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. 11 [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 11 [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
(X) 75 days after filing pursuant to paragraph (a) of Rule 485
( ) on (date) pursuant to paragraph (a) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective admendment.
<PAGE>
John Hancock
Declaration
Funds
[LOGO] Prospectus
May 1, 2000
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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.
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
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
V.A. Technology Fund
Income
V.A. Bond Fund
V.A. High Yield Bond Fund
V.A. Money Market Fund
V.A. Strategic Income Fund
[LOGO] John Hancock Funds
A Global Investment Management Firm
101 Huntington Avenue, Boston, Massachusetts 02199-7603
<PAGE>
Contents
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General information about Overview 3
the Declaration funds.
A fund-by-fund summary Equity
of goals, strategies, risks,
performance and financial V.A. Core Equity Fund 4
highlights. V.A. 500 Index Fund 6
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
V.A. Technology Fund 24
Income
V.A. Bond Fund 26
V.A. High Yield Bond Fund 28
V.A. Money Market Fund 30
V.A. Strategic Income Fund 32
Transaction policies and Account information
other information affecting
your fund investment. Buying and selling fund shares 34
Valuing fund shares 34
Fund expenses 34
Dividends and taxes 34
Further information on the Fund details
Declaration funds.
Business structure 35
For more information back cover
<PAGE>
Overview
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JOHN HANCOCK DECLARATION FUNDS
These funds offer investment choices for the variable annuity contracts and
variable life insurance policies of certain insurance companies. You should read
this prospectus together with the attached prospectus of the insurance product
you are considering.
RISKS OF MUTUAL FUNDS
Mutual funds are not bank deposits and are not insured or guaranteed by the
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 page six. Each description provides
the following information:
[Clip Art] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clip Art] Main risks The major risk factors associated with the fund.
[Clip Art] Past perfomance 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 S&P 500 Index.
The managers select from a menu of stocks of approximately 550 companies that
evolves over time. Approximately 70% to 80% of these companies also are included
in the S&P 500 Index. The subadviser's investment research team is organized by
industry and tracks these companies to develop earnings estimates and five-year
projections for growth. A series of proprietary computer models use this
in-house research to rank the stocks according to their combination of:
o value, meaning they appear to be underpriced
o momentum, meaning they show potential for strong growth
This process, together with a risk/ return analysis against the S&P 500 Index,
results in a portfolio of approximately 100 to 130 of the stocks from the top
60% of the menu. The fund 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.
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Year-by-year total returns -- calendar years
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1997 1998 1999
30.68% 28.42%
Best quarter: up xx.xx%, fourth quarter xxxx Worst quarter: down xx.xx%, third
quarter xxxx
Total return for the first three months of xxxx: xx.xx%
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Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year xx.xx% xx.xx%
Life of fund - began 8/29/96 xx.xx% xx.xx%
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.
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 __________________.
<TABLE>
<CAPTION>
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Period ended: 12/96(1) 12/97 12/98 12/99
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<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $11.11 $14.11
Net investment income (loss)(2) 0.06 0.16 0.10
Net realized and unrealized gain (loss) on investments 1.12 3.23 3.90
Total from investment operations 1.18 3.39 4.00
Less distributions:
Dividends from net investment income (0.06) (0.14) (0.10)
Distributions from net realized gain on investments sold (0.01) (0.25) (0.27)
Total distributions (0.07) (0.39) (0.37)
Net asset value, end of period $11.11 $14.11 $17.74
Total investment return at net asset value(3) (%) 11.78(4) 30.68 28.42
Total adjusted investment return at net asset value(3,5) (%) 10.66(4) 30.04 --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,149 8,719 26,691
Ratio of expenses to average net assets (%) 0.95(6) 0.95 0.95
Ratio of adjusted expenses to average net assets(7) (%) 4.23(6) 1.59 --
Ratio of net investment income (loss) to average net assets (%) 1.60(6) 1.24 0.65
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (1.68)(6) 0.60 --
Portfolio turnover rate (%) 24 53 55
Fee reduction per share(2) ($) 0.12 0.08 --
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
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 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%
Best quarter: up xx.xx%, fourth quarter xxxx Worst quarter: down xx.xx%, third
quarter xxxx
Total return for the first three months of xxxx: xx.xx
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year xx.xx% xx.xx%
Life of fund - began 8/29/96 xx.xx% xx.xx%
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.
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.
Note: "Standard & Poor's" and "S&P 500(R)" are trademarks of The McGraw-Hill
Companies, Inc. and have been licensed for use by the adviser. 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 ___________________.
<TABLE>
<CAPTION>
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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
Net investment income (loss)(2) 0.17 0.30 0.20
Net realized and unrealized gain (loss) on investments 0.98 2.72 3.37
Total from investment operations 1.15 3.02 3.57
Less distributions:
Dividends from net investment income (0.16) (0.30) (0.20)
Distributions from net realized gain on investments sold (0.55) (0.54) (0.76)
Total distributions (0.71) (0.84) (0.96)
Net asset value, end of period $10.44 $12.62 $15.23
Total investment return at net asset value(3) (%) 11.49(4) 29.51 28.44
Total adjusted investment return at net asset value(3,5) (%) 11.25(4) 29.27 28.12
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,049 20,008 26,457
Ratio of expenses to average net assets (%) 0.60(6) 0.36 0.35
Ratio of adjusted expenses to average net assets(7) (%) 1.31(6) 0.60 0.67
Ratio of net investment income (loss) to average net assets (%) 4.57(6) 2.45 1.44
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 3.86(6) 2.21 1.12
Portfolio turnover rate (%) -- 9 47
Fee reduction per share(2) ($) 0.03 0.03 0.04
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
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 S&P
500 Index, which was $xxx million to $xxx 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 at least 15% annual 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
David L. Eisenberg, CFA
- ---------------------------------------
Senior vice president of adviser
Joined team in 1999
Joined adviser in 1997
Began career in 1981
Geoffrey R. Plume, CFA
- ---------------------------------------
Second vice president of adviser
Joined team in 1998
Joined adviser in 1996
Began career in 1987
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). Past
performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998 1999
14.27% 24.60%
Best quarter: up xx.xx%, third quarter xxxx Worst quarter: down xx.xx%, first
quarter xxxx
Total return for the first three months of xxxx: xx.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year xx.xx% xx.xx%
Life of fund - began 8/29/96 xx.xx% xx.xx%
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.
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 ___________________.
<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
Net investment income (loss)(2) (0.01) (0.04) (0.00)(3)
Net realized and unrealized gain (loss) on investments (0.60) 1.38 2.64
Total from investment operations (0.61) 1.34 2.64
Net asset value, end of period $9.39 $10.73 $13.37
Total investment return at net asset value(4) (%) (6.10)(5) 14.27 24.60
Total adjusted investment return at net asset value(4,6) (%) (7.39)(5) 12.90 24.27
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 994 3,733 10,372
Ratio of expenses to average net assets (%) 1.00(7) 1.00 1.00
Ratio of adjusted expenses to average net assets(8) (%) 4.76(7) 2.37 1.33
Ratio of net investment income (loss) to average net assets (%) (0.23)(7) (0.39) (0.00)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (3.99)(7) (1.76) (0.33)
Portfolio turnover rate (%) 68 136 176
Fee reduction per share(2) ($) 0.13 0.13 0.04
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Less than $0.01 per share.
(4) Assumes dividend reinvestment.
(5) Not annualized.
(6) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
9
<PAGE>
V.A. Mid Cap Growth Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term capital appreciation. To pursue this goal,
the fund normally invests at least 80% of assets in stocks of
medium-capitalization companies (companies in the capitalization range of the
Russell Midcap Growth Index, which was $xxx million to $xxx 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 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 fund generally invests in
more than 100 companies. The fund may not invest more than 5% of assets in any
one security.
The manager considers broad economic trends, demographic factors, technological
changes, consolidation trends and legislative initiatives.
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 career in 1973
PAST PERFORMANCE
[Clip Art] The graph and table show the fund's total return for its first
calendar year along with broad-based market indices for reference. This
information may help provide an indication of the fund's risks. All figures
assume dividend reinvestment but do not include variable contract charges (see
attached variable product prospectus). Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Total return -- calendar year
- --------------------------------------------------------------------------------
1998 1999
10.35%
Best quarter: up xx.xx%, fourth quarter xxxx Worst quarter: down xx.xx%, third
quarter xxxx
Total return for the first three months of xxxx: xx.xx%
- --------------------------------------------------------------------------------
Average annual total return -- for period ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index 1 Index 2
1 year - began 1/7/98 xx.xx% xx.xx% xx.xx%
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.
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 during the year.
Figures audited by ___________________.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Period ended: 12/98(1) 12/99
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00
Net investment income (loss)(2) 0.01
Net realized and unrealized gain (loss) on investments 1.03
Total from investment operations 1.04
Less distributions:
Dividends from net investment income (0.01)
Tax return of capital (0.00)(3)
Total distributions (0.01)
Net asset value, end of period $11.03
Total investment return at net asset value(4) (%) 10.35(6)
Total adjusted investment return at net asset value(4,5) (%) 7.17(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,779
Ratio of expenses to average net assets (%) 1.00(7)
Ratio of adjusted expenses to average net assets(8) (%) 4.23(7)
Ratio of net investment income (loss) to average net assets (%) 0.06(7)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (3.17)(7)
Portfolio turnover rate (%) 103
Fee reduction per share(2) ($) 0.33
</TABLE>
(1) Began operations on January 7, 1998.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Less than $0.01 per share.
(4) Assumes dividend reinvestment.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the period shown.
(6) Not annualized.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
11
<PAGE>
V.A. 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 managers look for the most favorable
risk/return ratios. The fund may invest up to 15% of net assets in junk bonds
rated as low as CC/Ca and their unrated equivalents.
The fund may invest up to 25% of assets in foreign securities (35% during
adverse U.S. market conditions). The fund may also make limited use of certain
derivatives (investments whose value is based on indices, securities or
currencies).
In abnormal market conditions, the fund may temporarily invest extensively in
investment-grade short-term securities. In these and other cases, the fund might
not achieve its goal.
================================================================================
PORTFOLIO MANAGER
Timothy E. Keefe, CFA
- ---------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1996
Began career in 1987
PAST PERFORMANCE
[Clip Art] The graph and table show the fund's total return for its first
calendar year along with a broad-based market index for reference. This
information may help provide an indication of the fund's risks. All figures
assume dividend reinvestment but do not include variable contract charges (see
attached variable product prospectus). Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Total return -- calendar year
- --------------------------------------------------------------------------------
1998 1999
21.39%
Best quarter: up xx.xx%, fourth quarter xxxx Worst quarter: down xx.xx%, third
quarter xxxx
Total return for the first three months of xxxx: xx.xx%
- --------------------------------------------------------------------------------
Average annual total return -- for period ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year - began 1/6/98 xx.xx% xx.xx%
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 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.
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 during the year.
