N-30D 1 dc.txt JOHN HANCOCK DECLARATION TRUST ANNUAL REPORT John Hancock Declaration Trust 12.31.01 [A 2" x 1" John Hancock (Signature)/John Hancock Funds logo at bottom left center of page. A tag line below reads "JOHN HANCOCK FUNDS."] TABLE OF CONTENTS SECTOR FUNDS V.A. Financial Industries Fund Chairman's Message 3 Portfolio Manager Commentary 4 Fund's Investments 6 Financial Statements 7 Notes to Financial Statements 9 V.A. Technology Fund Chairman's Message 3 Portfolio Manager Commentary 4 Fund's Investments 6 Financial Statements 8 Notes to Financial Statements 10 EQUITY FUNDS V.A. Relative Value Fund Chairman's Message 3 Portfolio Manager Commentary 4 Fund's Investments 6 Financial Statements 7 Notes to Financial Statements 9 V.A. Sovereign Investors Fund Chairman's Message 3 Portfolio Manager Commentary 4 Fund's Investments 6 Financial Statements 8 Notes to Financial Statements 10 INCOME FUND V.A. Strategic Income Fund Chairman's Message 3 Portfolio Manager Commentary 4 Fund's Investments 6 Financial Statements 12 Notes to Financial Statements 14 ANNUAL REPORT John Hancock V.A. Financial Industries Fund A series of John Hancock Declaration Trust 12.31.01 [A 2" x 1" John Hancock (Signature)/John Hancock Funds logo at bottom left center of page. A tag line below reads "JOHN HANCOCK FUNDS."] FOR YOUR INFORMATION TRUSTEES Dennis S. Aronowitz* Richard P. Chapman, Jr. William J. Cosgrove* John M. DeCiccio Richard A. Farrell Maureen R. Ford Gail D. Fosler William F. Glavin Dr. John A. Moore Patti McGill Peterson John W. Pratt* *Members of the Audit Committee OFFICERS Maureen R. Ford Chairman, President and Chief Executive Officer William L. Braman Executive Vice President and Chief Investment Officer Richard A. Brown Senior Vice President and Chief Financial Officer Susan S. Newton Senior Vice President and Secretary William H. King Vice President and Treasurer Thomas H. Connors Vice President and Compliance Officer CUSTODIAN The Bank of New York One Wall Street New York, New York 10286 TRANSFER AGENT John Hancock Signature Services, Inc. 529 Main Street Charlestown, Massachusetts 02129 INVESTMENT ADVISER John Hancock Advisers, LLC 101 Huntington Avenue Boston, Massachusetts 02199-7603 INSURANCE PRODUCTS ISSUER John Hancock Life Insurance Company, John Hancock Variable Life Insurance Company* 200 Clarendon Street Boston, Massachusetts 02117 *Not licensed in New York FUND DISTRIBUTOR John Hancock Funds, LLC 101 Huntington Avenue Boston, Massachusetts 02199-7603 LEGAL COUNSEL Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109-1803 INDEPENDENT AUDITORS Ernst & Young LLP 200 Clarendon Street Boston, Massachusetts 02116-5072 HOW TO CONTACT US On the Internet www.jhancock.com By regular mail John Hancock Signature Services, Inc. 529 Main Street Charlestown, Massachusetts 02129 Customer service representatives 1-800-225-5291 24-hour automated information 1-800-338-8080 WELCOME [A photo of Maureen R. Ford, Chairman and CEO, flush right next to first paragraph.] Dear Shareholders, The U.S. stock market produced double-digit losses for the second year in a row in 2001 -- the first back-to-back down years for stocks since the 1973-74 bear market. The economy slipped into recession, wreaking havoc with corporate profits, and the tragic events of September 11 further rattled investors. Even a strong fourth quarter rally was not enough to lift the major indexes into positive territory. The Standard & Poor's 500 Index finished the year losing 11.88%, including reinvested dividends, and the Dow Jones Industrial Average lost 5.42%. The tech-heavy Nasdaq Composite Index fell 21.05% -- tamer than 2000's loss, thanks to a late-year rebound in the beleaguered technology and telecommunications sectors. Stock mutual fund investors didn't find many places to hide, and 83% of U.S. stock funds posted negative returns in 2001, with the average stock fund falling 10.89%, according to Lipper, Inc. In stark contrast, bonds beat stocks for the second straight year and produced positive results, buoyed by falling interest rates and investors' search for safety. These last two years couldn't have provided a more vivid example of the importance of being well diversified, since a portfolio concentrated solely in stocks would have fallen more in the last two years than one combining investments in both stocks and bonds. Two disappointing years of stock performance could also be a reason to re-evaluate with your investment professional whether you are still on track to meet your long-term financial goals. It's possible that downsized results, and modified expectations, could foster some changes in your investing strategies. And now is certainly a good time to perform this review, given the increased opportunities for retirement and college savings offered in President Bush's major tax-cut legislation enacted in June. With the market's fourth quarter rally, and the growing expectation that the economy will rebound sometime in 2002, we begin the year on a positive note, confident in the resilience of the economy, the financial markets and the nation. Sincerely, /S/ MAUREEN R. FORD Maureen R. Ford, Chairman and Chief Executive Officer Table of contents Managers' Report page 4 A Look at Performance page 5 Growth of $10,000 page 5 Financial Statements page 6 BY JAMES K. SCHMIDT, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND THOMAS C. GOGGINS AND THOMAS M. FINUCANE, PORTFOLIO MANAGERS John Hancock V.A. Financial Industries Fund MANAGERS' REPORT [A photo of James K. Schmidt, Team leader, flush right next to first paragraph.] On December 14, 2001, John Hancock V.A. Regional Bank Fund merged into John Hancock V.A. Financial Industries Fund. The stock market took a beating over the last 12 months, shaken by a rapidly declining economy and a steady stream of earnings disappointments. Even the aggressive string of 11 interest-rate cuts by the Federal Reserve throughout 2001 was not enough to spark an economic recovery, compounded by the events of September 11 that pushed the already fragile economy over the edge into a recession. A strong fourth quarter stock-market rally helped narrow the losses, but still the major indexes wound up losing ground, with the Standard & Poor's 500 Index returning -11.88% for the year ending December 31, 2001. Financial stocks held up better than the market as a whole, but performance varied widely within the sector. Financial companies whose businesses were connected to the equity market -- including brokers, asset managers and banks engaged in investment banking and trading -- were hard hit for most of the year by the market's downturn. They ended on a positive note, however, rebounding along with the market in the fourth quarter. Financial institutions that had more sensitivity to falling interest rates turned in excellent results, since their earnings held up better than most market segments and they were undervalued as the year began. FUND PERFORMANCE For the year ended December 31, 2001, John Hancock V.A. Financial Industries Fund posted a total return of -17.51% at net asset value, compared with the -4.14% return of the average open-end financial services fund and the -21.29% return of the average variable annuity specialty/miscellaneous fund, according to Lipper, Inc. LARGE CAPS, BROKERS, MARKET-SENSITIVE BANKS HURT Several factors accounted for the Fund's relative underperformance. In a year that favored small stocks over large and stocks with cheaper valuations, the Fund owned a significant number of the larger-cap financial companies with the highest price-to-earnings ratios that got particularly hard hit, including top holdings Citigroup, American Express and American International Group (AIG). Our emphasis on brokerage stocks such as Charles Schwab, Merrill Lynch, Morgan Stanley Dean Witter and J.P. Morgan Chase also hurt, as the declining market caused a sharp slowdown in trading, IPO, merger and acquisitions activity. Although we cut our brokerage stake midway through the year, we did not do so aggressively, because we still believed, incorrectly