio of expenses to average net assets (%) 1.05(7) 0.92 0.90
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 0.77
Ratio of adjusted net investment income (loss) to average net assets(8) (%) 0.98(7) -- --
Portfolio turnover rate (%) 11 38 72
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.
17
<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
at least 65% of assets 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.
Under normal conditions, the fund may not invest more than 10% of assets in cash
or cash equivalents.
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
James K. Ho, CFA
- ---------------------------------------
Executive vice president of adviser
Joined team in 1996
Joined adviser in 1985
Began business career in 1977
Anthony A. Goodchild
- ---------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1994
Began business career in 1968
Benjamin Matthews
- ---------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began business career in 1970
Triet M. Nguyen
- ---------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began business 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.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998 1999
9.30% 9.41% -0.51%
2000 total return as of March 31: 2.60%
Best quarter: Q3 '98, 4.76% Worst quarter: Q1 '97, -0.96%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year -0.51% -5.78%
Life of fund - began 8/29/96 6.89% 6.67%
Index: Lehman Brothers Corporate Bond Index, an unmanaged index of corporate
bonds and Yankee bonds.
18
<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 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 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 Foreign investments carry additional risks, including potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
o Certain derivatives could produce disproportionate losses and are
generally considered more risky than direct investments.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to fund shares.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
FINANCIAL HIGHLIGHTS
[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 12/99
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.19 $10.36 $10.51
Net investment income (loss)(2) 0.23 0.68 0.63 0.64
Net realized and unrealized gain (loss) on investments 0.21 0.24 0.32 (0.70)
Total from investment operations 0.44 0.92 0.95 (0.06)
Less distributions:
Dividends from net investment income (0.23) (0.68) (0.63) (0.64)
Distributions from net realized gain on investments sold (0.02) (0.07) (0.17) --
Total distributions (0.25) (0.75) (0.80) (0.64)
Net asset value, end of period $10.19 $10.36 $10.51 $9.81
Total investment return at net asset value(3) (%) 4.42(4) 9.30 9.41 (0.51)
Total adjusted investment return at net asset value(3,5) (%) 3.25(4) 7.52 8.82 (0.77)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,056 3,682 10,669 12,531
Ratio of expenses to average net assets (%) 0.75(6) 0.75 0.75 0.75
Ratio of adjusted expenses to average net assets(7) (%) 4.15(6) 2.53 1.34 1.01
Ratio of net investment income (loss) to average net assets (%) 6.69(6) 6.57 5.93 6.39
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 3.29(6) 4.79 5.34 6.13
Portfolio turnover rate (%) 45 193 367 3.07
Fee reduction per share(2) ($) 0.12 0.18 0.06 0.03
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation 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. 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.
================================================================================
PORTFOLIO MANAGERS
Arthur N. Calavritinos, CFA
- ---------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1988
Began business career in 1986
Frederick L. Cavanaugh, Jr.
- ---------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1986
Began business career in 1975
Janet L. Clay, CFA
- ---------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began business career in 1990
Daniel S. Janis
- ---------------------------------------
Second vice president of adviser
Joined team in 1999
Joined adviser in 1999
Began business 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
- --------------------------------------------------------------------------------
1998 1999
-9.80% 13.12%
2000 total return as of March 31: 1.15%
Best quarter: Q2 '99, 4.51% Worst quarter: Q3 '98, -14.84%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 13.12% 2.39%
Life of fund - began 1/6/98 1.02% 2.13%
Index: Lehman Brothers High Yield Bond Index, an unmanaged index of high yield
bonds.
20
<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 instability.
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 losses and are
generally considered more risky than direct investments.
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) 12/99
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $8.22
Net investment income (loss)(2) 0.90 0.88
Net realized and unrealized gain (loss) on investments and foreign currency transactions (1.82) 0.16
Total from investment operations (0.92) 1.04
Less distributions:
Dividends from net investment income (0.84) (0.88)
Distributions from net realized gain on investments sold and foreign currency transactions -- (0.07)
Tax return of capital (0.02) --
Total distributions (0.86) (0.95)
Net asset value, end of period $8.22 $8.31
Total investment return at net asset value(3) (%) (9.80)(4) 13.12
Total adjusted investment return at net asset value(3,5) (%) (10.10)(4) 12.94
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 8,120 9,287
Ratio of expenses to average net assets (%) 0.85(6) 0.85
Ratio of adjusted expenses to average net assets(7) (%) 1.15(6) 1.03
Ratio of net investment income (loss) to average net assets (%) 9.85(6) 10.56
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 9.55(6) 10.38
Portfolio turnover rate (%) 102 122
Fee reduction per share(2) ($) 0.03 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.
21
<PAGE>
V.A. Money Market Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks the maximum current income that is consistent with
maintaining liquidity and preserving capital. The fund intends to maintain a
stable $1 share price.
The fund invests only in dollar-denominated securities rated within the two
highest short-term credit categories and their unrated equivalents. These
securities 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, and
does not invest in securities with remaining maturities of more than 13 months.
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 1999
4.88% 4.87% 4.58%
2000 total return as of March 31: 1.30%
Best quarter: Q1 '98, 1.25% Worst quarter: Q1 '99, 1.06%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund
1 year 4.58%
Life of fund - began 8/29/96 4.72%
22
<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 instability.
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 12/99
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00
Net investment income (loss)(2) 0.02 0.05 0.05 0.05
Less distributions:
Dividends from net investment income (0.02) (0.05) (0.05) (0.05)
Net asset value, end of period $1.00 $1.00 $1.00 $1.00
Total investment return at net asset value(3) (%) 1.61(4) 4.88 4.87 4.58
Total adjusted investment return at net asset value(3,5) (%) (7.55)(4) 4.36 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 207 8,377 16,519 32,952
Ratio of expenses to average net assets (%) 0.75(6) 0.75 0.74 0.66
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 4.55
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.
23
<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 categories 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
In managing the portfolio, the managers allocate assets among the three major
categories based on analysis of economic factors such as projected international
interest rate movements, industry cycles and political trends. However, the
managers may invest up to 100% of assets in any one category.
Within each category, 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.
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.
The fund may also invest in preferred stock and other types of debt securities.
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 business career in 1975
Arthur N. Calavritinos, CFA
- ---------------------------------------
Vice president of adviser
Joined team in 1996
Joined adviser in 1988
Began business career in 1986
Janet L. Clay, CFA
- ---------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began business career in 1990
Daniel S. Janis
- ---------------------------------------
Second vice president of adviser
Joined team in 1999
Joined adviser in 1999
Began business 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 1999
11.77% 4.92% 4.82%
2000 total return as of March 31: 0.59%
Best quarter: Q2 '97, 6.28% Worst quarter: Q3 '98, -2.79%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year 4.82% -2.15%
Life of fund - began 8/29/96 8.34% 6.49%
Index: Lehman Brothers Government/Corporate Bond Index, an unmanaged index of
U.S. government, U.S. corporate and Yankee bonds.
24
<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 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 instability. 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 losses and are
generally considered more risky than direct investments.
================================================================================
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 12/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.30 $10.47 $10.10
Net investment income (loss)(2) 0.27 0.91 0.85 0.80
Net realized and unrealized gain (loss) on investments and foreign
currency transactions 0.36 0.26 (0.35) (0.33)
Total from investment operations 0.63 1.17 0.50 0.47
Less distributions:
Dividends from net investment income (0.27) (0.91) (0.85) (0.80)
Distributions from net realized gain on investments sold,
financial futures contracts and foreign currency transactions (0.06) (0.09) (0.02) --
Total distributions (0.33) (1.00) (0.87) (0.80)
Net asset value, end of period $10.30 $10.47 $10.10 $9.77
Total investment return at net asset value(3) (%) 6.45(4) 11.77 4.92 4.82
Total adjusted investment return at net asset value(3,5) (%) 5.96(4) 11.25 4.84 4.80
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,131 5,540 15,019 22,282
Ratio of expenses to average net assets (%) 0.85(6) 0.85 0.85 0.85
Ratio of adjusted expenses to average net assets(7) (%) 2.28(6) 1.37 0.93 0.87
Ratio of net investment income (loss) to average net assets (%) 7.89(6) 8.77 8.19 8.06
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 6.46(6) 8.25 8.11 8.04
Portfolio turnover rate (%) 73 110 92 53(8)
Fee reduction per share(2) ($) 0.05 0.05 0.01 0.00(9)
</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) Porfolio turnover rate excludes merger activity.
(9) Less than $0.01 per share.
25
<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
funds 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 funds' board of trustees. If
a 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:
- --------------------------------------------------------------------------------
Equity Funds % of net assets
- --------------------------------------------------------------------------------
V.A. Core Equity Fund 0.70%
V.A. Large Cap Growth Fund 0.75%
V.A. Mid Cap Growth Fund 0.75%
V.A. Relative Value Fund 0.60%
V.A. Small Cap Growth Fund 0.75%
V.A. Sovereign Investors Fund 0.60%
- --------------------------------------------------------------------------------
Sector Funds
- --------------------------------------------------------------------------------
V.A. Financial Industries Fund 0.80%
- --------------------------------------------------------------------------------
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 management fees, at least until April 30,
2001. 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.
26 ACCOUNT INFORMATION
<PAGE>
FUND DETAILS
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
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.
------------------------------------------
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 & 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 27
<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, as well as the
auditors' report (in 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 Annuity Servicing Office
529 Main St. (X-4)
Charlestown, MA 02129
By phone: 1-800-824-0335
On the Internet: www.jhfunds.com
Or you may view or obtain these documents from the SEC:
In person: at the SEC's Public Reference Room in Washington, DC. For access to
the Reference Room call 1-202-942-8090
By mail: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-0102
(duplicating fee required)
By electronic request:
[email protected]
(duplicating fee required)
On the Internet: www.sec.gov
SEC file number 811-07437
[LOGO] JOHN HANCOCK FUNDS John Hancock Funds, Inc.
A Global Investment Management Firm 101 Huntington Avenue
Boston MA 02199-7603
(C)2000 John Hancock Funds, Inc.
PVA00P 5/00
<PAGE>
JOHN HANCOCK DECLARATION TRUST
Statement of Additional Information
May 1, 2000
John Hancock V.A. Core Equity Fund
John Hancock V.A. 500 Index Fund
John Hancock V.A. Large Cap Growth Fund
John Hancock V.A. Mid Cap Growth Fund
John Hancock V.A. Relative Value Fund
John Hancock V.A. Small Cap Growth Fund
John Hancock V.A. Sovereign Investors Fund
John Hancock V.A. International Fund
John Hancock V.A. Financial Industries Fund
John Hancock V.A. Regional Bank Fund
John Hancock V.A. Technology Fund
John Hancock V.A. Bond Fund
John Hancock V.A. High Yield Bond Fund
John Hancock V.A. Money Market Fund
John Hancock V.A. Strategic Income Fund
(each, a "Fund" and collectively, the "Funds")
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' current Prospectuses. (the "Prospectuses").
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectuses, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Annuity Servicing Office
529 Main Street (X-4)
Charlestown, Massachusetts 02129
1-800-824-0335
<PAGE>
Table of Contents
Page
Organization of the Trust............................................ 3
Eligible Investors................................................... 3
Investment Policies and Strategies................................... 4
Equity............................................................... 4
International........................................................ 7
Sector............................................................... 8
Income............................................................... 10
Risk Factors Investments and Techniques.............................. 12
Investment Restrictions.............................................. 33
Those Responsible for Management..................................... 37
Investment Advisory and Other Services............................... 45
Distribution Contracts............................................... 49
Net Asset Value...................................................... 49
Special Redemptions.................................................. 50
Description of the Trust's Shares.................................... 50
Dividends............................................................ 51
Tax Status........................................................... 52
Calculation of Performance........................................... 55
Brokerage Allocation................................................. 57
Shareholder Servicing Agent.......................................... 60
Custody of Portfolio................................................. 60
Independent Auditors ................................................ 60
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 the laws of
the Commonwealth of Massachusetts. 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. Technology Fund ("Technology 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. Relative Value Fund ("Relative Value Fund") (formerly John
Hancock V.A. Large Cap Value Fund and before that, 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 Fund); 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
Life Insurance Company (formerly 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
Life Company is wholly owned by John Hancock Financial Services, Inc., a
Delaware Corporation, organized in February, 2000. The International Fund's
Sub-adviser is Indocam International Investment Services ("IIIS"). IIIS is
organized under the laws of France and indirectly owned by Caisse Nationale de
Credit Agricole. As Sub-adviser, IIIS is responsible for providing advice to the
International Fund with respect to investments, subject to the review of the
trustees and overall supervision of the Adviser. The investment Sub-adviser of
Core Equity Fund is Independence Investment Associates, Inc. ("IIA"). The
Technology Fund's Subadviser is American Fund Advisors, Inc. ("AFA"). Together
AFA, IIA and IIIS are sometimes referred to herein collectively as the
"Sub-advisers" or, individually, as the "Sub-adviser." IIA is a wholly owned
indirect subsidiary of the Life Company.
ELIGIBLE INVESTORS
The following information supplements the discussion of each Fund's investment
objective and policies discussed in the Prospectuses. 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.
3
<PAGE>
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. The following information supplements the
discussion of each Fund's investment objective and policies as discussed in the
prospectuses.
Each Fund has adopted investment restrictions detailed in the "Investment
Restrictions" section of this Statement of Additional Information. Some of these
restrictions may help to reduce investment risk. Those restrictions designated
as fundamental may not be changed without shareholder approval. Each Fund's
investment objective, investment policies and non-fundamental restrictions,
however, may be changed by a vote of the Trustees without shareholder approval.
If there is a change in a Fund's investment objective, investors should consider
whether the Fund remains an appropriate investment in light of their current
financial position and needs.
EQUITY
Core Equity Fund
The CORE EQUITY FUND seeks above-average total return (capital appreciation plus
income). To pursue this goal, the Fund normally invests at least 65% of assets
in a diversified portfolio of primarily large capitalization stocks. The
portfolio's risk profile is similar to that of the Standard & Poor's 500 Stock
Index. Consequently, the Fund invests in a number of industry groups without
concentrating in any particular industry.
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 Sub-adviser'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 use this
in-house research to rank the stocks according to their combination of: (1)
value, meaning they appear to be underpriced; and (2) improving fundamentals,
meaning they show potential for strong growth.
The Fund may invest in certain other types of equity and debt securities,
including 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 Depositary
Receipts.
The fixed income securities of the 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 Sub-adviser.
500 Index Fund
The 500 INDEX FUND seeks to provide investment results that correspond to the
total return performance of the Standard & Poor's 500 Stock Price Index ("S&P
500 Index"). To pursue this goal, the Fund normally invests at least 80% of its
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"
4
<PAGE>
the total return performance of the S&P 500 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 (excluding cash and cash equivalents segregated in relation to futures
contracts). 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.
Large Cap Growth Fund
The LARGE CAP GROWTH FUND seeks long-term capital appreciation. To pursue this
goal, the Fund normally invests at least 65% of assets in stocks of
large-capitalization companies (companies in the capitalization range of the
Standard & Poor's 500 Stock Index, which was $316 million to $553.02 billion as
of March 31, 2000).
In choosing individual securities, the managers use fundamental financial
analysis to identify companies with: (1) strong cash flows; (2) secure market
franchises; and (3) sales growth that outpaces their industries.
When management believes that current market or economic conditions warrant, the
Fund may retain cash or invest in preferred stocks and other types of equity and
debt securities. Fixed income securities held by the Fund may be rated as low as
C by S&P or Moody's. No more than 5% of the 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 Fund may
invest up to 15% of assets in foreign securities.
Mid Cap Growth Fund
The MID CAP GROWTH FUND seeks long-term capital appreciation. To pursue this
goal, the Fund normally invests at least 80% of assets in stocks of medium
capitalization companies (companies in the capitalization range of the Russell
MidCap Growth Index, which was $171 million to $66.54 billion as of March 31,
2000.)
In choosing individual securities, the manager looks for companies with growth
stemming from a combination of gains in market share and increased operating
efficiency. The manager considers broad economic trends, demographic factors,
technological changes, consolidation trends and legislative initiatives.
The Fund may invest up to 10% of total assets in the securities of foreign
issuers, including, but not limited to, common stocks, sponsored or unsponsored
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
and Global Depositary Receipts (GDRs), convertible preferred stocks, preferred
stocks and warrants. Under normal conditions, the Fund may not invest more than
10% of assets in cash and/or cash equivalents (except cash segregated in
relation to futures, forward and option contracts). In addition, under normal
conditions, the Fund will not invest in any fixed income securities. However, in
abnormal conditions, the fund may temporarily invest in U.S. government
securities with maturities of up to three years, and may also invest more than
10% of total assets in cash and/or cash equivalents (including U.S. government
securities maturing in 90 days or less). The Fund may not invest more than 5% of
assets at the time of purchase in any one security (other than U.S. government
securities).
5
<PAGE>
Relative Value Fund
The RELATIVE VALUE 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 selecting equity securities for the Fund, the portfolio manager emphasizes
issuers whose equity securities trade at valuation ratios lower than comparable
issuers. 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 manager 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 manager attempts to identify investments which possess
characteristics such as high relative value, intrinsic value, going concern
value, net asset value and replacement book value. The manager also considers an
issuer's financial strength, competitive position, projected future earnings and
dividends and other investment criteria.
The Fund may invest in U.S. Government securities and corporate bonds, notes and
other debt securities of any maturity. The 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. The Fund may also
invest up to 25% of its total assets in foreign securities (35% during adverse
U.S. market conditions).
The Fund is managed by Timothy E. Quinlisk, CFA. Mr. Quinlisk is a Senior Vice
President of the Adviser and has managed the Fund since 1998 except between
January and March 2000.
Small Cap Growth Fund
The SMALL CAP GROWTH FUND seeks long-term capital appreciation. To pursue this
goal, the Fund normally invests at least 80% of total assets in stocks of small
capitalization companies (companies in the capitalization range of the Russell
2000 Growth Index, which was $23 million to $10.45 billion on March 31, 2000.)
The managers look for companies in the emerging growth phase of development that
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 accelerated earnings. For a description of some of the investment
characteristics of smaller capitalization companies, see "Smaller Capitalization
Companies."
The Fund may invest up to 10% of total assets in the securities of foreign
issuers, including, but not limited to, common stocks, sponsored or unsponsored
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
Global Depositary Receipts (GDRs), convertible preferred stocks, preferred
stocks and warrants. Under normal conditions, the Fund may not invest more than
10% of assets in cash or cash equivalents (except cash segregated in relation to
futures, forward and option contracts). In addition, under normal conditions,
the Fund will not invest in any fixed income securities. However, in abnormal
conditions, the fund may temporarily invest in U.S. government securities and
U.S. government agency securities with maturities of up to three years, and may
also invest more than 10% of total assets in cash and/or cash equivalents
(including U.S. government securities maturing in 90 days or less). The Fund may
not invest more than 5% of total assets at time of purchase in any one security
(other than U.S. government securities).
6
<PAGE>
Sovereign Investors Fund
The SOVEREIGN INVESTORS FUND seeks long-term growth of capital and income
without assuming undue market risks. To pursue these goals, the Fund typically
invests most of its assets in a diversified portfolio of stocks. Under normal
conditions, the Fund invests at least 80% of its stocks in companies within the
capitalization range of the Standard & Poor's 500 Stock Index. On March 31,
2000, that range was $316 million to $553.02 billion.
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. 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 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
judgement of the management team of what might best achieve the Fund's
investment objective.
The Fund's portfolio securities are selected 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 or mix of 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 and fixed income markets.
The fund may not invest more than 5% of total assets at time of purchase in any
one security (other than U.S. government securities). Under normal conditions,
the fund may not invest more than 10% of assets in cash or cash equivalents
(except cash segregated in relation to futures, forward and option contracts).
Fixed income securities held by the Fund may be rated as low as C by S&P or
Moody's. No more than 5% of the 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. 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
determination, the Fund will dispose of the security as promptly as possible
while attempting to minimize any loss.
INTERNATIONAL
International Fund
The INTERNATIONAL FUND seeks long-term growth of capital. To pursue this goal,
the Fund normally invests at least 80% of total assets in stocks of foreign
companies. The Fund may invest up to 30% of total assets in emerging markets as
classified by Morgan Stanley Capital International (MSCI). For a description of
some of the investment characteristics of foreign securities, see "Foreign
Securities and Emerging Countries." Generally, the Fund's portfolio contains
securities of issuers from at least three countries other than the United
States.
In managing the portfolio, the managers focus 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 Fund's foreign equities may include, but are not
limited to, common stocks, convertible preferred stocks, preferred stocks,
warrants, American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs"), and Global Depositary Receipts (GDRs).
7
<PAGE>
Under normal conditions the Fund may not invest more than 10% of total assets in
cash and/or cash equivalents (except cash segregated in relation to futures,
forward and option contracts). In addition, under normal conditions the Fund
will not invest in any fixed income securities. However, in abnormal conditions
the Fund may temporarily invest in U.S. government securities and U.S.
government agency securities with maturities of up to three years, and may also
invest more than 10% of total assets in cash and/or cash equivalents (including
U.S. government securities maturing in 90 days or less). The Fund may not invest
more than 5% of total assets at time of purchase in any one security (other than
U.S. government securities).
SECTOR
Financial Industries Fund
The FINANCIAL INDUSTRIES FUND seeks capital appreciation. To pursue this goal,
the Fund normally invests at least 65% of its total assets in equity securities
of U.S. and foreign financial services companies.
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
holding companies; 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.
In managing the portfolio, the managers focus primarily on stock selection
rather than industry allocation. The managers use a strategy of investing in
financial services companies that are currently undervalued, appear to be
positioned for a merger, or are 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 "Financial
Industries."
To avoid the need to sell equity securities to meet redemption requests, and to
provide flexibility to take advantage of investment opportunities, the Fund may
invest up to 15% of its net assets in investment grade short-term securities.
The 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.
Regional Bank Fund
The REGIONAL BANK FUND seeks long-term capital appreciation. To pursue this
goal, the Fund normally invests at least 65% of total assets in stocks of
regional banks and lending companies, including commercial and industrial banks,
savings and loan associations 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 insured (including any state or
federally chartered savings and loan association). Although the managers 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.
8
<PAGE>
The Fund may also invest 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. For a description of the investment
characteristics of the Banking Industry, see the "Banking Industry."
To avoid the need to sell equity securities to meet redemption requests, and to
provide flexibility to take advantage of investment opportunities, the Fund may
invest up to 15% of its net assets in investment grade short-term securities.
The 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.
Technology Fund
The TECHNOLOGY FUND seeks long-term growth of capital. To pursue this goal, the
Fund invests principally in equity securities of companies that rely extensively
on technology in their product development or operations.
Under normal market conditions, at least 65% of the Fund's total assets are
invested in securities of the technology companies noted above. The Fund's
portfolio is primarily comprised of U.S. and foreign common stocks and
securities convertible into common stocks, including convertible bonds,
convertible preferred stocks and warrants.
Investments in U.S. and foreign companies that rely extensively on technology in
product development or operations may be expected to benefit from scientific
developments and the application of technical advances resulting from improving
technology in many different fields, such as computer software and hardware
(including internet-related technology), semiconductors, telecommunications,
defense and commercial electronics, data storage and retrieval, biotechnology
and others. Generally, investments will be made in securities of a company that
relies extensively on technology in product development or operations only if a
significant part of its assets are invested in, or a significant part of its
total revenue or net income is derived from, technology. For a description of
the investment characteristics of the technology industry, see
"Technology-Intensive Companies."
The Fund may invest up to 10% of its net assets in fixed income securities that,
at the time of investment, are rated CC or higher by Standard & Poor's Ratings
Group ("Standard & Poor's") or Ca or higher be Moody's Investors Service, Inc.
("Moody's") or their equivalent, and unrated fixed income securities of
comparable quality as determined by the Adviser.
When market conditions suggest a need for a defensive investment strategy, the
Fund may temporarily invest in short-term obligations of or securities
guaranteed by the U.S. Government or its agencies or instrumentalities, high
quality bank certificates of deposit and commercial paper. This temporary
investment strategy is not designed to achieve the Fund's primary investment
objective.
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INCOME
Bond Fund
The BOND FUND seeks to generate a high level of current income consistent with
prudent investment risk. To pursue this goal, the Fund normally invests at least
65% of total assets in a diversified portfolio of debt securities. These include
corporate bonds and debentures, as well as U.S. government and agency
securities. In addition, the Fund contemplates at least 75% of the value of its
total assets will be in (1) debt securities that have, at the time of purchase,
a rating within the four highest grades as determined by Moody's Investors
Service, Inc. ("Moody's") (Aaa, Aa, A or Baa) or Standard & Poor's ("S&P") (AAA,
AA, A, or BBB); (2) debt 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 Moody's or S&P, are considered by the Fund to have
investment quality comparable to securities receiving ratings within the four
highest grades; and (3) cash and cash equivalents. Under normal conditions, the
Fund may not invest more than 10% of total assets in cash and/or cash
equivalents (except cash segregated in relation to futures, forward and options
contracts).
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 "High
Yield/High Risk Debt Obligations." 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).
High Yield Bond Fund
The HIGH YIELD BOND 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 its total assets in U.S. and foreign bonds
rated Baa or lower by Moody's or BBB or lower 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 junk 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 High Yield / High Risk Debt Obligations." 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 telecommunications 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."
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Money Market Fund
The MONEY MARKET FUND seeks the maximum current income that is consistent with
maintaining liquidity and preserving capital. The Fund invests in high-quality
money market instruments including, but not limited to, U.S. Government,
municipal and foreign government securities; obligations of supranational
organizations (e.g., the World Bank and the International Monetary Fund);
obligations of U.S. and foreign banks and other lending institutions; corporate
obligations; repurchase agreements and reverse repurchase agreements. All of the
Fund's investments are denominated in U.S. dollars.
At the time the Money Market Fund acquires its investments, they will be rated
(or issued by an issuer that is rated with respect to a comparable class of
short-term debt obligations) in one of the two highest rating categories for
short-term debt obligations assigned by at least two nationally recognized
rating organizations (or one rating organization if the obligation was rated by
only one such organization). These high quality securities are divided into
"first tier" and "second tier" securities. First tier securities have received
the highest rating from at least two rating organizations while second tier
securities have received ratings within the two highest categories from at least
two rating agencies, but do not qualify as first tier securities. The Fund may
also purchase obligations that are not rated, but are determined by the Adviser,
based on procedures adopted by the Trust's Board of Trustees, to be of
comparable quality to rated first or second tier securities. The Fund may not
purchase any second tier security if, as a result of its purchase (a) more than
5% of its total assets would be invested in second tier securities or (b) more
than 1% of its total assets or $1 million (whichever is greater) would be
invested in the second tier securities of a single issuer.