Figures audited by ___________________.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Period ended: 12/98(1) 12/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00
Net investment income (loss)(2) 0.11
Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.02
Total from investment operations 2.13
Less distributions:
Dividends from net investment income (0.10)
Net asset value, end of period $12.03
Total investment return at net asset value(3) (%) 21.39(4)
Total adjusted investment return at net asset value(3,5) (%) 21.21(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 17,368
Ratio of expenses to average net assets (%) 0.85(6)
Ratio of adjusted expenses to average net assets(7) (%) 1.03(6)
Ratio of net investment income (loss) to average net assets (%) 1.17(6)
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 0.99(6)
Portfolio turnover rate (%) 242
Fee reduction per share(2) ($) 0.02
</TABLE>
(1) Began operations on January 6, 1998.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
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 $xx million to $xxx 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 career in 1986
Laura J. Allen, CFA
- ---------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began career in 1981
Anurag Pandit, CFA
- ---------------------------------------
Vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began career in 1984
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with broad-based market
indices for reference). This information may help provide an indication of the
fund's risks. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). Past
performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998 1999
11.06% 15.94%
Best quarter: up xx.xx%, fourth quarter xxxx Worst quarter: down xx.xx%, third
quarter xxxx
Total return for the first three months of xxxx: xx.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index 1 Index 2
1 year xx.xx% xx.xx% xx.xx%
Life of fund - began 8/29/96 xx.xx% xx.xx% xx.xx%
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.
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
Net investment income (loss)(2) 0.02 (0.02) (0.06)
Net realized and unrealized gain (loss) on investments and foreign currency
transactions (0.68) 1.05 1.71
Total from investment operations (0.66) 1.03 1.65
Less distributions:
Dividends from net investment income (0.02) (0.00)(3) --
Net asset value, end of period $9.32 $10.35 $12.00
Total investment return at net asset value(4) (%) (6.62)(5) 11.06 15.94
Total adjusted investment return at net asset value(4,6) (%) (8.05)(5) 9.34 15.31
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 975 3,841 8,232
Ratio of expenses to average net assets (%) 1.00(7) 1.00 1.00
Ratio of adjusted expenses to average net assets(8) (%) 5.19(7) 2.72 1.63
Ratio of net investment income (loss) to average net assets (%) 0.62(7) (0.16) (0.59)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (3.57)(7) (1.88) (1.22)
Portfolio turnover rate (%) 31 79 93
Fee reduction per share(2) ($) 0.14 0.17 0.07
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Less than $0.01 per share.
(4) Assumes dividend reinvestment.
(5) Not annualized.
(6) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
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 $xx million to $xx 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 industrywide
growth. The managers generally visit companies to evaluate the strength and
consistency of their management strategy. Finally, the managers look for stocks
that are reasonably priced relative to their earnings and industry.
Historically, companies that meet these criteria have tended to have large or
medium 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.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
PORTFOLIO MANAGERS
John F. Snyder III
- ---------------------------------------
Executive vice president of adviser
Joined team in 1996
Joined adviser in 1991
Began career in 1971
Barry H. Evans, CFA
- ---------------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1986
Began career in 1986
Peter M. Schofield, CFA
- ---------------------------------------
Vice president of adviser
Joined team in 1996
Joined adviser in 1996
Began career in 1984
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). Past
performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998 1999
28.43% 16.88%
Best quarter: up xx.xx%, fourth quarter xxxx Worst quarter: down xx.xx%, third
quarter xxxx
Total return for the first three months of xxxx: xx.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year xx.xx% xx.xx%
Life of fund - began 8/29/96 xx.xx% xx.xx%
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.
o In a down market, higher-risk securites and derivatives could become
harder to value or to sell at a fair price.
o Foreign investments carry additional risks, including inadequate or
inaccurate financial information and social or political 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 $10.74 $13.59
Net investment income (loss)(2) 0.07 0.22 0.27
Net realized and unrealized gain (loss) on investments 0.76 2.82 2.00
Total from investment operations 0.83 3.04 2.27
Less distributions:
Dividends from net investment income (0.07) (0.18) (0.25)
Distributions from net realized gain on investments sold (0.02) (0.01) --
Total distributions (0.09) (0.19) (0.25)
Net asset value, end of period $10.74 $13.59 $15.61
Total investment return at net asset value(3) (%) 8.30(4) 28.43 16.88
Total adjusted investment return at net asset value(3,5) (%) 7.30(4) 28.12 --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,111 12,187 34,170
Ratio of expenses to average net assets (%) 0.85(6) 0.85 0.74
Ratio of adjusted expenses to average net assets(7) (%) 3.78(6) 1.16 --
Ratio of net investment income (loss) to average net assets (%) 1.90(6) 1.81 1.88
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (1.03)(6) 1.50 --
Portfolio turnover rate (%) 17 11 19
Fee reduction per share(2) ($) 0.11 0.04 --
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
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%
Best quarter: up xx.xx%, fourth quarter xxxx Worst quarter: down xx.xx%, third
quarter xxxx
Total return for the first three months of xxxx: xx.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year xx.xx% xx.xx%
Life of fund - began 8/29/96 xx.xx% xx.xx%
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.
================================================================================
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 __________________.
<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
Net investment income (loss)(2) 0.07 0.05 0.07
Net realized and unrealized gain (loss) on investments and foreign
currency transactions 1.20 (0.13) 1.69
Total from investment operations 1.27 (0.08) 1.76
Less distributions:
Dividends from net investment income (0.04) (0.01) (0.07)
Dividends in excess of net investment income -- -- (0.01)
Distributions from net realized gain on investments sold and foreign
currency transactions -- (0.64) --
Total distributions (0.04) (0.65) (0.08)
Net asset value, end of period $11.23 $10.50 $12.18
Total investment return at net asset value(3) (%) 12.75(4) (0.54) 16.75
Total adjusted investment return at net asset value(3,5) (%) 12.07(4) (1.43) 14.77
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,267 3,792 7,201
Ratio of expenses to average net assets (%) 1.15(6) 1.15 1.15
Ratio of adjusted expenses to average net assets(7) (%) 3.13(6) 2.04 3.13
Ratio of net investment income (loss) to average net assets (%) 2.03(6) 0.43 0.59
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 0.05(6) (0.46) (1.39)
Portfolio turnover rate (%) 14 273 89
Fee reduction per share(2) ($) 0.07 0.10 0.22
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
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.
================================================================================
PORFOLIO MANAGERS
James K. Schmidt, CFA
- ---------------------------------------
Executive vice president of adviser
Joined team in 1997
Joined adviser in 1985
Began career in 1979
Thomas M. Finucane
- ---------------------------------------
Vice president of adviser
Joined team in 1997
Joined adviser in 1990
Began career in 1990
Thomas C. Goggins
- ---------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began career in 1981
PAST PERFORMANCE
[Clip Art] The graph shows the fund's total return, while the table shows
performance over time along with a broad-based market index for reference. This
information may help provide an indication of the fund's risks. All figures
assume dividend reinvestment but do not include variable contract charges (see
attached variable product prospectus). Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Total return -- calendar year
- --------------------------------------------------------------------------------
1998 1999
8.55%
Best quarter: up xx.xx%, fourth quarter xxxx Worst quarter: down xx.xx%, third
quarter xxxx
Total return for the first three months of xxxx: xx.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year xx.xx% xx.xx%
Life of fund - began 4/30/97 xx.xx% xx.xx%
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.
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 ___________________.
<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
Net investment income (loss)(2) 0.11 0.18
Net realized and unrealized gain (loss) on investments and foreign currency
transactions 3.39 0.97
Total from investment operations 3.50 1.15
Less distributions:
Dividends from net investment income (0.05) (0.14)
Distributions from net realized gain on investments sold (0.01) (0.00)(3)
Total distributions (0.06) (0.14)
Net asset value, end of period $13.44 $14.45
Total investment return at net asset value(4) (%) 35.05(5) 8.55
Total adjusted investment return at net asset value(4,6) (%) 34.71(5) --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 18,465 54,569
Ratio of expenses to average net assets (%) 1.05(7) 0.92
Ratio of adjusted expenses to average net assets(8) (%) 1.39(7) --
Ratio of net investment income (loss) to average net assets (%) 1.32(7) 1.25
Ratio of adjusted net investment income (loss) to average net assets(8) (%) 0.98(7) --
Portfolio turnover rate (%) 11 38
Fee reduction per share(2) ($) 0.03 --
</TABLE>
(1) Began operations on April 30, 1997.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Less than $0.01 per share.
(4) Assumes dividend reinvestment.
(5) Not annualized.
(6) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
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.
================================================================================
PORFOLIO MANAGERS
James K. Schmidt, CFA
- ---------------------------------------
Executive vice president of adviser
Joined team in 1998
Joined adviser in 1985
Began career in 1979
Thomas M. Finucane
- ---------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1990
Began career in 1990
Thomas C. Goggins
- ---------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began career in 1981
PAST PERFORMANCE
[Clip art] 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 -- calender year
- --------------------------------------------------------------------------------
1999
Best quarter: up xx.xx%, fourth quarter xxxx Worst quarter: down xx.xx%, third
quarter xxxx
Total return for the first three months of xxxx: xx.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
i year xx.xx% xx.xx%
Life of fund - began 5/1/98 xx.xx% xx.xx%
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.
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 ____________________.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Period ended: 12/98(1) 12/99
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00
Net investment income (loss)(2) 0.09
Net realized and unrealized gain (loss) on investments (0.74)
Total from investment operations (0.65)
Less distributions:
Dividends from net investment income (0.07)
Distributions from net realized gain on investments sold (0.00)(3)
Total distributions (0.07)
Net asset value, end of period $9.28
Total investment return at net asset value(4) (%) (6.43)(6)
Total adjusted investment return at net asset value(4,5) (%) (6.49)(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 20,256
Ratio of expenses to average net assets (%) 1.05(7)
Ratio of adjusted expenses to average net assets(8) (%) 1.14(7)
Ratio of net investment income (loss) to average net assets (%) 1.39(7)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) 1.30(7)
Portfolio turnover rate (%) 28
Fee reduction per share(2) ($) 0.01
</TABLE>
(1) Began operations on May 1, 1998.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Less than $0.01 per share.
(4) Assumes dividend reinvestment.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the period shown.
(6) Not annualized.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
23
<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
biotechnology.
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 under going 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
PORFOLIO MANAGERS
Barry J. Gordon
- ---------------------------------------
President of subadviser
Joined team in 1983
Began career in 1971
Marc H. Klee, CFA
- ---------------------------------------
Senior vice president of subadviser
Joined team in 1983
Began 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.
24
<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.
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. 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
25
<PAGE>
V.A. Bond Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks to generate a high level of current income consistent
with prudent investment risk. In pursuing this goal, the fund normally invests
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.
================================================================================
PORFOLIO MANAGERS
James K. Ho, CFA
- ---------------------------------------
Executive vice president of adviser
Joined team in 1996
Joined adviser in 1985
Began career in 1977
Anthony A. Goodchild
- ---------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1994
Began career in 1968
Benjamin Matthews
- ---------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began career in 1970
Triet M. Nguyen
- ---------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1998
Began career in 1980
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). Past
performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998 1999
9.30% 9.41%
Best quarter: up xx.xx%, third quarter xxxx Worst quarter: down xx.xx%, first
quarter xxxx
Total return for the first three months of xxxx: xx.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year xx.xx% xx.xx%
Life of fund - began 8/29/96 xx.xx% xx.xx%
Index: Lehman Brothers Corporate Bond Index, an unmanaged index of corporate
bonds and Yankee bonds.
26
<PAGE>
MAIN RISKS
[Clip Art] The major factors in this fund's performance are interest rates and
credit risk. When interest rates rise, bond prices generally fall. Generally, an
increase in the fund's average maturity will make it more sensitive to interest
rate risk.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain sectors or investments 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.
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 ___________________.