as it turned out, that the Fed's rate cuts would spark a rebound in the equity and capital markets in the second half of 2001. For now, we are keeping our emphasis on the institutional side of the brokerage business, holding stocks like Goldman Sachs, because the trading volume there has remained high, and because we believe the investment banking business will come back more quickly than the retail side. [Table at bottom right hand column entitled "Top five stock holdings." The first listing is Fifth Third Bancorp 5.0%, the second is Citigroup 4.9%, the third American International Group 4.6%, the fourth Fannie Mae 4.6% and the fifth Wells Fargo 4.4%. A note below the table reads "As a percentage of net assets on 12-31-01."] Our exposure to market-sensitive banks involved in higher-growth, fee-based businesses -- such as brokerage, investment management and mutual fund processing - also hurt performance. These included The Bank of New York, Northern Trust and State Street. We also were underweighted in the more rate sensitive savings and loans and smaller banks, so we missed much of the rally in those stocks, as their fundamentals improved with falling rates and investors liked their cheap valuations. INSURANCE: FOCUS ON PROPERTY AND CASUALTY Insurance stocks produced mixed results during the year. Life insurance companies suffered in the turbulent equity market environment, which took a toll on variable annuity sales and life company earnings. On the other hand, property and casualty companies benefited from an improved pricing environment. After a brief downturn following the events of September 11, the property and casualty stocks rebounded as it became clear that the industry was equipped to handle the cost of September 11 claims. In this group, we are emphasizing the highest quality, most financially stable names, since we believe they will benefit from a "flight to quality." FINANCE COMPANIES BOOSTED, THEN CUT In the first half of the year, we boosted our stake in finance companies that benefit from falling rates, including Fannie Mae and Household International, and they were among our top performers early on. But as the year progressed and the economy continued to sour, we took profits and scaled back our holdings, especially in credit card companies, which could be harmed by an economy in recession. As a result, we missed the substantial decline of former holdings Providian and NextCard. We kept only dominant credit-card players, such as MBNA, and also held on to Fannie Mae, which has strong earnings visibility. A LOOK AHEAD We think that the recession we experienced in the latter part of 2001 was ending around year end. The economy should gather strength during 2002, providing the impetus for better stock market performance and better earnings comparisons. Although problem loans will continue to increase at some banks, we have minimized our exposure by owning banks that have been conservative lenders and that have sound loan review policies. It is a good time to look at market-sensitive companies since these companies should recover as the market environment improves. This commentary reflects the views of the portfolio managers through the end of the Fund's period discussed in this report. Of course, the managers' views are subject to change as market and other conditions warrant. Sector investing is subject to greater risks than the market as a whole. A LOOK AT PERFORMANCE For the year ended 12-31-01 Cumulative total returns One year -17.51% Since inception (4-30-97) 55.68% Average annual total returns One year -17.51% Since inception (4-30-97) 9.94% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. GROWTH OF $10,000 John Hancock V.A. Financial Industries Fund 4-30-97 -- 12-31-01 Line chart with the heading John Hancock V.A. Financial Industries Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Financial Industries Fund on April 30, 1997 and is equal to $15,568 as of December 31, 2001. The second line represents the Standard & Poor's 500 Index and is equal to $15,280 as of December 31, 2001. The chart to the left shows how much a $10,000 investment in the John Hancock V.A. Financial Industries Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. FINANCIAL STATEMENTS Fund's Investments Securities owned by the Fund on 12-31-01
SHARES ISSUER VALUE COMMON STOCKS 97.27% $86,489,139 (Cost $84,511,640) Banks -- Foreign 2.50% $2,219,117 26,000 Credit Suisse Group (Switzerland) 1,108,715 22,000 UBS AG (Switzerland) 1,110,402 Banks -- Midwest 5.09% 4,527,065 72,342 Fifth Third Bancorp 4,436,735 1,500 Northern Trust Corp. 90,330 Banks -- Money Center 11.29% 10,036,640 57,500 Bank of America Corp. 3,619,625 87,000 Citigroup, Inc. 4,391,760 44,500 J.P. Morgan Chase & Co. 1,617,575 13,000 Wachovia Corp. 407,680 Banks -- Northeast 4.28% 3,801,611 3,812 Chittenden Corp. 105,211 1,500 M & T Bank Corp. 109,275 65,500 State Street Corp. 3,422,375 5,000 Valley National Bancorp. 164,750 Banks -- Southeast 3.54% 3,146,574 80,900 BB&T Corp. 2,921,299 3,000 National Commerce Financial Corp. 75,900 2,500 SouthTrust Corp. 61,675 2,000 Whitney Holding Corp. 87,700 Banks -- Southwest 0.37% 332,000 2,500 BancFirst Corp. 86,750 5,000 Southwest Bancorp. of Texas, Inc.* 151,350 7,500 Sterling Bancshares, Inc. 93,900 Banks -- Superregional 18.07% 16,074,119 68,000 Bank of New York Co., Inc. (The) 2,774,400 11,500 Bank One Corp. 449,075 1,000 Comerica, Inc. 57,300 2,000 Charter One Financial, Inc. 54,300 78,036 FleetBoston Financial Corp. 2,848,314 76,500 Mellon Financial Corp. 2,877,930 36,000 PNC Financial Services Group. 2,023,200 6,500 SunTrust Banks, Inc. 407,550 17,500 U.S. Bancorp 366,275 10,000 Washington Mutual, Inc. 327,000 89,500 Wells Fargo & Co. 3,888,775 Banks -- West 0.24% 210,320 4,000 Zions Bancorp. 210,320 Broker Services 11.54% 10,266,936 34,700 Goldman Sachs Group, Inc. 3,218,425 47,000 Legg Mason, Inc. 2,349,060 45,500 Merrill Lynch & Co., Inc. 2,371,460 6,750 Morgan Stanley Dean Witter & Co. 377,595 126,076 Schwab (Charles) Corp. (The) 1,950,396 Diversified Operations 5.04% 4,480,590 65,500 General Electric Co. 2,625,240 31,500 Tyco International Ltd. 1,855,350 Finance -- Consumer Loans 5.78% 5,137,480 50,000 Household International, Inc. 2,897,000 63,650 MBNA Corp. 2,240,480 Finance -- Investment Management 2.09% 1,860,559 129,000 Amvescap Plc (United Kingdom) 1,860,559 Finance -- Services Misc 3.57% 3,176,187 70,900 American Express Co. 2,530,421 19,700 Concord EFS, Inc.* 645,766 Insurance -- Brokers 3.60% 3,202,010 29,800 Marsh & McLennan Cos., Inc. 3,202,010 Insurance -- Diversified 2.41% 2,146,250 850 Berkshire Hathaway Inc.* 2,146,250 Insurance -- Multi Line 1.83% 1,624,749 3,000 Muenchener Rueckversicherungs- Gesellschaft AG (Germany) 814,709 6,660 Prudential Financial, Inc.* 221,045 50,000 Riunione Adriatica di Sicurta SpA (Italy) 588,995 Insurance -- Property & Casualty 7.90% 7,020,532 51,704 American International Group, Inc. 4,105,298 48,000 St. Paul Cos., Inc. (The) 2,110,560 8,000 Swiss Re (Switzerland) 804,674 Mortgage & Real Estate Services 8.13% 7,226,400 51,000 Fannie Mae 4,054,500 48,500 Freddie Mac 3,171,900 ISSUER, DESCRIPTION INTEREST PAR VALUE MATURITY DATE RATE (000S OMITTED) VALUE SHORT-TERM INVESTMENTS 2.61% $2,323,000 (Cost $2,323,000) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. -- Dated 12-31-01, due 01-02-02 (Secured by U.S. Treasury Bonds 9.875% due 11-15-15 and 8.750% due 05-15-17, U.S. Treasury Notes 5.625% due 12-31-02 and 6.250% due 02-15-03, U.S. Treasury Inflation Index Bond 3.375% due 04-25-32, U.S. Treasury Inflation Index Note 3.375% due 01-15-07) 1.70% $2,323 2,323,000 TOTAL INVESTMENTS 99.88% $88,812,139 OTHER ASSETS AND LIABILITIES, NET 0.12% $108,129 TOTAL NET ASSETS 100.00% $88,920,268 * Non-income producing security. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. PORTFOLIO CONCENTRATION VALUE AS A % COUNTRY DIVERSIFICATION OF FUND NET ASSETS Germany 0.92% Italy 0.66 Switzerland 3.40 United Kingdom 2.09 United States 92.81 Total investments 99.88% See notes to financial statements.