The Fund seeks to maintain a constant $1.00 share price although there can be no
assurance it will do so. All of the Fund's investments will mature in 397 days
or less. The Fund will maintain an average dollar-weighted portfolio maturity of
90 days or less.
Strategic Income Fund
The STRATEGIC INCOME FUND seeks a high level of current income. In pursuing this
goal, the Fund invests primarily in the following categories of securities:
foreign government and foreign corporate securities from developed and emerging
countries, U.S. Government and agency 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 categories.
However, from time to time the Fund may invest up to 100% of its total assets in
any one category. 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 "Risks Associated With Specific Types of Derivative Debt Securities."
The Fund generally intends to keep its average credit quality in the investment
grade range. However, the Fund may invest up to 100% of 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 High Yield / High Risk Debt Obligations." for a
description of the risks and characteristics of the various ratings categories.
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RISK FACTORS, INVESTMENTS AND TECHNIQUES
Banking Industry. Since the Regional Bank Fund's investments will be
concentrated in the banking industry, it will be subject to risks in addition to
those that apply to the general equity market. Events may occur which
significantly affect the entire banking industry. Thus, the Fund's share value
may at times increase or decrease at a faster rate than the share value of a
mutual fund with investments in many industries. In addition, despite some
measure of deregulation, banks and other lending institutions are still subject
to extensive governmental regulation which limits their activities. The
availability and cost of funds to these entities is crucial to their
profitability. Consequently, volatile interest rates and general economic
conditions can adversely affect their financial performance and condition. The
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, recent legislation removing traditional barriers between
banking and investment banking activities will 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 Securities & Emerging Countries."
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Technology-Intensive Companies. Since the Technology Fund's investments will be
concentrated in technology-intensive companies, it will be subject to risks in
addition to those that apply to the general equity and debt markets. Securities
prices of technology-intensive companies have tended to be subject to greater
volatility than securities prices in many other industries, due to particular
factors affecting these industries. Competitive pressures may also have a
significant effect on the financial condition of technology-intensive companies.
For example, if the development of new technology continues to advance at an
accelerated rate, and the number of companies and product offerings continues to
expand, the companies could become increasingly sensitive to short product
cycles and aggressive pricing. Accordingly, the Fund's performance will be
particularly susceptible to factors affecting these companies as well as the
economy as a whole.
Smaller Capitalization Companies. Smaller capitalization 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.
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 (other than Financial
Industries Fund, Regional Bank Fund and Technology 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.
Fixed Income Securities. Fixed income investments of each Fund 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. Under
normal conditions, International Fund, Mid Cap Growth Fund, and Small Cap Growth
Fund will not invest in any fixed income securities (other than preferred stock
and cash equivalents).
Fixed income securities of corporate and governmental issuers are subject to the
risk of an issuer's inability to meet principal and interest payments on the
obligations (credit risk) and may also be subject to price volatility due to
factors such as interest rate sensitivity, market perception of the issuer's
creditworthiness and general market liquidity (market risk). Debt securities
will be selected based upon credit risk analysis of issuers, the characteristics
of the security and interest rate sensitivity of the various debt issues
available from a particular issuer as well as analysis of the anticipated
volatility and liquidity of the fixed income instruments. The longer a Fund's
average portfolio maturity, the more the value of the portfolio and the net
asset value of the Fund's shares will fluctuate in response to changes in
interest rates. An increase in rates will generally decrease the value of the
Fund's securities, while a decline in interest rates will generally increase
their value.
Preferred Stocks. Each Fund (other than 500 Index Fund and Money Market Fund)
may invest in preferred stock. 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
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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 500 Index Fund and 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. The International Fund, Mid Cap Growth Fund, and Small Cap Growth Fund
may only invest in convertible preferred stock.
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.
The S&P 500 Index. The S&P 500 Index is a capitalization weighted index
comprised of 500 industrial, utility, transportation and financial companies in
the United States markets. The S&P 500 Index represents approximately 75% of the
total market capitalization of stocks traded in the U.S. equity market.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 60.61% 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, 2000, the five largest companies
in the Index were: Microsoft (4.36%), Cisco Systems (4.17%), General Electric
(4.01%), Intel (3.48%), and Exxon Mobil (2.12%). The largest industry categories
were: computer software (9.75%), communications equipment (8.93%), electronics
(semi-conductors) (7.26%), computer systems (6.97%) and electrical equipment
(4.55%).
"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 John Hancock Advisers, Inc. ("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.
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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 JOHN
HANCOCK ADVISERS, INC., 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.
SPDRS. The 500 Index Fund may invest in securities referred to as SPDRs, or
"spiders", that are designed to track the S&P 500 Index. SPDRs represent an
ownership interest in the SPDR Trust, which holds a portfolio of common stocks
that closely tracks the price performance and dividend yield of the S&P 500
Index. SPDRs trade on the American Stock Exchange like shares of common stock.
SPDRs have many of the same risks as direct investments in common stocks. The
market value of SPDRs is expected to rise and fall as the S&P 500 Index rises
and falls. If the Fund invests in SPDRs, it would, in addition to its own
expenses, indirectly bear its ratable share of the SPDR's expenses.
Foreign Securities and Emerging Countries. Each Fund (other than 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. The Core
Equity Fund, 500 Index Fund, Sovereign Investors 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. The International Fund, Small Cap
Growth Fund, Technology Fund, High Yield Bond Fund and Strategic Income Fund may
also invest securities of foreign issuers located in countries with emerging
economies or securities markets.
Investing in obligations of non-U.S. issuers and foreign banks, particularly
securities of issuers located in emerging countries, may entail greater risks
than investing in similar securities of U.S. issuers. These risks include (i)
social, political and economic instability; (ii) the small current size of the
markets for many such securities and the currently low or nonexistent volume of
trading, which may result in a lack of liquidity and in greater price
volatility; (iii) certain national policies which may restrict a Fund's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; and
(v) the absence of developed structures governing private or foreign investment
or allowing for judicial redress for injury to private property. Investing in
securities of non-U.S. companies may entail additional risks due to the
potential political and economic instability of certain countries and the risks
of expropriation, nationalization, confiscation or the imposition of
restrictions on foreign investment and on repatriation of capital invested. In
the event of such expropriation, nationalization or other confiscation by any
country, a Fund could lose its entire investment in any such country.
In addition, even though opportunities for investment may exist in foreign
countries, and in particular emerging markets, any change in the leadership or
policies of the governments of those countries or in the leadership or policies
of any other government which exercises a significant influence over those
countries, may halt the expansion of or reverse the liberalization of foreign
investment policies now occurring and thereby eliminate any investment
opportunities which may currently exist. Investors should note that upon the
accession to power of authoritarian regimes, the governments of a number of
Latin American countries previously expropriated large quantities of real and
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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 will
(under normal circumstances) invest, a portion of their total assets in
securities which are denominated or quoted in foreign currencies, the strength
or weakness of the U.S. dollar against such currencies may account for part of
the Funds' investment performance. A decline in the value of any particular
currency against the U.S. dollar will cause a decline in the U.S. dollar value
of a Fund's holdings of securities denominated in such currency and, therefore,
will cause an overall decline in the Fund's net asset value and any net
investment income and capital gains to be distributed in U.S. dollars to
shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries and the U.S.,
and other economic and financial conditions affecting the world economy.
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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."
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. Foreign currency transactions 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.
Each Fund (other than Core Equity Fund, 500 Index Fund, Sovereign Investors
Fund, and Money Market Fund) may also enter into forward foreign currency
exchange contracts to hedge against fluctuations in currency exchange rates
affecting a particular transaction or portfolio position. 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. Transaction hedging is the purchase
or sale of forward foreign currency contracts with respect to specific
receivables or payables of a Fund accruing in connection with the purchase and
sale of its portfolio securities quoted or denominated in the same or related
foreign currencies. Portfolio hedging is the use of forward foreign currency
contracts to offset portfolio security positions denominated or quoted in the
same or related foreign currencies. A Fund may elect to hedge less than all of
its foreign portfolio positions as deemed appropriate by the Adviser. The Funds
will not engage in speculative forward foreign currency exchange transactions.
If a Fund purchases a forward contract, the Fund will segregate cash or liquid
securities in a separate account in an amount equal to the value of the Fund's
total assets committed to the consummation of such forward contract. The assets
in the segregated account will be valued at market daily and if the value of the
securities in the separate account declines, additional cash or securities will
be placed in the account so that the value of the account will be equal the
amount of the Fund's commitment in forward contracts.
Hedging against a decline in the value of a 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 the Funds 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.
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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 "primary dealers" in U.S. government securities. The Adviser or
relevant Sub-adviser will continuously monitor the creditworthiness of the
parties with whom a Fund enters into repurchase agreements.
Each Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, a Fund could experience delays in liquidating
the underlying securities and could experience losses, including the possible
decline in the value of the underlying securities during the period in which the
Fund seeks to enforce its rights thereto, possible subnormal levels of income or
lack of access to income during this period, as well as the expense of enforcing
its rights. A Fund will not invest in a repurchase agreement maturing in more
than seven days, if such investment, together with other illiquid securities
held by the Fund would exceed 15% (10% for Money Market Fund) of the Fund's net
assets.
Reverse Repurchase Agreements. Each Fund may also enter into reverse repurchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank with an agreement that the Fund will buy back the securities
at a fixed future date at a fixed price plus an agreed amount of "interest"
which may be reflected in the repurchase price. Reverse repurchase agreements
are considered to be borrowings by a Fund. Reverse repurchase agreements involve
the risk that the market value of securities purchased by a Fund with proceeds
of the transaction may decline below the repurchase price of the securities sold
by a Fund which it is obligated to repurchase. A Fund will also continue to be
subject to the risk of a decline in the market value of the securities sold
under the agreements because it will reacquire those securities upon effecting
their repurchase. To minimize various risks associated with reverse repurchase
agreements, a Fund will establish and maintain 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 have adopted
guidelines and delegated 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.
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Options on Securities, Securities Indices and Currency. Mid Cap Growth Fund,
Small Cap Growth Fund and Sovereign Investors Fund may each purchase and write
(sell) call and put options on any index based on securities in which it may
invest. Each other Fund (except 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 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. Each
Fund, other than the International Fund, Mid Cap Growth Fund, Small Cap Growth
Fund and Sovereign Investors Fund, may also write and purchase options to
enhance total return.
Writing Covered Options. A call option on securities or currency written by a
Fund obligates the Fund to sell specified securities or currency to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. A put option on securities or currency written by a Fund
obligates the Fund to purchase specified securities or currency from the option
holder at a specified price if the option is exercised at any time before the
expiration date. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash
settlement payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Writing covered call options may
deprive a Fund of the opportunity to profit from an increase in the market price
of the securities or foreign currency assets in its portfolio. Writing covered
put options may deprive a Fund of the opportunity to profit from a decrease in
the market price of the securities or foreign currency assets to be acquired for
its portfolio.
All call and put options written by the Funds are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities,
either of which may be quoted or denominated in any currency, in a segregated
account maintained by the affected Fund's custodian with a value at least equal
to the Fund's obligation under the option, (ii) entering into an offsetting
forward commitment and/or (iii) purchasing an offsetting option or any other
option which, by virtue of its exercise price or otherwise, reduces the Fund's
net exposure on its written option position. A written call option on securities
is typically covered by maintaining the securities that are subject to the
option in a segregated account. Each Fund may cover call options on a securities
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.
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The purchase of a put option would entitle a Fund, in exchange for the premium
paid, to sell specified securities or currency at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of the Fund's portfolio securities or the
currencies in which they are denominated. Put options may also be purchased by a
Fund for the purpose of affirmatively benefiting from a decline in the price of
securities or currencies which it does not own. A Fund would ordinarily realize
a gain if, during the option period, the value of the underlying securities or
currency decreased below the exercise price sufficiently to cover the premium
and transaction costs; otherwise the Fund would realize either no gain or a loss
on the purchase of the put option. Gains and losses on the purchase of put
options may be offset by countervailing changes in the value of a Fund's
portfolio securities.
Each Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which a Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If a Fund is unable
to effect a closing purchase transaction with respect to covered options it has
written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if a Fund is unable to effect a closing sale
transaction with respect to options it has purchased, it would have to exercise
the options in order to realize any profit and will incur transaction costs upon
the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
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.
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Futures Contracts and Options on Futures Contracts. Mid Cap Growth Fund, Small
Cap Growth Fund and Sovereign Investors Fund may each purchase and sell futures
contracts on any index based on securities in which it may invest for hedging or
other non-speculative purposes. The International Fund may purchase and sell
various types of futures contracts and options on these futures contracts to
hedge against changes in interest rates, securities prices, or currency exchange
rates or for other non-speculative purposes. To seek to increase total return or
hedge against changes in interest rates, securities prices or currency exchange
rates, each other Fund except 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 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.
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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. Subject to
the limitations imposed on International Fund, Mid Cap Growth Fund, Small Cap
Growth Fund, and Sovereign Investors Fund, as described above, 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 the futures contracts described above for the same
purposes as its transactions in futures contracts. The purchase of put and call
options on futures contracts will give a Fund the right (but not the obligation)
for a specified price to sell or to purchase, respectively, the underlying
futures contract at any time during the option period. As the purchaser of an
option on a futures contract, a Fund obtains the benefit of the futures position
if prices move in a favorable direction but limits its risk of loss in the event
of an unfavorable price movement to the loss of the premium and transaction
costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of a Fund's assets. By writing a call
option, a Fund becomes obligated, in exchange for the premium (upon exercise of
the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that a Fund intends to purchase. However, a
Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by each Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. A Fund's ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid market.
Other Considerations. The International Fund, Mid Cap Growth Fund, Small Cap
Growth Fund, and Sovereign Investors Fund may each engage in futures and related
options transactions for hedging or other non-speculative purposes. Each other
Fund (except 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
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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.
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.
Government Securities. Each Fund may invest in government securities. However,
under normal conditions, International Fund, Mid Cap Growth Fund, and Small Cap
Growth Fund will not invest in any fixed income securities, with the exception
of cash equivalents (which include U.S. Government securities maturing in 90
days or less). In abnormal conditions, these funds may temporarily invest in
U.S. Government securities and U.S. Government agency securities with maturities
of up to three years, and may also invest more than 10% of total assets in cash
and/or cash equivalents. Certain U.S. Government securities, including U.S.
Treasury bills, notes and bonds, and Government National Mortgage Association
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certificates ("GNMA"), are supported by the full faith and credit of the United
States. Certain other U.S. Government securities, issued or guaranteed by
Federal agencies or government sponsored enterprises, are not supported by the
full faith and credit of the United States, but may be supported by the right of
the issuer to borrow from the U.S. Treasury. These securities include
obligations of the Federal Home Loan Mortgage Corporation ("FHLMC"), and
obligations supported by the credit of the instrumentality, such as Federal
National Mortgage Association Bonds ("FNMA"). No assurance can be given that the
U.S. Government will provide financial support to such Federal agencies,
authorities, instrumentalities and government sponsored enterprises in the
future.
Municipal Obligations. The High Yield Bond Fund may invest in a variety of
municipal obligations which consist of municipal bonds, municipal notes and
municipal commercial paper.
Municipal Bonds. Municipal bonds are issued to obtain funds for various public
purposes including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
bonds may be issued include refunding outstanding obligations, obtaining funds
for general operating expenses and obtaining funds to lend to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds for many types of local, privately operated facilities. Such debt
instruments are considered municipal obligations if the interest paid on them is
exempt from federal income tax. The payment of principal and interest by issuers
of certain obligations purchased by the Fund may be guaranteed by a letter of
credit, note repurchase agreement, insurance or other credit facility agreement
offered by a bank or other financial institution. Such guarantees and the
creditworthiness of guarantors will be considered by the Adviser in determining
whether a municipal obligation meets the Fund's investment quality requirements.
No assurance can be given that a municipality or guarantor will be able to
satisfy the payment of principal or interest on a municipal obligation.
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
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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.
Swaps, Caps, Floors and Collars. 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 Technology Fund, Bond Fund, High Yield Bond Fund,
and Strategic Income 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. The
Technology Fund may purchase only those participation interests that mature in
60 days or less, or, if maturing in more than 60 days, that have a floating rate
that is automatically adjusted at least once every 60 days.
Pay-In-Kind, Delayed and Zero Coupon Bonds. The Bond Fund, Strategic Income
Fund, High Yield Bond Fund and Technology 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
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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. The Funds' investments
in pay-in-kind, delayed and zero coupon bonds may require a Fund to sell certain
of its portfolio securities to generate sufficient cash to satisfy certain
income distribution requirements.
Structured or Hybrid Notes. The Bond Fund, Strategic Income Fund, High Yield
Bond Fund, and Technology 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.
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. Each Fund, other than International Fund, Mid Cap Growth
Fund, and Small Cap Growth Fund, may 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
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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 (other than International Fund, Mid Cap
Growth Fund, and Small Cap Growth Fund) may invest in mortgage pass-through
certificates and multiple-class pass-through securities, such as real estate
mortgage investment conduits ("REMIC") pass-through certificates, collateralized
mortgage obligations ("CMOs") and stripped mortgage-backed securities ("SMBS"),
and other types of "Mortgage-Backed Securities" that may be available in the
future.
Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-through
securities represent participation interests in pools of residential mortgage
loans and are issued by U.S. Governmental or private lenders and guaranteed by
the U.S. Government or one of its agencies or instrumentalities, including but
not limited to the Government National Mortgage Association ("Ginnie Mae"), the
Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan
Mortgage Corporation ("Freddie Mac"). Ginnie Mae certificates are guaranteed by
the full faith and credit of the U.S. Government for timely payment of principal
and interest on the certificates. Fannie Mae certificates are guaranteed by
Fannie Mae, a federally chartered and privately owned corporation, for full and
timely payment of principal and interest on the certificates. Freddie Mac
certificates are guaranteed by Freddie Mac, a corporate instrumentality of the
U.S. Government, for timely payment of interest and the ultimate collection of
all principal of the related mortgage loans.
Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations.
CMOs and REMIC pass-through or participation certificates may be issued by,
among others, U.S. Government agencies and instrumentalities as well as private
issuers. CMOs and REMIC certificates are issued in multiple classes and the
principal of and interest on the mortgage assets may be allocated among the
several classes of CMOs or REMIC certificates in various ways. Each class of
CMOs or REMIC certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Generally, interest is paid or accrues on all
classes of CMOs or REMIC certificates on a monthly basis.
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.
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Risk Factors Associated with Mortgage-Backed Securities. Investing in
Mortgage-Backed Securities involves certain risks, including the failure of a
counterparty to meet its commitments, adverse interest rate changes and the
effects of prepayments on mortgage cash flows. In addition, investing in the
lowest tranche of CMOs and REMIC certificates involves risks similar to those
associated with investing in equity securities. Further, the yield
characteristics of Mortgage-Backed Securities differ from those of traditional
fixed income securities. The major differences typically include more frequent
interest and principal payments (usually monthly), the adjustability of interest
rates, and the possibility that prepayments of principal may be made
substantially earlier than their final distribution dates.
Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors and cannot be
predicted with certainty. Both adjustable rate mortgage loans and fixed rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest rate environment. Under certain interest
rate and prepayment rate scenarios, a Fund may fail to recoup fully its
investment in Mortgage-Backed Securities notwithstanding any direct or indirect
governmental, agency or other guarantee. When a Fund reinvests amounts
representing payments and unscheduled prepayments of principal, it may receive a
rate of interest that is lower than the rate on existing adjustable rate
mortgage pass-through securities. Thus, Mortgage-Backed Securities, and
adjustable rate mortgage pass-through securities in particular, may be less
effective than other types of U.S. Government securities as a means of "locking
in" interest rates.
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.
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Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Risks Associated With Specific Types of Derivative Debt Securities. Different
types of derivative debt securities are subject to different combinations of
prepayment, extension and/or interest rate risk. Conventional mortgage
pass-through securities and sequential pay CMOs are subject to all of these
risks, but are typically not leveraged. Thus, the magnitude of exposure may be
less than for more leveraged Mortgage-Backed Securities.
The risk of early prepayments is the primary risk associated with interest only
debt securities ("IOs"), leveraged floating rate securities whose yield changes
in the same direction, rather than inversely to, a referenced interest rate ("
super floaters"), other leveraged floating rate instruments and Mortgage-Backed
Securities purchased at a premium to their par value. In some instances, early
prepayments may result in a complete loss of investment in certain of these
securities.
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. The Bond Fund, High Yield Bond Fund and Strategic Income Fund may
invest in Brady Bonds and other sovereign debt securities of countries that have
restructured or are in the process of restructuring sovereign debt pursuant to
the Brady Plan. Brady Bonds are debt securities described as part of a
restructuring plan created by U.S. Treasury Secretary Nicholas F. Brady in 1989
as a mechanism for debtor nations to restructure their outstanding external
indebtedness (generally, commercial bank debt). In restructuring its external
debt under the Brady Plan framework, a debtor nation negotiates with its
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existing bank lenders as well as multilateral institutions such as the World
Bank and the International Monetary Fund (the "IMF"). The Brady Plan facilitates
the exchange of commercial bank debt for newly issued bonds (known as Brady
Bonds). The World Bank and the IMF provide funds pursuant to loan agreements or
other arrangements which enable the debtor nation to collateralize the new Brady
Bonds or to repurchase outstanding bank debt at a discount. Under these
arrangements the IMF debtor nations are required to implement domestic monetary
and fiscal reforms. These reforms have included the liberalization of trade and
foreign investment, the privatization of state-owned enterprises and the setting
of targets for public spending and borrowing. These policies and programs seek
to promote the debtor country's ability to service its external obligations and
promote its economic growth and development. The Brady Plan only sets forth
general guiding principles for economic reform and debt reduction, emphasizing
that solutions must be negotiated on a case-by-case basis between debtor nations
and their creditors. The Adviser believes that economic reforms undertaken by
countries in connection with the issuance of Brady Bonds make the debt of
countries which have issued or have announced plans to issue Brady Bonds an
attractive opportunity for investment.
Brady Bonds may involve a high degree of risk, may be in default or present the
risk of default. Agreements implemented under the Brady Plan to date are
designed to achieve debt and debt-service reduction through specific options
negotiated by a debtor nation with its creditors. As a result, the financial
packages offered by each country differ. The types of options have included the
exchange of outstanding commercial bank debt for bonds issued at 100% of face
value of such debt, bonds issued at a discount of face value of such debt, bonds
bearing an interest rate which increases over time and bonds issued in exchange
for the advancement of new money by existing lenders. Certain Brady Bonds have
been collateralized as to principal due at maturity by U.S. Treasury zero coupon
bonds with a maturity equal to the final maturity of such Brady Bonds, although
the collateral is not available to investors until the final maturity of the
Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and
the debtor nations' reserves. In addition, the first two or three interest
payments on certain types of Brady Bonds may be collateralized by cash or
securities agreed upon by creditors. Although Brady Bonds may be collateralized
by U.S. Government securities, repayment of principal and interest is not
guaranteed by the U.S. Government.
Ratings as Investment Criteria. In general, the ratings of Moody's Investors
Service, Inc. ("Moody's), Standard & Poor's Ratings Group ("S&P") and Fitch
Investors Service ("Fitch") represent the opinions of these agencies as to the
quality of the securities which they rate. It should be emphasized, however,
that such ratings are relative and subjective and are not absolute standards of
quality. These ratings will be used by the Funds as initial criteria for the
selection of debt 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 (other than Sovereign Investors Fund), but the Adviser will consider the
event in its determination of whether the Fund should continue to hold the
securities. 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.
Lower Rated High Yield/High Risk Debt Obligations. Strategic Income Fund,
Regional Bank Fund, Financial Industries Fund, Relative Value Fund, Sovereign
Investors Fund, Large Cap Growth Fund, Technology 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).
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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. In the past, economic downturns and increases in interest rates have
caused a higher incidence of default by the issuers of lower-rated securities
and may do so in the future, particularly with respect to highly leveraged
issuers
Each Fund (other than Money Market 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 longer the 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 interest
rates will generally reduce the value of the Fund's portfolio securities and the
Fund's shares, while a decline in interest rates will generally increase their
value.
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 Funds not to lend portfolio securities having a total
value exceeding 33 1/3% of its total assets.
Short Sales. Large Cap Growth Fund and Financial Industries 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, International Fund, Mid Cap
Growth Fund, Small Cap Growth Fund, Sovereign Investors Fund, Technology 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.
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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 equal to the difference between (a) the market value
of the securities sold short and (b) any cash or U.S. Government securities
required to be deposited as collateral with the broker in connection with the
short sale (not including the proceeds from the short sale). In addition, until
a Fund replaces the borrowed security, it must daily maintain the segregated
account at such a level that the amount deposited in it plus the amount
deposited with the broker as collateral will equal the current market value of
the securities sold short. Except for short sales against the box, the amount of
the Fund's net assets that may be committed to short sales is limited and the
securities in which short sales are made must be listed on a national securities
exchange.
Short selling may produce higher than normal portfolio turnover which may result
in increased transaction costs to a Fund.
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.
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, Large Cap Growth Fund, Relative Value
Fund, Mid Cap Growth Fund, Small Cap Growth Fund, Technology 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.
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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 each Fund is shown in the section captioned
"Financial Highlights" in the prospectuses. 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.
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 Prospectuses 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 2,
5 and 6 below. For purposes of this restriction, the issuance
of shares of beneficial interest in multiple classes or
series, the deferral of the Trustees' fees and the purchase or
sale of options, futures contracts, forward commitments, swaps
and repurchase agreements entered into in accordance with the
Fund's investment policies within the meaning of paragraph 6
below, are not deemed to be senior securities.
2. Borrow money, except for the following extraordinary or
emergency purposes: (i) from banks for temporary or short-term
purposes or for the clearance of transactions; (ii) in
connection with the redemption of Fund shares or to finance
failed settlements of portfolio trades without immediately
liquidating portfolio securities or other assets; and (iii) in
order to fulfill commitments or plans to purchase additional
securities pending the anticipated sale of other portfolio
securities or assets, but only if after each such borrowing
there is asset coverage of at least 300% as defined in the
1940 Act. For purposes of this investment restriction, the
deferral of trustees' fees and short sales, transactions in
futures contracts and options on futures contracts, securities
or indices and forward commitment transactions shall not
constitute borrowing. This restriction does not apply to
transactions in reverse repurchase agreements in amounts not
to exceed 33 1/3% of the value of the Fund's total assets
(including the amount borrowed) taken at market value.