<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
Net investment income (loss)(2) 0.23 0.68 0.63
Net realized and unrealized gain (loss) on investments 0.21 0.24 0.32
Total from investment operations 0.44 0.92 0.95
Less distributions:
Dividends from net investment income (0.23) (0.68) (0.63)
Distributions from net realized gain on investments sold (0.02) (0.07) (0.17)
Total distributions (0.25) (0.75) (0.80)
Net asset value, end of period $10.19 $10.36 $10.51
Total investment return at net asset value(3) (%) 4.42(4) 9.30 9.41
Total adjusted investment return at net asset value(3,5) (%) 3.25(4) 7.52 8.82
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,056 3,682 10,669
Ratio of expenses to average net assets (%) 0.75(6) 0.75 0.75
Ratio of adjusted expenses to average net assets(7) (%) 4.15(6) 2.53 1.34
Ratio of net investment income (loss) to average net assets (%) 6.69(6) 6.57 5.93
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 3.29(6) 4.79 5.34
Portfolio turnover rate (%) 45 193 367
Fee reduction per share(2) ($) 0.12 0.18 0.06
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
27
<PAGE>
V.A. High Yield Bond Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks to maximize current income without assuming undue
risk. Capital appreciation is a secondary goal. In pursuing these goals, the
fund normally invests at least 65% of assets in U.S. and foreign bonds rated
BBB/Baa or lower and their unrated equivalents. The fund may invest up to 30% of
assets in junk bonds rated CC/Ca and their unrated equivalents. There is no
limit on the fund's average maturity.
In managing the fund's portfolio, the managers concentrate on industry
allocation and securities selection: deciding which types of industries to
emphasize at a given time, and then which individual bonds to buy. The managers
use top-down analysis to determine which industries may benefit from current and
future changes in the economy.
In choosing individual securities, the managers use bottom-up research to find
securities that appear comparatively undervalued. The managers look at the
financial condition of the issuers as well as the collateralization and other
features of the securities themselves.
The managers also look at companies' financing cycles to determine which types
of securities (for example, bonds, preferred stocks or common stocks) to favor.
The fund typically invests in a broad range of industries, although it may
invest up to 40% of assets in electric utilities and telecommunications
companies.
The fund may use certain higher-risk investments, including derivatives
(investments whose value is based on indices, securities or currencies) and
restricted or illiquid securities. In addition, the fund may invest up to 20% of
net assets in U.S. and foreign stocks.
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
PORFOLIO MANAGERS
Arthur N. Calavritinos, CFA
- ---------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1988
Began career in 1986
Frederick L. Cavanaugh, Jr.
- ---------------------------------------
Senior vice president of adviser
Joined team in 1998
Joined adviser in 1986
Began career in 1975
Janet L. Clay, CFA
- ---------------------------------------
Vice president of adviser
Joined team in 1998
Joined adviser in 1995
Began career in 1990
Daniel S. Janis
- ---------------------------------------
Second vice president of adviser
Joined team in 1999
Joined adviser in 1999
Began career in 1984
PAST PERFORMANCE
[Clip Art] The graph and table show the fund's total return for its first
calendar year along with a broad-based market index for reference. This
information may help provide an indication of the fund's risks. All figures
assume dividend reinvestment but do not include variable contract charges (see
attached variable product prospectus). Past performance does not indicate future
results.
- --------------------------------------------------------------------------------
Total return -- calendar year
- --------------------------------------------------------------------------------
1998 1999
-9.80%
Best quarter: up xx.xx%, fourth quarter xxxx Worst quarter: down xx.xx%, third
quarter xxxx
Total return for the first three months of xxxx: xx.xx
- --------------------------------------------------------------------------------
Average annual total return -- for period ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year - began 1/6/98 xx.xx% xx.xx%
Index: Lehman Brothers High Yield Bond Index, an unmanaged index of high yield
bonds.
28
<PAGE>
MAIN RISKS
[Clip Art] The major factors in the fund's performance are interest rates and
credit risk. When interest rates rise, bond prices generally fall. Generally, an
increase in the fund's average maturity will make it more sensitive to interest
rate risk.
Credit risk depends largely on the perceived financial health of bond issuers.
In general, lower-rated bonds have higher credit risks. Junk bond prices can
fall on bad news about the economy, an industry or a company. Share price, yield
and total return may fluctuate more than with less aggressive bond funds.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. If certain industries or investments do not perform as the
fund expects, it could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Foreign investments carry additional risks, including potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political 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.
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 __________________.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Period ended: 12/98(1) 12/99
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00
Net investment income (loss)(2) 0.90
Net realized and unrealized gain (loss) on investments and foreign currency transactions (1.82)
Total from investment operations (0.92)
Less distributions:
Dividends from net investment income (0.84)
Tax return of capital (0.02)
Total distributions (0.86)
Net asset value, end of period $8.22
Total investment return at net asset value(3) (%) (9.80)(4)
Total adjusted investment return at net asset value(3,5) (%) (10.10)(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 8,120
Ratio of expenses to average net assets (%) 0.85(6)
Ratio of adjusted expenses to average net assets(7) (%) 1.15(6)
Ratio of net investment income (loss) to average net assets (%) 9.85(6)
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 9.55(6)
Portfolio turnover rate (%) 102
Fee reduction per share(2) ($) 0.03
</TABLE>
(1) Began operations on January 6, 1998.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the period shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
29
<PAGE>
V.A. Money Market Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks 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%
Best quarter: up xx.xx%, first quarter xxxx Worst quarter: up xx.xx%, fourth
quarter xxxx
Total return for the first three months of xxxx: xx.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund
1 year xx.xx%
Life of fund - began 8/29/96 xx.xx%
30
<PAGE>
MAIN RISKS
[Clip Art] The value of your investment will be most affected by short-term
interest rates. If interest rates rise sharply, the fund could underperform its
peers or lose money.
An issuer of securities held by the fund could default or have its credit rating
downgraded.
Foreign investments carry additional risks, including inadequate or inaccurate
financial information and social or political 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 _______________________.
<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
Net investment income (loss)(2) 0.02 0.05 0.05
Less distributions:
Dividends from net investment income (0.02) (0.05) (0.05)
Net asset value, end of period $1.00 $1.00 $1.00
Total investment return at net asset value(3) (%) 1.61(4) 4.88 4.87
Total adjusted investment return at net asset value(3,5) (%) (7.55)(4) 4.36 --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 207 8,377 16,519
Ratio of expenses to average net assets (%) 0.75(6) 0.75 0.74
Ratio of adjusted expenses to average net assets(7) (%) 27.48(6) 1.27 --
Ratio of net investment income (loss) to average net assets (%) 4.68(6) 4.86 4.70
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (22.05)(6) 4.34 --
Fee reduction per share(2) ($) 0.08 0.00(8) --
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Less than $0.01 per share.
31
<PAGE>
V.A. Strategic Income Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income. In pursuing this goal,
the fund invests primarily in the following types of securities:
o foreign government and corporate debt securities from developed and
emerging markets
o U.S. government and agency securities
o U.S. junk bonds
The fund may also invest in preferred stock and other types of debt securities.
Although the fund invests in securities rated as low as CC/Ca and their unrated
equivalents, it generally intends to keep its average credit quality in the
investment-grade range. There is no limit on the fund's average maturity.
In managing the portfolio, the managers allocate assets among the three major
sectors based on analysis of economic factors such as projected international
interest rate movements, industry cycles and political trends. However, the
managers may invest up to 100% of assets in any one sector.
Within each sector, the managers look for securities that are appropriate for
the overall portfolio in terms of yield, credit quality, structure and industry
distribution. In selecting securities, relative yields and risk/reward ratios
are the primary considerations.
The fund may use certain higher-risk investments, including derivatives
(investments whose value is based on indices, securities or currencies) and
restricted or illiquid securities. In addition, the fund may invest up to 10% of
net assets in U.S. or foreign stocks.
In abnormal market conditions, the fund may temporarily invest extensively in
investment-grade short-term securities. In these and other cases, the fund might
not achieve its goal.
The fund may trade securities actively, which could increase its transaction
costs, thus lowering performance.
================================================================================
PORFOLIO MANAGERS
Frederick L. Cavanaugh, Jr.
- ---------------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1986
Began career in 1975
Arthur N. Calavritinos, CFA
- ---------------------------------------
Vice president of adviser
Joined team in 1996
Joined adviser in 1988
Began career in 1986
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks. All figures assume dividend reinvestment but do not include
variable contract charges (see attached variable product prospectus). Past
performance does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1997 1998 1999
11.77% 4.92%
Best quarter: up xx.xx%, second quarter xxxx Worst quarter: down xx.xx%, third
quarter xxxx
Total return for the first three months of xxxx: xx.xx%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/99
- --------------------------------------------------------------------------------
Fund Index
1 year xx.xx% xx.xx%
Life of fund - began 8/29/96 xx.xx% xx.xx%
Index: Lehman Brothers Government/Corporate Bond Index, an unmanaged index of
U.S. government, U.S. corporate and Yankee bonds.
32
<PAGE>
MAIN RISKS
[Clip Art] 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.
================================================================================
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 ___________________.
<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
Net investment income (loss)(2) 0.27 0.91 0.85
Net realized and unrealized gain (loss) on investments and foreign
currency transactions 0.36 0.26 (0.35)
Total from investment operations 0.63 1.17 0.50
Less distributions:
Dividends from net investment income (0.27) (0.91) (0.85)
Distributions from net realized gain on investments sold (0.06) (0.09) (0.02)
Total distributions (0.33) (1.00) (0.87)
Net asset value, end of period $10.30 $10.47 $10.10
Total investment return at net asset value(3) (%) 6.45(4) 11.77 4.92
Total adjusted investment return at net asset value(3,5) (%) 5.96(4) 11.25 4.84
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,131 5,540 15,019
Ratio of expenses to average net assets (%) 0.85(6) 0.85 0.85
Ratio of adjusted expenses to average net assets(7) (%) 2.28(6) 1.37 0.93
Ratio of net investment income (loss) to average net assets (%) 7.89(6) 8.77 8.19
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 6.46(6) 8.25 8.11
Portfolio turnover rate (%) 73 110 92
Fee reduction per share(2) ($) 0.05 0.05 0.01
</TABLE>
(1) Began operations on August 29, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
33
<PAGE>
Account information
- --------------------------------------------------------------------------------
BUYING AND SELLING FUND SHARES
When you invest in a Declaration fund through a variable contract, your premium
payments are used to buy units of an insurance company separate account that
then buys shares of the fund. The shares are purchased at net asset value (NAV)
and are generally credited to the separate account immediately after the fund
accepts payment from the insurance company. In unusual circumstances or to
protect shareholders, a fund may refuse a purchase order, especially when the
adviser believes the order might be large enough to disrupt the fund's
management. A fund may also temporarily suspend the offering of its shares.
Shares are sold at the next NAV to be determined after the fund accepts the sell
request. The sales proceeds are normally forwarded by bank wire to the insurance
company on the next business day. In unusual circumstances, the fund may
temporarily suspend the processing of sell requests. It may also postpone the
payment of sales proceeds for up to seven days or longer, as allowed by federal
securities laws.
- --------------------------------------------------------------------------------
VALUING FUND SHARES
The NAV for each fund is determined each business day at the close of business
on the New York Stock Exchange (typically 4:00 P.M. Eastern Time). The Exchange
is typically open Monday through Friday.
Except for V.A. Money Market Fund, which values its securities at amortized
cost, securities in a fund's portfolio are generally valued on the basis of
market quotations and valuations provided by independent pricing services. The
fund may also value securities at fair value, especially if market quotations
are not readily available or if the securities' value has been materially
affected by events following the close of a foreign market. Fair value is
determined according to procedures approved by the fund's board of trustees. If
the fund uses this method, the securities' prices may be higher or lower than
the same securities held by another fund using market quotations.