Statement of Assets and Liabilities 12-31-01 ASSETS Investments at value (cost $86,834,640) $88,812,139 Cash 77,598 Receivable for shares sold 855 Dividends and interest receivable 108,844 Other assets 11,845 Total assets 89,011,281 LIABILITIES Payable for shares repurchased 855 Payable to affiliates 57,125 Other payables and accrued expenses 33,033 Total liabilities 91,013 NET ASSETS Capital paid-in 91,445,182 Accumulated net realized loss on investments and foreign currency transactions (4,475,389) Net unrealized appreciation of investments 1,977,499 Distributions in excess of net investment income (27,024) Net assets $88,920,268 NET ASSET VALUE PER SHARE (Based on 6,108,954 shares of beneficial interest outstanding -- unlimited number of shares authorized with no par value) $14.56 See notes to financial statements. Statement of Operations For the year ended 12-31-01 INVESTMENT INCOME Dividends (net of foreign withholding taxes of $18,332) $1,105,679 Interest (including securities lending income of $930) 82,229 Total investment income 1,187,908 EXPENSES Investment management fee 592,963 Custodian fee 23,962 Auditing fee 18,500 Accounting and legal services fee 15,125 Trustee's fee 3,794 Printing 3,698 Miscellaneous 2,692 Legal fee 1,059 Registration and filing fee 279 Total expenses 662,072 Net investment income 525,836 REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on Investments 2,939,147 Foreign currency transactions (55,906) Change in unrealized appreciation (depreciation) on Investments (17,546,329) Translation of assets and liabilities in foreign currencies 139 Net realized and unrealized loss (14,662,949) Decrease in net assets from operations ($14,137,113) See notes to financial statements. Statement of Changes in Net Assets YEAR YEAR ENDED ENDED 12-31-00 12-31-01 INCREASE (DECREASE) IN NET ASSETS From operations Net investment income $194,288 $525,836 Net realized gain 696,899 2,883,241 Change in net unrealized appreciation (depreciation) 12,306,484 (17,546,190) Increase (decrease) in net assets resulting from operations 13,197,671 (14,137,113) Distributions to shareholders From net investment income (169,614) (499,736) From net realized gain -- (2,739,375) (169,614) (3,239,111) From fund share transactions 9,026,099 34,929,896 NET ASSETS Beginning of period 49,312,440 71,366,596 End of period 1 $71,366,596 $88,920,268 1 Includes undistributed net investment income of $2,898 and distributions in excess of net investment income of $27,024, respectively. See notes to financial statements.
Financial Highlights 12-31-97 1 12-31-98 12-31-99 12-31-00 12-31-01 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $10.00 $13.44 $14.45 $14.46 $18.34 Net investment income 2 0.11 0.18 0.11 0.06 (0.11) Net realized and unrealized gain (loss) on investments 3.39 0.97 0.06 3.87 (3.11) Total from investment operations 3.50 1.15 0.17 3.93 (3.22) Less distributions: From net investment income (0.05) (0.14) (0.10) (0.05) (0.09) From net realized gain (0.01) -- 3 (0.05) -- (0.47) Tax return of capital -- -- (0.01) -- -- (0.06) (0.14) (0.16) (0.05) (0.56) Net asset value, end of period $13.44 $14.45 $14.46 $18.34 $14.56 Total return 4 (%) 35.05 5,6 8.55 1.23 27.16 (17.51) RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $18 $55 $49 $71 $89 Ratio of expenses to average net assets % 1.05 7 0.92 0.90 0.90 0.89 Ratio of adjusted expenses to average net assets 8 % 1.39 7 -- -- -- -- Ratio of net investment income to average net assets % 1.32 7 1.25 0.77 0.36 0.71 Portfolio turnover % 11 38 72 41 97 9 1 Began operations on 4-30-97. 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 Total return would have been lower had certain expenses not been reduced during the period shown. 7 Annualized. 8 Does not take into consideration expense reductions during the period shown. 9 Excludes merger activity.