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.
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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
Technology Fund will ordinarily invest more than 25% of its
total assets in the technology 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 [see
non-fundamental investment restriction (h)], 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:
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.
34
<PAGE>
3. Act as an underwriter, except to the extent that, in
connection with the disposition of portfolio securities, the
Fund may be deemed to be an underwriter for purposes of the
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:
(a) 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.
(b) 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. The 500 Index
Fund, International Fund, Mid Cap Growth Fund, Small Cap
Growth Fund Sovereign Investors Fund, and Technology Fund may
not make short sales.
35
<PAGE>
(c) 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.
(d) 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.
(e) Purchase securities while outstanding borrowings (other than
reverse repurchase agreements) exceed 5% of the Fund's total
assets.
(f) Invest for the purpose of exercising control over or
management of any company.
(g) Under normal conditions, Bond Fund, International Fund, Mid
Cap Growth Fund, Small Cap Growth Fund and Sovereign Investors
Fund may not invest more than 10% of total assets in cash
and/or cash equivalents (except cash segregated in relation to
futures, forward and option contracts).
(h) International Fund, Mid Cap Growth Fund, Small Cap Growth Fund
and Sovereign Investors Fund may not invest more than 5% of
total assets at time of purchase in any one security (other
than U.S. government securities).
(i) Under normal conditions, International Fund, Mid Cap Growth
Fund and Small Cap Growth Fund will not invest in any fixed
income securities. However, in abnormal conditions, these
Funds may temporarily invest in U.S. government securities and
U.S. government agency securities with maturities of up to
three years, and may also invest more than 10% of total assets
in cash and/or cash equivalents (including U.S. government
securities maturing in 90 days or less).
(j) International Fund normally invests at least 80% of total
assets in a diversified portfolio of foreign stocks from both
developed and emerging countries. The Fund may invest up to
30% of total assets in emerging markets as classified by
Morgan Stanley Capital International (MSCI). Foreign equities
include but are not limited to common stocks, convertible
preferred stocks, preferred stocks, warrants, ADRs, GDRs and
EDRs.
(k) Mid Cap Growth Fund and Small Cap Growth Fund may not invest
more than 10% of total assets in foreign securities.
36
<PAGE>
Money Market Fund may not:
(a) 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.
(b) 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.
(c) 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.
(d) 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").
37
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Stephen L. Brown* Trustee and Chairman (1, 2) Chairman and Chief Executive Officer,
John Hancock Place John Hancock Life Insurance Company;
P.O. Box 111 Chairman and Director, John Hancock
Boston, MA 02117 Advisers, Inc. (The Adviser), John
July 1937 Hancock Funds, Inc. (John Hancock
Funds), The Berkeley Financial
Group, Inc. (The Berkeley Group);
Director, John Hancock
Subsidiaries, Inc.; John Hancock
Insurance Agency, Inc.; (Insurance
Agency), (until June 1999); Federal
Reserve Bank of Boston (until March
1999); John Hancock Signature
Services, Inc. (Signature Services)
(until January 1997) ; Trustee,
John Hancock Asset Management
(until March 1997).
Maureen R. Ford * Trustee, Vice Chairman and Chief President, Broker/Dealer Distributor,
101 Huntington Avenue Executive Officer John Hancock Life Insurance Company;
Boston, MA 02199 Vice Chairman, Director and Chief
April 1955 Executive Officer, the Advisers, The
Berkeley Group, John Hancock Funds;
Chairman, Director and President,
Insurance Agency, Inc.; Chairman,
Director and Chief Executive Officer,
Sovereign Asset Management
Corporation (SAMCorp.); Senior Vice
President, MassMutual Insurance Co.
(until 1999); Senior Vice President,
Connecticut Mutual Insurance Co.
(until 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.
38
<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
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.
39
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
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 Apollo Gold, Inc.; Director Original
Sixteen to One Mines, Inc. (until
1999); Management Consultant (from
1984-1987 and 1991-1998); Director,
Freeport-McMoran Copper & Gold, Inc.
(until 1997); Vice President, Chief
Financial Officer and Director of
Amax Gold, Inc. (until 1998).
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.
- -------------------
* 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
Council For International Exchange of International Exchange of Scholars
Scholars (since January 1998), Vice
3007 Tilden Street, N.W. President, Institute of
Washington, D.C. 20008 International Education (since
May 1943 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).
- -------------------
* 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>
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).
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Insurance Company; Director, the
P.O. Box 111 Adviser, John Hancock Funds,
Boston, MA 02117 Signator Investors, Inc., John
August 1937 Hancock Subsidiaries, Inc.,
SAMCorp., NM Capital, The Berkeley
Group, JH Networking Insurance
Agency, Inc.; Insurance Agency, Inc.
(until June 1999), Signature
Services (until January 1997).
Osbert M. Hood Executive Vice President and Chief Executive Vice President and Chief
101 Huntington Avenue Financial Officer Financial Officer, each of the John
Boston, MA 02199 Hancock Funds; Executive Vice
August 1952 President, Treasurer and Chief
Financial Officer of the Adviser,
the Berkeley Group, John Hancock
Funds, and SAMCorp.; Senior Vice
President, Chief Financial Officer
and Treasurer, Signature Services,
NM Capital; Director IndoCam Japan
Limited; Vice President and Chief
Financial Officer, John Hancock
Life Insurance Company, Retail
Sector (until 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.
42
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Thomas H. Connors Vice President and Compliance Officer Vice President and Compliance
101 Huntington Avenue Officer, the Adviser; Vice
Boston, MA 02199 President, John Hancock Funds, Inc.
September 1959
Susan S. Newton Vice President, Secretary and Chief Vice President, Secretary and Chief
101 Huntington Avenue Legal Officer Legal Officer and Secretary, the
Boston, MA 02199 Adviser; John Hancock Funds,
March 1950 Signature Services, The Berkeley
Group, NM Capital and SAMCorp.
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>
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. Brown and Scipione and Ms.
Ford, 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
From the Funds Fiscal Year All Funds in John Hancock
Independent Trustees Ended December 31, 1999 Fund Complex to Trustees(*)
- -------------------- ----------------------- ---------------------------
Dennis S. Aronowitz $ 1,223 $ 75,250
Richard P. Chapman, Jr.+ 1,223 75,250
William J. Cosgrove+ 1,163 72,250
Douglas M. Costle*** 845 56,000
Leland O. Erdahl 1,165 72,350
Richard A. Farrell 1,223 75,250
Gail D. Fosler 1,163 72,250
William F. Glavin+ 1,090 68,100
John A. Moore+ 1,165 72,350
Patti McGill Peterson 1,225 75,350
John W. Pratt 1,163 72,250
--------- ---------
Total $12,648 $786,650
(*) The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is for the calendar year ended December 31, 1999. As of
this date, there were sixty-five funds in the John Hancock Fund Complex of which
each of these Independent Trustees serving on thirty-one funds.
(*) As of December 31, 1999, Mr. Costle resigned.
+ As of December 31, 1999, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Fund Complex for Mr.
Chapman was $112,162, for Mr. Cosgrove was $224,553 and for Mr. Glavin was
$342,213, and for Dr. Moore was $283,877 under the John Hancock Deferred
Compensation Plan for Independent Trustees (the "Plan").
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, 1999, all shares were held by the Life Co. and the Variable
Life Co. except the Adviser owns the following: International Fund 36.74%,
Regional Bank 2.19%, Small Cap Growth Fund 9.71%, Mid Cap Growth 13.54%, Large
Cap Growth Fund 7.38%, Relative Value 2.45%, Bond Fund 9.86%, Strategic Income
Fund 21.67%, High Yield Bond Fund 21.85% and Money Market Fund 0.35%.
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.
44
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $30 billion in assets under management
in its capacity as investment adviser to the Funds and the other funds and
publicly traded investment companies in the John Hancock group of funds as well
as institutional accounts. The Adviser is 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 International Fund, the Adviser has entered into a
sub-investment management contract (the "Sub-advisory Agreement") with Indocam
International Investment Services ("IIIS"), the Sub-adviser, which became
effective January 1, 2000. Under its Sub-advisory Agreement with the Adviser,
IIIS will provide the International Fund with advice and recommendations
regarding the Fund's investments. IIIS will also provide the International Fund
on a continuous basis with economic, financial and political information,
research and assistance concerning international markets. IIIS is organized
under the laws of France and is a wholly owned subsidiary of Indocam, the asset
45
<PAGE>
management affiliate of Credit Agricole, a French banking group with a presence
in financial centers around the world. IIIS is located at 90 Boulevard Pasteur,
Paris, France 75105. Indocam is an asset management firm maintaining established
relationships with institutional, corporate, and individual investors, Credit
Agricole is one of the largest banks in the world. Until March 1, 2000, the
International Fund had another Sub-adviser, John Hancock Advisers, International
("JHAI"), located at 6th Floor, Duke's Court, 32-36 Duke Street, St. James's,
London, England SW1Y6DF. JHAI is a wholly-owned subsidiary of the Adviser formed
in 1987 to provide international investment research and advisory services to
U.S. institutional clients. The Adviser's Sub-advisory contract with JHAI was
terminated effective March 1, 2000.
With respect to Core Equity Fund, the Adviser has entered into a Sub-advisory
Agreement with Independence Investment Associates ("IIA"). IIA, located at 53
State Street, Boston, Massachusetts 02109, and organized in 1982, is a wholly
owned indirect subsidiary of John Hancock Subsidiaries, Inc. With respect to
Sovereign Investors Fund, the Adviser's Sub-advisory Agreement with SAMCorp was
terminated effective January 1, 1999.
With respect to Technology Fund, the Adviser has entered into a Sub-advisory
Agreement with American Fund Advisors, Inc. ("AFA"). AFA is located at 1415
Kellum Place, Suite 205 Garden City, New York 11530 and was incorporated under
the laws of New York in 1978. AFA, subject to the supervision of the Adviser,
manages the Technology Fund's investments. AFA also provides investment advisory
and management services to individual and institutional clients.
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.
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.
- ------------------------------------------------ ---------------------------
Technology Fund 0.80%
- ------------------------------------------------ ---------------------------
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%
- ------------------------------------------------ ---------------------------
Relative 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 April 30, 2001.
Under each Sub-advisory Agreement, the Adviser (not the Fund) pays a portion of
its fee to the corresponding Sub-adviser. With respect to the International
Fund, the Adviser pays a sub-advisory fee to IIIS equal to 55% of the gross
management fee received by the Adviser with respect to the International Fund's
average daily net assets. Prior to March 1, 2000, the Adviser paid JHAI a
Sub-advisory fee equal to 70% of the advisory fee payable on the International
Fund's average daily net assets. JHAI agreed to waive all but 0.05% of this fee
beginning January 1, 2000. The Adviser's Subadvisory Agreement with JHAI was
terminated effective March 1, 2000.
With respect to the Core Equity Fund, the Adviser pays a sub-advisory fee to IIA
equal to 55% of the advisory fee payable on the Fund's average daily net assets.
With respect to Technology Fund, the Adviser pays a sub-advisory fee to AFA
equal to 0.10% of the Technology Fund's average daily net assets.
46
<PAGE>
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 agreement.
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.
For the fiscal years ended December 31, 1997, 1998 and 1999, the Adviser's
management fee for each Fund is listed below.
1997
Management fee received by the
Funds Adviser
----- -------
International $26,618
Financial Industries 41,060
Small Cap Growth 14,584
Large Cap Growth 16,677
Core Equity 23,457
500 Index 11,552*
Sovereign Investors 27,842
Strategic Income 19,377
Bond 8,924
Money Market 12,328
47
<PAGE>
1998 1999
Management fee received Management fee received
Funds by the Adviser by the Adviser
----- -------------- --------------
International $49,454 $ 66,480
Regional Bank 72,908 173,090
Financial Industries 324,581 398,471
Small Cap Growth 43,238 80,965
Mid Cap Growth 7,546 20,806
Large Cap Growth 48,603 121,727
Relative Value 45,181 147,515
Core Equity 112,746 254,281
Sovereign Investors 139,125 248,937
500 Index 20,232* 32,613*
Bond 35,548 57,967
Strategic Income 62,923 117,404
High Yield Bond 32,414 54,095
Money Market 61,349 117,918
*Net of limitation by Adviser. For the fiscal years ended December 31, 1997,
1998 and 1999, the Adviser limited its management fee. Without this limitation,
the management fee received by the Adviser would have been $36,352, $70,811 and
$114,145, respectively.
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.
- -----------------------------------------------------------------------------
Funds 1997 1998 1999
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
International 535 870 1,312
- -----------------------------------------------------------------------------
Regional Bank -- 1,353+ 3,822
- -----------------------------------------------------------------------------
Financial Industries 909* 6,370 8,707
- -----------------------------------------------------------------------------
Small Cap Growth 349 915 1,972
- -----------------------------------------------------------------------------
Mid Cap Growth -- 158+++ 511
- -----------------------------------------------------------------------------
Large Cap Growth 400 1,012 2,952
- -----------------------------------------------------------------------------
Relative Value -- 1,136++ 4,476
- -----------------------------------------------------------------------------
Core Equity 600 2,523 6,545
- -----------------------------------------------------------------------------
Sovereign Investors 829 3,643 7,445
- -----------------------------------------------------------------------------
500 Index 1,862 3,237 5,834
- -----------------------------------------------------------------------------
Bond 322 1,109 2,094
- -----------------------------------------------------------------------------
Strategic Income 583 1,645 3,504
- -----------------------------------------------------------------------------
High Yield Bond -- 839++ 1,598
- -----------------------------------------------------------------------------
Money Market 439 1,914 4,300
- -----------------------------------------------------------------------------
*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.
Personnel of the Adviser, Sub-Advisers, and their affiliates may trade
securities for their personal accounts. The Funds also may hold, or may be
buying or selling, the same securities. To prevent the Funds from being
disadvantaged, the Adviser, the Sub-Adviser and their affiliates and the Funds
have adopted a code of ethics which restricts the trading activity of those
personnel.
48
<PAGE>
DISTRIBUTION CONTRACTS
Distribution Agreement. John Hancock Funds, a wholly owned subsidiary of the
Adviser, serves as the principal underwriter for the Trust in connection with
the continuous offering of the shares of the Funds. John Hancock Funds has the
exclusive right, pursuant to the Distribution Agreement, to purchase shares from
the Funds at net asset value for resale to the separate accounts of insurance
companies at the public offering price.
Each Advisory Agreement, Sub-advisory Agreement and Distribution Agreement will
continue in effect from year to year if approved by either the vote of the
Fund's shareholders or the Trustees, including a vote of a majority of the
Trustees who are not parties to the agreement or "interested persons" of any
such party, cast at a meeting called for such purposes. These agreements may be
terminated on 60 days written notice by any party or by a vote of a majority of
the outstanding voting securities of the affected Fund and will terminate
automatically if assigned.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Funds' shares,
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.
49
<PAGE>
The NAV for each Fund is determined each business day at the close of regular
trading on the New York Stock Exchange (typically 4:00 p.m. Eastern Time) by
dividing the Fund's net assets by the number of its shares outstanding. On any
day an international market is closed and the New York Stock Exchange is open,
any foreign securities will be valued at the prior day's close with the current
day's exchange rate. Trading of foreign securities may take place on Saturdays
and U.S. business holidays on which a Fund's NAV is not calculated.
Consequently, a Fund's portfolio securities may trade and the NAV of that Fund's
shares may be significantly affected on days when a shareholder has no access to
that Fund.
SPECIAL REDEMPTIONS
Although the Funds would not normally do so, each Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, a brokerage charge would be incurred. Any
such securities 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, each Fund must
redeem its shares solely for cash, except to the extent that redemption payments
during any 90-day period for any one account, would exceed the lesser of
$250,000 or 1% of the net asset value.
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 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 and classes, 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 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 Prospectuses 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 Prospectuses 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.
50
<PAGE>
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Trust. However, each Fund's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Funds. The Declaration of Trust also provides for indemnification out of the
Funds' assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Funds shall be liable for the liabilities of
any other series. Furthermore, no fund included in the Funds' Prospectuses shall
be liable for the liabilities of any other series. Liability is therefore
limited to circumstances in which the Funds would be unable to meet their
obligations, and the possibility of this occurrence is remote.
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 Funds
to verify the accuracy of the information or for background or financial history
purposes. A joint account will be administered as a joint tenancy with right of
survivorship, unless the joint owners notify 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 losses 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
- ---- -------- ----
Technology Fund Annually Annually
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
Relative 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
51
<PAGE>
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, has
elected or intends to elect to be treated, as a separate "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), and intends to continue to qualify for each taxable year. As such
and by complying with the applicable provisions of the Code regarding the
sources of its income, the timing of its distributions, and the diversification
of its assets, each Fund will not be subject to Federal income tax on taxable
income (including net realized capital gains) which is distributed to
shareholders in accordance with the timing requirements of the Code.
Qualification of a Fund for treatment as a regulated investment company under
the Code requires, among other things, that (a) at least 90% of a Fund's annual
gross income, without being offset for losses from the sale or other disposition
of stock or securities or other transactions, be derived from interest,
dividends, payments with respect to securities loans and gains from the sale or
other disposition of stock or securities or foreign currencies, or other income
(including but not limited to gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies; (b) each Fund distributes to its shareholders for each taxable year
(in compliance with certain timing requirements) as dividends at least 90% of
the sum of its taxable and tax-exempt net investment income, the excess of net
short-term capital gain over net long-term capital loss earned in each year and
any other net income (except for the excess, if any, of net long-term capital
gain over net short-term capital loss, which need not be distributed in order
for the Fund to qualify as a regulated investment company but is taxed to the
Fund if it is not distributed); and (c) each Fund diversifies its assets so
that, at the close of each quarter of its taxable year, (i) at least 50% of the
fair market value of its total (gross) assets is comprised of cash, cash items,
U.S. Government securities, securities of other regulated investment companies
and other securities limited in respect of any one issuer to no more than 5% of
the fair market value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer and (ii) no more than 25% of the fair market
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies) or of two or more issuers controlled by the Fund and engaged in the
same, similar, or related trades or businesses.
Each Fund also must, and intends to, comply with the diversification
requirements imposed by Section 817(h) of the Code and the regulations
thereunder on certain insurance company separate accounts. These requirements,
which are in addition to the diversification requirements imposed on a Fund by
the 1940 Act and Subchapter M of the Code, place certain limitations on assets
of each insurance company separate account used to fund variable contracts and,
because Section 817(h) and those regulations treat the assets of the Fund as
assets of the related separate account, the assets of a Fund that may be
invested in securities of any one, two, three and four issuers. Specifically,
the regulations provide that, except as permitted by the "safe harbor" described
52
<PAGE>
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 prospectuses, 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
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.
53
<PAGE>
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, 1999, the
following Funds had capital loss carry forwards which expire in 2006 and 2007,
respectively; Bond $0 and $67,593, Financial Industries $0 and $2,140,648,
Strategic Income $4,130 and $136,493, Sovereign Investors $157,877 and $101,159,
and High Yield Bond $122,097 and $0.
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 Relative
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 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.
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<PAGE>
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, 1999, the annualized yield was:
Bond Fund 6.66%
Strategic Income Fund 9.17%
High Yield Bond Fund 11.87%
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 and annualizing the result.
While this is the standard accounting method for calculating yield, it does not
reflect the Fund's actual bookkeeping; as a result, the income reported or paid
by the Fund may be different. The Fund's yield is computed according to the
following standard formula:
6
Yield = 2 ( [ ( a - b ) + 1 ] - 1 )
-------
cd
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding
during the period that would be entitled to receive
dividends.
d = the net asset value per share on the last day of the
period.
Money Market Fund Yield. For the purposes of calculating yield for the Money
Market Fund, daily income per share consists of interest and discount earned on
the Fund's investments less provision for amortization of premiums and
applicable expenses, divided by the number of shares outstanding, but does not
include realized or unrealized appreciation or depreciation.
If the Fund reports its annualized yield, it will also furnish information as to
the average portfolio maturities of the Fund. It will also report any material
effect of realized gains or losses or unrealized appreciation on dividends which
have been excluded from the computation of yield.
Yield calculations are based on the value of a hypothetical preexisting account
with exactly one share at the beginning of the seven day period. Yield is
computed by determining the net change in the value of the account during the
base period and dividing the net change by the value of the account at the
beginning of the base period to obtain the base period return. Base period is
multiplied by 365/7 and the resulting figure is carried to the nearest 100th of
a percent. Net change in account value during the base period includes dividends
declared on the original share, dividends declared on any shares purchased with
dividends of that share and any account or sales charges that would affect an
account of average size, but excludes any capital changes.
55
<PAGE>
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
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
The average annual total return for each Fund for the 1 year period ended
December 31, 1999 and since, the commencement of operations through December 31,
1999 is as follows:
1 year period ended Commencement of Operations to
Funds December 31, 1999 December 31, 1999*
----- ----------------- ------------------
V.A. International 31.55% 17.68%
V.A. Financial Industries 1.23% 15.95%
V.A. Regional Bank (4.86%) (6.74%)
V.A. Small Cap Growth 68.52% 23.55%
V.A. Mid Cap Growth 56.18% 31.63%
V.A. Large Cap Growth 20.71% 15.41%
V.A. Relative Value 56.65% 38.26%
V.A. Core Equity 13.89% 25.52%
V.A. Sovereign Investors 3.84% 16.97%
V.A. 500 Index 20.81% 27.32%
V.A. Bond (0.51%) 6.72%
V.A. High Yield Bond 13.12% 1.02%
V.A. Strategic Income 4.82% 8.39%
* V.A. Financial Industries Fund commenced operations on April 30, 1997.
Relative 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.
n ______
T = \ / ERV/P - 1
P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made at the
beginning of the indicated period.
This calculation assumes that all dividends and distributions are reinvested at
net asset value on the reinvestment dates during the period. The "distribution
rate" is determined by annualizing the result of dividing the declared dividends
of a Fund during the period stated by the net asset value at the end of the
period.
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<PAGE>
In addition to average annual total returns, a Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period.
From time to time, in reports and promotional literature, a Fund's yield and
total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper--Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on 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, and excerpts from,
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." 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.
57
<PAGE>
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.
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.
1997 1998 1999
Broker Broker Broker
Funds Commissions Commissions Commissions
- ----- ----------- ----------- -----------
International $17,425 $31,688 $ 44,805
Regional Bank 0 15,933 13,672
Financial Industries 16,780 85,961 107,541
Small Cap Growth 4,501 10,790 15,451
Mid Cap Growth 0 4,603 7,790
Large Cap Growth 7,000 28,768 55,628
Relative Value 0 67,087 113,466
Core Equity 1,936 15,467 43,018
Sovereign Investors 5,611 34,227 38,021
500 Index 12,893 8,110 4,016
Bond 0 0 0
Strategic Income 0 455 12
High Yield Bond 0 2,778 1,613
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, 1999, Financial Industries,
High Yield Bond, International, Sovereign Investors, Regional Bank, Small Cap
Growth, Large Cap Growth, Relative Value and Mid Cap Growth directed commissions
in the amounts of $8,902, $144, $106, $2,327, $677, $1,358, $24,856, $27,300,
and $2,576, respectively, to compensate brokers for research services such as
industry, economics and company reviews and evaluations of securities.
58
<PAGE>
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"). Credit
Agricole, IIIS parent, has several affiliates engaged in the brokerage business
in Europe and Asia: Credit Agricole Indosuez Cheuvreux; CPR Action (ex-Schelcher
Prince Cheuvreux de Virieu International Ltd, London; Cheuvreux de Virieu,
Nordic AB, Stockholm, Cheuvreux de Virieu, Espana, Madrid, Credit Agricole
Indosuez Cheuvreux Deutschland GMBH, Frankfourt/ Main; Caboto Sim in Italy; Carr
Securities; Carr Futures SNC. (Paris) and Carr Futures PTE, Singapore (all
"Affiliated Brokers"). Pursuant to procedures determined by the Trustees and
consistent with the above policy of obtaining best net results, the Funds may
execute portfolio transactions with or through Affiliated Brokers. During the
fiscal years ending December 31, 1997, 1998 and 1999, the Funds did not execute
any portfolio transactions with Affiliated Brokers.
Affiliated Brokers 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 Investment Company 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 a Fund would have to pay a commission rate less favorable than the Affiliated
Broker's contemporaneous charges for comparable transactions for its other most
favored, but unaffiliated, customers except for accounts for which the
Affiliated Broker acts as 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
Investment Company Act) of the Fund, the Adviser or the Affiliated Broker.
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. Because of
this, client accounts in a particular style may sometimes not sell or acquire
securities as quickly or at the same prices as they might if each were managed
and traded individually.
For purchases of equity securities, when a complete order is not filled, a
partial allocation will be made to each account pro rata based on the order
size. For high demand issues (for example, initial public offerings), shares
will be allocated pro rata by account size as well as on the basis of account
objective, account size ( a small account's allocation may be increased to
provide it with a meaningful position), and the account's other holdings. In
addition, an account's allocation may be increased if that account's portfolio
manager was responsible for generating the investment idea or the portfolio
manager intends to buy more shares in the secondary market. For fixed income
accounts, generally securities will be allocated when appropriate among accounts
based on account size, except if the accounts have different objectives or if an
account is too small to get a meaningful allocation. For new issues, when a
complete order is not filled, a partial allocation will be made to each account
pro rata based on the order size. However, if a partial allocation is too small
to be meaningful, it may be reallocated based on such factors as account
objectives, duration benchmarks and credit and sector exposure. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtainable for it. On the other
hand, to the extent permitted by law, the Adviser or Sub-Adviser may aggregate
securities to be sold or purchased for the Fund with those to be sold or
purchased for other clients managed by it in order to obtain best execution.
59
<PAGE>
SHAREHOLDER SERVICING AGENT
John Hancock Annuity Servicing Office, 529 Main Street (X-4), Charlestown, MA
02129, 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 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.
60
<PAGE>
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 1999 Annual Report to
Shareholder's for the year ended December 31, 1999 (filed electronically on
March 3, 2000, accession number 0000928816-00-000138, file no. 811-07437 and
33-64465).
John Hancock Declaration Trust
Statement of Assets and Liabilities as of December 31, 1999.
Statement of Operations for the year ended of December 31, 1999.