- --------------------------------------------------------------------------------
FUND EXPENSES
Management fees The management fees paid to the investment adviser by the John
Hancock Declaration funds last year are as follows:
- --------------------------------------------------------------------------------
Equity Funds % of net assets
- --------------------------------------------------------------------------------
V.A. Core Equity Fund xx%
V.A. 500 Index Fund xx%
V.A. Large Cap Growth Fund xx%
V.A. Mid Cap Growth Fund xx%
V.A. Relative Value Fund xx%
V.A. Small Cap Growth Fund xx%
V.A. Sovereign Investors Fund xx%
- --------------------------------------------------------------------------------
Interational Funds
- --------------------------------------------------------------------------------
V.A. International Fund xx%
- --------------------------------------------------------------------------------
Sector Funds
- --------------------------------------------------------------------------------
V.A. Financial Industries Fund xx%
V.A. Regional Bank Fund xx%
V.A. Technology Fund xx%
- --------------------------------------------------------------------------------
Income Funds
- --------------------------------------------------------------------------------
V.A. Bond Fund xx%
V.A. High Yield Bond Fund xx%
V.A. Money Market Fund xx%
V.A. Strategic Income Fund xx%
The adviser pays subadvisory fees out of its own assets, and no fund is
responsible for paying a fee to its sub-adviser.
Expense limitation The adviser may reduce its fee or make other arrangements to
limit each fund's expenses to a specified percentage of average daily net
assets. The adviser has agreed to limit temporarily each fund's expenses to
0.25% of average net assets, excluding advisory fees, at least until May 1,
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 gross
income of the separate accounts holding these shares. For a discussion of the
tax status of your variable contract, including the tax consequences of
withdrawals or other payments, refer to the prospectus of your insurance
company's separate account.
34 ACCOUNT INFORMATION
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
When you invest in a Declaration fund through a variable contract, your premium
payments are used to buy units of an insurance company separate account that
then buys shares of the fund. The diagram below shows the basic business
structure used by the Declaration funds. The funds' board of trustees oversees
the funds' business activities and retains the services of the various firms
that carry out the funds' operations.
The trustees of the Declaration funds have the power to change the funds'
investment goals without shareholder or contract holder approval.
Year 2000 compliance The adviser and the funds' service providers are taking
steps to address any year 2000-related computer problems. However, there is some
risk that these problems could disrupt the issuers in which the funds invest,
the funds' operations or financial markets generally.
------------------------------------------------
Variable
contract holders
------------------------------------------------
------------------------------------------------
Insurance company
separate accounts
------------------------------------------------
------------------------------------------------
Declaration funds
------------------------------------------------
------------------------------------------------
Subadvisers
American Fund Advisors, Inc.
1415 Kellum Place
Garden City, NY 11530
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.
------------------------------------------------
------------------------------------------------
Investment adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Manages the funds' business and
investment activities.
------------------------------------------------
------------------------------------------------
Custodian
Investors Bank & Trust Co.
State Street Bank and Trust Company
Hold the funds' assets, settle all
portfolio trades and collect most of
the valuation data required for
calculating each fund's NAV.
------------------------------------------------
------------------------------------------------
Trustees
Oversee the funds' activities.
------------------------------------------------
FUND DETAILS 35
<PAGE>
For more information
- --------------------------------------------------------------------------------
This prospectus should be used with the variable contract/product prospectus.
Two documents are available that offer further information on the John Hancock
Declaration funds:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, a discussion of the market conditions and
investment strategies that significantly affected performance, and the auditors'
report (in the annual report only).
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the funds. The
current annual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference into (is legally a part of) this prospectus.
To request a free copy of the current annual/semiannual report or the SAI,
please contact John Hancock:
By mail:
John Hancock Servicing Center
P.O. Box 9298
Boston, MA02205-9298
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
A Global Investment Management Firm
101 Huntington Avenue
Boston, Massachusetts
02199-7603
John Hancock(R) (C) 2000 John Hancock Funds, Inc.
VA00P 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' Prospectus. (the "Prospectus").
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Servicing Center
P.O. Box 9298
Boston, Massachusetts 02205-9298
1-800-824-0335
<PAGE>
TABLE OF CONTENTS
Page
Organization of the Trust............................................... 3
Eligible Investors...................................................... 3
Investment Policies and Strategies...................................... 3
Equity.................................................................. 4
International........................................................... 7
Sector.................................................................. 8
Income.................................................................. 9
Risk Factors Investments and Techniques................................. 11
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....................................... 51
Dividends............................................................... 52
Tax Status.............................................................. 52
Calculation of Performance.............................................. 55
Brokerage Allocation.................................................... 58
Shareholder Servicing Agent............................................. 61
Custody of Portfolio.................................................... 61
Independent Auditors ................................................... 61
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 Prospectus. The Funds are designed to
serve as investment vehicles for variable annuity and variable life insurance
contracts (the "Variable Contracts") offered by the separate accounts of various
insurance companies. Participating insurance companies are the owners of shares
of beneficial interest in each Fund of the Trust. In accordance with any
limitations set forth in their Variable Contracts, contract holders may direct,
through their participating insurance companies, the allocation of amounts
available for investment among the Funds. Instructions for any such allocation,
or for the purchase or redemption of shares of a Fund, must be made by the
investor's participating insurance company's separate account as the owner of
the Fund's shares. The rights of participating insurance companies as owners of
shares of a Fund are different from the rights of contract holders under their
Variable Contracts. The term "shareholder" in this Statement of Additional
Information refers only to participating insurance companies, and not to
contract holders.
INVESTMENT POLICIES AND STRATEGIES
Each Fund has its own distinct investment objective and policies. In striving to
meet its objective, each Fund will face the challenges of changing business,
economic and market conditions. There is no assurance that the Funds will
achieve their investment objectives. The following information supplements the
discussion of each Fund's investment objective and policies as discussed in the
prospectus.
3
<PAGE>
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 in at least 65% of
assets 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) momentum, 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"
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."
4
<PAGE>
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 $__ to $ __ billion as of
xx/xx/xxxx).
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 $---- million to $-- billion as of _____ __,
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 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 on 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).
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 $---- million to $--- billion on ____ __, 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. 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).
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 -- -, 2000,
that range was - million to - billion.
6
<PAGE>
While there is considerable flexibility in the investment grade and type of
security in which the Fund may invest, the Fund currently uses a strategy of
investing only in those common stocks which have a record of having increased
their dividend payout in each of the preceding ten or more years. This "dividend
performers" strategy can be changed at any time. 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). 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"), Global Depositary Receipts (GDRs).
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).
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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.
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
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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.
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.
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. The 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
9
<PAGE>
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."
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.
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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 types of securities: foreign
government and foreign corporate securities from developed and emerging
countries, U.S. Government securities and lower-rated high yield, high risk,
fixed income securities of U.S. issuers. Under normal circumstances, the Fund's
assets are invested in each of the foregoing three sectors. However, from time
to time the Fund may invest up to 100% of its total assets in any one sector.
The Fund may invest up to 10% of its net assets in common stocks and similar
equity securities of U.S. and foreign companies. No more than 25% of the Fund's
total assets, at the time of purchase, will be invested in government securities
of any one foreign country. The fixed income securities in which the Fund may
invest include bonds, debentures, notes (including variable and floating rate
instruments), preferred and preference stock, zero coupon bonds, payment-in-kind
securities, increasing rate note securities, participation interests, multiple
class passthrough securities, collateralized mortgage obligations, stripped debt
securities, other mortgage-backed securities, asset-backed securities and other
derivative debt securities. Variable and floating rate instruments,
mortgage-backed securities and asset-backed securities are derivative
instruments that derive their value from an underlying security. Derivative
securities are subject to additional risks. See "Risks Associated With Specific
Types of Derivative Debt Securities."
The Fund generally intends to keep its average credit quality in the investment
grade range. The Fund may investment 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.
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
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<PAGE>
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."
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.
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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
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.
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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 comprised of 500 industrial, utility,
transportation and financial companies in the United States markets. Most of
these companies are listed on the New York Stock Exchange (the "Exchange").
Companies included in the S&P 500 Index represent about __% of the Exchange's
market capitalization and __% of the Exchange's issuers. The S&P 500 Index is a
capitalization weighted index calculated on a total return basis with dividends
reinvested. The inclusion of a stock in the S&P 500 Index in no way implies that
Standard & Poor's believes the stock to be an attractive investment.
Because of the market-value weighting, the 50 largest companies in the S&P 500
Index currently account for approximately __% 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 April , 2000, ____, the five largest companies in
the Index were: ________ (__%), _________ (__%), ______ (__%), ____ (__%), and
______ (__%). The largest industry categories were: ________ (__%), ____ (__%),
_____ (__%), _____ (__%) and _____ (__%).
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use by the Adviser. The 500 Index Fund is not sponsored, endorsed, sold or
promoted by Standard & Poor's. Standard & Poor's makes no representation or
warranty, express or implied, to the purchasers of the Fund or any member of the
public regarding the advisability of investing in securities generally or in the
500 Index Fund particularly or the ability of the S&P 500 Index to track general
stock market performance. Standard & Poor's only relationship to the Adviser is
the licensing of certain trademarks and trade names of Standard & Poor's and of
the S&P 500 Index, which is determined, composed and calculated by Standard &
Poor's without regard to the Adviser or the 500 Index Fund. Standard & Poor's
has no obligation to take the needs of the Adviser or the purchasers of the 500
Index Fund into consideration in determining, composing or calculating the S&P
500 Index. Standard & Poor's is not responsible for and has not participated in
the determination of the prices and amount of the 500 Index Fund, the timing of
the issuance or sale of the 500 Index Fund or in the determination or
calculation of the equation by which the 500 Index Fund is to be converted into
cash. Standard & Poor's has no obligation or liability in connection with the
administration, marketing or trading of the 500 Index Fund.
STANDARD & POOR'S DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE
S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND STANDARD & POOR'S SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. STANDARD & POOR'S
MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE
ADVISER, THE TRUST, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN. STANDARD & POOR'S MAKES NO EXPRESS OR
IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY
DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL
STANDARD & POOR'S HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
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<PAGE>
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
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.
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<PAGE>
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.
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
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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.
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.
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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.
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.
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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.
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.
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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.
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
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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.
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
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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
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.
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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
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.
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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
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
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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
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
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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
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.
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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.
Risk Factors Associated with Mortgage-Backed Securities. Investing in
Mortgage-Backed Securities involves certain risks, including the failure of a
counterparty to meet its commitments, adverse interest rate changes and the
effects of prepayments on mortgage cash flows. In addition, investing in the
lowest tranche of CMOs and REMIC certificates involves risks similar to those
associated with investing in equity securities. Further, the yield
characteristics of Mortgage-Backed Securities differ from those of traditional
fixed income securities. The major differences typically include more frequent
interest and principal payments (usually monthly), the adjustability of interest
rates, and the possibility that prepayments of principal may be made
substantially earlier than their final distribution dates.
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Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors and cannot be
predicted with certainty. Both adjustable rate mortgage loans and fixed rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest rate environment. Under certain interest
rate and prepayment rate scenarios, a Fund may fail to recoup fully its
investment in Mortgage-Backed Securities notwithstanding any direct or indirect
governmental, agency or other guarantee. When a Fund reinvests amounts
representing payments and unscheduled prepayments of principal, it may receive a
rate of interest that is lower than the rate on existing adjustable rate
mortgage pass-through securities. Thus, Mortgage-Backed Securities, and
adjustable rate mortgage pass-through securities in particular, may be less
effective than other types of U.S. Government securities as a means of "locking
in" interest rates.