See notes to financial statements. NOTES TO FINANCIAL STATEMENTS NOTE A Organization John Hancock V. A. Financial Industries Fund (the "Fund") is a diversified series of John Hancock Declaration Trust (the "Trust"), an open-end investment management company registered under the Investment Company Act of 1940. The Trust, organized as a Massachusetts business trust in 1995, consists of five different series at December 31, 2001. The Trustees may authorize the creation of additional series from time to time to satisfy various investment objectives. An insurance company issuing a Variable Contract that participates in the Trust will vote shares of the Fund held by the insurance company's separate accounts as required by law. In accordance with current law and interpretations thereof, participating insurance companies are required to request voting instructions from policy owners and must vote shares of the Fund in proportion to the voting instructions received. The investment objective of the Fund is to seek capital appreciation. The Fund has one class of shares with equal rights as to voting, redemption, dividends and liquidation. Significant accounting policies of the Fund are as follows: Valuation of investments Securities in the Fund's portfolio are valued on the basis of market quotations, valuations provided by independent pricing services or, if quotations are not readily available, or the value has been materially affected by events occurring after the closing of a foreign market, at fair value as determined in good faith in accordance with procedures approved by the Trustees. Short-term debt investments maturing within 60 days are valued at amortized cost, which approximates market value. All portfolio transactions initially expressed in terms of foreign currencies have been translated into U.S. dollars as described in "Foreign currency translation" below. Joint repurchase agreement Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Fund, along with other registered investment companies having a management contract with John Hancock Advisers, LLC (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, LLC, may participate in a joint repurchase agreement transaction. Aggregate cash balances are invested in one or more large repurchase agreements, whose underlying securities are obligations of the U.S. government and/or its agencies. The Fund's custodian bank receives delivery of the underlying securities for the joint account on the Fund's behalf. The Adviser is responsible for ensuring that the agreement is fully collateralized at all times. Foreign currency translation All assets or liabilities initially expressed in terms of foreign currencies are translated into U.S. dollars based on London currency exchange quotations as of 5:00 P.M., London time, on the date of any determination of the net asset value of the Fund. Transactions affecting statement of operations accounts and net realized gain (loss) on investments are translated at the rates prevailing at the dates of the transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Reported net realized foreign exchange gains or losses arise from sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities, other than investments in securities, resulting from changes in the exchange rate. Investment transactions Investment transactions are recorded as of the date of purchase, sale or maturity. Net realized gains and losses on sales of investments are determined on the identified cost basis. Capital gains realized on some foreign securities are subject to foreign taxes, which are accrued as applicable. Expenses The majority of the expenses are directly identifiable to an individual fund. Expenses that are not readily identifiable to a specific fund will be allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative sizes of the funds. Bank borrowings The Fund is permitted to have bank borrowings for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Fund has entered into a syndicated line of credit agreement with various banks. This agreement enables the Fund to participate with other funds managed by the Adviser in an unsecured line of credit with banks, which permit borrowings up to $500 million, collectively. Interest is charged to each fund, based on its borrowing. In addition, a commitment fee is charged to each fund based on the average daily unused portion of the line of credit and is allocated among the participating funds. The Fund had no borrowing activity under the line of credit during the year ended December 31, 2001. Securities lending The Fund may lend securities to certain qualified brokers who pay the Fund negotiated lender fees. These fees are included in interest income. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay of the loaned securities in recovery or even loss of rights in the collateral, should the borrower of the securities fail financially. At December 31, 2001, the Fund loaned securities having a market value of $1,781,700 collateralized by securities in the amount of $1,794,161. Federal income taxes The Fund qualifies as a "regulated investment company" by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income which is distributed to shareholders. Therefore, no federal income tax provision is required. For federal income tax purposes, the Fund has $1,143,472 of a capital loss carryforward available, to the extent provided by regulations, to offset future net realized capital gains. To the extent that such carryforward is used by the Fund, no capital gain distributions will be made. The Fund's entire carryforward expires December 31, 2008. Additionally, net capital losses of $3,109,292 are attributable to security transactions incurred after October 31, 2001 and are treated as arising on the first day (January 1, 2002) of the Fund's net taxable year. Dividends, interest and distributions Dividend income on investment securities is recorded on the ex-dividend date or, in the case of some foreign securities, on the date thereafter when the Fund identifies the dividend. Interest income on investment securities is recorded on the accrual basis. Foreign income may be subject to foreign withholding taxes, which are accrued as applicable. The Fund records distributions to shareholders from net investment income and realized gains on the ex-dividend date. Such distributions are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. Use of estimates The preparation of these financial statements, in accordance with accounting principles generally accepted in the United States of America, incorporates estimates made by management in determining the reported amount of assets, liabilities, revenues and expenses of the Fund. Actual results could differ from these estimates. NOTE B Management fee and transactions with affiliates and others The Fund has an investment management contract with the Adviser. Under the investment management contract, the Fund pays a monthly management fee to the Adviser at an annual rate of 0.80% of the Fund's average daily net asset value. The Adviser has agreed to limit the Fund's expenses, excluding the management fee, to 0.25% of the Fund's average daily net assets, at least until April 30, 2002. There was no expense reduction for the year ended December 31, 2001. The Adviser reserves the right to terminate this limitation in the future. The Fund has an agreement with the Adviser to perform necessary tax, accounting and legal services for the Fund. The compensation for the year was at an annual rate of 0.02% of the average net assets of the Fund. Ms. Maureen R. Ford and Mr. John M. DeCiccio are directors and/or officers of the Adviser and/or its affiliates, as well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees may elect to defer for tax purposes their receipt of this compensation under the John Hancock Group of Funds Deferred Compensation Plan. The Fund makes investments into other John Hancock funds, as applicable, to cover its liability for the deferred compensation. Investments to cover the Fund's deferred compensation liability are recorded on the Fund's books as an other asset. The deferred compensation liability and the related other asset are always equal and are marked to market on a periodic basis to reflect any income earned by the investment as well as any unrealized gains or losses. The Deferred Compensation Plan investments had no impact on the operations of the Fund. NOTE C Fund share transactions This listing illustrates the number of shares sold, reinvested, and repurchased during the last two periods, along with the corresponding dollar value. The Fund has an unlimited number of shares authorized with no par value. YEAR ENDED 12-31-00 YEAR ENDED 12-31-01 SHARES AMOUNT SHARES AMOUNT Shares sold 1,252,923 $20,739,283 1,981,835 $42,063,445 Issued in reorganization -- -- 675,457 9,888,426 Distributions reinvested 9,578 169,614 225,879 3,239,111 Repurchased (779,897) (11,882,798) (666,362) (20,261,086) NET INCREASE 482,604 $9,026,099 2,216,809 $34,929,896 NOTE D Investment transactions Purchases and proceeds from sales of securities, other than short-term securities and obligations of the U.S. government, during the year ended December 31, 2001, aggregated $100,231,937 and $70,034,804, respectively. The cost of investments owned at December 31, 2001, including short-term investments, for federal income tax purposes was $87,057,265. Gross unrealized appreciation and depreciation of investments aggregated $5,251,402 and $3,496,528, respectively, resulting in net unrealized appreciation of $1,754,874. The difference between book basis and tax basis net unrealized appreciation of investments is attributable primarily to the tax deferral of losses on wash sales. NOTE E Reclassification of accounts During the year