Statement of Changes in Net Assets for each of the two years in the
period ended December 31, 1999.
Financial Highlights for each of the two years in the period ended
December 31, 1999.
Schedule of Investments as of December 31, 1999.
Notes to Financial Statements.
Report of Independent Auditors.
F-1
<PAGE>
JOHN HANCOCK DECLARATION TRUST
PART C.
OTHER INFORMATION
Item. 23. Exhibits:
The exhibits to this Registration Statement are listed in the Exhibit Index
hereto and are incorporated herein by reference.
Item 24. Persons Controlled by or under Common Control with Registrant.
No person is directly or indirectly controlled by or under common control with
Registrant.
Item. 25. Indemnification.
Indemnification provisions relating to the Registrant's Trustees, officers,
employees and agents is set forth in Article VII of the Registrant's By Laws
included as Exhibit 2 herein.
Under Section 12 of the Distribution Agreement, John Hancock Funds, Inc. ("John
Hancock Funds") has agreed to indemnify the Registrant and its Trustees,
officers and controlling persons against claims arising out of certain acts and
statements of John Hancock Funds.
Section 9(a) of the By-Laws of John Hancock Mutual Life Insurance Company ("the
Insurance Company") provides, in effect, that the Insurance Company will,
subject to limitations of law, indemnify each present and former director,
officer and employee of the Insurance Company who serves as a Trustee or officer
of the Registrant at the direction or request of the Insurance Company against
litigation expenses and liabilities incurred while acting as such, except that
such indemnification does not cover any expense or liability incurred or imposed
in connection with any matter as to which such person shall be finally
adjudicated not to have acted in good faith in the reasonable belief that his
action was in the best interests of the Insurance Company. In addition, no such
person will be indemnified by the Insurance Company in respect of any final
adjudication unless such settlement shall have been approved as in the best
interests of the Insurance Company either by vote of the Board of Directors at a
meeting composed of directors who have no interest in the outcome of such vote,
or by vote of the policyholders. The Insurance Company may pay expenses incurred
in defending an action or claim in advance of its final disposition, but only
upon receipt of an undertaking by the person indemnified to repay such payment
if he should be determined not to be entitled to indemnification.
Article IX of the respective By-Laws of John Hancock Funds and John Hancock
Advisers, Inc. ("the Adviser") provide as follows:
"Section 9.01. Indemnity. Any person made or threatened to be made a party to
any action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was at any time since the
inception of the Corporation a director, officer, employee or agent of the
Corporation or is or was at any time since the inception of the Corporation
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified by the Corporation against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and the liability was not incurred by reason of gross
negligence or reckless disregard of the duties involved in the conduct of his
office, and expenses in connection therewith may be advanced by the Corporation,
all to the full extent authorized by the law."
<PAGE>
"Section 9.02. Not Exclusive; Survival of Rights: The indemnification provided
by Section 9.01 shall not be deemed exclusive of any other right to which those
indemnified may be entitled, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person."
Insofar as indemnification for liabilities under the Securities Act of 1933 (the
"Act") may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the Registrant's Declaration of Trust and By-Laws of John
Hancock Funds, the Adviser, or the Insurance Company or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether indemnification by it is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
Item 26. Business and Other Connections of Investment Advisers.
For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and Directors of the Adviser,
reference is made to Form ADV (801-8124) filed under the Investment Advisers Act
of 1940, which is incorporated herein by reference.
Item 27. Principal Underwriters.
(a) John Hancock Funds acts as principal underwriter for the Registrant and also
serves as principal underwriter or distributor of shares for John Hancock Cash
Reserve, Inc., John Hancock Bond Trust, John Hancock Current Interest, John
Hancock Series Trust, John Hancock Tax-Free Bond Trust, John Hancock California
Tax-Free Income Fund, John Hancock Capital Series, John Hancock Bond Fund, John
Hancock Tax-Exempt Series, John Hancock Strategic Series, John Hancock World
Fund, John Hancock Investment Trust, John Hancock Institutional Series Trust,
Special Equities Fund, 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>
Name and Principal Positions and Offices Positions and Offices
------------------ --------------------- ---------------------
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Stephen L. Brown Director and Chairman Trustee and Chairman
John Hancock Place
Boston, Massachusetts
Maureen R. Ford Director, Vice Chairman and Trustee, Vice Chairman and
101 Huntington Avenue Chief Executive Officer Chief Executive Officer
Boston, Massachusetts
Robert H. Watts Director, Executive Vice None
John Hancock Place President and Chief Compliance
P.O. Box 111 Officer
Boston, Massachusetts
Osbert M. Hood Executive Vice President, Chief Executive 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
C-3
<PAGE>
Name and Principal Positions and Offices Positions and Offices
------------------ --------------------- ---------------------
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Susan S. Newton Vice President Vice President and Secretary
101 Huntington Avenue
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 Positions and Offices
------------------ --------------------- ---------------------
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
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
James V. Bowhers President None
101 Huntington Avenue
Boston, Massachusetts
Kathleen M. Graveline Senior Vice President None
P.O. Box 111
Boston, Massachusetts
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 the requirements
for effectiveness of this Registration Statement to Rule 485(b) to be signed on
its behalf by the undersigned, thereto duly authorized, in the City of Boston,
and The Commonwealth of Massachusetts on the 27th day of April, 2000.
JOHN HANCOCK DECLARATION TRUST
By: *
--------------------------
Stephen L. Brown
Chairman
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>
* Trustee and Chairman April 27, 2000
- -------------------------
Stephen L. Brown
*
- ------------------------- Trustee, Vice Chairman and
Maureen R. Ford Chief Executive Officer
*
- ------------------------- Executive Vice President and
Osbert M. Hood Chief Financial Officer
/s/James J. Stokowski Vice President, Treasurer
- ------------------------- (Principal Accounting Officer)
James J. Stokowski
* Trustee
- -------------------------
Dennis S. Aronowitz
* Trustee
- -------------------------
Richard P. Chapman, Jr.
* Trustee
- -------------------------
William J. Cosgrove
* Trustee
- -------------------------
Leland O. Erdahl
C-7
<PAGE>
* Trustee
- -------------------------
Richard A. Farrell
* Trustee
- -------------------------
Gail D. Fosler
* Trustee
- -------------------------
William F. Glavin
* Trustee
- -------------------------
John A. Moore
* Trustee
- -------------------------
Patti McGill Peterson
* Trustee
- -------------------------
Richard S. Scipione
By: /s/Susan S. Newton April 27, 2000
------------------
Susan S. Newton,
Attorney-in-Fact, under
Powers of Attorney dated
January 1, 1999 and March 17, 1999,
and December 7, 1999.
<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.(a).9 Instrument Fixing the Number of Trustees and Appointing Individual to
Fill Vacancy dated December 7, 1999.********
99.(a).10 Instrument Changing name of series of shares of the trust (V.A. Large
Cap Value to V.A. Relative Value) dated March 7, 2000.+
99.(a).11 Establishing and Designation of shares of beneficial interest of John
Hancock V.A. Technology Fund dated March 7, 2000.+
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 and John Hancock Advisers, Inc. 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.(d).6 Sub-Investment Management Contracts among the Registrant on behalf of
John Hancock V.A. International Fund, John Hancock Advisers, Inc. and
Indocam International Investment Services.********
99.(d).7 John Hancock Advisers International, Limited waived a part of its fees
as of January 1, 2000.+
99.(d).8 Instrument Terminating Sub-Investment Management Contract among the
Registrant on behalf of John Hancock V.A. International, John Hancock
Advisers, Inc. and John Hancock Advisers International, Limited.+
99.(d).9 Investment Advisory Agreement between John Hancock V.A. Technology Fund
and John Hancock Advisers, Inc.+
99.(d).10 Sub-Investment Management Contract among the Registrant on behalf of
John HancockAdvisers, Inc. and American Fund Advisers, Inc.+
99.(e) Underwriting Contracts. Distribution Agreement between John Hancock
Funds, Inc. and the Registrant dated July 22, 1996.***
<PAGE>
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.(e).4 Amendments to the Distribution Agreement between V.A. Technology Fund,
the Registrant and John Hancock Funds, Inc. dated May 1, 2000.+
99.(f) Bonus or Profit Sharing Contracts. Not Applicable.
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.(g).2 Agreement between the Registrant on behalf of V.A. Technology Fund and
Investors Bank & Trust Company to maintain the Fund's securities and
cash in the custody of the Bank pursuant to Master Custodian Agreement
effective May 1, 2000.+
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 July 22, 1996.+
99.(h).1 Accounting Services Agreement between John Hancock Advisers, Inc. and
Registrant as of January 1, 1996.******
99.(h).2 Amendment Master Transfer Agency and Service Agreement establishing a
new series of shares, V.A. Technology, and Registrant retaining the
Transfer Agent.+
99.(i) Legal Opinion.*******
99.(j) Other Opinions. Auditor's 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) Rule 18f-3 Plan. Not Applicable
99.(p) Code of Ethics. John Hancock Funds, Inc., Independence Investments
Associates, Inc., Indocam International Investment Services and
American Fund Advisors, Inc.+
* 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.
******* Previously filed electronically with Registration Statement and/or
post-effective amendment no. 10 file nos. 811-07437 and 33-64465 on
April 29, 1999 accession number 0001010521-99-000201.
******** Previously filed electronically with Registration Statement and/or
post-effective amendment no. 11 file nos. 811-07437 and 33-64465 on
February 16, 2000 accession number 0001010521-00-000186.
+ Filed herewith.
</TABLE>
JOHN HANCOCK DECLARATION TRUST
John Hancock V.A. Large Cap Value Fund
Change of Name of a Series of Shares
The undersigned, being a majority of the Trustees of John Hancock
Declaration Trust, a Massachusetts business trust (the "Trust"), hereby amend
the Trust's Declaration of Trust dated November 10, 1995, as amended from time
to time, to the extent necessary to reflect the change of the name of John
Hancock V.A. Large Cap Value Fund to John Hancock V.A. Relative Value Fund.
The Declaration of Trust is hereby amended to the extent necessary to
reflect the change of name of a series of shares, effective May 1, 2000.
Capitalized terms not otherwise defined herein shall have the meanings
set forth in the Declaration of Trust.
IN WITNESS WHEREOF, the undersigned have executed this instrument this
7th day of March, 2000.
/s/Dennis S. Aronowitz
- ---------------------- -----------------------------
Dennis S. Aronowitz Gail D. Fosler
/s/Stephen L. Brown
- ------------------- -----------------------------
Stephen L. Brown 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/Leland O. Erdahl /s/Patti McGill Peterson
- ------------------- ------------------------
Leland O. Erdahl Patti McGill Peterson
/s/Richard A. Farrell /s/John W. Pratt
- --------------------- ----------------
Richard A. Farrell John W. Pratt
/s/Maureen R. Ford
- ------------------ -----------------------------
Maureen R. Ford 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 Palm Beach )
Then personally appeared the above-named Dennis S. Aronowitz, Stephen
L. Brown, Richard P. Chapman, Jr., William J. Cosgrove, Leland O. Erdahl,
Richard A. Farrell, Maureen R. Ford, 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 7th day of March, 2000.
/s/Connie McCarron
------------------
Notary Public
My Commission Expires: 11/1/2000
JOHN HANCOCK DECLARATION TRUST
John Hancock V.A. Technology Fund
Establishment and Designation
of Shares of Beneficial Interest of
John Hancock V.A. Technology Fund
a series of John Hancock Declaration Trust
The undersigned, being a majority of the Trustees of John Hancock
Declaration Trust, a Massachusetts business trust (the "Trust"), acting pursuant
to the Declaration of Trust dated November 10, 1995, as amended from time to
time, do hereby establish an additional series of shares of the Trust (the
"Shares"), having rights and preferences set forth in the Declaration of Trust
and in the Trust's Registration Statement on Form N-1A, which Shares shall
represent undivided beneficial interests in a separate portfolio of assets of
the Trust (the "Fund") designated "John Hancock V.A. Technology Fund".
The Declaration of Trust is hereby amended to the extent necessary to
reflect the establishment of such additional series of Shares, effective May 1,
2000.
Capitalized terms not otherwise defined herein shall have the meanings
set forth in the Declaration of Trust.
IN WITNESS WHEREOF, the undersigned have executed this instrument this
7th day of March, 2000.
/s/Dennis S. Aronowitz
- ---------------------- -----------------------------
Dennis S. Aronowitz Gail D. Fosler
/s/Stephen L. Brown
- ------------------- -----------------------------
Stephen L. Brown 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/Leland O. Erdahl /s/Patti McGill Peterson
- ------------------- ------------------------
Leland O. Erdahl Patti McGill Peterson
/s/Richard A. Farrell /s/John W. Pratt
- --------------------- ----------------
Richard A. Farrell John W. Pratt
/s/Maureen R. Ford
- ------------------ -----------------------------
Maureen R. Ford 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 Palm Beach )
Then personally appeared the above-named Dennis S. Aronowitz, Stephen
L. Brown, Richard P. Chapman, Jr., William J. Cosgrove, Leland O. Erdahl,
Richard A. Farrell, Maureen R. Ford, 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 7th day of March, 2000.
/s/Connie McCarra
-----------------
Notary Public
My Commission Expires: 11/1/2000
January 1, 2000
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
Re: John Hancock V.A. International Fund ("Fund")
Ladies and Gentlemen:
The Sub-Investment Contract between John Hancock Declaration Trust (the "Trust")
on behalf of the Fund, John Hancock Advisers, Inc. (the "Adviser") and John
Hancock Advisers International, Ltd. (the "Sub-Adviser"), dated August 29, 1996,
currently provides that the Adviser will pay the Sub-Adviser quarterly, for each
of the preceding 3 months, in arrears a fee at the annual rate of 70% of the
investment advisory fee payable to the Adviser. The Fund shall not be liable to
the Sub-Adviser for the Sub-Adviser's compensation.
As of January 1, 2000, the Sub-Adviser hereby agrees to waive its right to
receive its sub-advisory fee except for an amount equal to .05% of the Fund's
average daily net asset value. Indocam International Investment Services
("IIIS") will provide advice and services under the terms of a separate
Sub-Advisory Agreement with the Fund, and the Sub-Adviser will act as a limited
Co-Sub-Adviser with IIIS.
Agreed to by:
JOHN HANCOCK ADVISERS
INTERNATIONAL, LIMITED
/s/Anne C. Hodsdon
------------------
Anne C. Hodsdon
Director
Funds/dectrust/vainternatnl/JHAIwaiver-99
February 3, 2000
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
Re: John Hancock V.A. International Fund ("Fund")
Ladies and Gentlemen:
The Sub-Investment Management Contract between John Hancock Declaration Trust
(the "Trust") on behalf of the Fund, John Hancock Advisers, Inc. (the "Adviser")
and John Hancock Advisers International, Ltd. (the "Sub-Adviser"), dated August
29, 1996, and the fee waiver letter dated January 1, 2000 (together the
"Contracts") currently provide that the Sub-Adviser will act as a limited
Co-Sub-Adviser with Indocam International Investment Services.
As of March 1, 2000, the Sub-Adviser hereby agrees to terminate the Contracts
and to waive its right to receive sixty (60) days notice of this termination.
Agreed to by:
JOHN HANCOCK ADVISERS
INTERNATIONAL, LIMITED
/s/Anne C. Hodsdon
------------------
Anne C. Hodsdon
Director
Funds/dectrust/vainternatnl/JHAI/termination00
JOHN HANCOCK V.A. TECHNOLOGY FUND
(a series of John Hancock Declaration Trust)
101 Huntington Avenue
Boston, Massachusetts
May 1, 2000
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
Investment Management Contract
------------------------------
Ladies and Gentlemen:
John Hancock Declaration Trust (the "Trust") of which John Hancock V.A.
Technology Fund (the "Fund") is a series, has been organized as a business trust
under the laws of the Commonwealth of Massachusetts to engage in the business of
an investment company. The Trust's shares of beneficial interest are currently
divided into fifteen series (including the Fund), each series representing the
entire undivided interest in a separate portfolio of assets. Series may be
established or terminated from time to time by action of the Board of Trustees
of the Trust. This Agreement relates solely to the Fund.
The Board of Trustees of the Trust (the "Trustees") has selected John
Hancock Advisers, Inc. (the "Adviser") to provide overall investment advice and
management for the Fund, and to provide certain other services, as more fully
set forth below, and the Adviser is willing to provide such advice, management
and services under the terms and conditions hereinafter set forth.
Accordingly, the Adviser and the Trust, on behalf of the Fund, agree as
follows:
1. Delivery of Documents. The Trust has furnished the Adviser
with copies, properly certified or otherwise authenticated, of
each of the following:
(a) Declaration of Trust of the Trust, dated November 15, 1995,
(the "Declaration of Trust");
(b) By-Laws of the Trust as in effect on the date hereof;
(c) Resolutions of the Trustees selecting the Adviser as the
investment adviser for the Fund and approving the form of this
Agreement; and
(d) The Trust's Code of Ethics.
The Trust will furnish the Adviser from time to time with copies,
properly certified or otherwise authenticated, of all amendments of or
supplements to the foregoing, if any.
<PAGE>
2. Investment and Management Services. The Adviser will use its best
efforts to provide to the Fund continuing and suitable investment
programs with respect to investments, consistent with the investment
objectives, policies and restrictions of the Fund. In the performance
of the Adviser's duties hereunder, subject always (x) to the provisions
contained in the documents delivered to the Adviser pursuant to Section
1, as each of the same may from time to time be amended or
supplemented, and (y) to the limitations set forth in the Fund's
then-current Prospectus and Statement of Additional Information
included in the registration statement of the Trust as in effect from
time to time under the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended (the "1940 Act"), the
Adviser will, at its own expense:
(a) furnish the Fund with advice and recommendations, consistent
with the investment objectives, policies and restrictions of
the Fund, with respect to the purchase, holding and
disposition of portfolio securities including the purchase and
sale of options, alone or in consultation with any sub-adviser
or sub-advisers appointed pursuant to this Agreement and
subject to the provisions of any sub-investment management
contract respecting the responsibilities of such sub-adviser
or sub-advisers;
(b) advise the Fund in connection with policy decisions to be made
by the Trustees or any committee thereof with respect to the
Fund's investments and, as requested, furnish the Fund with
research, economic and statistical data in connection with the
Fund's investments and investment policies;
(c) provide administration of the day-to-day investment operations
of the Fund;
(d) submit such reports relating to the valuation of the Fund's
securities as the Trustees may reasonably request;
(e) assist the Fund in any negotiations relating to the Fund's
investments with issuers, investment banking firms, securities
brokers or dealers and other institutions or investors;
(f) consistent with provisions of Section 8 of this Agreement,
place orders for the purchase, sale or exchange of portfolio
securities with brokers or dealers selected by the Adviser,
provided that in connection with the placing of such orders
and the selection of such brokers or dealers the Adviser shall
seek to obtain execution and pricing within the policy
guidelines determined by the Trustees and set forth in the
Prospectus and Statement of Additional Information of the Fund
as in effect from time to time;
(g) provide office space and equipment and supplies, the use of
accounting equipment when required, and necessary executive,
clerical and secretarial personnel for the administration of
the affairs of the Fund;
(h) from time to time or at any time requested by the Trustees,
make reports to the Fund of the Adviser's performance of the
foregoing services and furnish advice and recommendations with
respect to other aspects of the business and affairs of the
Fund;
(i) maintain all books and records with respect to the Fund's
securities transactions required by the 1940 Act, including
sub-paragraphs (b)(5), (6), (9) and (10) and paragraph (f) of
Rule 31a-1 thereunder (other than those records being
maintained by the Fund's custodian or transfer agent) and
preserve such records for the periods prescribed therefor by
Rule 31a-2 of the 1940 Act (the Adviser agrees that such
records are the property of the Fund and will be surrendered
to the Fund promptly upon request therefor);
<PAGE>
(j) obtain and evaluate such information relating to economies,
industries, businesses, securities markets and securities as
the Adviser may deem necessary or useful in the discharge of
the Adviser's duties hereunder;
(k) oversee and use the Adviser's best efforts to assure the
performance of the activities and services of the custodian,
transfer agent or other similar agents retained by the Fund;
and
(l) give instructions to the Fund's custodian as to deliveries of
securities to and from such custodian and transfer of payment
of cash for the account of the Fund.
3. Sub-advisers. The Adviser may engage one or more investment advisers
which are either registered as such or specifically exempt from
registration under the 1940 Act to act as sub-advisers to provide, with
respect to the Fund, certain services set forth in Section 2 of this
Agreement, all as shall be set forth in a written sub-advisory contract
to which the Trust and the Adviser shall be parties. The sub-advisory
contract shall be subject to approval by the vote of a majority of the
Trustees of the Trust who are not interested persons of the Adviser,
the sub-adviser or of the Trust, cast in person at a meeting called for
the purpose of voting on such approval and by the vote of a majority of
the outstanding voting securities of the Fund and otherwise consistent
with the terms of the 1940 Act. Any fee, compensation or expense to be
paid to any sub-adviser shall be paid by the Adviser, and no obligation
to the sub-adviser shall be incurred on the Fund's or Trust's behalf,
except as agreed upon by the Trustees of the Trust and otherwise
consistent with the terms of the 1940 Act.
4. Expenses paid by the Adviser. The Adviser will pay:
(a) the compensation and expenses of all officers and employees of
the Fund;
(b) the expenses of office, rent, telephone and other utilities,
office furniture, equipment, supplies and other expenses of
the Fund;
(c) any other expenses incurred by the Adviser in connection with
the performance of its duties hereunder; and
(d) premiums for such insurance as may be agreed upon between the
Adviser and the Trustees.
5. Expenses of the Fund Not Paid by the Adviser. The Adviser will not
be required to pay any expenses which this Agreement does not expressly
make payable by it. In particular, and without limiting the generality
of the foregoing but subject to the provisions of Section 4, the
Adviser will not be required to pay under this Agreement:
(a) the expenses of organizing the Trust and the Fund (including
without limitation legal, accounting and auditing fees and
expenses incurred in connection with the matters referred to
in this clause (a)), of initially registering the shares of
the Trust under the Securities Act of 1933, as amended, and of
qualifying the shares for sale under state securities laws for
the initial offering and sale of shares;
<PAGE>
(b) the compensation and expenses of Trustees who are not
interested persons (as used in this Agreement such term shall
have the meaning specified in the 1940 Act) of the Adviser,
and of independent advisers, independent contractors,
consultants, managers and other unaffiliated agents employed
by the Fund other than through the Adviser;
(c) legal (including an allocable portion of the cost of its
employees rendering legal services to the Fund), accounting
and auditing fees and expenses of the Fund;
(d) the fees and disbursements of custodians and depositories of
the Fund's assets, transfer agents, disbursing agents, plan
agents and registrars;
(e) taxes and governmental fees assessed against the Fund's
assets and payable by the Fund;
(f) the cost of preparing and mailing dividends, distributions,
reports, notices and proxy materials to shareholders of the
Fund;
(g) brokers' commissions and underwriting fees; and
(h) the expense of periodic calculations of the net asset value
of the shares of the Fund.
6. Compensation of the Adviser. For all services to be rendered,
facilities furnished and expenses paid or assumed by the Adviser as
herein provided, the Adviser shall be entitled to a fee, paid monthly
in arrears, equal to 0.80% of the average daily net assets of the Fund.
The "average daily net assets" of the Fund shall be determined on the
basis set forth in the Fund's Prospectus or otherwise consistent with
the 1940 Act and the regulations promulgated thereunder. The Adviser
will receive a pro-rata portion of such monthly fee for any periods in
which the Adviser serves as investment adviser to the Fund for less
than a full month. On any day that the net asset value calculation is
suspended as specified in the Fund's Prospectus, the net asset value
for purposes of calculating the advisory fee shall be calculated as of
the date last determined.
In the event that normal operating expenses of the Fund, exclusive of
certain expenses prescribed by state law, are in excess of any
limitation imposed by the law of a state where the Fund is registered
to sell shares of beneficial interest, the fee payable to the Adviser
will be reduced to the extent required by law, and the Adviser will
make any arrangements that the Adviser is required by law to make.
In addition, the Adviser may agree not to impose all or a portion of
its fee (in advance of the time its fee would otherwise accrue) and/or
undertake to make any other payments or arrangements necessary to limit
the fund's expenses to any level the Adviser may specify. Any fee
reduction or undertaking shall constitute a binding modification of
this agreement while it is in effect but may be discontinued or
modified prospectively by the adviser at any time.
7. Other Activities of the Adviser and Its Affiliates. Nothing herein
contained shall prevent the Adviser or any affiliate or associate of
the Adviser from engaging in any other business or from acting as
investment adviser or investment manager for any other person or
entity, whether or not having investment policies or portfolios similar
<PAGE>
to the Fund's; and it is specifically understood that officers,
directors and employees of the Adviser and those of its parent company,
John Hancock Life Insurance Company, or other affiliates may continue
to engage in providing portfolio management services and advice to
other investment companies, whether or not registered, to other
investment advisory clients of the Adviser or of its affiliates and to
said affiliates themselves.
8. Avoidance of Inconsistent Position. In connection with purchases or
sales of portfolio securities for the account of the Fund, neither the
Adviser nor any of its investment management subsidiaries, nor any of
the Adviser's or such investment management subsidiaries' directors,
officers or employees will act as principal or agent or receive any
commission except as may be permitted by the 1940 Act and rules and
regulations promulgated thereunder. If any occasions shall arise in
which the Adviser advises persons concerning the shares of the Fund,
the Adviser will act solely on its own behalf and not in any way on
behalf of the Fund.
Nothing herein contained shall limit or restrict the Adviser or any of
its officers, affiliates or employees from buying, selling or trading
in any securities for its or their own account or accounts. The Fund
acknowledges that the Adviser and its officers, affiliates, and
employees, and its other clients may at any time have, acquire,
increase, decrease or dispose of positions in investments which are at
the same time being acquired or disposed of hereunder. The Adviser
shall have no obligation to acquire with respect to the Fund a position
in any investment which the Adviser, its officers, affiliates or
employees may acquire for its or their own accounts or for the account
of another client, if, in the sole discretion of the Adviser, it is not
feasible or desirable to acquire a position in such investment on
behalf of the Fund. Nothing herein contained shall prevent the Adviser
from purchasing or recommending the purchase of a particular security
for one or more funds or clients while other funds or clients may be
selling the same security.
9. No Partnership or Joint Venture. Neither the Trust, the Fund, nor
the Adviser are partners of or joint venturers with each other and
nothing herein shall be construed so as to make them such partners or
joint venturers or impose any liability as such on any of them.