Conversely, in a rising interest rate environment, a declining prepayment rate
will extend the average life of many Mortgage-Backed Securities. This
possibility is often referred to as extension risk. Extending the average life
of a Mortgage-Backed Security increases the risk of depreciation due to future
increases in market interest rates.
Asset-Backed Securities. The Bond Fund, Strategic Income Fund and High Yield
Bond Fund may invest in securities that represent individual interests in pools
of consumer loans and trade receivables similar in structure to Mortgage-Backed
Securities. The assets are securitized either in a pass-through structure
(similar to a mortgage pass-through structure) or in a pay-through structure
(similar to a CMO structure). Although the collateral supporting asset-backed
securities generally is of a shorter maturity than mortgage loans and
historically has been less likely to experience substantial prepayments, no
assurance can be given as to the actual maturity of an asset-backed security
because prepayments of principal may be made at any time. Payments of principal
and interest typically are supported by some form of credit enhancement, such as
a letter of credit, surety bond, limited guarantee by another entity or having a
priority to certain of the borrower's other securities. The degree of credit
enhancement varies, and generally applies to only a fraction of the asset-backed
security's par value until exhausted. If the credit enhancement of an
asset-backed security held by a Fund has been exhausted, and if any required
payments of principal and interest are not made with respect to the underlying
loans, a Fund may experience losses or delays in receiving payment.
Asset-backed securities are often subject to more rapid repayment than their
stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying loans. During periods of declining
interest rates, prepayment of loans underlying asset-backed securities can be
expected to accelerate. Accordingly, a Fund's ability to maintain positions in
these securities will be affected by reductions in the principal amount of such
securities resulting from prepayments, and its ability to reinvest the returns
of principal at comparable yields is subject to generally prevailing interest
rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
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Risks Associated With Specific Types of Derivative Debt Securities. Different
types of derivative debt securities are subject to different combinations of
prepayment, extension and/or interest rate risk. Conventional mortgage
pass-through securities and sequential pay CMOs are subject to all of these
risks, but are typically not leveraged. Thus, the magnitude of exposure may be
less than for more leveraged Mortgage-Backed Securities.
The risk of early prepayments is the primary risk associated with interest only
debt securities ("IOs"), leveraged floating rate securities whose yield changes
in the same direction, rather than inversely to, a referenced interest rate ("
super floaters"), other leveraged floating rate instruments and Mortgage-Backed
Securities purchased at a premium to their par value. In some instances, early
prepayments may result in a complete loss of investment in certain of these
securities.
The primary risks associated with certain other derivative debt securities are
the potential extension of average life and/or depreciation due to rising
interest rates. These securities include floating rate securities based on the
Cost of Funds Index ("COFI floaters"), other "lagging rate" floating rate
securities, floating rate securities that are subject to a maximum interest rate
("capped floaters"), Mortgage-Backed Securities purchased at a discount,
leveraged inverse floating rate securities ("inverse floaters"), principal only
debt securities ("POs"), certain residual or support tranches of CMOs and index
amortizing notes. Index amortizing notes are not Mortgage-Backed Securities, but
are subject to extension risk resulting from the issuer's failure to exercise
its option to call or redeem the notes before their stated maturity date.
Leveraged inverse IOs combine several elements of the Mortgage-Backed Securities
described above and thus present an especially intense combination of
prepayment, extension and interest rate risks.
Planned amortization class ("PAC") and target amortization class ("TAC") CMO
bonds involve less exposure to prepayment, extension and interest rate risks
than other Mortgage-Backed Securities, provided that prepayment rates remain
within expected prepayment ranges or "collars." To the extent that prepayment
rates remain within these prepayment ranges, the residual or support tranches of
PAC and TAC CMOs assume the extra prepayment, extension and interest rate risks
associated with the underlying mortgage assets.
Other types of floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates. X-reset
floaters have a coupon that remains fixed for more than one accrual period.
Thus, the type of risk involved in these securities depends on the terms of each
individual X-reset floater.
Brady Bonds. 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
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
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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).
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.
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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.
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.
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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.
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 prospectus. 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.
32
<PAGE>
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. Each Fund has adopted the following
fundamental investment restrictions which will not be changed without the
approval of a majority of the applicable Fund's outstanding voting securities.
Under the Investment Company Act of 1940, as amended (the "1940 Act"), and as
used in the Prospectus and this Statement of Additional Information, a "majority
of the outstanding voting securities" means approval by the lesser of (1) the
holders of 67% or more of the Fund represented at a meeting if the more than 50%
of the Fund's outstanding shares of the Fund are present in person or by proxy
or (2) more than 50% of the outstanding shares.
Each Fund (other than Money Market Fund) may not:
1. Issue senior securities, except as permitted by paragraphs 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.
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.
33
<PAGE>
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.
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.
34
<PAGE>
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.
(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.
35
<PAGE>
(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.
The 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.
36
<PAGE>
(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); Vice
President, Integrated Resources
(until 1989).
- -------------------
* 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>
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser, The
Boston, MA 02199 Berkeley Group; Director and
April 1953 President, NM Capital and SAMCorp.;
Director, John Hancock Funds,
Advisers International, and John
Hancock Advisers International
(Ireland) Ltd.; Executive Vice
President, the Adviser (until
1994); Director, Insurance Agency,
Inc. (until June 1999); Director,
Signature Services (until January
1997).
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 and Chief Legal
101 Huntington Avenue Legal Officer Officer and Secretary, the Adviser;
Boston, MA 02199 John Hancock Funds, Signature
March 1950 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
and Ms. Hodsdon, each a non-Independent Trustee, and each of the officers of the
Funds are interested persons of the Adviser, are compensated by the Adviser
and/or its affiliates and receive no compensation from the Funds for their
services.
Aggregate Compensation Total Compensation From
From the Funds Fiscal Year All Funds in John Hancock
Independent Trustees Ended December 31, 1999 Fund Complex to Trustees(*)
- -------------------- ----------------------- ---------------------------
Dennis S. Aronowitz $ $ 75,250
Richard P. Chapman, Jr.+ 75,250
William J. Cosgrove+ 72,250
Douglas M. Costle** 56,000
Leland O. Erdahl 72,350
Richard A. Farrell 75,250
Gail D. Fosler 72,250
William F. Glavin+ 68,100
John A. Moore+ 72,350
Patti McGill Peterson 75,350
John W. Pratt 72,250
---------
Total $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.
(**) Effective December 31, 1999, Mr. Costle resigned as Trustee of the Complex.
+ 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
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.
45
<PAGE>
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 May 1, 2000.
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 up to $500 million and 90% of the advisory fee
payable on the Fund's assets exceeding $500 million. JHAI agreed to waive all
but 0.05% of this fee beginning January 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.
For the fiscal years ended December 31, 1997, 1998 and 1999, the Adviser paid
JHAI $18,127, $32,611 and $ , respectively. For the fiscal years ended December
31, 1997, 1998 and 1999, respectively, the Sub-advisers of Core Equity Fund and
Sovereign Investors Fund waived their fees.
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
46
<PAGE>
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 before Management fee received
Fund expense reduction by the Adviser
- ---- ----------------- --------------
International Fund $26,618 $ 188
Financial Industries Fund 41,060 23,382
Small Cap Growth Fund 14,584 0
Large Cap Growth Fund 16,677 0
Core Equity Fund 23,457 2,169
500 Index Fund 11,552* 0
Sovereign Investors Fund 27,842 13,539
Strategic Income Fund 19,377 2,512
Bond Fund 8,924 0
Money Market Fund 12,328 0
47
<PAGE>
1998
Management fee before Management fee received
Fund expense reduction by the Adviser
---- ----------------- --------------
International Fund $49,454 $ 0
Regional Bank Fund 72,908 64,783
Financial Industries Fund 324,581 324,581
Small Cap Growth Fund 43,238 6,661
Mid Cap Growth Fund 7,546 0
Large Cap Growth Fund 48,603 27,347
Relative Value Fund 45,181 31,498
Core Equity Fund 112,746 112,746
Sovereign Investors Fund 139,125 139,125
500 Index Fund 20,232* 0
Bond Fund 35,548 0
Strategic Income Fund 62,923 54,828
High Yield Bond Fund 32,414 16,272
Money Market Fund 61,349 61,349
1999
Management fee before Management fee received
Fund expense reduction by the Adviser
---- ----------------- --------------
International Fund $
Regional Bank Fund
Financial Industries Fund
Small Cap Growth Fund
Mid Cap Growth Fund
Large Cap Growth Fund
Relative Value Fund
Core Equity Fund
Sovereign Investors Fund
500 Index Fund
Bond Fund
Strategic Income Fund
High Yield Bond Fund
Money Market Fund
*Net of limitation by Adviser.
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.
48
<PAGE>
- --------------------------------------------------------------------------------
1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
International Fund 535 870
- --------------------------------------------------------------------------------
Regional Bank Fund -- 1,353+
- --------------------------------------------------------------------------------
Financial Industries Fund 909* 6,370
- --------------------------------------------------------------------------------
Small Cap Growth Fund 349 915
- --------------------------------------------------------------------------------
Mid Cap Growth Fund -- 158+++
- --------------------------------------------------------------------------------
Large Cap Growth Fund 400 1,012
- --------------------------------------------------------------------------------
Relative Value Fund -- 1,136++
- --------------------------------------------------------------------------------
Core Equity Fund 600 2,523
- --------------------------------------------------------------------------------
Sovereign Investors Fund 829 3,643
- --------------------------------------------------------------------------------
500 Index Fund 1,862 3,237
- --------------------------------------------------------------------------------
Bond Fund 322 1,109
- --------------------------------------------------------------------------------
Strategic Income Fund 583 1,645
- --------------------------------------------------------------------------------
High Yield Bond Fund -- 839++
- --------------------------------------------------------------------------------
Money Market Fund 439 1,914
- --------------------------------------------------------------------------------
*From commencement of operations on April 30, 1997.
+From commencement of operations on May 1, 1998.
++From commencement of operations on January 6, 1998.
+++From commencement of operations on January 7, 1998.
In order to avoid conflicts with portfolio trades for the Funds, the Adviser,
the Sub-advisers and the Funds have adopted extensive restrictions on personal
securities trading by personnel of the Adviser, the Sub-advisers and their
affiliates. In the case of the Adviser, some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. The Sub-advisers have adopted similar
restrictions which may differ where appropriate as long as they have similar
intent. These restrictions are a continuation of the basic principle that the
interests of the Funds and their shareholders come first.
DISTRIBUTION CONTRACTS
Distribution Agreement. John Hancock Funds, a wholly owned subsidiary of the
Adviser, serves as the principal underwriter for the Trust in connection with
the continuous offering of the shares of the Funds. John Hancock Funds has the
exclusive right, pursuant to the Distribution Agreement, to purchase shares from
the Funds at net asset value for resale to the separate accounts of insurance
companies at the public offering price.
Each Advisory Agreement, Sub-advisory Agreement and Distribution Agreement 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.
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<PAGE>
Debt securities are valued on the basis of valuations furnished by a principal
market maker or a pricing service, both of which generally utilize electronic
data processing techniques to determine valuations for normal institutional size
trading units of debt securities without exclusive reliance upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National Market
issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the last
available bid price.
Short-term debt instruments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of any security may be determined in good faith in accordance with
procedures approved by the Trustees.
Money Market Fund utilizes the amortized cost valuation method of valuing
portfolio instruments in the absence of extraordinary or unusual circumstances.