ended December 31, 2001, the Fund has reclassified amounts to reflect an increase in accumulated net realized loss on investments of $1,136,865, an increase in distributions in excess of net investment income of $56,022 and an increase in capital paid-in of $1,192,887. This represents the amount necessary to report these balances on a tax basis, excluding certain temporary difference, as of December 31, 2001. Additional adjustments may be needed in subsequent reporting periods. These reclassifications, which have no impact on the net asset value of the Fund, are primarily attributable to the treatment of net operating losses in the computation of distributable income and capital gains under federal tax rules versus accounting principles generally accepted in the United States of America. The calculation of net investment income in the financial highlights excludes these adjustments. NOTE F On December 5, 2001, the shareholders of John Hancock V. A. Regional Bank Fund ("V.A. Regional Bank Fund") approved a plan of reorganization between V. A. Regional Bank Fund and the Fund providing for the transfer of substantially all of the assets and liabilities of the V. A. Regional Bank Fund to the Fund in exchange solely for shares of beneficial interest in the Fund. The acquisition of the V. A. Regional Bank Fund was accounted for as a tax-free exchange of 675,457 shares of the Fund for the net assets of V. A. Regional Bank Fund, which amounted to $9,888,426, including $523,082 of unrealized appreciation, after the close of business on December 14, 2001. Report of Ernst & Young LLP, Independent Auditors To the contract owners and trustees of John Hancock Declaration Trust, We have audited the accompanying statement of assets and liabilities of the John Hancock V.A. Financial Industries Fund (the "Fund"), one of the portfolios constituting John Hancock Declaration Trust, including the schedule of investments, as of December 31, 2001, and the related statement of the Fund's operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2001, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the John Hancock V.A. Financial Industries Fund of the John Hancock Declaration Trust at December 31, 2001, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States. /S/ ERNST & YOUNG LLP Boston, Massachusetts February 8, 2002 Tax Information UNAUDITED For federal income tax purposes, the following information is furnished with respect to the distributions of the Fund for its fiscal year ended December 31, 2001. The Fund has designated distributions to shareholders of $2,739,375 as a long-term capital gain dividend. These amounts were reported on the 2001 U.S. Treasury Department Form 1099-DIV. With respect to the ordinary dividends paid by the Fund for the fiscal year ended December 31, 2001, 100% of the dividends qualify for the corporate dividends-received deduction. TRUSTEES & OFFICERS This chart provides information about the Trustees and Officers who oversee your John Hancock fund. Officers elected by the Trustees manage the day-to-day operations of the Fund and execute policies formulated by the Trustees. INDEPENDENT TRUSTEES
NUMBER OF NAME, AGE JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER TRUSTEE FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE 2 BY TRUSTEE Dennis S. Aronowitz 1, Born: 1931 1997 30 Professor of Law, Emeritus, Boston University School of Law (as of 1996); Director, Brookline Bancorp. Richard P. Chapman, Jr., Born: 1935 1997 30 Chairman, President, and Chief Executive Officer, Brookline Bancorp. (lending) (since 1972); Trustee, Northeastern University (education); Chairman and Director, Lumber Insurance Co. (insurance) (until 2000); Chairman and Director, Northeast Retirement Services, Inc. (retirement administration) (since 1998). William J. Cosgrove 1, Born: 1933 1997 30 Vice President, Senior Banker and Senior Credit Officer, Citibank, N.A. (retired 1991); Executive Vice President, Citadel Group Representatives, Inc.; Director, Hudson City Bancorp; Trustee, Scholarship Fund for Inner City Children (since 1986). Richard A. Farrell 1, Born: 1932 1997 30 President, Farrell, Healer & Co., Inc. (venture capital management firm) (since 1980) and General Partner of the Venture Capital Fund of NE (since 1980); prior to 1980, headed the venture capital group at Bank of Boston Corporation. Gail D. Fosler, Born: 1947 1997 30 Senior Vice President and Chief Economist, The Conference Board (non-profit economic and business research) (since 1989); Director, Unisys Corp. (since 1993); Director, H.B. Fuller Company (since 1992) and DBS Holdings (Singapore) (banking and financial services) (since 1999); Director, National Bureau of Economic Research (academic) (since 1989); Director, Baxter International (medical health care) (since 2001). William F. Glavin, Born: 1932 1997 30 President Emeritus, Babson College (as of 1998); Vice Chairman, Xerox Corporation (until 1989); Director, Reebok, Inc. (since 1994) and Inco Ltd. John A. Moore, Born: 1939 1997 36 President and Chief Executive Officer, Institute for Evaluating Health Risks, (nonprofit institution) (until 2001); Senior Scientist, Sciences International (health research) (since 1998); Principal, Hollyhouse (consulting) (since 2000); Director, CIIT (nonprofit research) (since 2002). Patti McGill Peterson, Born: 1943 1997 36 Executive Director, Council for International Exchange of Scholars (since 1998), Vice President, Institute of International Education (since January 1998); Senior Fellow, Cornell Institute of Public Affairs, Cornell University (until 1997); President Emerita of Wells College and St. Lawrence University; Director, Niagara Mohawk Power Corporation (electric utility). John W. Pratt 1, Born: 1931 1997 30 Professor of Business Administration Emeritus, Harvard University Graduate School of Business Administration (as of 1998). INTERESTED TRUSTEES 3 NAME, AGE NUMBER OF POSITION(S) HELD WITH FUND JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER TRUSTEE FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE 2 BY TRUSTEE John M. DeCiccio, Born: 1948 2001 66 Trustee Executive Vice President and Chief Investment Officer, John Hancock Financial Services, Inc.; Director, Executive Vice President and Chief Investment Officer, John Hancock Life Insurance Company; Chairman of the Committee of Finance of John Hancock Life Insurance Company; Director, John Hancock Subsidiaries, LLC, Hancock Natural Resource Group, Independence Investment LLC, Independence Fixed Income LLC, John Hancock Advisers, LLC (the "Adviser") and The Berkeley Financial Group, LLC ("The Berkeley Group"), John Hancock Funds, LLC ("John Hancock Funds"), Massachusetts Business Development Corporation; Director, John Hancock Insurance Agency, Inc. ("Insurance Agency, Inc.") (until 1999) and John Hancock Signature Services, Inc. ("Signature Services") (until 1997). Maureen R. Ford, Born: 1955 2000 66 Trustee, Chairman, President and Chief Executive Officer, John Hancock Financial Services, Inc., John Hancock Life Insurance Company; Chairman, Director, President and Chief Executive Officer, the Advisers and The Berkeley Group; Chairman, Director and Chief Executive Officer, John Hancock Funds, Chairman, Director and President, Insurance Agency, Inc.; Chairman, Director and Chief Executive Officer, Sovereign Asset Management Corporation ("SAMCorp."); Director, Independence Investment LLC, Independence Fixed Income LLC and Signature Services; Senior Vice President, MassMutual Insurance Co. (until 1999); Senior Vice President, Connecticut Mutual Insurance Co. (until 1996). PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES NAME, AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) AND OTHER OFFICER DIRECTORSHIPS DURING PAST 5 YEARS SINCE William L. Braman, Born: 1953 2000 Executive Vice President and Chief Investment Officer Executive Vice President and Chief Investment Officer, the Adviser and each of the John Hancock funds; Director, SAMCorp., Executive Vice President and Chief Investment Officer, Barring Asset Management, London UK (until 2000). Richard A. Brown, Born: 1949 2000 Senior Vice President and Chief Financial Officer Senior Vice President, Chief Financial Officer and Treasurer, the Adviser, John Hancock Funds, and The Berkeley Group; Second Vice President and Senior Associate Controller, Corporate Tax Department, John Hancock Financial Services, Inc. (until 2001). Thomas H. Connors, Born: 1959 1997 Vice President and Compliance Officer Vice President and Compliance Officer, the Adviser and each of the John Hancock funds; Vice President, John Hancock Funds. William H. King, Born: 1952 1997 Vice President and Treasurer Vice President and Assistant Treasurer, the Adviser; Vice President and Treasurer of each of the John Hancock funds; Assistant Treasurer of each of the John Hancock funds (until 2001). Susan S. Newton, Born: 1950 1997 Senior Vice President, Secretary and Chief Legal Officer Senior Vice President, Secretary and Chief Legal Officer, SAMCorp., the Adviser and each of the John Hancock funds, John Hancock Funds and The Berkeley Group; Vice President, Signature Services (until 2000); Director, Senior Vice President and Secretary, NM Capital. The business address for all Trustees and Officers is 101 Huntington Avenue, Boston, Massachusetts, 02199. The Statement of Additional Information of the Fund includes additional information about members of the board of Trustees of the Fund and is available, without charge, upon request, by calling 1-800-426-5523. 1 Member of Audit Committee. 2 Each Trustee serves until resignation, retirement age or until his or her successor is elected. 3 Interested Trustee holds positions with the Fund's investment adviser, underwriter and certain other affiliates.