10. Name of the Trust and Fund. The Trust and the Fund may use the name
"John Hancock" or any name or names derived from or similar to the
names "John Hancock Advisers, Inc.," "John Hancock Life Insurance
Company," or "John Hancock Financial Services, Inc." only for so long
as this Agreement (or similar agreement with John Hancock Life
Insurance Company or any of its affiliates or subsidiaries) remains in
effect. At such time as this Agreement or such other agreement shall no
longer be in effect, the Fund will (to the extent that it lawfully can)
cease to use such a name or any other name indicating that the Fund is
advised by or otherwise connected with the Adviser. The Fund
acknowledges that it has adopted the name "John Hancock V.A. Technology
Fund" through permission of John Hancock Life Insurance Company, a
Massachusetts insurance company, and agrees that John Hancock Life
Insurance Company reserves to itself and to John Hancock Financial
Services, Inc. and any successor to its business the right to grant the
non-exclusive right to use the name "John Hancock" or any similar name
or names to any other corporation or entity, including but not limited
to any investment company of which John Hancock Financial Services,
Inc. or any subsidiary or affiliate thereof shall be the investment
adviser.
<PAGE>
11. Limitation of Liability of the Adviser. The Adviser shall not be
liable for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which this
Agreement relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. Any person, even though
also employed by the Adviser, who may be or become an employee of and
paid by the Fund shall be deemed, when acting within the scope of his
employment by the Fund, to be acting in such employment solely for the
Fund and not as the Adviser's employee or agent.
12. Duration and Termination of this Agreement. This Agreement shall
remain in force until the second anniversary of the date upon which
this Agreement was executed by the parties hereto, and from year to
year thereafter, but only so long as such continuance is specifically
approved at least annually by (a) a majority of the Trustees who are
not interested persons of the Adviser or (other than as Board Members)
of the Fund, cast in person at a meeting called for the purpose of
voting on such approval, and (b) either (i) the Trustees or (ii) a
majority of the outstanding voting securities of the Fund. This
Agreement may, on 60 days' written notice, be terminated at any time
without the payment of any penalty by the vote of a majority of the
outstanding voting securities of the Fund, by the Trustees or by the
Adviser. Termination of this Agreement shall not be deemed to terminate
or otherwise invalidate any provisions of any contract between the
Adviser and any other series of the Trust. This Agreement shall
automatically terminate in the event of its assignment. In interpreting
the provisions of this Section 12, the definitions contained in Section
2(a) of the 1940 Act (particularly the definitions of "assignment,"
"interested person" and "voting security"), shall be applied.
13. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of
the change, waiver, discharge or termination is sought, and no
amendment, transfer, assignment, sale, hypothecation or pledge of this
Agreement shall be effective until approved by (a) the Trustees,
including a majority of the Trustees who are not interested persons of
the Adviser or (other than as Board Members) of the Fund, cast in
person at a meeting called for the purpose of voting on such approval,
and (b) a majority of the outstanding voting securities of the Fund, as
defined in the 1940 Act.
14. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the Commonwealth of Massachusetts.
15. Severability. The provisions of this Agreement are independent of
and separable from each other, and no provision shall be affected or
rendered invalid or unenforceable by virtue of the fact that for any
reason any other or others of them may be deemed invalid or
unenforceable in whole or in part.
16. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
This Agreement may be executed simultaneously in two or more
<PAGE>
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. The name
John Hancock V.A. Technology Fund is a series designation of the
Trustees under the Trust's Declaration of Trust, dated November 15,
1995, as amended from time to time. The Declaration of Trust has been
filed with the Secretary of State of the Commonwealth of Massachusetts.
The obligations of the Fund are not personally binding upon, nor shall
resort be had to the private property of, any of the Trustees,
shareholders, officers, employees or agents of the Fund, but only the
Fund's property shall be bound. The Fund shall not be liable for the
obligations of any other series of the Trust and no other series shall
be liable for the Fund's obligations hereunder.
Yours very truly,
JOHN HANCOCK DECLARATION TRUST
on behalf of John Hancock V.A. Technology Fund
By: /s/Anne C. Hodsdon
------------------
Anne C. Hodsdon
President
The foregoing contract is hereby agreed to as of the date hereof.
JOHN HANCOCK ADVISERS, INC.
By: /s/Susan S. Newton
------------------
Susan S. Newton
Vice President
JOHN HANCOCK DECLARATION TRUST
John Hancock V.A. Technology Fund
Sub-Investment Management Contract
Dated May 1, 2000
<PAGE>
JOHN HANCOCK ADVISERS, INC.
101 Huntington Avenue
Boston, Massachusetts 02199
JOHN HANCOCK DECLARATION TRUST
John Hancock V.A. Technology Fund
101 Huntington Avenue
Boston, Massachusetts 02199
AMERICAN FUND ADVISORS, INC.
1415 Kellum Place, Suite 205
Garden City, New York 11530
Sub-Investment Management Contract
----------------------------------
Ladies and Gentlemen:
John Hancock Declaration Trust (the "Trust") has been organized as a
business trust under the laws of The Commonwealth of Massachusetts to engage in
the business of an investment company. The Trust's shares of beneficial interest
may be classified into series, each series representing the entire undivided
interest in a separate portfolio of assets. Series may be established or
terminated from time to time by action of the Board of Trustees of the Trust. As
of the date hereof, the Trust has fifteen series of shares, representing
interests in John Hancock V.A. Bond Fund, John Hancock V.A. Core Equity Fund,
John Hancock V.A. Financial Industries Fund, John Hancock V.A. 500 Index Fund,
John Hancock V.A. High Yield Bond Fund, John Hancock V.A. International Fund,
John Hancock V.A. Large Cap Growth Fund, John Hancock V.A. Large Cap Value Fund,
John Hancock V.A. Mid Cap Growth Fund, John Hancock V.A. Money Market Fund, John
Hancock V.A. Regional Bank Fund, John Hancock V.A. Small Cap Growth Fund, John
Hancock V.A. Sovereign Investors Fund, John Hancock V.A. Strategic Income Fund,
and John Hancock V.A. Technology Fund.
The Board of Trustees of the Trust (the "Trustees") has selected John
Hancock Advisers, Inc. (the "Adviser") to provide overall investment advice and
management for the John Hancock V.A. Technology Fund (the "Fund"), and to
provide certain other services, under the terms and conditions provided in the
Investment Management Contract, dated as of the date hereof, between the Trust,
the Fund and the Adviser (the "Investment Management Contract").
The Adviser and the Trustees have selected American Fund Advisors, Inc.
(the "Sub-Adviser") to provide the Adviser and the Fund with the advice and
services set forth below, and the Sub-Adviser is willing to provide such advice
and services, subject to the review of the Trustees and overall supervision of
the Adviser, under the terms and conditions hereinafter set forth. The
Sub-Adviser hereby represents and warrants that it is registered as an
investment adviser under the Investment Advisers Act of 1940, as amended.
Accordingly, the Trust, on behalf of the Fund, and the Adviser agree with the
Sub-Adviser as follows:
1. Delivery of Documents. The Trust has furnished the Sub-Adviser with
copies, properly certified or otherwise authenticated, of each of the following:
<PAGE>
(a) Declaration of Trust dated November 15, 1995, as amended from time
to time (the "Declaration of Trust");
(b) By-Laws of the Trust as in effect on the date hereof;
(c) Resolutions of the Trustees approving the form of this Agreement by
and among the Adviser, the Sub-Adviser and the Trust, on behalf of the Fund;
(d) Resolutions of the Trustees selecting the Adviser as investment
adviser for the Fund and approving the form of the Investment Management
Contract;
(e) the Investment Management Contract;
(f) the Fund's portfolio compliance checklists; and
(g) the Fund's current Registration Statement, including the Fund's
Prospectus and Statement of Additional Information.
The Trust will furnish to the Sub-Adviser from time to time copies,
properly certified or otherwise authenticated, of all amendments of or
supplements to the foregoing, if any.
The Sub-Adviser has furnished the Adviser with a copy of the
Sub-Adviser's Code of Ethics, and will furnish the Adviser from time to time
with copies of any amendments to the code. The restrictions of the Sub-Adviser
may differ from those of the Trust where appropriate as long as they maintain
the same intent consistent with the sub-adviser's own procedures for
recommending and purchasing securities.
2. Investment Services. The Sub-Adviser will use its best efforts to
provide to the Fund continuing and suitable investment advice with respect to
investments, consistent with the investment policies, objectives and
restrictions of the Fund as set forth in the Fund's Prospectus and Statement of
Additional Information. In the performance of the Sub-Adviser's duties
hereunder, subject always (x) to the provisions contained in the documents
delivered to the Sub-Adviser pursuant to Section 1, as each of the same may from
time to time be amended or supplemented, and (y) to the limitations set forth in
the Registration Statement of the Trust, on behalf of the Fund, as in effect
from time to time under the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended (the "1940 Act"), the Sub-Adviser
will, have investment discretion with respect to the Fund and will, at its own
expense:
(a) furnish the Adviser and the Fund with advice and recommendations,
consistent with the investment policies, objectives and restrictions of the Fund
as set forth in the Fund's Prospectus and Statement of Additional Information,
with respect to the purchase, holding and disposition of portfolio securities
including, the purchase and sale of options;
(b) furnish the Adviser and the Fund with advice as to the manner in
which voting rights, subscription rights, rights to consent to corporate action
and any other rights pertaining to the Fund's assets shall be exercised, the
Fund having the responsibility to exercise such voting and other rights;
(c) furnish the Adviser and the Fund with research, economic and
statistical data in connection with the Fund's investments and investment
policies;
(d) submit such reports relating to the valuation of the Fund's
securities as the Trustees may reasonably request;
2
<PAGE>
(e) subject to prior consultation with the Adviser, engage in
negotiations relating to the Fund's investments with issuers, investment banking
firms, securities brokers or dealers and other institutions or investors;
(f) consistent with provisions of Section 7 of this Agreement, place
orders for the purchase, sale or exchange of portfolio securities with brokers
or dealers selected by the Adviser or the Sub-Adviser, provided that in
connection with the placing of such orders and the selection of such brokers or
dealers the Sub-Adviser shall seek to obtain execution and pricing within the
policy guidelines determined by the Trustees and set forth in the Prospectus and
Statement of Additional Information of the Fund as in effect and furnished to
the Sub-Adviser from time to time;
(g) from time to time or at any time requested by the Adviser or the
Trustees, make reports to the Adviser or the Trust of the Sub-Adviser's
performance of the foregoing services;
(h) subject to the supervision of the Adviser, maintain all books and
records with respect to the Fund's securities transactions required by the 1940
Act, and preserve such records for the periods prescribed therefor by the 1940
Act (the Sub-Adviser agrees that such records are the property of the Trust and
copies will be surrendered to the Trust promptly upon request therefor);
(i) give instructions to the Fund's custodian as to deliveries of
securities to and from such custodian and transfer of payment of cash for the
account of the Fund, and advise the Adviser on the same day such instructions
are given; and
(j) cooperate generally with the Fund and the Adviser to provide
information necessary for the preparation of registration statements and
periodic reports to be filed with the Securities and Exchange Commission,
including Form N-1A, periodic statements, shareholder communications and proxy
materials furnished to holders of shares of the Fund, filings with state "blue
sky" authorities and with United States agencies responsible for tax matters,
and other reports and filings of like nature.
3. Expenses Paid by the Sub-Adviser. The Sub-Adviser will pay the cost of
maintaining the staff and personnel necessary for it to perform its obligations
under this Agreement, the expenses of office rent, telephone, telecommunications
and other facilities it is obligated to provide in order to perform the services
specified in Section 2, and any other expenses incurred by it in connection with
the performance of its duties hereunder.
4. Expenses of the Fund Not Paid by the Sub-Adviser. The Sub-Adviser will not be
required to pay any expenses which this Agreement does not expressly make
payable by the Sub-Adviser. In particular, and without limiting the generality
of the foregoing but subject to the provisions of Section 3, the Sub-Adviser
will not be required to pay under this Agreement:
(a) the compensation and expenses of Trustees and of independent
advisers, independent contractors, consultants, managers and other agents
employed by the Trust or the Fund other than through the Sub-Adviser;
(b) legal, accounting and auditing fees and expenses of the Trust or
the Fund;
(c) the fees and disbursements of custodians and depositories of the
Trust or the Fund's assets, transfer agents, disbursing agents, plan agents and
registrars;
(d) taxes and governmental fees assessed against the Trust or the
Fund's assets and payable by the Trust or the Fund;
3
<PAGE>
(e) the cost of preparing and mailing dividends, distributions,
reports, notices and proxy materials to shareholders of the Trust or the Fund
except that the Sub-Adviser shall bear the costs of providing the information
referred to in Section 2(j) to the Adviser;
(f) brokers' commissions and underwriting fees; and
(g) the expense of periodic calculations of the net asset value of the
shares of the Fund.
5. Compensation of the Sub-Adviser. For all services to be rendered, facilities
furnished and expenses paid or assumed by the Sub-Adviser as herein provided for
the Fund, the Adviser will pay the Sub-Adviser monthly, in arrears, a fee equal
to 0.10% of the average daily net assets of the Fund.
The fee payable to the Adviser is caluclated on the basis of the
"average daily net assets" of the Fund and shall be determined on the basis set
forth in the Fund's Prospectus or otherwise consistent with the 1940 Act and the
regulations promulgated thereunder. The Sub-Adviser will receive a pro rata
portion of such fee for any periods in which the Sub-Adviser advises the Fund
less than a full month. Fund shall not be liable to the Sub-Adviser for the
Sub-Adviser's compensation hereunder. Calculations of the Sub-Adviser's fee will
be based on average net asset values as provided by the Adviser.
In addition to the foregoing, the Sub-Adviser may from time to time
agree not to impose all or a portion of its fee otherwise payable hereunder (in
advance of the time such fee or portion thereof would otherwise accrue) and/or
undertake to pay or reimburse the Fund for all or a portion of its expenses not
otherwise required to be borne or reimbursed by it. Any such fee reduction or
undertaking may be discontinued or modified by the Sub-Adviser at any time.
6. Other Activities of the Sub-Adviser and Its Affiliates. Nothing herein
contained shall prevent the Sub-Adviser or any associate of the Sub-Adviser from
engaging in any other business or from acting as investment adviser or
investment manager for any other person or entity, whether or not having
investment policies or portfolios similar to the Fund's; and it is specifically
understood that officers, directors and employees of the Sub-Adviser or other
affiliates may continue to engage in providing portfolio management services and
advice to other investment companies, whether or not registered, to other
investment advisory clients of the Sub-Adviser or its affiliates and to said
affiliates themselves.
7. Avoidance of Inconsistent Position. In connection with purchases or sales of
portfolio securities for the account of the Fund, neither the Sub-Adviser nor
any of its investment management subsidiaries nor any of such investment
management subsidiaries' directors, officers or employees will act as principal
or agent or receive any commission, except as may be permitted by the 1940 Act
and rules and regulations promulgated thereunder. The Sub-Adviser shall not
knowingly recommend that the Fund purchase, sell or retain securities of any
issuer in which the Sub-Adviser has a financial interest without obtaining prior
approval of the Adviser prior to the execution of any such transaction.
Nothing herein contained shall limit or restrict the Sub-Adviser or any
of its officers, affiliates or employees from buying, selling or trading in any
securities for its or their own account or accounts. The Trust and Fund
acknowledge the Sub-Adviser and its officers, affiliates, and employees, and its
other clients may at any time have, acquire, increase, decrease or dispose of
positions in investments which are at the same time being acquired or disposed
of hereunder. The Sub-Adviser shall have no obligation to acquire with respect
to the Fund, a position in any investment which the Sub-Adviser, its officers,
affiliates or employees may acquire for its or their own accounts or for the
account of another client, if in the sole discretion of the Sub-Adviser, it is
not feasible or desirable to acquire a position in such investment on behalf of
the Fund. Nothing herein contained shall prevent the Sub-Adviser from purchasing
or recommending the purchase of a particular security for one or more funds or
clients while other funds or clients may be selling the same security.
4
<PAGE>
8. No Partnership or Joint Venture. The Trust, the Fund, the Adviser and the
Sub-Adviser are not partners of or joint venturers with each other and nothing
herein shall be construed so as to make them such partners or joint venturers or
impose any liability as such on any of them.
9. Limitation of Liability of Sub-Adviser. The Sub-Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Trust or the Fund or the Adviser in connection with the matters to which this
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the Sub-Adviser's part in the performance of its duties
or from reckless disregard by it of its obligations and duties under this
Agreement. Any person, even though also employed by the Sub-Adviser, who may be
or become an employee of and paid by the Trust or the Fund shall be deemed, when
acting within the scope of his employment by the Trust or the Fund, to be acting
in such employment solely for the Trust or the Fund and not as the Sub-Adviser's
employee or agent.
10. Duration and Termination of this Agreement. This Agreement shall remain in
force until the second anniversary of the date upon which this Agreement was
executed by the parties hereto, and from year to year thereafter, but only so
long as such continuance is specifically approved at least annually by (a) a
majority of the Trustees who are not interested persons of the Adviser, the
Sub-Adviser, or (other than as Board members) of the Trust or the Fund, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
either (i) the Trustees or (ii) a majority of the outstanding voting securities
of the Fund. This Agreement may, on 60 days' written notice, be terminated at
any time without the payment of any penalty by the Trust or the Fund by vote of
a majority of the outstanding voting securities of the Fund, by the Trustees,
the Adviser or the Sub-Adviser. Termination of this Agreement with respect to
the Fund shall not be deemed to terminate or otherwise invalidate any provisions
of any contract between the Sub-Adviser and any other series of the Trust. This
Agreement shall automatically terminate in the event of its assignment or upon
termination of the Investment Management Contract. In interpreting the
provisions of this Section 11, the definitions contained in Section 2(a) of the
1940 Act (particularly the definitions of "assignment," "interested person" or
"voting security"), shall be applied.
11. Amendment of this Agreement. No provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, waiver, discharge
or termination is sought, and no amendment, transfer, assignment, sale,
hypothecation or pledge of this Agreement shall be effective until approved by
(a) the Trustees, including a majority of the Trustees who are not interested
persons of the Adviser, the Sub-Adviser, or (other than as Board members) of the
Trust or the Fund, cast in person at a meeting called for the purpose of voting
on such approval, and (b) a majority of the outstanding voting securities of the
Fund, as defined in the 1940 Act.
12. Governing Law. This Agreement shall be governed and construed in accordance
with the laws of the Commonwealth of Massachusetts.
13. Severability. The provisions of this Agreement are independent of and
separable from each other, and no provision shall be affected or rendered
invalid or unenforceable by virtue of the fact that for any reason any other or
others of them may be deemed invalid or unenforceable in whole or in part.
5
<PAGE>
14. Miscellaneous. (a) The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. The name John Hancock Declaration Trust is the
designation of the Trustees under the Declaration of Trust dated November 15,
1995, as amended from time to time. The Declaration of Trust has been filed with
the Secretary of The Commonwealth of Massachusetts. The obligations of the Trust
and the Fund are not personally binding upon, nor shall resort be had to the
private property of, any of the Trustees, shareholders, officers, employees or
agents of the Fund, but only the Fund's property shall be bound. The Trust or
the Fund shall not be liable for the obligations of any other series of the
Trust. (b) Any information supplied by the Sub-Adviser, which is not otherwise
in the public domain, in connection with the performance of its duties hereunder
is to be regarded as confidential and for use only by the Fund and/or its
agents, and only in connection with the Fund and its investments.
Yours very truly,
JOHN HANCOCK ADVISERS, INC.
By: /s/Susan S. Newton
----------------------
Susan S. Newton
Vice President
The foregoing contract is hereby agreed to as of the date hereof.
JOHN HANCOCK DECLARATION TRUST
on behalf of John Hancock V.A. Technology Fund
By: /s/Anne C. Hodsdon
----------------------
Anne C. Hodsdon
President
AMERICAN FUND ADVISORS, INC.
By: /s/Barry J. Gordon
----------------------
Name: Barry J. Gordon
Title: President
6
JOHN HANCOCK DECLARATION TRUST
101 Huntington Avenue
Boston, MA 02199
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, MA 02199
Ladies and Gentlemen:
Pursuant to Section 13 of the Distribution Agreement dated as of July
22, 1996 between John Hancock Declaration Trust (the "Trust") and John Hancock
Funds, Inc., please be advised that the Trust has established a new series of
its shares, namely, John Hancock V.A. Technology Fund (the "Fund"), and please
be further advised that the Trust desires to retain John Hancock Funds, Inc. to
serve as distributor and principal underwriter under the Distribution Agreement
for the Fund.
Please indicate your acceptance of this responsibility by signing this
letter as indicated below.
JOHN HANCOCK FUNDS, INC. JOHN HANCOCK DECLARATION TRUST
on behalf of John Hancock V.A. Technology Fund
By: /s/James V.Bowhers By: /s/Anne C. Hodsdon
---------------------- ----------------------
President President
Dated: May 1, 2000
JOHN HANCOCK DECLARATION TRUST
101 Huntington Avenue
Boston, MA 02199
May 1, 2000
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
RE: JOHN HANCOCK DECLARATION Trust
- John Hancock V.A. Technology Fund
Ladies and Gentlemen:
John Hancock Declaration Trust (the "Trust"), a Massachusetts business
trust on behalf of John Hancock V.A. Technology Fund (the "Fund") hereby
notifies Investors Bank & Trust Company (the "Bank") that it desires to place
and maintain the Fund's securities and cash in the custody of the Bank pursuant
to the Master Custodian Agreement between John Hancock Mutual Funds and the Bank
dated March 9, 1999, effective May 1, 2000.
If the Bank agrees to provide such services, please sign below and
return a signed copy of this letter to the undersigned.
INVESTORS BANK & TRUST COMPANY JOHN HANCOCK DECLARATION TRUST
on behalf of John Hancock V.A. Technology Fund
By: /s/Kevin J. Sheehan By: /s/Anne C. Hodsdon
------------------- ------------------
Name: Kevin J. Sheehan Name: Anne C. Hodsdon
Title: Chief Executive Officer Title: President
Attest: /s/Paul R. Apero Attest: /s/Carmine M. Pelissier
------------------- -----------------------
TRANSFER AGENCY AND SERVICE AGREEMENT
-------------------------------------
AGREEMENT made as of the 22nd day of July, 1996 by and between JOHN HANCOCK
DECLARATION TRUST, a Massachusetts business trust, having its principal office
and place of business at 101 Huntington Avenue, Boston, Massachusetts, 02199
(the "Trust"), and John Hancock Investor Services Corporation, a Delaware
corporation having its principal office and place of business at 101 Huntington
Avenue, Boston, Massachusetts 02199 ("JHISC").
WITNESSETH:
-----------
WHEREAS, the Trust desires to appoint JHISC as its transfer agent, dividend
disbursing agent and agent in connection with certain other activities, and
JHISC desires to accept such appointment;
WHEREAS, the Trust is authorized to issue shares in separate series, with each
such series representing interests in a separate portfolio of securities and
other assets; and
WHEREAS, the Trust intends to initially offer shares in ten series designated
as: John Hancock V.A. Emerging Growth Fund, John Hancock V.A. Discovery Fund,
John Hancock V.A. International Fund, John Hancock V.A. 500 Index Fund, John
Hancock V.A. Independence Equity Fund, John Hancock V.A. Sovereign Investors
Fund, John Hancock V.A. Sovereign Bond Fund, John Hancock V.A. Strategic Income
Fund, John Hancock V.A. World Bond Fund and John Hancock V.A. Money Market Fund,
together with all other series subsequently established by the Trust and made
subject to this Agreement (each, a "Fund" and collectively, the "Funds");
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of JHISC
-------------------------------------
1.01 Subject to the terms and conditions set forth in this
Agreement, the Trust hereby employs and appoints JHISC to act, and JHISC agrees
to act, as transfer agent and dividend dispursing agent with respect to the
authorized and issued shares of beneficial interest ("Shares") of each series of
the Trust subject to this Agreement and to provide to the shareholders of the
Trust ("Shareholders") such services in connection therewith as may be set out
in the prospectuses of the Trust from time to time.
1.02 JHISC agrees that it will perform the following
services:
(a) In accordance with procedures established from time to
time by agreement between the Trust and JHISC, JHISC shall:
(i) Receive for acceptance, orders for the purchase of
Shares, and promptly deliver payment and appropriate documentation
therefor to each Fund's Custodian authorized pursuant to the Trust's
Declaration of Trust (the "Custodian");
1
<PAGE>
(ii) Pursuant to purchase orders, issue the
appropriate number of Shares and hold
such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance, redemption requests
and redemption directions and
deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it
receives monies paid to it by the
Custodian with respect to any redemption, pay over or cause to be paid
over in the appropriate manner such monies as instructed by the
redeeming Shareholders;
(v) Effect transfers of Shares by the registered
owners thereof upon receipt of
appropriate instructions;
(vi) Prepare and transmit payments for dividends
and distributions declared by the
Funds, processing the reinvestment of distributions on each Fund at the
net asset value per share for that Fund next computed after the payment
(in accordance with the Fund's then-current prospectus);
(vii) Maintain records of account for and advise
the Trust and its Shareholders as
to the foregoing; and
(viii) Record the issuance of Shares of each Fund
and maintain pursuant to Rule
17Ad-10(e) of the rules and regulations of the Securities Exchange Act
of 1934 a record of the total number of Shares of each Fund which are
authorized, based upon data provided to it by each Fund, and issued and
outstanding. JHISC shall also provide each Fund on a regular basis with
the total number of Shares which are authorized and issued and
outstanding and shall have no obligation, when recording the issuance of
Shares, to monitor the issuance of these Shares or to take cognizance of
any laws relating to the issue or sale of these Shares, which functions
shall be the sole responsibility of each Fund.
(b) In calculating the number of Shares to be issued on
purchase or reinvestment, or redeemed or repurchased, or the amount of the
purchase payment or redemption or repurchase payments owed, JHISC shall use the
net asset value per share (as described in each fund's then-current prospectus)
computed by it or such other person as may be designated by the Trust's board of
trustees. It is understood that, unless the Trust directs otherwise, the
issuance, redemption or repurchase of the Funds' shares arising out of an
automatic transaction under an insurance contract (such as investment of net
premiums, death of insureds, deduction of fees and charges, transfers,
surrenders, loans, loan repayments, deductions of interest on loans, lapses,
reinstatements and similar automatic transactions) shall be effected at the net
asset value per share computed as of the close of business on the day as of
which said automatic transaction is effected, even though the "order" for
purchase, sale or redemption of the Funds' shares is not received until after
said close of business. All other issuances, redemptions or repurchases of the
Funds' shares shall be effected at net asset values per share next computed
after receipt of the orders therefore and said orders shall become irrevocable
at the time as of which said value is next computed.