Under the amortized cost method, assets are valued by constantly amortizing over
the remaining life of an instrument the difference between the principal amount
due at maturity and the cost of the instrument to the Fund. The Trustees will
from time to time review the extent of any deviation of the net asset value, as
determined on the basis of the amortized cost method, from net asset value as it
would be determined on the basis of available market quotations. If any
deviation occurs which may result in unfairness either to new investors or
existing shareholders, the Trustees will take such actions as they deem
appropriate to eliminate or reduce such unfairness to the extent reasonably
practicable. These actions may include selling portfolio instruments prior to
maturity to realize gains or losses or to shorten the Fund's average portfolio
maturity, withholding dividends, splitting, combining or otherwise
recapitalizing outstanding shares or utilizing available market quotations to
determine net asset value per share.
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars by the Funds' custodian
based on London currency exchange quotations as of 5:00 p.m., London time (12:00
noon, New York time) on the date of any determination of a Fund's NAV. If
quotations are not readily available, or the value has been materially affected
by events occurring after the closing of a foreign market, assets are valued by
a method that the Trustees believe accurately reflects fair value.
The NAV for each Fund is determined each business day at the close of regular
trading on the New York Stock Exchange (typically 4:00 p.m. Eastern Time) by
dividing the Fund's net assets by the number of its shares outstanding. On any
day an international market is closed and the New York Stock Exchange is open,
any foreign securities will be valued at the prior day's close with the current
day's exchange rate. Trading of foreign securities may take place on Saturdays
and U.S. business holidays on which a Fund's NAV is not calculated.
Consequently, a Fund's portfolio securities may trade and the NAV of that Fund's
shares may be significantly affected on days when a shareholder has no access to
that Fund.
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.
50
<PAGE>
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 Prospectus under the caption "Organization and
Management of the Funds." In the event of liquidation of a Fund, shareholders
are entitled to share pro rata in the net assets of the Fund available for
distribution to such shareholders. Shares of a Fund are freely transferable and
have no preemptive, subscription or conversion rights.
In accordance with the provisions of the Declaration of Trust, the Trustees have
initially determined that shares entitle their holders to one vote per share on
any matter on which such shares are entitled to vote. The Trustees may determine
in the future, without the vote or consent of shareholders, that each dollar of
net asset value (number of shares owned times net asset value per share) will be
entitled to one vote on any matter on which such shares are entitled to vote.
The rights, if any, of Variable Contract holders to vote the shares of a Fund
are governed by the relevant Variable Contract. For information on these voting
rights, see the Prospectus describing the Variable Contract.
Unless otherwise required by the 1940 Act or the Declaration of Trust, each Fund
has no intention of holding annual meetings of shareholders. Fund shareholders
may remove a Trustee by the affirmative vote of at least two-thirds of the
Trust's outstanding shares and the Trustees shall promptly call a meeting for
such purpose when requested to do so in writing by the record holders of not
less than 10% of the outstanding shares of the Trust. Shareholders may, under
certain circumstances, communicate with other shareholders in connection with
requesting a special meeting of shareholders. However, at any time that less
than a majority of the Trustees holding office were elected by the shareholders,
the Trustees will call a special meeting of shareholders for the purpose of
electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Trust. However, 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' Prospectus 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
51
<PAGE>
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
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.
52
<PAGE>
Qualification of a Fund for treatment as a regulated investment company under
the Code requires, among other things, that (a) at least 90% of a Fund's annual
gross income, without being offset for losses from the sale or other disposition
of stock or securities or other transactions, be derived from interest,
dividends, payments with respect to securities loans and gains from the sale or
other disposition of stock or securities or foreign currencies, or other income
(including but not limited to gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies; (b) each Fund distributes to its shareholders for each taxable year
(in compliance with certain timing requirements) as dividends at least 90% of
the sum of its taxable and tax-exempt net investment income, the excess of net
short-term capital gain over net long-term capital loss earned in each year and
any other net income (except for the excess, if any, of net long-term capital
gain over net short-term capital loss, which need not be distributed in order
for the Fund to qualify as a regulated investment company but is taxed to the
Fund if it is not distributed); and (c) each Fund diversifies its assets so
that, at the close of each quarter of its taxable year, (i) at least 50% of the
fair market value of its total (gross) assets is comprised of cash, cash items,
U.S. Government securities, securities of other regulated investment companies
and other securities limited in respect of any one issuer to no more than 5% of
the fair market value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer and (ii) no more than 25% of the fair market
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies) or of two or more issuers controlled by the Fund and engaged in the
same, similar, or related trades or businesses.
Each Fund also must, and intends to, comply with the diversification
requirements imposed by Section 817(h) of the Code and the regulations
thereunder on certain insurance company separate accounts. These requirements,
which are in addition to the diversification requirements imposed on a Fund by
the 1940 Act and Subchapter M of the Code, place certain limitations on assets
of each insurance company separate account used to fund variable contracts and,
because Section 817(h) and those regulations treat the assets of the Fund as
assets of the related separate account, the assets of a Fund that may be
invested in securities of any one, two, three and four issuers. Specifically,
the regulations provide that, except as permitted by the "safe harbor" described
below, as of the end of each calendar quarter or within 30 days thereafter no
more than 55% of the total assets of a Fund may be represented by any one
investment, no more than 70% by any two investments, no more than 80% by any
three investments and no more than 90% by any four investments. For this
purpose, all securities of the same issuer are considered a single investment,
and each U.S. Government agency and instrumentality is considered a separate
issuer. Section 817(h) provides, as a safe harbor, that a separate account will
be treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets is attributable to cash and cash items (including
receivables), U.S. Government securities and securities of other regulated
investment companies. Failure by a Fund to both qualify as a regulated
investment company and satisfy the Section 817(h) requirements would generally
result in treatment of the variable contract holders other than as described in
the applicable variable contract prospectus, including possible current
inclusion in ordinary income of income accrued under the contracts for the
current and all prior taxable years. Under certain circumstances described in
the applicable Treasury regulations, inadvertent failure to satisfy the
applicable diversification requirements may be corrected, but such a correction
would require a payment to the Internal Revenue Service (the "I.R.S.") based on
the tax contract holders would have incurred if they were treated as receiving
the income on the contract for the period during which the diversification
requirements were not satisfied. Any such failure may also result in adverse tax
consequences for the insurance company issuing the contracts. Failure by a Fund
to qualify as a regulated investment company would also subject the Fund to
federal and state income taxation of all of its taxable income and gain, whether
or not distributed to shareholders.
If a Fund acquires stock in certain non-U.S. corporations that receive at least
75% of their annual gross income from passive sources (such as interest,
dividends, certain rents and royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies"), that Fund could be subject to Federal income tax and
additional interest charges on "excess distributions" received from such
53
<PAGE>
companies or gain from the sale of stock in such companies, even if all income
or gain actually received by the Fund is timely distributed to its shareholders.
The Fund would not be able to pass through to its shareholders any credit or
deduction for such a tax. Certain elections may ameliorate these adverse tax
consequences, but any such election could require the applicable Fund to
recognize taxable income or gain without the concurrent receipt of cash. Any
Fund that is permitted to acquire stock in foreign corporations may limit and/or
manage its holdings in passive foreign investment companies to minimize its tax
liability or maximize its return from these investments.
Foreign exchange gains and losses realized by a Fund in connection with certain
transactions involving foreign currency-denominated debt securities, certain
foreign currency futures and options, foreign currency forward contracts,
foreign currencies, or payables or receivables denominated in a foreign currency
are subject to Section 988 of the Code, which generally causes such gains and
losses to be treated as ordinary income and losses and may affect the amount,
timing and character of distributions to shareholders. Any such transactions
that are not directly related to a Fund's investment in stock or securities,
possibly including speculative currency positions or currency derivatives not
used for hedging purposes, and could under future Treasury regulations produce
income not among the types of "qualifying income" from which the Fund must
derive at least 90% of its annual gross income. Income from investments in
commodities, such as gold and certain related derivative instruments, is also
not treated as qualifying income under this test. If the net foreign exchange
loss for a year treated as ordinary loss under Section 988 were to exceed a
Fund's investment company taxable income computed without regard to such loss
but after considering the post-October loss regulations (i.e., all of the Fund's
net income other than any excess of net long-term capital gain over net
short-term capital loss) the resulting overall ordinary loss for such year would
not be deductible by the Fund or its shareholders in future years.
A Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to its investments in foreign securities. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes in
some cases.
For Federal income tax purposes, each Fund is generally permitted to carry
forward a net realized capital loss in any year to offset its own net realized
capital gains, if any, during the eight years following the year of the loss. To
the extent subsequent net realized capital gains are offset by such losses, they
would not result in Federal income tax liability to the applicable Fund and
would not be distributed as such to shareholders. As of December 31, 1999, the
following Funds had capital loss carry forwards which expire in 2004, 2005 and
2006, respectively; Small Cap Growth Fund $ , $ and $ ; Large Cap Growth Fund $
, $ , and $ ; International Fund $ , $ and $ ; Mid Cap Growth Fund $ , $ and $ ;
Sovereign Investors Fund $ , $ and $ and High Yield Bond Fund $ , $ and $ .
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,
54
<PAGE>
how payments received on obligations in default should be allocated between
principal and income, and whether exchanges of debt obligations in a workout
context are taxable. These and other issues will be addressed by any Fund that
may hold such obligations in order to reduce the risk of distributing
insufficient income to preserve its status as a regulated investment company and
seek to avoid becoming subject to Federal income tax.
Limitations imposed by the Code on regulated investment companies like the Funds
may restrict a Fund's ability to enter into futures, options and currency
forward transactions.
Certain options, futures and forward foreign currency transactions undertaken by
a Fund may cause such Fund to recognize gains or losses from marking to market
even though its securities or other positions have not been sold or terminated
and affect the character as long-term or short-term (or, in the case of certain
currency forwards, options and futures, as ordinary income or loss) and timing
of some capital gains and losses realized by the Fund. Also, certain of a Fund's
losses on its transactions involving options, futures and forward foreign
currency contracts and/or offsetting or successor portfolio positions may be
deferred rather than being taken into account currently in calculating the
Fund's taxable income or gains. These transactions may therefore affect the
amount, timing and character of a Fund's distributions to shareholders. Certain
of the applicable tax rules may be modified if the Fund is eligible and chooses
to make one or more of certain tax elections that may be available. The Funds
will take into account the special tax rules (including consideration of
available elections) applicable to options, futures or forward contracts in
order to minimize any potential adverse tax consequences.
The tax rules applicable to dollar rolls, currency swaps and interest rate
swaps, caps, floors and collars may be unclear in some respects, and the Funds
may be required to limit participation in such transactions in order to qualify
as regulated investment companies. Additionally, the Fund may be required to
recognize gain, but not loss, if a swap or other transaction is treated as a
constructive sale of an appreciated financial position in the Fund's portfolio.
The Fund may have to sell portfolio securities under disadvantageous
circumstances to generate cash, or borrow cash, to satisfy these distribution
requirements.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to the Funds and certain aspects of their distributions. The
discussion does not address special tax rules applicable to insurance companies.
Shareholders should consult their own tax advisers as to the Federal, state or
local tax consequences of ownership or redemption of shares of, and receipt of
distributions from, a Fund in their particular circumstances.
The Funds are not subject to Massachusetts corporate excise or franchise taxes.