JOHN HANCOCK FUNDS DECLARATION TRUST ANNUAL REPORT [LOGO] John Hancock [Rings] World Wide Sponsor John Hancock Funds, LLC MEMBER NASD 101 Huntington Avenue Boston, MA 02199-7603 1-800-225-5291 1-800-554-6713 TDD 1-800-338-8080 EASI-Line www.jhfunds.com Mutual Funds Institutional Services Private Managed Accounts Retirement Plans This report is for the information of the shareholders of the John Hancock V.A. Financial Industries Fund. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE 8280A 12/01 2/02 ANNUAL REPORT John Hancock V.A. Technology Fund A series of John Hancock Declaration Trust 12.31.01 [A 2" x 1" John Hancock (Signature)/John Hancock Funds logo at bottom left center of page. A tag line below reads "JOHN HANCOCK FUNDS."] FOR YOUR INFORMATION TRUSTEES Dennis S. Aronowitz* Richard P. Chapman, Jr. William J. Cosgrove* John M. DeCiccio Richard A. Farrell Maureen R. Ford Gail D. Fosler William F. Glavin Dr. John A. Moore Patti McGill Peterson John W. Pratt* *Members of the Audit Committee OFFICERS Maureen R. Ford Chairman, President and Chief Executive Officer William L. Braman Executive Vice President and Chief Investment Officer Richard A. Brown Senior Vice President and Chief Financial Officer Susan S. Newton Senior Vice President and Secretary William H. King Vice President and Treasurer Thomas H. Connors Vice President and Compliance Officer CUSTODIAN The Bank of New York One Wall Street New York, New York 10286 TRANSFER AGENT John Hancock Signature Services, Inc. 529 Main Street Charlestown, Massachusetts 02129 INVESTMENT ADVISER John Hancock Advisers, LLC 101 Huntington Avenue Boston, Massachusetts 02199-7603 SUB-INVESTMENT ADVISER American Fund Advisors, Inc. 1415 Kellum Place Garden City, New York 11530 INSURANCE PRODUCTS ISSUER John Hancock Life Insurance Company, John Hancock Variable Life Insurance Company* 200 Clarendon Street Boston, Massachusetts 02117 *Not licensed in New York FUND DISTRIBUTOR John Hancock Funds, LLC 101 Huntington Avenue Boston, Massachusetts 02199-7603 LEGAL COUNSEL Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109-1803 INDEPENDENT AUDITORS Ernst & Young LLP 200 Clarendon Street Boston, Massachusetts 02116-5072 HOW TO CONTACT US On the Internet www.jhancock.com By regular mail John Hancock Signature Services, Inc. 529 Main Street Charlestown, Massachusetts 02129 Customer service representatives 1-800-225-5291 24-hour automated information 1-800-338-8080 WELCOME [A photo of Maureen R. Ford, Chairman and CEO, flush right next to first paragraph.] Dear Shareholders, The U.S. stock market produced double-digit losses for the second year in a row in 2001 -- the first back-to-back down years for stocks since the 1973-74 bear market. The economy slipped into recession, wreaking havoc with corporate profits, and the tragic events of September 11 further rattled investors. Even a strong fourth quarter rally was not enough to lift the major indexes into positive territory. The Standard & Poor's 500 Index finished the year losing 11.88%, including reinvested dividends, and the Dow Jones Industrial Average lost 5.42%. The tech-heavy Nasdaq Composite Index fell 21.05% -- tamer than 2000's loss, thanks to a late-year rebound in the beleaguered technology and telecommunications sectors. Stock mutual fund investors didn't find many places to hide, and 83% of U.S. stock funds posted negative returns in 2001, with the average stock fund falling 10.89%, according to Lipper, Inc. In stark contrast, bonds beat stocks for the second straight year and produced positive results, buoyed by falling interest rates and investors' search for safety. These last two years couldn't have provided a more vivid example of the importance of being well diversified, since a portfolio concentrated solely in stocks would have fallen more in the last two years than one combining investments in both stocks and bonds. Two disappointing years of stock performance could also be a reason to re-evaluate with your investment professional whether you are still on track to meet your long-term financial goals. It's possible that downsized results, and modified expectations, could foster some changes in your investing strategies. And now is certainly a good time to perform this review, given the increased opportunities for retirement and college savings offered in President Bush's major tax-cut legislation enacted in June. With the market's fourth quarter rally, and the growing expectation that the economy will rebound sometime in 2002, we begin the year on a positive note, confident in the resilience of the economy, the financial markets and the nation. Sincerely, /S/ MAUREEN R. FORD Maureen R. Ford, Chairman and Chief Executive Officer Table of contents Managers' Report page 4 A Look at Performance page 5 Growth of $10,000 page 5 Financial Statements page 6 John Hancock V.A. Technology Fund BY BARRY J. GORDON, MARC H. KLEE, CFA, AND ALAN J. LOEWENSTEIN, CFA, PORTFOLIO MANAGERS MANAGERS' REPORT [Photos of Barry Gordon, Marc Klee and Alan Loewenstein, flush right next to first paragraph.] While there is no way to sugarcoat the extremely disappointing performance of technology stocks during the year ended December 31, 2001, some signs of optimism began to emerge towards the end of the period. As investors began to look ahead to an economic recovery in 2002, the tech market rebounded sharply in the final two months of 2001. The driving force behind the sell-off in tech stocks was a mounting worry over earnings. Already troubled by overcapacity and anemic demand, tech stocks tumbled as a weak economy ate away at tech company earnings. The Standard & Poor's technology sector's earnings dropped 40% in the first quarter of 2001 compared with the same quarter the previous year, followed by a second quarter year-over-year decline of 64%. The third quarter proved even tougher for tech stocks. Business, which actually appeared as if it had already bottomed in August, came to a complete standstill after the tragic events of September 11. Many companies and individuals put their technology spending on hold, causing tech companies -- which typically book 40% to 60% of their revenues during the third month of the quarter -- to post earnings that declined more than 70% compared to the same quarter a year earlier. Fortunately, the sector's prospects improved in the final quarter of 2001. Bargain-hunting investors returned to technology stocks after a handful of the sector's most influential companies confirmed that they were on track to meeting earnings forecasts made in August, while other companies noted that they were at or near the cycle's bottom. FUND PERFORMANCE EXPLAINED For the 12 months ended December 31, 2001, John Hancock V.A. Technology Fund posted a total return of -44.06% at net asset value, compared with the -37.55% return of the average open-end science and technology fund and the -21.29% return of the average variable annuity specialty/miscellaneous fund, according to Lipper, Inc. FUND MAINTAINS BULLISH POSTURE Throughout much of the past 12 months, we maintained a bullish posture -- with heavy weightings in economically sensitive software and semiconductor stocks -- because we believed the economy was poised for recovery and that tech stocks would rally in anticipation of a healthier economy. That posture was rewarded in the summer, and again at the end of the year, but on balance it held back our relative performance. HIGH PRICE-TO-EARNINGS STOCKS HIT HARDEST High-growth, high-multiple tech stock holdings fared particularly poorly throughout most of the year, as investors shifted to safer havens in the midst of the economic and global market malaise. Quality software companies