2
<PAGE>
(c) In addition to and not in lieu of the services set forth
in the above paragraph (a), JHISC shall: (i) perform all of the customary
services of a transfer agent and dividend disbursing agent including but not
limited to: maintaining all Shareholder accounts, preparing Shareholder meeting
lists, mailing proxies, receiving and tabulating proxies, mailing Shareholder
reports and prospectuses to current Shareholders, withholding taxes on U.S.
resident and non-resident alien accounts, preparing and filing appropriate forms
required with respect to dividends and distributions by federal authorities for
all Shareholders, preparing and mailing confirmation forms and statements of
account to Shareholders for all purchases and redemptions of Shares and other
confirmable transactions in Shareholder accounts, preparing and mailing activity
statements for Shareholders, and providing Shareholder account information and
(ii) provide a system which will enable the Trust to monitor the total number of
each Fund's Shares sold in each State.
(d) In addition, the Trust shall (i) identify to JHISC in
writing those transactions and assets to be treated as exempt from the blue sky
reporting for each State and (ii) verify the establishment of transactions for
each State on the system prior to activation and thereafter monitor the daily
activity for each State. The responsibility of JHISC for the Trust's blue sky
State registration status is solely limited to the initial establishment of
transactions subject to blue sky compliance by the Trust and the reporting of
these transactions to the Trust as provided above.
(e) Additionally, JHISC shall:
(i) Utilize a system to identify all share transactions
which involve purchase and redemption orders that are processed at a time other
than the time of the computation of net asset value per share next computed
after receipt of such orders, and shall compute the net effect upon each Fund of
the transactions so identified on a daily and cumulative basis.
(ii) If upon any day the cumulative net effect of such
transactions upon a Fund is negative and exceeds a dollar amount equivalent to
1/2 of 1 cent per share, JHISC shall promptly make a payment to the Fund in cash
or through the use of a credit in the manner described in paragraph (iv) below,
in such amount as may be necessary to reduce the negative cumulative net effect
to less than 1/2 of 1 cent per share.
(iii) If on the last business day of any month the cumulative
net effect upon a Fund of such transactions (adjusted by the amount of all prior
payments and credits by JHISC and the Fund) is negative, the Fund shall be
entitled to a reduction in the fee next payable under the Agreement by an
equivalent amount, except as provided in paragraph (iv) below. If on the last
business day in any month the cumulative net effect upon a Fund of such
transactions (adjusted by the amount of all prior payments and credits by JHISC
and the Fund) is positive, JHISC shall be entitled to recover certain past
payments and reductions in fees, and to a credit against all future payments and
fee reductions that may be required under the Agreement as herein described in
paragraph (iv) below.
(iv) At the end of each month, any positive cumulative net
effect upon a Fund of such transactions shall be deemed to be a credit to JHISC
which shall first be applied to permit JHISC to recover any prior cash payments
3
<PAGE>
and fee reductions made by it to the Fund under paragraphs (ii) and (iii) above
during the calendar year, by increasing the amount of the monthly fee under the
Agreement next payable in an amount equal to prior payments and fee reductions
4
<PAGE>
made by JHISC during such calendar year, but not exceeding the sum of that
month's credit and credits arising in prior months during such calendar year to
the extent such prior credits have not previously been utilized as contemplated
by this paragraph. Any portion of a credit to JHISC not so used by it shall
remain as a credit to be used as payment against the amount of any future
negative cumulative net effects that would otherwise require a cash payment or
fee reduction to be made to a Fund pursuant to paragraphs (ii) or (iii) above
(regardless of whether or not the credit or any portion thereof arose in the
same calendar year as that in which the negative cumulative net effects or any
portion thereof arose).
(v) JHISC shall supply to each Fund from time to time, as
mutually agreed upon, reports summarizing the transactions identified pursuant
to paragraph (I) above, and the daily and cumulative net effects of such
transactions, and shall advise a Fund at the end of each month of the net
cumulative effect at such time. JHISC shall promptly advise a Fund if at any
time the cumulative net effects exceeds a dollar amount equivalent to 1/2 of 1
cent per share.
(vi) In the event that this Agreement is terminated for
whatever cause, or this provision 1.02 (d) is terminated pursuant to paragraph
(vii) below, a Fund shall promptly pay to JHISC an amount in cash equal to the
amount by which the cumulative net effect upon the Fund is positive or, if the
cumulative net effect upon the Fund is negative, JHISC shall promptly pay to the
Fund an amount in cash equal to the amount of such cumulative net effect.
(vii) This provision 1.02 (e) of the Agreement may be
terminated by JHISC at any time without cause, effective as of the close of
business on the date written notice (which may be by telex) is received by the
Trust.
Procedures applicable to certain of these services may be
established from time to time by agreement between the Trust and JHISC.
Article 2 Fees and Expenses
2.01 For performance by JHISC pursuant to this Agreement,
the Trust on behalf of each Fund agrees to pay JHISC an annual maintenance fee
for each Shareholder account as set out in the initial fee schedule attached
hereto. Such fees and out-of-pocket expenses and advances identified under
Section 2.02 below may be changed from time to time subject to mutual written
agreement between the Fund and JHISC.
2.02 In addition to the fee paid under Section 2.01 above,
the Trust on behalf of each Fund agrees to reimburse JHISC for out-of-pocket
expenses or advances incurred by JHISC for the items set out in the fee schedule
attached hereto. In addition, any other expenses incurred by JHISC at the
request or with the consent of a Fund, will be reimbursed by the Trust on behalf
of such Fund.
2.03 The Trust on behalf of each Fund agrees to pay all fees
and reimbursable expenses promptly following the mailing of the respective
billing notice. Postage for mailing of proxies to all shareholder accounts shall
be advanced to JHISC by the Trust on behalf of the Funds at least seven (7) days
prior to the mailing date of such materials.
5
<PAGE>
Article 3 Representations and Warranties of JHISC
---------------------------------------
JHISC represents and warrants to the Trust that:
3.01 It is a corporation duly organized and existing and in
good standing under the laws of the State of Delaware, and is duly qualified and
in good standing as a foreign corporation under the Laws of The Commonwealth of
Massachusetts.
3.02 It has corporate power and authority to enter into and
perform its obligations under this Agreement.
3.03 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.04 It has and will continue to have access to the
necessary facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
Article 4 Representations and Warranties of the Trust
-------------------------------------------
The Trust represents and warrants to JHISC that:
4.01 It is a business trust duly organized and existing and
in good standing under the laws of The Commonwealth of Massachusetts.
4.02 It has power and authority to enter into and perform
this Agreement.
4.03 All trust proceedings required by the Declaration of
Trust and By-Laws have been taken to authorize it to enter into and perform this
Agreement.
4.04 It is an open-end investment company registered under
the Investment Company Act of 1940, as amended (the "1940 Act").
4.05 A registration statement under the Securities Act of
1933, as amended, with respect to the shares of each series of the Trust subject
to this Agreement has become effective, and appropriate state securities law
filings have been made and will continue to be made.
Article 5 Indemnification
5.01 JHISC shall not be responsible for, and the Trust shall
indemnify and hold JHISC harmless from and against, any and all losses, damages,
costs, charges, counsel fees, payments, expenses and liabilities arising out of
or attributable to:
(a) All actions of JHISC or its agents or subcontractors
required to be taken pursuant to this Agreement, provided that such actions are
taken in good faith and without negligence or willful misfeasance.
6
<PAGE>
(b) The Trust's refusal or failure to comply with the terms
of this Agreement, or which arise out of the Trust's bad faith, gross negligence
or willful misfeasance or which arise out of the reckless disregard of any
representation or warranty of the Trust hereunder.
(c) The reliance on or use by JHISC or its agents or
subcontractors of information, records and documents which (i) are received by
JHISC or its agents or subcontractors and furnished to it by or on behalf of the
Trust, and (ii) have been prepared and/or maintained by the Trust or any other
person or firm on behalf of the Trust.
(d) The reliance on, or the carrying out by JHISC or its
agents or subcontractors of, any instructions or requests of the Trust.
(e) The offer or sale of Shares in violation of any
requirement under the federal securities laws or regulations or the securities
laws or regulations of any state that Fund Shares be registered in that state or
in violation of any stop order or other determination or ruling by any federal
agency or any state with respect to the offer or sale of Shares in that state.
(f) It is understood and agreed that the assets of each Fund
may be used to satisfy the indemnity under this Article 5 only to the extent
that the loss, damage, cost, charge, counsel fee, payment, expense and liability
arises out of or is attributable to services hereunder with respect to the
Shares of such Fund.
5.02 JHISC shall indemnify and hold harmless the Trust on
behalf of each Fund from and against any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liabilities arising out of or
attributed to any action or failure or omission to act by JHISC as a result of
JHISC's lack of good faith, negligence or willful misfeasance.
5.03 At any time JHISC may apply to any officer of the Trust
for instructions, and may consult with legal counsel with respect to any matter
arising in connection with the services to be performed by JHISC under this
Agreement, and JHISC and its agents or subcontractors shall not be liable and
shall be indemnified by the Trust for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. JHISC, its
agents and subcontractors shall be protected and indemnified in acting upon any
paper or document furnished by or on behalf of the Trust, reasonably believed to
be genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents provided JHISC or its
agents or subcontractors by machine readable input, telex, CRT data entry or
other similar means authorized by the Trust, and shall not be held to have
notice of any change of authority of any person, until receipt of written notice
thereof from the Trust. JHISC, its agents and subcontractors shall also be
protected and indemnified in recognizing share certificates which are reasonably
believed to bear the proper manual or facsimile signatures of the officer of the
Trust, and the proper countersignature of any former transfer agent or
registrar, or of a co- transfer agent or co-registrar.
5.04 In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be liable for
damages to the other for any damages resulting from such failure to perform or
otherwise from such causes.
7
<PAGE>
5.05 Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of this Agreement or
for any act or failure to act hereunder.
5.06 In order that the indemnification provisions contained
in this Article 5 shall apply, upon the assertion of a claim for which either
party may be required to indemnify the other, the party seeking indemnification
shall promptly notify the other party of such assertion, and shall keep the
other party advised with respect to all developments concerning such claim. The
party who may be required to indemnify shall have the option to participate with
the party seeking indemnification in the defense of such claim. The party
seeking indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to indemnify it
except with the other party's prior written consent.
Article 6 Covenants of the Trust and JHISC
--------------------------------
6.01 The Trust shall promptly furnish to JHISC the
following:
(a) A certified copy of the resolution(s) of the Trustees of
the Trust authorizing the appointment of JHISC and the execution and delivery of
this Agreement.
(b) A copy of the Declaration of Trust and By-Laws of
the Trust and all amendments thereto.
6.02 JHISC hereby agrees to establish and maintain
facilities and procedures reasonably acceptable to the Trust for safekeeping of
share certificates and facsimile signature imprinting devices, if any; and for
the preparation or use, and for keeping account of, such certificates and
devices.
6.03 JHISC shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Company Act of 1940 and the
rules and regulations of the Securities and Exchange Commission thereunder,
JHISC agrees that all such records prepared or maintained by JHISC relating to
the services to be performed by JHISC hereunder are the property of the Trust
and will be preserved, maintained and made unavailable in accordance with such
Act and rules, and will be surrendered to the Trust on and in accordance with
its request.
6.04 JHISC and the Trust agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily disclosed to
any other person, except as may be required by law.
6.05 In case of any requests or demands for the inspection
of the Shareholder records of the Trust, JHISC will endeavor to notify the Trust
and to secure instructions from an authorized officer of the Trust as to such
inspection. JHISC reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person.
8
<PAGE>
Article 7 Termination of Agreement
------------------------
7.01 This Agreement may be terminated by either party upon
one hundred twenty (120) days' written notice to the other.
7.02 Should the Trust exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and material will
be borne by the Trust. Additionally, JHISC reserves the right to charge for any
other reasonable expenses associated with such termination.
Article 8 Assignment
----------
8.01 Except as provided in Section 8.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be
binding upon the parties and their respective permitted successors and assigns.
8.03 JHISC may, without further consent on the part of the
Trust, subcontract for the performance hereof with (i) Boston Financial Data
Services, Inc., a Massachusetts corporation ("BFDS") which is duly registered as
a transfer agent pursuant to Section 17A(c)(1) of the Securities Exchange Act of
1934 ("Section 17A(c)(1)") or any other entity registered as a transfer agent
under Section 17A(c)(1) JHISC deems appropriate in order to comply with the
terms and conditions of this Agreement; provided, however, that JHISC shall be
as fully responsible to the Trust for the acts and omissions of any
subcontractor as it is for its own acts and omissions.
Article 9 Amendment
---------
9.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Trustees of the Trust.
Article 10 Massachusetts Law to Apply
--------------------------
10.01 This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the internal substantive laws
of The Commonwealth of Massachusetts.
Article 11 Merger of Agreement
-------------------
11.01 This Agreement constitutes the entire agreement
between the parties hereto and
supersedes any prior agreement with respect to the subject hereof whether oral
or written.
9
<PAGE>
Article 12 Limitation on Liability
-----------------------
12.01 The name "John Hancock Declaration Trust" is the
designation of the Trustees
under the Declaration of Trust dated November 15, 1995. The obligations of such
Trust are not personally binding upon, nor shall resort be had to the property
of, any of the Trustees, shareholders, officers, employees or agents of such
Trust, but the Trust's property only shall be bound. Each Fund shall be liable
only for its own obligations under this Agreement and shall not be jointly or
severally liable to the obligations of any other Fund hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
JOHN HANCOCK DECLARATION TRUST
By: /s/Anne C. Hodsdon
------------------
Anne C. Hodsdon
President
JOHN HANCOCK INVESTOR SERVICES CORPORATION
By: /s/Charles J. McKenney, Jr.
---------------------------
Charles J. McKenney, Jr.
Vice President
s:\funds\dectrust\transfer.doc
10
JOHN HANCOCK DECLARATION TRUST
101 Huntington Avenue
Boston, MA 02199
John Hancock Signature Services, Inc.
101 Huntington Avenue
Boston, MA 02199
Re: Master Transfer Agency and Service Agreement
--------------------------------------------
Ladies and Gentlemen:
Pursuant to Section 11.01 of the Master Transfer Agency and Service
Agreement dated as of July 22, 1996 between John Hancock Declaration Trust (the
"Trust") and John Hancock Signature Services, Inc. (the "Transfer Agent"),
please be advised that the Trust has established a new series of its shares,
namely, John Hancock V.A. Technology Fund (the "Fund"), and please be further
advised that the Trust desires to retain the Transfer Agent to render transfer
agency services under the Master Transfer Agency and Service Agreement for the
Fund in accordance with the fee schedule attached as Exhibit A.
Please state below whether you are willing to render such services in
accordance with the fee schedule attached as Exhibit A.
JOHN HANCOCK DECLARATION TRUST
on behalf of John Hancock V.A. Technology Fund
ATTEST: /s/Carmen M. Pelissier By: /s/Anne C. Hodsdon
------------------------------ ----------------------
Asst. Secretary President
Dated: May 1, 2000
We are willing to render transfer agency services to John Hancock V.A.
Technology Fund in accordance with the fee schedule attached hereto as Exhibit
A.
JOHN HANCOCK SIGNATURE SERVICES, INC.
ATTEST: /s/Carmen M. Pelissier By: /s/Charles J. McKenney, Jr.
-------------------------- ------------------------------
Dated: May 1, 2000
<PAGE>
EXHIBIT A
TRANSFER AGENCY FEE SCHEDULE
----------------------------
Effective May 1, 2000, the transfer agent fees payable monthly under the
transfer agency agreement between each Fund listed below and John Hancock
Signature Services, Inc. shall be the following rates plus certain out-of-pocket
expenses as described to the Board:
Fund Annual Rate Per Account
- ---- -----------------------
John Hancock V.A. Bond Fund No Current Fee
John Hancock V.A. Core Equity Fund No Current Fee
John Hancock V.A. Financial Industries Fund No Current Fee
John Hancock V.A. 500 Index Fund No Current Fee
John Hancock V.A. High Yield Bond Fund No Current Fee
John Hancock V.A. International Fund No Current Fee
John Hancock V.A. Large Cap Growth Fund No Current Fee
John Hancock V.A. Large Cap Value Fund No Current Fee
John Hancock V.A. Mid Cap Growth Fund No Current Fee
John Hancock V.A. Money Market Fund No Current Fee
John Hancock V.A. Regional Bank Fund No Current Fee
John Hancock V.A. Small Cap Growth Fund No Current Fee
John Hancock V.A. Sovereign Investors Fund No Current Fee
John Hancock V.A. Strategic Income Fund No Current Fee
John Hancock V.A. Technology Fund No Current Fee
s:\funds\dectrust\feesched.doc
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in the Prospectuses and under the caption "Independent Auditors" in
the Statement of Additional Information in Post-Effective Amendment Number 12 to
the Registration Statement (Form N-1A, No. 33-64465) of John Hancock Declaration
Trust.
We also consent to the incorporation by reference into the Statement of
Additional Information of our report dated February 11, 2000 on the financial
statements included in the Annual Report of the John Hancock Declaration Trust
for the year ended December 31, 1999.
/s/ERNST & YOUNG LLP
--------------------
ERNST & YOUNG LLP
Boston, Massachusetts
April 25, 2000
AMERICAN FUND ADVISORS, INC.
CODE OF ETHICS
The conduct of officers, directors, and employees of American Fund
Advisors, Inc. ("AFA") on behalf of all registered investment companies and
advisory accounts (the "Funds") is governed by one basic principle: the
interests of the shareholders and investors of the Funds are paramount. The
personal interests of the officers, directors, and employees must be
subordinated to those of the shareholders and investors (collectively the
"shareholders"). Thus, no AFA officer, director, or employee may make personal
use of information available by reason of his or her position with AFA until
after the Funds have acted upon the information. In addition, each investment
opportunity which comes to the attention of any such officer, director, or
employee and which is appropriate for consideration by any of the Funds must be
first made available for the benefit of such Fund before the officer, director,
or employee can take any personal advantage of the opportunity. A conflict
between the interest of an individual and that of one of the Funds can arise
when the individual by virtue of his or her association with AFA anticipates
action on the part of the Fund and places himself or herself in a position to
profit by the Fund's action. A conflict can also arise when an individual by
reason of a pre-existing securities position in a personal account, has an
interest in whether the Fund buys, sells or holds a particular security. The
following guidelines are designed to assist those affiliated with AFA in their
personal transactions by clearly specifying some, but not all, of the areas
where personal investment transactions might raise questions of conflict with
the best interests of the Funds and the shareholders.
This Code of Ethics applies to everyone who is a director, officer, or
employee, whether full- or part-time, of AFA.
An employee ("associate") or person considered an associate under this
Code of Ethics should observe the following rules:
1. PRE-CLEARANCE FOR ALL TRADES
- ALL ASSOCIATES AND FAMILY MEMBERS1
Pre-clearance for Public Securities2:
1 For purposes of this Code, the term "family" or "family member" means an
associate's "significant other", spouse or other relative, whether related by
blood, marriage or otherwise, who either (i) shares the same home, or (ii) is
financially dependent upon the associate, or (iii) whose investments are
controlled by the associate. The term also includes any unrelated individual for
whom an associate controls investments and materially contributes to the
individual's financial support.
2 Excludes U.S. Government securities, bank CD's, commercial paper and open-end
mutual funds and physical commodities other than gold.
<PAGE>
Any personal trades, whether equity or debt, MUST be approved in advance.
This requirement applies to all associates. The pre-clearance policy
governs trades for all associates' personal accounts, those of a spouse,
"significant other" or family members sharing a household, as well as all
accounts over which the associate has discretion or gives advice or
information. The procedures for pre-clearance are contained in a document
attached to the Code of Ethics.
YOU MAY NOT TRADE UNTIL CLEARANCE IS RECEIVED. Clearance
approval is valid only for the date granted.
Clearance for Private Placements:
Clearance for purchase of private placement securities may be obtained by
contacting the Review Officer3 in writing. The procedures for private
placement pre-clearance are contained in a document attached to the Code
of Ethics.
Clearance of a private placement may be denied if the transaction would
raise issues regarding the appearance of impropriety.
2. BAN ON SHORT-TERM TRADING PROFITS
Associates and their family members cannot profit from the purchase and
sale or the sale and purchase of the same or equivalent securities held
91 or fewer days. A gift from an associate is considered a sale. Any
profits realized on such short-term trades must be disgorged and
contributed to a charity approved by the Board of Directors of AFA. This
restriction assures that personal trading is for investment purposes. Any
investments in an associate's or family member's account prior to the
date of this Code are not subject to this ban.
3. Purchase of Initial Public Offerings ("IPO's")
No associate nor any member of his or her family acting on advice or
information from the associate should purchase any newly issued or
publicly-offered securities4 until the next business (trading) day after
the offering date and after receipt of pre-clearance approval. No
purchase should be at other than the market price prevailing on, or
subsequent to, such business day. This restriction shall apply also to
anyone with whom the associate or family member covered by this Code has
any contract, understanding, relationship, agreement or other arrangement
providing benefits substantially equivalent to those of ownership of the
securities in question and to any owner of securities in which the
associate or family member has the right to vest or revest title at once
or at some future time , and also to any trust of which the associate or
family member is an income beneficiary or remainderman and over which the
associate or family member has any direct influence or control
("controlled trust").
3 "Review Officer" means the Chairman and President of AFA, or in his absence
the Senior Vice President, or in their absence such person as the Chairman and
President shall designate.
4 This provision applies to all initial public offerings except those defined in
Footnote 2.
<PAGE>
4. Proprietary Information
Investment opportunities and ideas brought to AFA are considered
proprietary to AFA and its Funds. Associates have an obligation to share
any proprietary information in their possession with the investment staff
prior to submitting a request for pre-clearance. All written credit or
company reports produced by AFA are also considered proprietary. This
information should not be used for personal trading until pre-clearance
has been received.
An associate cannot make available to others any information acquired
solely by reason of his or her position with AFA even though the
associate may have conflicting duties as a director, trustee or agent of
another entity with portfolio management or investment responsibilities.
Information not generally available and obtained through an associate's
position is not available to another person or entity and may not be used
in discharging duties to the other person or entity.
5. Dealings with Brokers
No associate nor any family member, controlled trust or nominee shall
seek or accept favors or preferential treatment from securities brokers
or dealers or other organizations with which AFA might transact business.
Occasional participation in lunches, dinners, cocktail parties, sporting
activities or similar gatherings conducted for business purposes is not
prohibited. For the protection of both the associate and AFA, however,
the appearance of a possible conflict of interest must be avoided.
Caution is to be exercised in any instance in which business travel and
lodging are paid for by other than AFA's funds. Associates, their family
members, controlled trusts or nominees may subscribe to private offerings
placed through a securities firm or to public offerings made to a
restricted or limited number of investors, subject to the pre-clearance
provisions in Section 1 and the initial public offering bar in Section 3.
Compliance with Section 5 on Dealings with Brokers minimizes the basis
for any charge that AFA associates use AFA's position to obtain for
themselves issues and opportunities which otherwise would not be offered
to them.
<PAGE>
6. Reports
Associates deemed to be "advisory representatives"5 and others so
designated are required quarterly to file a report of individual security
transactions not otherwise excepted. See exceptions set forth below.6 An
advisory representative is not required to report transactions for an
account over which the advisory representative has no direct or indirect
influence or control. The report is due not later than 10 days after the
end of each calendar quarter in which a transaction to which the report
relates was effected and shall be filed with the Review Officer. To the
extent not otherwise required by a Securities and Exchange Commission
Rule or Regulation, the securities transaction reports will be kept
confidential. The reports are required to be preserved for a period of
not less than 5 years from the end of the fiscal year in which they are
made and must remain in an easily accessible place for the first 2 years.
7. REPORT OF BOARD, TRUSTEE OR LEADERSHIP POSITIONS IN COMPANIES
ISSUING SECURITIES
Those deemed to be "advisory representatives" as noted in Section 6 must
report promptly to the Review Officer for the Code of Ethics any board,
trustee or leadership position the "advisory representative" holds in a
private, public or private non-profit company which issues or plans to
issue any security.
8. ANNUAL DISCLOSURE OF PERSONAL HOLDINGS
BY QUARTERLY REPORTING PERSONS
All those deemed to be "advisory representatives" as noted in Section 6
must disclose all personal securities holdings upon commencement of
employment and thereafter by March 15 for holdings as of December 31 of
the prior calendar year.
5 The definition of "advisory representative" is contained in Rule
204-2(a)(12)(A) of the Advisers Act of 1940. "Advisory representatives" include
any employee who makes any recommendation, who participates in the
determination of which recommendation shall be made, or whose functions
or duties relate to the determination of which recommendation shall be
made; any employee who, in connection with his [or her] duties, obtains
any information concerning which securities are being recommended prior
to the effective dissemination of such recommendations or the
information concerning such recommendations.
6 Securities exempted from individual security transaction reporting
("Quarterlies") are those which are direct obligations of the United States and
shares of non-affiliated registered open-end investment companies.
<PAGE>
9. BLACKOUT PERIOD FOR PORTFOLIO MANAGERS
Portfolio managers are prohibited from buying or selling a security
within seven calendar days before and after an investment company that he
or she manages trades in that security. Any profits realized on trades
within the proscribed periods are required to be disgorged and
contributed to a charity approved by the Board of Directors of AFA. The
names of portfolio managers subject to this provision will be submitted
annually by the Review Officer and updated as needed.
10. INSIDE INFORMATION
All AFA associates are also subject to the Policy and Procedures of
American Fund Advisors, Inc. Designed to Detect and Prevent Insider
Trading.
INTERPRETATION AND ENFORCEMENT
The Code of Ethics cannot anticipate every situation in which personal
interests may be in conflict with the interests of the shareholders. Associates
should be responsive to the spirit and intent of the Code as well as its
specific provisions.
When any doubt exists regarding any provision of the Code or whether a
conflict of interest with shareholders might exist, the transaction should be
discussed beforehand with the Review Officer for the Code of Ethics.