Provided that each Fund qualifies as a regulated investment company under the
Code, it will also not be required to pay any Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended December 31, 1999, the annualized yield was:
Bond Fund %
Strategic Income Fund %
High Yield Bond Fund %
Yield (except for Money Market Fund). The yield of each Fund (except for Money
Market Fund) is computed by dividing net investment income per share determined
for a 30-day period by the net asset value per share on the last day of the
period, according to the following standard formula:
55
<PAGE>
6
Yield = 2 ( [ ( a - b ) + 1 ] - 1 )
-------
cd
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding
during the period that would be entitled to receive
dividends.
d = the net asset value per share on the last day of the period.
Money Market Fund Yield. For the purposes of calculating yield for the Money
Market Fund, daily income per share consists of interest and discount earned on
the Fund's investments less provision for amortization of premiums and
applicable expenses, divided by the number of shares outstanding, but does not
include realized or unrealized appreciation or depreciation.
If the Fund reports its annualized yield, it will also furnish information as to
the average portfolio maturities of the Fund. It will also report any material
effect of realized gains or losses or unrealized appreciation on dividends which
have been excluded from the computation of yield.
Yield calculations are based on the value of a hypothetical preexisting account
with exactly one share at the beginning of the seven day period. Yield is
computed by determining the net change in the value of the account during the
base period and dividing the net change by the value of the account at the
beginning of the base period to obtain the base period return. Base period is
multiplied by 365/7 and the resulting figure is carried to the nearest 100th of
a percent. Net change in account value during the base period includes dividends
declared on the original share, dividends declared on any shares purchased with
dividends of that share and any account or sales charges that would affect an
account of average size, but excludes any capital changes.
Effective yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical preexisting account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then compounding the base period return by adding 1, raising
the sum to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)365/7]-1
The average annual total return for each Fund for the 1 year period ended
December 31, 1999 and since, the commencement of operations through December 31,
1999 is as follows:
56
<PAGE>
<TABLE>
<CAPTION>
1 year 1 year Commencement of
period ended period ended Operations to
December 31, 1999 December 31, 1998 December 31, 1998*
----------------- ----------------- ------------------
<S> <C> <C> <C>
V.A. International Fund 16.75% 12.20%
V.A. Financial Industries Fund 8.55% 25.76%
V.A. Regional Bank -- -6.43**%
V.A. Small Cap Growth Fund 15.94% 8.20%
V.A. Mid Cap Growth Fund -- 10.35%**
V.A. Large Cap Growth Fund 24.60% 13.22%
V.A. Relative Value Fund -- 21.39%**
V.A. Core Equity Fund 28.42% 30.85%
V.A. Sovereign Investors Fund 16.88% 23.08%
V.A. 500 Index Fund 28.44% 30.24%
V.A. Bond Fund 9.41% 9.96%
V.A. High Yield Bond Fund -- -9.80%**
V.A. Strategic Income Fund 4.92% 9.94%
</TABLE>
* 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.
** Not annualized
Total Return. Each Fund's total return is computed by finding the average annual
compounded rate of return over the indicated period that would equate the
initial amount invested to the ending redeemable value according to the
following formula
n ______
T = \ / ERV/P - 1
P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made at
the beginning of the indicated period.
This calculation assumes that all dividends and distributions are reinvested at
net asset value on the reinvestment dates during the period. The "distribution
rate" is determined by annualizing the result of dividing the declared dividends
of a Fund during the period stated by the net asset value at the end of the
period.
In addition to average annual total returns, a Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period.
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.
57
<PAGE>
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.
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.
58
<PAGE>
To the extent consistent with the foregoing, each Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser or relevant
Sub-adviser of the Fund, and their value and expected contribution to the
performance of the Fund. It is not possible to place a dollar value on
information and services to be received from brokers and dealers, since it is
only supplementary to the research efforts of the Adviser or relevant
Sub-adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser or relevant Sub-adviser. The research
information and statistical assistance furnished by brokers and dealers may
benefit the Life Company or other advisory clients of the Adviser or relevant
Sub-adviser, and conversely, brokerage commissions and spreads paid by other
advisory clients of the Adviser or relevant Sub-adviser may result in research
information and statistical assistance beneficial to the Funds. The Funds will
not make commitments to allocate portfolio transactions on any prescribed basis.
While the Adviser's officers will be primarily responsible for the allocation of
each Fund's brokerage business, the policies and practices of the Adviser in
this regard must be consistent with the foregoing and will at all times be
subject to review by the Trustees. For the year ended December 31, 1997, the
Fund paid broker commissions as follows: International Fund $17,425, Small Cap
Growth Fund $4,501, Large Cap Growth Fund $7,000, Core Equity Fund $1,936,
Sovereign Investors Fund $5,611, 500 Index Fund $0, Bond Fund $0, Strategic
Income Fund $0 and Financial Industries Fund $16.780. For the year ended
December 31, 1998, the Fund paid broker commissions as follows: International
Fund $31,688, Regional Bank Fund $15,933, Mid Cap Growth Fund $4,603, Small Cap
Growth Fund $10,790, Large Cap Growth Fund $28,768, Core Equity Fund $15,467,
Sovereign Investors Fund $34,227, 500 Index Fund $0, Bond Fund $0, Strategic
Income Fund $455, High Yield Bond $ 2,778, Financial Industries Fund $85,961 and
Relative Value Fund $67,087. For the year ended December 31, 1999, the Fund paid
broker commissions as follows: International Fund $ , Regional Bank Fund $ , Mid
Cap Growth Fund $ , Small Cap Growth Fund $ , Large Cap Growth Fund $ , Core
Equity Fund $ , Sovereign Investors Fund $ , 500 Index Fund $ , Bond Fund $ ,
Strategic Income Fund $ , High Yield Bond $ , Financial Industries Fund $ and
Relative Value Fund $ .
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, Large Cap Growth Fund,
Small Cap Growth Fund, Financial Industries Fund, Relative Value Fund,
International Fund, Sovereign Investors, Mid Cap Growth and 500 Index directed
commissions in the amounts of $ , $ , $ , $ , $ , $ , $ , $ and $ ,
respectively, to compensate brokers for research services such as industry,
economics and company reviews and evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of Signator Investors, Inc., a broker-dealer (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.
59
<PAGE>
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.
60
<PAGE>
SHAREHOLDER SERVICING AGENT
John Hancock Servicing Center, P.O. Box 9298, Boston, MA 02205, a division of
the Life Company, is the shareholder servicing agent for the Funds. Currently,
the Funds pay no fee.
CUSTODY OF PORTFOLIO
Portfolio securities of the International Fund, Money Market Fund and 500 Index
Fund are held pursuant to a custodian agreement between the Trust and State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02205.
Portfolio securities of the other Funds are held pursuant to a custodian
agreement between the Trust and Investors Bank & Trust Company, 200 Clarendon
Street, Boston, MA 02117. Under the custodian agreements, the custodians perform
custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
_________, is the independent auditor of the Trust. The financial statements of
the Funds included in the Prospectus and this Statement of Additional
Information have been audited by 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.
61
<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
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,
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
Anne C. Hodsdon Director, Executive Vice President Trustee, President, Chief Investment
101 Huntington Avenue Officer and Chief Operating
Boston, Massachusetts Officer
Robert H. Watts Director, Executive Vice None
John Hancock Place President and Chief Compliance
P.O. Box 111 Officer
Boston, Massachusetts
Osbert M. Hood 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
William C. Fletcher Director None
53 State Street
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 has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Boston, and The Commonwealth of Massachusetts on the 16th day of
February, 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 February 16, 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
- -------------------------
Anne C. Hodsdon
* Trustee
- -------------------------
John A. Moore
* Trustee
- -------------------------
Patti McGill Peterson
* Trustee
- -------------------------
Richard S. Scipione
By: /s/Susan S. Newton February 16, 2000
------------------
Susan S. Newton,
Attorney-in-Fact, under
Powers of Attorney dated
January 1, 1999 and March 17, 1999,
and December 7, 1999 filed herewith.
<PAGE>
John Hancock Capital Series John Hancock Sovereign Bond Fund
John Hancock Declaration Trust John Hancock Special Equities Fund
John Hancock Income Securities Trust John Hancock Strategic Series
John Hancock Investment Trust II John Hancock Tax-Exempt Series Fund
John Hancock Investment Trust III John Hancock World Fund
John Hancock Investors Trust
POWER OF ATTORNEY
-----------------
The undersigned Trustee/Officer of each of the above listed Trusts,
each a Massachusetts business trust, does hereby severally constitute and
appoint Susan S. Newton and James J. STOKOWSKI, and each acting singly, to be my
true, sufficient and lawful attorneys, with full power to each of them, and each
acting singly, to sign for me, in my name and in the capacity indicated below,
any Registration Statement on Form N-1A and any Registration Statement on Form
N-14 to be filed by the Trust under the Investment Company Act of 1940, as
amended (the "1940 Act"), and under the Securities Act of 1933, as amended (the
"1933 Act"), and any and all amendments to said Registration Statements, with
respect to the offering of shares and any and all other documents and papers
relating thereto, and generally to do all such things in my name and on my
behalf in the capacity indicated to enable the Trust to comply with the 1940 Act
and the 1933 Act, and all requirements of the Securities and Exchange Commission
thereunder, hereby ratifying and confirming my signature as it may be signed by
said attorneys or each of them to any such Registration Statements and any and
all amendments thereto.
IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument as
of the 7th day of December, 1999.
/s/Stephen L. Brown /s/William F. Glavin
- ------------------- --------------------
Stephen L. Brown, as Trustee and Chairman William F. Glavin
/s/Maureen R. Ford /s/Anne C. Hodsdon
- ------------------ ------------------
Maureen R. Ford, as Trustee, Anne C. Hodsdon, as Trustee and President
Vice Chairman, Chief Executive Officer
/s/Dennis S. Aronowitz /s/Osbert M. Hood
- ---------------------- -----------------
Dennis S. Aronowitz Osbert M. Hood, as Chief Financial Officer
/s/Richard P. Chapman, Jr. /s/John A. Moore
- -------------------------- ----------------
Richard P. Chapman, Jr. John A. Moore
/s/William J. Cosgrove /s/Patti McGill Peterson
- ---------------------- ------------------------
William J. Cosgrove Patti McGill Peterson
/s/Leland O. Erdahl /s/John W. Pratt
- ------------------- ----------------
Leland O. Erdahl John W. Pratt
/s/Richard A. Farrell /s/Richard S. Scipione
- --------------------- ----------------------
Richard A. Farrell Richard S. Scipione
/s/Gail D. Fosler
- -----------------
Gail D. Fosler
<PAGE>
The Declaration of Trust, a copy of which, together with all amendments
thereto, is on file in the office of the Secretary of State of The Commonwealth
of Massachusetts, provides that no Trustee, officer, employee or agent of the
Trust or any Series thereof shall be subject to any personal liability
whatsoever to any Person, other than to the Trust or its shareholders, in
connection with Trust Property or the affairs of the Trust, save only that
arising from bad faith, willful misfeasance, gross negligence or reckless
disregard of his/her duties with respect to such Person; and all such Persons
shall look solely to the Trust Property, or to the Trust Property of one or more
specific Series of the Trust if the claim arises from the conduct of such
Trustee, officer, employee or agent with respect to only such Series, for
satisfaction of claims of any nature arising in connection with the affairs of
the Trust.
COMMONWEALTH OF MASSACHUSETTS )
)ss
COUNTY OF SUFFOLK )
Then personally appeared the above-named Dennis S. Aronowitz, Stephen
L. Brown, Richard P. Chapman, Jr., William J. Cosgrove, Leland O. Erdahl,
Richard A. Farrell, Maureen L. Ford, Gail D. Fosler, William F. Glavin, Anne C.