such as BEA Systems, i2 Technologies, Mercury Interactive and Rational Software suffered large stock price declines when hopes of an economic recovery diminished. Storage companies such as EMC and Network Appliance also sold off as business demand plummeted. [Table at bottom right hand column entitled "Top five holdings." The first listing is Flextronics International 3.4%, the second is Micron Technology 3.3%, the third AOL Time Warner 3.0%, the fourth Dell Computer 3.0% and the fifth Nokia 2.8%. A note below the table reads "As a percentage of net assets on 12-31-01."] Semiconductor and semiconductor capital equipment stocks -- which accounted for about 30% of the Fund's investments -- held up better than other areas until September 11. But after the terrorist attacks, the combination of waning consumer confidence and a delayed economic recovery caused a broad sell-off in chip makers and equipment companies, including Taiwan Semiconductor Manufacturing, Micron Technology, Integrated Device Technology and Cypress Semiconductor. Later, the semiconductor sector rebounded in anticipation of a 2002 recovery, pulling some of those same stocks into positive territory for the year. INDIVIDUAL STANDOUTS A number of holdings were able to buck the inhospitable market environment. KLA-Tencor posted strong gains thanks to increased awareness of the importance of its products for the next generation of semiconductor technologies, while Networks Associates, the maker of anti-virus software, benefited from increased demand for their products and a corporate reorganization. Blue chip stalwart Microsoft also ended the period with positive returns. OUTLOOK We expect that the economy will stage a recovery beginning late in the first half of 2002 and that tech stocks will enjoy a comeback in anticipation. We don't expect, however, that the recovery will be as sharp or as deep as the downturn has been. Certainly, the building blocks for recovery are in place. Interest rates are at their lowest levels in nearly 40 years, tax rates have been lowered and oil prices continue to drop. We look forward to better tech company earnings both this year and next, although stock price volatility is likely to continue. Tech companies' efforts to reduce costs, coupled with the improved top line due to a better economy, are almost certain to result in better profit margins. Along with improved business fundamentals, many tech stocks should benefit from easier year-over-year earnings comparisons in 2002. And with tech stocks at such low valuations, we expect to see an increase in company stock buybacks, merger and acquisition activity and improved interest from institutional investors, all of which should help bolster stock prices. This commentary reflects the views of the portfolio managers through the end of the Fund's period discussed in this report. Of course, the managers' views are subject to change as market and other conditions warrant. Sector investing is subject to greater risks than the market as a whole. A LOOK AT PERFORMANCE For the year ended 12-31-01 Cumulative total returns One year -44.06% Since inception (5-1-00) -58.92% Average annual total returns One year -44.06% Since inception (5-1-00) -41.33% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. GROWTH OF $10,000 John Hancock V.A. Technology Fund 5-1-00 -- 12-31-01 Line chart with the heading John Hancock V.A. Technology Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Standard & Poor's 500 Index and is equal to $8,074 as of December 31, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Technology Fund on May 1, 2000 and is equal to $4,108 as of December 31, 2001. The chart to the left shows how much a $10,000 investment in the John Hancock V.A. Technology Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. FINANCIAL STATEMENTS Fund's Investments Securities owned by the Fund on 12-31-01
SHARES ISSUER VALUE COMMON STOCKS 92.45% $20,273,973 (Cost $29,262,438) Aerospace/Aircraft Equipment 0.74% $161,575 2,500 United Technologies Corp. 161,575 Computer -- Graphics 1.90% 416,480 19,000 Cadence Design Systems, Inc.* 416,480 Computer -- Internet Security 2.84% 623,770 5,000 Networks Associates, Inc.* 129,250 13,000 VeriSign, Inc.* 494,520 Computer -- Internet Services 4.61% 1,010,350 20,000 Amazon.com, Inc.* 216,400 24,000 EarthLink, Inc.* 292,080 14,000 Infospace, Inc.* 28,700 18,000 Inktomi Corp.* 120,780 2,600 Lawson Software, Inc.* 40,950 20,000 ScreamingMedia, Inc.* 44,000 10,000 TIBCO Software, Inc.* 149,300 22,000 Vignette Corp.* 118,140 Computer -- Local Networks 3.27% 717,045 31,500 Cisco Systems, Inc.* 570,465 12,000 Lucent Technologies, Inc. 75,480 18,000 Redback Networks, Inc.* 71,100 Computer -- Memory Devices 6.88% 1,508,453 25,000 EMC Corp.* 336,000 14,000 Emulex Corp.* 553,140 12,500 VERITAS Software Corp.* 560,375 9,400 Western Digital Corp.* 58,938 Computer -- Micro/Macro 4.43% 972,120 24,000 Dell Computer Corp.* 652,320 26,000 Sun Microsystems, Inc.* 319,800 Computer -- Services 2.87% 630,330 7,000 Electronic Data Systems Corp. 479,850 12,000 Unisys Corp.* 150,480 Computer -- Software 14.57% 3,193,960 26,000 BEA Systems, Inc.* 400,400 20,000 Citrix Systems, Inc.* 453,200 21,000 i2 Technologies, Inc.* 165,900 15,500 Mercury Interactive Corp.* 526,690 5,000 Microsoft Corp.* 331,250 32,000 Parametric Technology Corp.* 249,920 26,000 Rational Software Corp.* 507,000 20,000 Siebel Systems, Inc.* 559,600 Electronics -- Components Misc. 10.72% 2,351,530 31,000 Flextronics International Ltd.* (Singapore) 743,690 11,000 KLA-Tencor Corp.* 545,160 23,000 Micron Technology, Inc.* 713,000 31,000 Solectron Corp.* 349,680 Electronics -- Semiconductor Components 24.60% 5,392,470 14,000 Altera Corp.* 297,080 22,000 Amkor Technology, Inc.* 352,660 13,000 Analog Devices, Inc.* 577,070 14,000 Applied Materials, Inc.* 561,400 19,000 Applied Micro Circuits Corp.* 215,080 13,000 ASM Lithography Holding N.V.* (Netherlands) 221,650 20,500 Atmel Corp.* 151,085 10,000 Conexant Systems, Inc.* 143,600 27,000 Cypress Semiconductor Corp.* 538,110 18,500 Integrated Device Technology, Inc.* 491,915 7,500 Intel Corp. 235,875 16,500 MKS Instruments, Inc.* 445,995 35,000 Taiwan Semiconductor Manufacturing Co. Ltd.* American Depositary Receipt (ADR) (Taiwan) 600,950 20,000 Texas Instruments, Inc. 560,000 Fiber Optics 4.82% 1,058,040 20,000 Aeroflex, Inc.* 378,600 12,000 CIENA Corp.* 171,720 32,000 Finisar Corp.* 325,440 21,000 JDS Uniphase Corp.* 182,280 Media -- Cable TV 3.00% 658,050 20,500 AOL Time Warner, Inc.* 658,050 Telecom -- Equipment 5.85% 1,283,590 22,000 Ericsson (L.M.) Telephone Co. (Class B) (ADR) (Sweden) 114,840 25,000 Nokia Corp. (ADR) (Finland) 613,250 11,000 QUALCOMM, Inc.* 555,500 Telecom -- Services 1.35% 296,210 13,000 Metromedia Fiber Network, Inc. (Class A)* 5,720 9,000 Primus Telecommunications Group, Inc. * 5,850 12,000 Research in Motion Ltd.* (Canada) 284,640 RIGHTS 0.00% $0 (Cost $0) 5,200 Seagate Technology, Inc.* 0 ISSUER, DESCRIPTION, INTEREST PAR VALUE MATURITY DATE RATE (000s OMITTED) VALUE SHORT-TERM INVESTMENTS 8.88% $1,947,000 (Cost $1,947,000) Joint Repurchase Agreement 8.88% Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. -- Dated 12-31-01, due 01-02-02 (Secured by U.S. Treasury Bonds 9.875% due 11-15-15 and 8.750% due 05-15-17, U.S. Treasury Notes 5.625% due 12-31-02 and 6.250% due 02-15-03, U.S. Treasury Inflation Index Bond 3.375% due 04-15-32, U.S. Treasury Inflation Index Note 3.375% due 01-15-07) 1.70% $1,947 1,947,000 TOTAL INVESTMENTS 101.33% $22,220,973 OTHER ASSETS AND LIABILITIES, NET (1.33%) ($291,638) TOTAL NET ASSETS 100.00% $21,929,335 * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund.