The Code of Ethics is designed to detect and prevent fraud against fund
investors, and to avoid the appearance of impropriety. To provide assurance that
policies are effective, personal securities transaction reports will be
monitored and checked against fund portfolio transactions by the Review Officer.
In addition, other internal auditing procedures may be adopted from time to
time.
Violations of the Code will be referred by the Review Officer to the
Board of Directors of AFA for review and appropriate action. Sanctions for
violations could include fines, suspension or termination of the violator's
position with AFA and/or a report to the appropriate regulatory authority.
Adopted by the Board of Directors of American Fund
Advisors, Inc. on July 11, 1995.
<PAGE>
AMERICAN FUND ADVISORS, INC.
CODE OF ETHICS
PRE-CLEARANCE PROCEDURES
An employee ("associate") or person considered an associate under the
Code of Ethics should observe the following procedures:
PRE-CLEARANCE FOR ALL TRADES
- - ALL ASSOCIATES AND FAMILY MEMBERS1
Pre-clearance for Public Securities2:
Any personal trades, whether equity or debt, MUST be approved in
advance. This requirement applies to all associates ("associates"). The
pre-clearance policy governs trades for all associates' personal accounts, or
those of a spouse, "significant other" or other family members sharing a
household, as well as all accounts over which the associate has discretion or
gives advice or information.
Requests to pre-clear trades should be sent to the Review Officer prior
to 4:30 p.m. (Eastern Time). All required information must be included.
Associates will be notified by 11:00 a.m. the next business day as to whether
clearance has been granted. The request must include:
a. The associate's name and name of individual trading, if different,
b. Name of security and ticker symbol,
c. CUSIP number,
c. Whether sale or purchase, and
e. If sale, date of purchase.
YOU MAY NOT TRADE UNTIL CLEARANCE IS RECEIVED. Clearance approval is valid only
for the date granted.
Clearance for Private Placements:
Clearance for purchase of private placement securities may be obtained
by contacting the Review Officer in writing. The written request must include:
a. The associate's name,
b. The complete name of the security;
1 For purposes of these Guidelines, the term "family member" means an
associate's "significant other", spouse or other relative, whether related by
blood, marriage or otherwise, who either (i) shares the same home, or (ii) is
financially dependent upon the associate, or (iii) whose investments are
controlled by the associate. The term also includes any unrelated individual for
whom an associate controls investments and materially contributes to the
individual's financial support.
2 Excludes U.S. Government securities, bank certificates of deposit, commercial
paper and open-end mutual funds.
<PAGE>
c. The seller and whether or not the seller is one with whom the associate
does business on a regular basis,
d. Any potential conflict, present or future, with fund trading activity
and whether the security might be offered as inducement to later
recommend publicly traded securities for any fund; and
e. The date of the request.
Clearance of private placements may be denied if the transaction would
raise issues regarding the appearance of impropriety.
INDEPENDENCE INVESTMENT ASSOCIATES, INC.
and SUBSIDIARIES
CODE OF ETHICS
Independence Investment Associates, Inc. ("Independence Investment"), together
with its subsidiaries Independence International Associates, Inc. ("Independence
International") and Independence Fixed Income Associates, Inc. ("Independence
Fixed Income") (collectively, "Independence"), is committed to the highest
ethical and professional standards. This Code of Ethics provides guidance to
officers and employees of Independence (collectively referred to as "employees")
when they conduct any personal investment transactions. Employees are expected
to place the interests of clients ahead of their personal interests and to treat
all client accounts in a fair and equitable manner.
Employees are encouraged to raise any questions concerning the Code of Ethics
with Patricia Thompson, Vice President and Compliance Officer (the "Compliance
Officer").
CODE PROVISIONS
1. Ban on Transactions in Securities of Companies on the Working Lists and
Ban on Transactions in Corporate Fixed Income Securities
No employee of Independence or "family member"1 of such an employee may trade
in: (i) securities of companies on the Independence Investment domestic equity
and real estate working lists (collectively, "the Domestic Working Lists"), or
any securities or derivatives that derive their value principally from the value
of securities of companies on the Domestic Working Lists; (ii) securities of
companies on the Independence International international and Canadian working
lists (collectively, the "International Working Lists"), or any securities or
derivatives that derive their value principally from the value of securities of
companies on the International Working Lists; or (iii) any corporate fixed
income securities, domestic or international, or any securities or derivatives
that derive their value principally from any corporate fixed income securities.
Copies of the Domestic and International Working Lists are available from the
Compliance Office. Exemptions may be requested by contacting the Compliance
Office in writing. Exemptions may be granted for securities held at the time of
employment, held at the time of an employee becoming subject to one of the above
restrictions, held prior to a security being placed on a Working List or for
other compelling reasons. The securities referenced in footnote 2 below are
excluded from the bans contained in this section.
- ---------------------------
1 For the purposes of this Code, the term "family member" means an employee's
"significant other", spouse or other relative, whether related by blood,
marriage or otherwise, who either (i) shares the same home, or (ii) is
financially dependent upon the employee, or (iii) whose investments are
controlled by the employee. The term also includes any unrelated individual for
whom an employee controls investments and materially contributes to the
individual's financial support.
<PAGE>
2. Pre-Clearance
Independence requires that all permitted personal trades for employees and their
"family members", as defined in this Code, be pre-cleared. This requirement for
pre-clearance approval applies to all transactions in debt and equity
securities2 and derivatives which are not otherwise banned pursuant to this Code
and includes private placements (including 144A's) whether described in footnote
2 below or not, in order to avoid any perception of favored treatment from other
industry personnel or companies. Transactions in publicly-registered,
tax-exempt, domestic debt securities (municipal bonds) are excluded from this
pre-clearance requirement. A request for pre-clearance should be submitted in
writing to the Compliance Office using the electronic pre-clearance system or a
written equivalent and should contain:
a) The employee's name and name of individual trading, if different,
b) Name of security and ticker symbol, if publicly traded,
c) CUSIP number, if publicly traded,
d) Whether sale or purchase,
e) If sale, date of purchase,
f) If a private placement, the seller and/or the broker and whether or
not the seller and/or the broker is one with whom the associate does
business on a regular basis,
g) The date of the request,
h) The type of security and the appropriate trading room(s) for
pre-clear,
i) A statement that the employee has checked with the appropriate
trading room(s) and that no trades of the security have been
placed for client accounts and remain open, and
j) The initialed approval of the appropriate trading room(s).
At present, there are five trading rooms: the Independence Investment domestic
equity trading room, the Independence International international trading room,
the Independence Investment corporate fixed income trading room, the
Independence Investment global fixed income trading room and the Independence
Fixed Income trading room in McLean, Virginia. Clearance of private placements
or other transactions may be denied if the transaction would raise issues
regarding the appearance of impropriety. A sample form for pre-clearance is
attached. Please note that approval is effective only for the date granted.
- --------------------------
2 Excludes (i) direct obligations of the Government of the United States; (ii)
bankers' acceptances, bank certificates of deposit, commercial paper and high
quality (one of the two highest rating categories by a Nationally Recognized
Statistical Rating Organization) short-term debt instruments (maturity at
issuance of less than 366 days), including repurchase agreements; and (iii)
shares issued by registered open-end investment companies (mutual funds).
<PAGE>
3. No Purchases of Initial Public Offerings (IPOs)
In addition to the bans contained in Section 1, no employee or "family member"
may purchase any newly issued publicly-offered securities until the next
business (trading) day after the offering date and after receipt of
pre-clearance approval. No purchase should be at other than the market price
prevailing on, or subsequent to, such business day.
See also the prohibition on such purchases contained in a separate Independence
policy, the Company Conflict and Business Practice Policy.
4. Dealing with Brokers and Vendors
Independence employees should consult the Company Conflict and Business Practice
Policy regarding business dealings with brokers and vendors. Certain activities
may require the approval of the President of Independence and the General
Counsel of John Hancock Life Insurance Company. Employees are reminded that any
dealings with and/or potential expenditures involving public officials are
further limited by Section X of the Company Conflict and Business Practice
Policy.
5. Service as Director
Employees should refer to the Company Conflict and Business Practice Policy
regarding service on boards of publicly traded companies as well as service on
certain privately held company, non-profit or association boards.
6. Access Persons: Initial and Annual Disclosures of Personal Holdings
For purposes of Rule 17j-1 under the Investment Company Act of 1940,
Independence has decided to treat all directors, officers and employees of
Independence as though they were "access persons." Therefore, all directors,
officers and employees of Independence, within 10 days after becoming an "access
person" and annually thereafter, must disclose all securities in which they have
any direct or indirect beneficial ownership, and the name of any broker, dealer
or bank with whom the individual maintained an account in which any securities
were held for the direct or indirect benefit of the individual. Any securities
referenced in footnote 2, above, are exempted from this disclosure, as are any
accounts over which the "access person" has no direct or indirect influence or
control. Both "initial" and "annual" reports furnished under this section must
contain the information required by Rule 17j-1(d)(1).
<PAGE>
7. Quarterly Reports
Independence requires all directors, officers and employees to file Individual
Securities Transactions Reports ("Quarterlies") by the 10th day of the month
following the close of a quarter. These are required of directors, officers and
certain employees by Rule 204-2(a)(12) under the Investment Advisers Act of 1940
and by Rule 17j-1(d)(1) under the Investment Company Act of 1940 and must
contain all of the information required by those rules. All securities
transactions in which the individual has any direct or indirect beneficial
ownership must be disclosed except for (i) transactions effected in any account
over which the individual has no direct or indirect influence or control; and
(ii) transactions in the securities referenced in footnote 2 above. The format
for these reports has changed and each individual should carefully review the
information requested and be sure that all required information has been
disclosed.
8. Inside Information Policy and Procedures
Please refer to a separate Independence policy, the Company Inside Information
Policy and Procedures. In addition to the reporting requirements under this Code
of Ethics, employees are subject to certain reporting obligations under the
Company Inside Information Policy and Procedures. These include reporting
accounts over which the employee has investment discretion and a requirement
that notice of each transaction in such an account be sent to the Compliance
Officer within 10 days of a transaction.
The Standards of Practice Handbook (AIMR 1999), noted below, contains a useful
discussion on the prohibition against the use of material, non-public
information.
9. Conflict of Interest and Business Practice Policy
As required by its parent company, Independence has adopted the Company Conflict
and Business Practice Policy which is distributed annually to each employee for
review and certification of compliance. The provisions of the Company Conflict
and Business Practice Policy, therefore, are not incorporated within this Code
of Ethics.
10. Annual Report to the Board
Independence will be required to report annually to its Board of Directors that
all employees have received a copy of this Code of Ethics and have certified
their compliance.
Independence will summarize for the Board existing procedures and any changes
made during the past year or recommended to be made, and will identify to the
Board, and may identify to the Board of Directors of any registered investment
company advised by Independence, any violations requiring significant remedial
action during the past year.
<PAGE>
11. Association for Investment Management and Research ("AIMR")
Standards of Practice Handbook (9th Ed. 1999)
At Independence, some employees have earned the Chartered Financial Analyst
designation ("CFA(R)") and are subject to the Code of Ethics and Standards of
Professional Conduct contained in the AIMR Standards of Practice Handbook.
Employees are reminded that the Handbook is an excellent resource for
information on professional conduct. Copies are available from the Compliance
Officer.
12. Code of Ethics Enforcement
Employees are required annually to certify their compliance with this Code of
Ethics. The Compliance Officer may grant exemptions/exceptions to the
requirements of the Code on a case by case basis if the proposed conduct appears
to involve no opportunity for abuse. All exceptions/exemptions shall be in
writing and copies shall be maintained with a copy of the Code. A record shall
be maintained of any decision to grant pre-clearance to a private placement
transaction, or to grant an exemption to the ban on purchases of IPO's, together
with the reasons supporting the decision. The Compliance Office will conduct
post-trade monitoring and other audit procedures reasonably designed to assure
compliance with the Code of Ethics. Employees are advised that the Code's
procedures will be monitored and enforced, with potential sanctions for
violations including a written warning, disgorgement of profits, fines,
suspension, termination and, where required, reports to the AIMR or the
appropriate regulatory authority. Copies of all reports filed, records of
violations and copies of letters or other records of sanctions imposed will be
maintained in a compliance file. Significant violations of the Code may be
referred by the Compliance Officer to the Independence Board of Directors for
review and/or appropriate action.
Adopted by the Independence Board of Directors on November 21, 1994. Amended and
restated on February 27, 1996. Amended and restated as of January 15, 1997.
Amended and restated as of May 12, 1998. Amended and restated as of February 28,
2000.
CODE OF ETHICS.DOC
INDOCAM INTERNATIONAL INVESTMENT SERVICES
INDOCAM ASIA ADVISERS LTD.
Code of Ethics
A. Statement of Policy.
This Code of Ethics is based upon the principle that the
officers, directors and employees of Indocam International Investment
Services and Indocam Asia Advisers Ltd. (each an "Adviser") owe a
fiduciary duty to the shareholders of the investment companies (each a
"Fund") registered under the Investment Company Act of 1940, as amended
(the "1940 Act"), for which the Adviser acts as investment adviser or
subadviser. Accordingly, each officer, director and employee of the
Adviser should conduct personal trading activities in a manner that
does not interfere with a Fund's portfolio transactions or take
advantage of a relationship with any Fund. Persons covered by this Code
of Ethics must adhere to these general principles as well as the Code's
specific requirements.
The fundamental position of the Adviser is that in effecting
personal securities transactions personnel of the Adviser must place at
all time the interests of the Funds and the Funds' shareholders ahead
of their own pecuniary interests. All personal securities transactions
by such persons must be conducted in accordance with this Code of
Ethics and in a manner to avoid any actual or potential conflict of
interest or any abuse of such person's position of trust and
responsibility. Further, such persons should not take inappropriate
advantage of their positions with or on behalf of a Fund. Without
limiting the foregoing, it is the intention of the Adviser that this
Code of Ethics does not prohibit personal securities transactions by
personnel of the Adviser made in accordance with the letter and the
spirit of the Code.
B. Definitions.
For purposes of this Code of Ethics, the following definitions
will apply:
1. The term "access person" shall mean any director, officer or advisory
person (as defined below) of the Adviser.
2. The term "acquisition" or "acquire" includes the receipt of any gift of
a covered security (as defined below).
3. The term "advisory person" shall mean (i) every employee of the
Adviser (or of any company in a control relationship to the Adviser,
including Indocam Asset Management and Indocam Investment Services,
Inc.) who, in connection with his or her regular functions or duties,
makes, participates in, or obtains information regarding, the purchase
or sale of a covered security (as defined below) by a Fund, or whose
functions relate to the making of any recommendations with respect to
such purchases or sales, (ii) every natural person in a control
relationship to the Adviser who obtains information concerning
recommendations made to a Fund with regard to the purchase or sale of a
covered security and (iii) every other employee or independent
contractor of the Adviser (or a company in a control relationship to
the Adviser) designated as an advisory person by the Review Officer.
<PAGE>
4. The term "beneficial ownership" shall mean a direct or indirect
"pecuniary interest" (as defined in subparagraph (a)(2) of Rule 16a-1
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) that is held or shared by a person directly or indirectly
(through any contract, arrangement, understanding, relationship or
otherwise) in a security. While the definition of "pecuniary interest"
in subparagraph (a)(2) of Rule 16a-1 is complex, the term generally
means the opportunity directly or indirectly to provide or share in any
profit derived from a transaction in a security. An indirect pecuniary
interest in securities by a person would be deemed to exist as a result
of:
(i) ownership of securities by any of such person's
immediate family members sharing the same household (including
child, stepchild, grandchild, parent, stepparent, grandparent,
spouse or "significant other," sibling, mother- or
father-in-law, sister- or brother-in-law, and son- or
daughter-in-law);
(ii) the person's partnership interest in the
portfolio securities held by a general or limited partnership
which such person controls;
(iii) the existence of a performance-related fee (not
simply an asset-based fee) received by such person as broker
dealer, investment adviser or manager to a securities account;
(iv) the person's right to receive dividends from a
security provided such right is separate or separable from the
underlying securities;
(v) the person's interest in securities held by a
trust (as trustee, beneficiary, settlor or otherwise) under
certain circumstances including those specified in Rule
16a-8(b) of the Exchange Act; and
(vi) the person's right to acquire securities through
the exercise or conversion of a "derivative security" (which
term excludes (a) a broad-based index option or future, (b) a
right with an exercise or conversion privilege at a price that
is not fixed, and (c) a security giving rise to the right to
receive such other security only pro rata and by virtue of a
merger, consolidation or exchange offer involving the issuer
of the first security).
5. The term "control" shall mean the power to exercise a controlling
influence over the management or policies of the Adviser or a Fund,
unless such power is solely the result of an official position with the
Adviser or the Fund, all as determined in accordance with Section
2(a)(9) of the 1940 Act.
2
<PAGE>
6. The term "covered security" shall mean any "security" as defined in
Section 2(a)(36) of the 1940 Act, except that it shall not include
shares of U.S.-registered open-end investment companies, direct
obligations of the government of the United States, bankers'
acceptances, bank certificates of deposit, commercial paper and high
quality, short term debt instruments, including repurchase agreements,
and any other security determined by the Securities and Exchange
Commission or its staff to be excluded from the definition of covered
security under Rule 17j-1 under the 1940 Act.
7. The term "investment personnel" shall mean all portfolio managers of
the Adviser and other advisory persons who assist the portfolio
managers in making investment decisions for a Fund, including, but not
limited to, analysts and traders of the Adviser (or of a company in a
control relationship to the Adviser).
8. The term "material non-public information" with respect to an issuer
shall mean information, not yet released to the public, that would have
a substantial likelihood of affecting a reasonable investor's decision
to buy or sell any securities of such issuer.
9. The term "purchase" shall include the writing of an option to purchase
and the receipt, through a gift or any other acquisition, of a
security.
10. The term "Review Officer" shall mean the compliance officer of the
Adviser designated from time to time by the Adviser to receive and
review reports of purchases and sales by access persons. The term
"Alternative Review Officer" shall mean the officer of the Adviser
designated from time to time by the Adviser to receive and review
reports of purchases and sales by the Review Officer or, in the absence
of the Review Officer, other access persons, and who shall act in all
respects in the manner prescribed herein for the Review Officer. The
Adviser shall maintain the names of the officers who are designated as
Review Officer and Alternative Review Officer. All references in this
Code to the "Review Officer" shall include the "Alternative Review
Officer" unless the context indicates otherwise.
11. The term "sale" shall include the writing of an option to sell and
the making of a gift.
12. The phrase "security held or to be acquired" shall mean any covered
security which, within the most recent 15 days, is or has been held by
a Fund or is being or has been considered by the Adviser for purchase
by a Fund or any option to purchase or sell any security convertible
into, or exchangeable for, such covered security.
13. A security is "being considered for purchase or sale" when a
recommendation to purchase or sell a security has been made and
communicated and, with respect to the person making the recommendation,
when such person seriously considers making such a recommendation.
14. "Initial public offering" means, in the case of a U.S. issuer, an
offering of securities registered under the Securities Act of 1933, as
amended, by an issuer, which immediately before registration, was not
subject to reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended and, in the case of a
non-U.S. issuer, the initial public offering of equity securities in
the jurisdiction in which it is or will be principally traded.
3
<PAGE>
15. "Private offering" means (i) an offering that is exempt from
registration under the Securities Act of 1933 (the "Securities Act"),
as amended, pursuant to Section 4(2) or 4(6) of such Act or Regulation
D thereunder and an offshore offering exempt from registration pursuant
to Regulation S under the Securities Act.
C. Prohibited Activities.
While the scope of actions which may violate the Statement of
Policy set forth above cannot be exactly defined, such actions would
always include at least the following prohibited activities.
1. Competing with Fund Trades: No access person shall, directly or
indirectly, purchase or sell securities in such a way that the access
person knew, or reasonably should have known, that such securities
transactions compete in the market with actual or considered securities
transactions for a Fund, or otherwise personally act to injure a Fund's
securities transactions;
2. Personal Use of Fund Trading Knowledge: No access person shall use the
knowledge of securities purchased or sold by a Fund or securities being
considered for purchase or sale by a Fund to profit personally,
directly or indirectly, by the market effect of such transactions;
3. Disclosure of Fund Trading Knowledge: No access person shall, directly
or indirectly, communicate to any person who is not an access person
any material non-public information relating to a Fund or any issuer of
any security owned by a Fund, including, without limitation, the
purchase or sale or considered purchase or sale of a security on behalf
of a Fund, except to the extent necessary to effectuate securities
transactions on behalf of a Fund;
4. Board Service; Outside Employment: Access Persons shall not serve on
the board of directors or trustees of any organization whose securities
are quoted on a stock exchange, absent prior written authorization and
determination by the Review Officer that the board service would not be
inconsistent with the interests of the Funds and their shareholders.
Where board service is authorized, access persons serving as directors
may not take part in an investment decision on behalf of a Fund
concerning securities of such issuers. Likewise, no access person may
accept any outside employment absent the prior written authorization of
the Review Officer;
5. Short-Term Trading: Investment personnel shall not purchase and sell,
or sell and purchase, the same (or equivalent) securities within a 60
calendar day period, unless they have sought and obtained the prior
approval of the Review Officer, which approval shall only be granted in
extenuating circumstances, as determined in the sole discretion of the
Review Officer.
4
<PAGE>
6. Initial Public Offerings: Investment personnel shall not, directly or
indirectly, purchase any covered security sold in an Initial Public
Offering of an issuer without obtaining prior written approval from the
Review Officer;
7. Private Offerings: Investment personnel shall not, directly or
indirectly, purchase any security issued pursuant to a Private Offering
without obtaining prior written approval from the Review Officer.
Investment personnel who have received authorization to purchase a
Private Offering must disclose such holding when such investment
personnel are involved in consideration of the purchase of securities
of an issuer of such privately placed securities. A decision to
purchase securities of an issuer in which any investment personnel own
a privately issued security must be independently reviewed by
investment personnel with no personal interest in such issuer;
8. Acceptance of Gifts: Investment personnel shall not accept any gift or
other thing of more than de minimis value from any person or entity
that does business with or on behalf of any Fund;
9. Disclosure of Personal Interest: Investment personnel shall not
recommend any securities transaction by a Fund without having
previously disclosed any beneficial ownership interest in such
securities or the issuer thereof to the Review Officer, including
without limitation:
(i) his or her beneficial ownership of any securities of such
issuer;
(ii) any contemplated transaction by such person in such
securities;
(iii) any position with such issuer or its affiliates; and
(iv) any present or proposed business relationship between
such issuer or its affiliates and such person or any
party in which such person has a significant interest.
Such interested investment personnel may not participate in a
Fund's decision to purchase and sell securities of such issuer.
10. Transactions During Blackout Period: No portfolio manager shall,
directly or indirectly, purchase or sell any covered security in which
he or she has, or by reason of such purchase acquires, any beneficial
ownership within a period of seven (7) calendar days before and seven
(7) calendar days (or such shorter period not less than two (2) days as
approved by the Review Officer) after any Fund has purchased or sold
such covered security.
5
<PAGE>
D. Exempt Transactions and Conduct.
The following transactions are exempt from the preclearance
requirements and substantive prohibitions and restrictions of the Code:
1. Purchases or sales for an account over which the access person has no
direct or indirect influence or control;
2. Purchases or sales which are non-volitional on the part of the access
person;
3. Purchases which are part of an automatic dividend reinvestment plan,
automatic payroll deduction program, automatic cash purchase or
withdrawal plan or other similar automatic transaction program but only
to the extent the access person makes no voluntary adjustment in the
rate or type of investment;
4. Purchases made by exercising rights distributed by an issuer pro rata
to all holders of a class of its securities, to the extent such rights
were acquired by the access person from the issuer, and sales of such
rights so acquired;
5. Tenders of securities pursuant to tender offers which are expressly
conditioned on the tender offer's acquisition of all of the securities
of the same class;
6. Purchases or sales for which the access person has received prior
written approval from the Review Officer. Prior approval shall be
granted only if a purchase or sale of securities is consistent with the
purposes of this Code of Ethics and Section 17(j) of the 1940 Act and
rules thereunder;
7. Purchases in an initial public offering if (i) the offering is part of
the privatization of a government-owned enterprise and (ii) the
allocation of shares available for purchase by the access person are
allocated by a person or authority that is not an access person of the
Adviser;
8. The receipt of any gift of a covered security; and
9. Transactions involving the disposition solely of fractional shares of
equity covered securities.
Subject to applicable law, the Review Officer may, upon
consideration of all of the relevant facts and circumstances, grant a
written exemption from provisions of this Code of Ethics with respect
to any transaction based on a determination that the transaction does
not conflict with the interests of a Fund.
Transactions exempted from the restrictions in this section D
are subject to the Reporting requirements set forth in Section H and I
below.
6
<PAGE>
E. Joint Participation.
Access persons should be aware that a specific provision of
the 1940 Act prohibits such persons, in the absence of an order of the
Securities and Exchange Commission (the "Commission"), from effecting a
transaction in which the Fund is a "joint or a joint and several
participant" with such person. Any transaction which suggests the
possibility of a question in this area should be presented to legal
counsel for review.
F. Duplicate Brokerage Confirmations and Statements.
Each access person must direct the access person's brokers to
supply to the Review Officer, on a timely basis and not less frequently
than every calendar quarter, duplicate copies of confirmations of and
account statements reflecting all covered securities transactions and
holdings in which the access person has or acquires a direct or
indirect beneficial ownership, in each case whether or not one of the
exemptions listed in Section D above applies.
G. Preclearance Procedures For Transactions in Securities.
Investment personnel must request and obtain pre-clearance of
the Review Officer before effecting any personal securities
transactions in covered securities in or as to which the investment
personnel both: (i) has or acquires a beneficial ownership and (ii) has
direct or indirect sole or shared investment control, except for exempt
transactions described in Section D above. Investment personnel must
submit to the Review Officer a pre-clearance request on a form
designated by the Review Officer from time to time for each purchase or
sale of a covered security by such investment personnel or immediate
family members (as defined in Section B(4) above) prior to or as soon
as possible after the execution of such trade. The transaction may not
be effected unless the Review Officer pre-clears the transaction in
writing or orally (and subsequently confirming the oral pre-clearance
in writing). You may not trade until clearance is given. Pre-clearance
is valid only for the trading day on which it is issued.