Hodsdon, Osbert M. Hood, John A. Moore, Patti McGill Peterson, John W. Pratt,
and Richard S. Scipione, who acknowledged the foregoing instrument to be his or
her free act and deed, before me, this 7th day of December, 1999.
/s/Ann Marie White
------------------
Notary Public
My Commission Expires: 10/20/00
<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.(b) By-Laws. Amended and Restated By-Laws dated December 3, 1996.***
99.(c) Instruments Defining Rights of Securities Holders. See exhibits
99.(a) and 99.(b).
99.(d) Investment Advisory Contracts. Investment Advisory Agreement between
John Hancock V.A. International Fund, John Hancock V.A. Emerging Growth
Fund, John Hancock V.A. Growth Fund, John Hancock V.A. Independence
Equity Fund, John Hancock V.A. Sovereign Investors Fund, John Hancock
V.A. 500 Index Fund, John Hancock V.A. Bond Fund, John Hancock V.A.
Strategic Income Fund and John Hancock V.A. Money Market Fund and John
Hancock Advisers, Inc.**
99.(d).1 Investment Advisory Agreement between John Hancock V.A Financial
Industries Fund dated May 1, 1997.******
99.(d).2 Investment Advisory Agreement between John Hancock V.A Special
Opportunities Fund, John Hancock V.A. Growth and Income Fund and
John Hancock V.A. High Yield Bond Fund and John Hancock Advisers, Inc.
dated January 2, 1998.******
99.(d).3 Investment Advisory Agreement between John Hancock V.A Regional Bank
Fund dated May 1, 1998.******
99.(d).4 Sub-Investment Management Contracts among the Registrant on behalf of
John Hancock V.A. International Fund, John Hancock Advisers, Inc. and
John Hancock Advisers International, Ltd..**
99.(d).5 Sub-Investment Management Contracts among the Registrant on behalf of
John Hancock V.A. Independence Equity Fund, John Hancock Advisers, Inc.
and Independence Investment Associates, Inc.**
99.(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.(e) Underwriting Contracts. Distribution Agreement between John Hancock
Funds, Inc. and the Registrant dated July 22, 1996.***
99.(e).1 Amendment to Distribution Agreement between V.A. Financial Industries
and John Hancock Funds, Inc. dated May 1, 1997.******
99.(e).2 Amendment to Distribution Agreement between V.A. High Yield Bond, V.A.
Growth and Income and V.A. Special Opportunities Funds and John Hancock
Funds, Inc. dated January 2, 1998.******
99.(e).3 Amendment to Distribution Agreement between V.A. Regional Bank Fund and
John Hancock Funds, Inc. dated May 1, 1998.******
99.(f) Bonus or Profit Sharing Contracts. Not Applicable.
<PAGE>
99.(g) Custodian Agreements. Amended and Restated Master Custodian Agreement
between John Hancock Mutual Funds and Investors Bank and Trust Company
dated March 9, 1999.*******
99.(g).1 Amended and Restated Master Custodian Agreement between John Hancock
Mutual Funds and State Street Bank and Trust Company dated
March 9, 1999.*******
99.(h) Other Material Contracts. Amended and Restated Master Transfer Agency
and Service Agreement between John Hancock funds and John Hancock
Signature Services, Inc. dated June 1, 1998.******
99.(h).1 Accounting Services Agreement between John Hancock Advisers, Inc. and
Registrant as of January 1, 1996.******
99.(i) Legal Opinion.*******
99.(j) Other Opinions. Auditors Consent. Not Applicable.
99.(k) Omitted Financial Statements. Not Applicable.
99.(l) Initial Capital Agreements. Not Applicable.
99.(m) Rule 12b-1 Plans. Not Applicable
99.(n) Financial Data Schedule. Not Applicable.
99.(o) Rule 18f-3 Plan. Not Applicable
* Previously filed electronically with Registration Statement file nos.
811-07437 and 33-64465 on November 20, 1995, accession number
0000950146-95-000740.
** Previously filed electronically with Registration Statement and/or
pre-effective amendment no.1 file nos. 811-07437 and 33-64465 on
August 7, 1996, accession number 0001010521-96-000139.
*** Previously filed electronically with Registration Statement and/or
post-effective amendment no. 3. file nos. 811-07437 and 33-64465 on
February 14, 1997, accession number 0001010521-97-000212-.
**** Previously filed electronically with Registration Statement and/or
post-effective amendment no.4. file nos. 811-07437 and 33-64465 on
April 29, 1997 accession number 0001010521-97-000278.
***** Previously filed electronically with Registration Statement and/or
post-effective amendment no.6. file nos. 811-07437 and 33-64465 on
October 1, 1997 accession number 0001010521-97-000403.
****** 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.
+ Filed herewith.
</TABLE>
JOHN HANCOCK DECLARATION TRUST
Instrument Fixing the Number of Trustees and
Appointing Individual to Fill Vacancy
The undersigned, constituting a majority of the Trustees of John
Hancock Declaration Trust, a Massachusetts business trust (the "Trust), acting
pursuant to Section 2.12 of the Declaration of Trust dated November 15, 1995, as
amended from time to time (the "Declaration of Trust"), do hereby:
(a) fix the number of Trustees at sixteen (16);
(b) appoint Maureen R. Ford to fill the vacancy thereby created, such
appointment to become effective upon Ms. Ford accepting in writing such
appointment and agreeing to be bound by the terms of the Declaration of
Trust.
IN WITNESS WHEREOF, the undersigned have executed this instrument this
7th day of December, 1999.
/s/Dennis S. Aronowitz /s/Gail D. Fosler
- ---------------------- -----------------
Dennis S. Aronowitz Gail D. Fosler
/s/Edward J. Boudreau, Jr. /s/William F. Glavin
- -------------------------- --------------------
Edward J. Boudreau, Jr. William F. Glavin
/s/Anne C. Hodsdon
- -------------------------- ------------------
Stephen L. Brown Anne C. Hodsdon
/s/Richard P. Chapman, Jr. /s/John A. Moore
- -------------------------- ----------------
Richard P. Chapman, Jr. John A. Moore
/s/William J. Cosgrove /s/Patti McGill Peterson
- ---------------------- ------------------------
William J. Cosgrove Patti McGill Peterson
- ------------------------ ------------------------
Douglas M. Costle John W. Pratt
/s/Richard S. Scipione
- ------------------------ ----------------------
Leland O. Erdahl Richard S. Scipione
/s/Richard A. Farrell
- ---------------------
Richard A. Farrell
<PAGE>
The Declaration of Trust, a copy of which, together with all amendments
thereto, is on file in the office of the Secretary of State of The Commonwealth
of Massachusetts, provides that no Trustee, officer, employee or agent of the
Trust or any Series thereof shall be subject to any personal liability
whatsoever to any Person, other than to the Trust or its shareholders, in
connection with Trust Property or the affairs of the Trust, save only that
arising from bad faith, willful misfeasance, gross negligence or reckless
disregard of his/her duties with respect to such Person; and all such Persons
shall look solely to the Trust Property, or to the Trust Property of one or more
specific Series of the Trust if the claim arises from the conduct of such
Trustee, officer, employee or agent with respect to only such Series, for
satisfaction of claims of any nature arising in connection with the affairs of
the Trust.
COMMONWEALTH OF MASSACHUSETTS )
)ss
COUNTY OF SUFFOLK )
Then personally appeared the above-named Dennis S. Aronowitz, Edward J.
Boudreau, Jr., Richard P. Chapman, Jr., William J. Cosgrove, Richard A. Farrell,
Gail D. Fosler, William F. Glavin, Anne C. Hodsdon, John A. Moore, Patti McGill
Peterson, and Richard S. Scipione, who acknowledged the foregoing instrument to
be his or her free act and deed, before me, this 7th day of December, 1999.
/s/Ann Marie White
------------------
Notary Public
My Commission Expires: 10/20/00
JOHN HANCOCK DECLARATION TRUST
John Hancock V.A. International Fund
Sub-Investment Management Contract
Dated January 1, 2000
<PAGE>
JOHN HANCOCK ADVISERS, INC.
101 Huntington Avenue
Boston, Massachusetts 02199
JOHN HANCOCK DECLARATION TRUST
- John Hancock V.A. International Fund
101 Huntington Avenue
Boston, Massachusetts 02199
INDOCAM INTERNATIONAL INVESTMENT SERVICES
90 Boulevard Pasteur
Paris, FRANCE 75015
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 fourteen series of shares, representing
interests in John Hancock V.A. Bond Fund, John Hancock V.A. Large Cap Growth
Fund, John Hancock V.A. Small Cap Growth Fund, John Hancock V.A. 500 Index Fund,
John Hancock V.A. Financial Industries Fund, John Hancock V.A. Large Cap Value
Fund, John Hancock V.A. High Yield Bond Fund, John Hancock V.A. Core Equity
Fund, John Hancock V.A. International Fund, John Hancock V.A. Money Market Fund,
John Hancock V.A. Regional Bank Fund, John Hancock V.A. Sovereign Investors
Fund, John Hancock V.A. Mid Cap Growth Fund, and John Hancock V.A. Strategic
Income 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. International Fund (the "Fund"), and to
provide certain other services, under the terms and conditions provided in the
Investment Management Contract, dated August 29, 1996, between the Trust, the
Fund and the Adviser (the "Investment Management Contract").
The Adviser and the Trustees have selected Indocam International
Investment Services (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:
<PAGE>
1. Delivery of Documents. The Trust has furnished the Sub-Adviser with
copies, properly certified or otherwise authenticated, of each of the following:
(a) Declaration of Trust of the 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;
(g) the Fund's current Registration Statement, including the Fund's
Prospectus and Statement of Additional Information; and
(h) the Fund's Code of Ethics.
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.
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;
2
<PAGE>
(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;
(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
<PAGE>
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;
(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 quarterly, in arrears, a fee at
the annual rate of 55% of the investment advisory fee received by the Adviser.
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 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 quarter. The 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.
4
<PAGE>
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, understood that officers,
directors and employees of the Sub-Adviser or its 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.
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. Name of the Trust and the Fund. The Trust and the Fund may use the name "John
Hancock" or any name or names derived from or similar to the names "John Hancock
Advisers, Inc." or "John Hancock Mutual Life Insurance Company" only for so long
as this Agreement remains in effect. At such time as this Agreement shall no
longer be in effect, the Trust and the Fund will (to the extent that they
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. International Fund
through permission of John Hancock Mutual Life Insurance Company, a
Massachusetts insurance company, and agrees that John Hancock Mutual Life
Insurance Company reserves to itself and any successor to its business the right
to grant the nonexclusive right to use the name "John Hancock" or any similar
name or names to any other corporation or entity, including but not limited to
any investment company of which John Hancock Mutual Life Insurance Company or
any subsidiary or affiliate thereof shall be the investment adviser.
5
<PAGE>
10. 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.
11. Duration and Termination of this Agreement. This Agreement shall remain in
force until June 30, 2001, 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.
12. 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.
6
<PAGE>
13. Governing Law. This Agreement shall be governed and construed in accordance
with the laws of the Commonwealth of Massachusetts.
14. 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.
15. 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 DECLARATION TRUST
on behalf of John Hancock V.A. International Fund
By: /s/Anne C. Hodsdon
------------------
President
The foregoing contract
is hereby agreed to as
of the date hereof.
JOHN HANCOCK ADVISERS, INC.
By: /s/Anne C. Hodsdon
------------------
President
INDOCAM INTERNATIONAL INVESTMENT SERVICES
By: /s/Jean-Claude Kalfenbach
-------------------------
Name:
Title:
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7