Subject to applicable law, the Review Officer may, upon
consideration of all of the relevant facts and circumstances, grant a
written exemption from this preclearance provision of this Code of
Ethics to any person or category of employee of the Adviser. Any grant
of an exemption must be based on a determination that the person or
category of employee is not in a position with the Adviser where such
person or category of persons would have sufficient access to
information concerning a Fund's portfolio transactions to interfere
with such transactions or take advantage of the Adviser's relationship
with a Fund to warrant the preclearance of such person's or category of
persons' personal securities transactions.
7
<PAGE>
H. Reporting Requirements.
1. Quarterly Reports: Each access person shall submit to the Review
Officer a report in the form approved by the Review Officer as to all
covered securities transactions during each quarterly period, in which
such access person has, or by reason of such transactions acquires or
disposes of, any beneficial ownership of a covered security, whether or
not one of the exemptions listed in one of the other Sections of this
Code applies. Access persons shall not be required to report securities
transactions effected for any account over which such person does not
have any direct or indirect influence. Every report shall be made not
later than ten (10) days after the end of each calendar quarter in
which the transaction(s) to which the report relates was effected and
shall contain the following information:
(i) The date of each transaction, the title, class
and number of shares, and the principal amount of each covered
security involved;
(ii) The nature of each transaction (i.e., purchase,
sale or other type of acquisition or disposition);
(iii) The price at which each transaction was
effected; and
(iv) The name of the broker, dealer or bank with or
though whom each transaction was effected;
provided, however, if no transactions in any covered
securities required to be reported were effected during a quarterly
period by an access person, such access person shall submit to the
Review Officer a report in a form approved by the Review Officer within
the time-frame specified above stating that no reportable covered
securities transactions were effected.
2. Brokerage Accounts: With respect to any account established by the
access person, which account held any securities (including but not
limited to covered securities) in which such access person had a
beneficial ownership during the quarter, the access person must file
with the Review Officer with ten (10) days of the end of each calendar
quarter a report containing the following information:
(i) the name of the broker dealer or bank with which
the access person established the account.
(ii) the date the account was established.
(iii) the date the report is submitted.
An access person must also report within the time frames set forth
above the information set forth above as to any covered security
transaction in which an immediate family member of the access person
not sharing the same household as the access person acquires or
disposes of beneficial ownership of any covered security if the access
person exercises direct or indirect, sole or shared, investment control
as to the transactions.
8
<PAGE>
3. Every report concerning a covered securities transaction prohibited
under Section C hereof with respect to which the reporting person
relies upon one of the exceptions provided in Section D shall contain a
brief statement of the exemption relied upon and the circumstances of
the transaction.
4. Notwithstanding subparagraph (2) of this Section, an access person need
not report securities transactions pursuant to this Code of Ethics
where the reported information would be duplicative of information
reported pursuant to Rules 204-2(a)(12) or 204-2(a)(13) under the
Investment Advisers Act of 1940.
5. Any report submitted by an access person in accordance with this Code
may contain a statement that the report will not be construed as an
admission by that person that he or she has any direct or indirect
beneficial ownership in the covered security to which the report
relates, and the existence of any report will not by itself be
construed as an admission that any event reported thereon constitutes a
violation of this Code.
I. Initial and Annual Disclosure of Personal Holdings
1. Initial and Annual Reports: Every access person shall submit an initial
report to the Review Officer within 10 days of being notified that such
person is an access person and an annual report (which is current as of
a date between December 31 of the prior year and January 29 of the
current year) no later than January 29th of each year which contains
the following information:
9
<PAGE>
(i) The title, number of shares or principal amount
of each covered security in which such person has a direct or
indirect beneficial interest;
(ii) The name of the broker, dealer or bank with whom
such person maintains any account in which any securities
(including but not limited to covered securities) in which the
access person has a beneficial ownership; and
(iii) The date the report is submitted.
2. Likewise an access person must also file an initial and annual report
by the same dates specified above disclosing all covered securities in
which an immediate family member of the access person not sharing the
same household as the access person has a beneficial ownership if the
access person exercises direct or indirect sole or shared investment
control with respect to such covered securities. This report will
contain the information specified above but as to such immediate family
member's covered securities.
J. Alternative Reporting Provisions.
As an alternative to the literal compliance with the quarterly
and annual reporting requirements of Section H, an access person shall
be considered to have satisfied his or her reporting requirements
provided that, such access person supplies to the Review Officer
annually a list of all of his or her brokers during the prior year and
certifies that he or she directed such brokers to supply duplicate
copies of confirmations of all covered securities to the Review Officer
as provided by Section F of the Code. With respect to such access
persons, such persons must supply or direct his or her brokers to
supply a computer printout or similar report within 10 days after the
end of each calendar quarter and an annual report by January 29th of
each year which report shall contain at least the information that
would otherwise have been required by Section H.
The Review Officer may approve other alternative reporting
procedures consistent with Rule 17j-1 from time to time.
K. Initial and Annual Certification of Compliance.
Each access person, within ten (10) days of becoming an access
person, must certify, on a form designated by the Review Officer that:
(i) he or she has received, read and understands this Code of Ethics
and recognizes that he or she is subject thereof; (ii) he or she will
comply with the requirements of this Code of Ethics and any amendments
to this Code; and (iii) he or she has disclosed to the Adviser all
holdings of covered securities and all accounts required to be
disclosed pursuant to the requirements of this Code of Ethics.
All access persons shall certify annually (by a date specified
by the Review Officer) on the form approved by the Review Officer that
they (i) have read and understand this Code of Ethics and recognize
that they are subject hereto, (ii) have complied with the requirements
of this Code of Ethics and will comply with any amendments to this Code
and (iii) have disclosed or reported all personal securities
transactions, holdings and accounts required to be disclosed or
reported pursuant to the requirements of this Code of Ethics.
10
<PAGE>
L. Confidentiality.
All information obtained from any access person hereunder
shall normally be kept in strict confidence by the Adviser, except that
reports of securities transactions hereunder may be made available to
the Securities and Exchange Commission or any other regulatory or
self-regulatory organization or other civil or criminal authority to
the extent required and permitted by law or regulation or to the extent
considered appropriate by senior management of the Adviser in light of
all the circumstances. In addition, in the event of violations or
apparent violations of the Code, such information may be disclosed to
affected clients.
M. Notice to Access Persons.
The Adviser shall identify all persons who are considered to
be "access persons," "investment personnel" and "portfolio managers,"
inform such persons of their respective duties and provide such persons
with copies of this Code of Ethics. However, the failure of the Review
Officer to notify any person of their status as either an access
person, investment personnel and/or portfolio manager, shall not
relieve them of their obligations under this Code of Ethics. In
particular, personal securities positions and transactions will be
monitored against Fund portfolio positions and transactions.
N. Review of Reports.
The Code of Ethics is designed to detect and prevent fraud
against Fund shareholders, and to avoid the appearance of impropriety.
Accordingly, the Review Officer will review the information to be
compiled under this Code of Ethics in accordance with such review
procedures as the Review Officer and senior management of the Adviser
shall from time to time determine to be appropriate in light of the
purposes of this Code of Ethics.
O. Sanctions.
Any violation of this Code of Ethics shall result in the
imposition of such sanctions as the Adviser may deem appropriate under
the circumstances, which may include, but are not limited to, removal
or suspension from office, demotion, a letter of censure and/or
restitution to the applicable Fund(s) of an amount equal to the
advantage the offending person shall have gained by reason of such
violation, and referral to civil or criminal authorities.
P. Recordkeeping Requirements.
11
<PAGE>
The Adviser shall maintain and preserve:
1. in an easily accessible place, a copy of this Code of Ethics (and any
prior code of ethics that was in effect at any time during the past
five years) for a period of five years;
2. in an easily accessible place, a record of any violation of this Code
of Ethics (and any prior code of ethics that was in effect at any time
during the past five years) and of any action taken as a result of such
violation for a period of five years following the end of the fiscal
year in which the violation occurs;
3. a copy of each report (or computer printout) submitted under this Code
of Ethics for a period of five years, provided that for the first two
years such reports must be maintained and preserved in an easily
accessible place;
4. in an easily accessible place, a list of all persons who are, or within
the past five years were, required to make or required to review
reports pursuant to this Code of Ethics;
5. a copy of each report provided to any Fund as required by paragraph
(c)(2)(ii) of Rule 17j-1 under the 1940 Act or any successor provision
for a period of five years following the end of the fiscal year in
which such report is made, provided that for the first two years such
record shall be preserved in an easily accessible place; and
6. a written record of any decision, and the reasons supporting any
decision, to approve the purchase by an access person of any security
in an initial public offering or private offering for a period of five
years following the end of the fiscal year in which the approval is
granted.
Approved by IIIS: March 14, 2000
Approved by IAAL: _______________, 2000
12
JOHN HANCOCK FUNDS
and
JOHN HANCOCK INVESTMENT COMPANIES
CODE OF ETHICS
CONCEPT
The conduct of officers, directors, trustees and employees of John
Hancock Funds, its subsidiaries and sub-advisers on behalf of all registered
investment companies and advisory accounts (the "Funds") is governed by one
basic principle: the interests of the shareholders of the Funds are paramount.
The personal interests of the officers, directors, trustees and employees must
be subordinated to those of the shareholders and investors (collectively the
"shareholders"). Thus, no John Hancock Funds officer, director, trustee or
employee may make personal use of information available by reason of his or her
position with John Hancock Funds until after the Funds have acted upon the
information. In addition, each investment opportunity which comes to the
attention of any such officer, director, trustee or employee and which is
appropriate for consideration by any of the Funds must be first made available
for the benefit of such Fund before the officer, director, trustee or employee
can take any personal advantage of the opportunity. A conflict between the
interest of an individual and that of one of the Funds can arise when the
individual by virtue of his or her association with John Hancock Funds
anticipates action on the part of the Fund and places himself or herself in a
position to profit by the Fund's action. A conflict can also arise when an
individual by reason of a pre-existing securities position in a personal
account, has an interest in whether the Fund buys, sells or holds a particular
security. The following guidelines are designed to assist those affiliated with
John Hancock Funds in their personal transactions by clearly specifying some,
but not all, of the areas where personal investment transactions might raise
questions of conflict with the best interests of the Funds and the shareholders.
APPLICATION OF THE CODE OF ETHICS
This Code of Ethics applies to everyone who is a director, officer,
trustee or employee, whether full- or part-time, of John Hancock Funds. In
addition, the Code applies to each employee of John Hancock Mutual Life
Insurance Company or of any of its direct or indirect subsidiaries who, in
connection with the employee's regular functions or duties makes, participates
in, or obtains information regarding, the purchase or sale of a security by any
of the Funds, or whose functions relate to the making of any recommendations
with respect to such purchases or sales, and to anyone who obtains information
concerning recommendations made to such Fund with regard to the purchase or sale
of a security and has the power to exercise a controlling influence over the
management or policies of either Hancock or any of its subsidiaries unless such
power is solely the result of an official position with Hancock or the
subsidiary. Sub-advisers to John Hancock Funds affiliates, either by the
adoption of this Code of Ethics or procedures consistent with the Code's intent,
are required to protect the interests of the shareholders.
<PAGE>
GUIDELINES
An employee ("associate") or person considered an associate under this
Code of Ethics should observe the following rules:
1. PRE-CLEARANCE FOR ALL TRADES
- ALL ASSOCIATES AND FAMILY MEMBERS1
Pre-clearance for Public Securities2:
Any personal trades, whether equity or debt, MUST be approved in advance.
This requirement applies to all associates and "access" trustees3. The
pre-clearance policy governs trades for all associates' personal
accounts, those of a spouse, "significant other" or family members
sharing a household, as well as all accounts over which the associate has
discretion or gives advice or information. The procedures for
pre-clearance are contained in a document attached to the Code of Ethics.
Given these pre-clearance restrictions, John Hancock Funds does not
permit employee participation in investment clubs.
Employees may invest in derivatives or sell short provided:
- they submit pre-clearance requests, receive pre-clearance approval
and
- the transaction period exceeds the 91 day holding period.
The procedures for pre-clearance for derivatives, including futures and
options, and selling short are attached.
1 For purposes of this Code, the term "family" or "family member" means an
associate's "significant other", spouse or other relative, whether related by
blood, marriage or otherwise, who either (i) shares the same home, or (ii) is
financially dependent upon the associate, or (iii) whose investments are
controlled by the associate. The term also includes any unrelated individual for
whom an associate controls investments and materially contributes to the
individual's financial support.
2 Excludes U.S. Government securities, bank Certificates of Deposit, commercial
paper, open-end mutual funds and physical commodities other than gold. Employees
must obtain pre-clear approval before trading in closed-end funds, unit
investment trusts, or Real Estate Investment Trusts ("REIT's").
3 "Access" trustees include outside trustees of the Funds who have been deemed
to have access to fund transactions or proprietary information. Susan S. Newton,
Chief Legal Officer/Funds and Private Accounts is the principal authority on who
is deemed to be an "access" trustee consistent with the Investment Company Act
of 1940 and the Advisors Act of 1940.
<PAGE>
YOU MAY NOT TRADE UNTIL CLEARANCE IS RECEIVED. Clearance
approval is valid only for the date granted.
Clearance for Private Placements and Derivatives:
Clearance for purchase of private placement securities and derivatives
may be obtained by contacting Investment Compliance via Microsoft Outlook
in writing. The procedures for private placement and derivatives
pre-clearance are contained in a document attached to the Code of Ethics.
Clearance of a private placement or a derivative may be denied if the
transaction would raise issues regarding the appearance of impropriety.
2. BAN ON SHORT-TERM TRADING PROFITS
Effective April 15, 1994, associates and their family members cannot
profit
from the purchase and sale or the sale and purchase of the same or
equivalent securities held 91 or fewer days. A gift from an associate is
considered a sale. Any profits realized on such short-term trades must be
disgorged and contributed to a charity approved by the Executive
Committee of John Hancock Funds. This restriction assures that personal
trading is for investment purposes. Any investments in an associate's or
family member's account prior to April 15, 1994 are not subject to this
ban.
3. Purchase of Initial Public Offerings ("IPO's")
No associate nor any member of his or her family acting on advice or
information from the associate should purchase any newly issued or
publicly-offered securities4 until the next business (trading) day after
the offering date and after receipt of pre-clearance approval. No
purchase should be at other than the market price prevailing on, or
subsequent to, such business day. This restriction shall apply also to
anyone with whom the associate or family member covered by this Code has
any contract, understanding, relationship, agreement or other arrangement
providing benefits substantially equivalent to those of ownership of the
securities in question and to any owner of securities in which the
associate or family member has the right to vest or revest title at once
or at some future time , and also to any trust of which the associate or
family member is an income beneficiary or remainderman and over which the
associate or family member has any direct influence or control
("controlled trust").
4. Proprietary Information
Investment opportunities and ideas brought to John Hancock Funds are
considered proprietary to John Hancock Funds and its Funds. Associates
have an obligation to share any proprietary information in their
possession with the Investment Staff prior to submitting a request for
pre-clearance. All written credit or company reports produced by John
Hancock Funds associates are also considered proprietary. This
information should not be used for personal trading until pre-clearance
has been received. An associate cannot make available to others any
4 This provision applies to all initial public offerings except those defined in
Footnote 2. Employees cannot invest in "when-issued" bonds as these are
considered initial offerings.
<PAGE>
information acquired solely by reason of his or her position with John
Hancock Funds even though the associate may have conflicting duties as a
director, trustee or agent of another entity with portfolio management or
investment responsibilities. Information not generally available and
obtained through an associate's position is not available to another
person or entity and may not be used in discharging duties to the other
person or entity.
5. Dealings with Brokers
No associate nor any family member, controlled trust or nominee shall
seek or accept favors or preferential treatment from securities brokers
or dealers or other organizations with which John Hancock Funds might
transact business. Occasional participation in lunches, dinners, cocktail
parties, sporting activities or similar gatherings conducted for business
purposes is not prohibited. For the protection of both the associate and
John Hancock Funds, however, the appearance of a possible conflict of
interest must be avoided. Caution is to be exercised in any instance in
which business travel and lodging are paid for by other than John Hancock
Funds. Associates, their family members, controlled trusts or nominees
may subscribe to private offerings placed through a securities firm or to
public offerings made to a restricted or limited number of investors,
subject to the pre-clearance provisions in Section 1 and the initial
public offering bar in Section 3. Compliance with Section 5 on Dealings
with Brokers minimizes the basis for any charge that John Hancock Funds
associates use their John Hancock Funds position to obtain for themselves
issues and opportunities which otherwise would not be offered to them.
6. Quarterly Reports
Associates deemed to be "advisory representatives"5 and others so
designated are required quarterly to file a report of individual security
transactions not otherwise excepted. See exceptions set forth below.6 An
advisory representative is not required to report transactions for an
account over which the advisory representative has no direct or indirect
influence or control. The report is due not later than 10 days after the
end of each calendar quarter in which a transaction to which the report
relates was effected. The quarterly reports of each of the trustees who
are not "interested persons" should be filed with the Chairman of
5 The definition of "advisory representative" is contained in Rule
204-2(a)(12)(A) of the Advisers Act of 1940. "Advisory representatives" include
any employee who makes any recommendation, who participates in the determination
of which recommendation shall be made, or whose functions or duties relate to
the determination of which recommendation shall be made; any employee who, in
connection with his [or her] duties, obtains any information concerning which
securities are being recommended prior to the effective dissemination of such
recommendations or the information concerning such recommendations.
6 Securities exempted from individual security transaction reporting
("Quarterlies") are those which are direct obligations of the United States and
shares of non-affiliated registered open-end investment companies.
<PAGE>
Committee on Administration of the Funds.7 All other advisory
representatives should file their reports with John Hancock Adviser's
Legal Department. To the extent not otherwise required by a Securities
and Exchange Commission Rule or Regulation, the securities transaction
reports will be kept confidential. The reports are required to be
preserved for a period of not less than 5 years from the end of the
fiscal year in which they are made and must remain in an easily
accessible place for the first 2 years.
7. REPORT OF BOARD, TRUSTEE OR LEADERSHIP POSITIONS IN COMPANIES ISSUING
SECURITIES
Those deemed to be "advisory representatives" as noted in Section 6 must
report promptly to the Compliance Officer for the Code of Ethics any
board, trustee or leadership position the "advisory representative" holds
in a private, public or private non-profit company which issues or plans
to issue any security. The Compliance Officer for the Code of Ethics will
in turn report such positions to the Trustees of the Funds.
8. ANNUAL DISCLOSURE OF PERSONAL HOLDINGS
BY QUARTERLY REPORTING PERSONS
All those deemed to be "advisory representatives" as noted in Section 6
must disclose all personal securities holdings upon commencement of
employment and thereafter by March 15 for holdings as of December 31 of
the prior calendar year.
9. BLACKOUT PERIOD FOR PORTFOLIO MANAGERS
Portfolio managers, including those designated as portfolio managers in
the pre-clear system, are prohibited from buying or selling a security
within seven calendar days before and after an investment company that he
or she manages trades in that security. Any profits realized on trades
within the proscribed periods are required to be disgorged by making a
check payable to John Hancock Advisers, Inc. The money will be donated to
a charity approved by the Executive Committee of The Berkeley Financial
Group. The names of portfolio managers subject to this provision will be
submitted annually by the Chief Investment Officer to the Compliance
Office and updated as needed.
7 A trustee of a registered investment company who is not an "interested person"
within the meaning of the definition contained in the Investment Company Act of
1940 and who would be required to make a transaction report solely by reason of
being a trustee of the investment company, may dispense with the filing of a
report of a transaction in a security even where the investment company of which
she or he is a trustee purchased or sold such security or the company or John
Hancock Advisers, Inc. considered such purchase or sale, unless at the time of
the transaction the trustee knew or, in the ordinary course of fulfilling her or
his official duties as trustee, should have known that such purchase, sale or
consideration had occurred within 15 days before the transaction or would occur
within 15 days after it. 1 For purposes of these Guidelines, the term "family
member" means an associate's "significant other", spouse or other relative,
whether related by blood, marriage or otherwise, who either (i) shares the same
home, or (ii) is financially dependent upon the associate, or (iii) whose
investments are controlled by the associate. The term also includes any
unrelated individual for whom an associate controls investments and materially
contributes to the individual's financial support.
<PAGE>
10. INSIDE INFORMATION
All John Hancock Funds associates are subject to the Inside Information
Policies and Procedures. A copy may be obtained in "Public Folders" on MS
Mail under the heading "Compliance Policies".
11. CONFLICT OF INTEREST AND BUSINESS PRACTICE POLICY
Officer and letter grade employees are subject to the Conflict and
Business Practice Policy. A copy may be obtained in "Public Folders" on
MS Outlook under the heading "Compliance Policies".
INTERPRETATION AND ENFORCEMENT
The Code of Ethics cannot anticipate every situation in which personal
interests may be in conflict with the interests of the shareholders. Associates
should be responsive to the spirit and intent of the Code as well as its
specific provisions.
When any doubt exists regarding any provision of the Code or whether a
conflict of interest with shareholders might exist, the transaction should be
discussed beforehand with the Compliance Officer for the Code of Ethics, Thomas
H. Connors at (617) 375-1724 or Marcia Casey at (617) 572-9183.
The Code of Ethics is designed to detect and prevent fraud against fund
investors, and to avoid the appearance of impropriety. To provide assurance that
policies are effective, personal securities transaction reports will be
monitored and checked against fund portfolio transactions. Any deviations from
the policies will be reported to the Compliance Officer for the Code of Ethics.
In addition, other internal auditing procedures may be adopted from time to
time.
Violations of the Code will be referred by the Compliance Officer for the
Code of Ethics to the Executive Committee of John Hancock Funds or the
Administration Committee of the Fund or both for review and appropriate action.
The factors considered for a fine or other sanction for a Code violation
include:
- the employee's position and function;
- whether the employee is an officer, quarterly reporter or registered
person with the NASD;
- the amount of the trade;
- whether the funds or accounts hold the security and were trading the
same day;
- whether multiple violations occurred for the same transaction;
- whether the violation was by a "family member." Is the family member
employed in the securities industry and thus knowledgeable about
employee compliance requirements?
- whether the employee has had a prior violation and which Code provision
was involved.
<PAGE>
Code violations by NASD registered persons are reported to the NASD
Compliance Officer at John Hancock Mutual Life Insurance Company. Sanctions for
violations could include fines, suspension or termination of the violator's
position with John Hancock Funds and/or a report to the appropriate regulatory
authority.
Adopted by the boards of the companies of The Berkeley Financial Group on
October 19, 1994; revised and restated by the boards of the companies of The
Berkeley Financial Group on April 23, 1997; revised and restated by the boards
of the companies of The Berkeley Financial Group on October 1, 1998.
Adopted by the boards of the investment companies under the management
of John Hancock Advisers, Inc. on the following dates:
Panel A - September 27, 1994; Panel B - September 13, 1994; Panel C - September
27, 1994 and Southeastern Thrift and Bank Fund, Inc., on October 24, 1994.
Revised and restated by the boards of the investment companies under the
management of John Hancock Advisers, Inc., on the following dates:
Panel A - June 3, 1997; Panel B - June 2, 1997; and Southeastern Thrift and Bank
Fund, Inc., on May 1, 1997.
Revised and restated by the boards of the investment companies under the
management of John Hancock Advisers, Inc., on the following dates:
Panel A and Panel B - December 8, 1998; and Southeastern Thrift and Bank Fund,
Inc., on October 30, 1998.
<PAGE>
John Hancock Funds
Code of Ethics
PRE-CLEARANCE PROCEDURES
An employee ("associate") or person considered an associate under the
Code of Ethics should observe the following procedures:
PRE-CLEARANCE FOR ALL TRADES
- - ALL ASSOCIATES AND FAMILY MEMBERS1
Three categories of securities require pre-clearance: Public securities,
derivatives and private placements
1. Pre-clearance for Public Securities2:
Any personal trades, whether equity or debt, MUST be approved in
advance. This requirement applies to all associates and "access" Trustees3
("associates"). The pre-clearance policy governs trades for all associates'
personal accounts, or those of a spouse, "significant other" or other family
members sharing a household, as well as all accounts over which the associate
has discretion or gives advice or information.
Requests to pre-clear trades must be entered into the pre-clear
database on the day prior to the requested trade date. The database is located
in Microsoft Outlook under the Tools option, Preclear Personal Trades. It can be
accessed by entering your social security number in the appropriate field. If
Microsoft Outlook is unavailable, please contact the HELP Desk at 101 Huntington
Avenue at (617) 375-4357 for assistance.
<PAGE>
The following data must be entered:
- name of security to trade
- ticker symbol
- cusip number (9 alpha-numeric characters)
- trade type
- purchase date (required when selling a security)
- brokerage house
- brokerage account number
When all data has been entered, select SEND REQUEST which is located in
the top right corner of the screen. Associates will be notified by 11:00 A.M.
Boston time on the requested trade date via Microsoft Outlook as to whether
clearance has been granted.
If you have any questions or require assistance entering a trade,
please call Mary Ellen Logee at (617) 375-4967 or Fred Spring at (617) 375-4987
in the Internal Audit and Investment Compliance Department.
YOU MAY NOT TRADE UNTIL CLEARANCE IS RECEIVED. Clearance approval is valid only
for the date granted.
2. Pre-clearance Procedures for Derivatives, Futures, Options and Selling Short:
Clearance for the purchase, sale or related transactions for these securities
must be obtained by contacting Bill Sylva via Microsoft Outlook. The request
must include:
- the associate's name;
- the associate's John Hancock Funds' company;
- the date of request;
- the complete name of the security;
- a description of the security including its relationship to an
underlying common stock or stock index;
- the duration or description of the contract or exercise period;
- any potential conflict, present or future, with funds' trading
activity and whether the security might be offered an inducement to
later recommend publicly traded securities for any fund;
- the seller and whether or not the seller is one with whom the
associate does business on a regular basis.
<PAGE>
Clearance of such securities may be denied if the transaction would raise issues
regarding the appearance of impropriety.
3. Pre-clearance for Private Placements and Derivatives: Clearance for purchase
of private placement securities and derivatives may be obtained by contacting
Bill Sylva via Microsoft Outlook (please "cc." Mary Ellen Logee on all such
requests). The request must include:
- the associate's name;
- the associate's John Hancock Funds' company;
- the complete name of the security;
- the seller and whether or not the seller is one with whom the
associate does business on a regular basis;
- any potential conflict, present or future, with fund trading
activity and whether the security might be offered as inducement to
later recommend publicly traded securities for any fund; and
- the date of the request.
Clearance of private placements and derivatives may be denied if the
transaction would raise issues regarding the appearance of impropriety.
2/99
s:\corpsec/proced/codeofethics