See notes to financial statements. PORTFOLIO CONCENTRATION December 31, 2001 (unaudited) VALUE AS A % COUNTRY DIVERSIFICATION OF FUND NET ASSETS Canada 1.30% Finland 2.80 Netherlands 1.01 Singapore 3.39 Sweden 0.52 Taiwan 2.74 United States 89.57 Total investments 101.33% See notes to financial statements. Statement of Assets and Liabilities 12-31-01 ASSETS Investments at value (cost $31,209,438) $22,220,973 Cash 50,044 Interest receivable 92 Other assets 111 Total assets 22,271,220 LIABILITIES Payable for investments purchased 285,161 Payable for written call options (premium received $12,570) 4,255 Payable to affiliates 22,837 Other payables and accrued expenses 29,632 Total liabilities 341,885 NET ASSETS Capital paid-in 35,947,504 Accumulated net realized loss on investments and written options (5,037,973) Net unrealized depreciation of investments and written options (8,980,150) Accumulated net investment loss (46) Net assets $21,929,335 NET ASSET VALUE PER SHARE (Based on 5,348,140 shares of beneficial interest outstanding -- unlimited number of shares authorized with no par value) $4.10 See notes to financial statements. Statement of Operations For the year ended 12-31-01 INVESTMENT INCOME Interest $92,408 Dividends (net of foreign withholding taxes of $1,455) 7,350 Securities lending income 5,818 Total investment income 105,576 EXPENSES Investment management fee 141,663 Custodian fee 24,405 Auditing fee 12,000 Printing 4,209 Accounting and legal services fee 3,619 Legal fee 3,243 Trustee's fee 790 Miscellaneous 506 Registration and filing fee 112 Total expenses 190,547 Less expense reductions (4,640) Net expenses 185,907 Net investment loss (80,331) REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on Investments (4,844,645) Written options 267 Change in unrealized appreciation (depreciation) on Investments (5,099,373) Written options 8,315 Net realized and unrealized loss (9,935,436) Decrease in net assets from operations ($10,015,767) See notes to financial statements. Statement of Changes in Net Assets PERIOD YEAR ENDED ENDED 12-31-00 1 12-31-01 INCREASE (DECREASE) IN NET ASSETS From operations Net investment income (loss) $25,753 ($80,331) Net realized loss (193,630) (4,844,378) Change in net unrealized appreciation (depreciation) (3,889,092) (5,091,058) Decrease in net assets resulting from operations (4,056,969) (10,015,767) Distributions to shareholders From net investment income (24,458) (1,272) From fund share transactions 18,123,471 17,904,330 NET ASSETS Beginning of period -- 14,042,044 End of period 2 $14,042,044 $21,929,335 1 Began operations on 5-1-00. 2 Includes distributions in excess of net investment income of $21,494 and accumulated net investment loss of $46, respectively. See notes to financial statements. Financial Highlights 12-31-00 1 12-31-01 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $10.00 $7.33 Net investment income (loss) 2 0.03 (0.02) Net realized and unrealized loss on investments (2.69) (3.21) Total from investment operations (2.66) (3.23) Less distributions: From net investment income (0.01) -- 3 Net asset value, end of period $7.33 $4.10 Total return 4,5 (%) (26.56) 6 (44.06) RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $14 $22 Ratio of expenses to average net assets % 1.05 7 1.05 Ratio of adjusted expenses to average net assets 8 % 1.99 7 1.08 Ratio of net investment income (loss) to average net assets % 0.62 7 (0.45) Portfolio turnover % 75 29 1 Began operations on 5-1-00. 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 Total returns would have been lower had certain expenses not been reduced during the periods shown. 6 Not annualized. 7 Annualized. 8 Does not take into consideration expense reductions during the periods shown. See notes to financial statements. NOTES TO FINANCIAL STATEMENTS NOTE A Organization John Hancock V.A. Technology Fund (the "Fund") is a diversified series of John Hancock Declaration Trust, (the "Trust") an open-end investment management company registered under the Investment Company Act of 1940. The Trust, organized as a Massachusetts business trust in 1995, consists of five different series at December 31, 2001. The Trustees may authorize the creation of additional series from time to time to satisfy various investment objectives. An insurance company issuing a Variable Contract that participates in the Trust will vote shares of the Fund held by the insurance company's separate accounts as required by law. In accordance with current law and interpretations thereof, participating insurance companies are required to request voting instructions from policy owners and must vote shares of the Fund in proportion to the voting instructions received. The investment objective of the Fund is to seek long-term growth of capital. The Fund has one class of shares with equal rights as to voting, redemption, dividends and liquidation. Significant accounting policies of the Fund are as follows: Valuation of investments Securities in the Fund's portfolio are valued on the basis of market quotations, valuations provided by independent pricing services or at fair value as determined in good faith in accordance with procedures approved by the Trustees. Short-term debt investments maturing within 60 days are valued at amortized cost, which approximates market value. Joint repurchase agreement Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Fund, along with other registered investment companies having a management contract with John Hancock Advisers, LLC (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, LLC, may participate in a joint repurchase agreement transaction. Aggregate cash balances are invested in one or more large repurchase agreements, whose underlying securities are obligations of the U.S. government and/or its agencies. The Fund's custodian bank receives delivery of the underlying securities for the joint account on the Fund's behalf. The Adviser is responsible for ensuring that the agreement is fully collateralized at all times. Investment transactions Investment transactions are recorded as of the date of purchase, sale or maturity. Net realized gains and losses on sales of investments are determined on the identified cost basis. Expenses The majority of the expenses are directly identifiable to an individual fund. Expenses that are not readily identifiable to a specific fund will be allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative sizes of the funds. Bank borrowings The Fund is permitted to have bank borrowings for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Fund has entered into a syndicated line of credit agreement with various banks. This agreement enables the Fund to participate with other funds managed by the Adviser in an unsecured line of credit with banks, which permit borrowings up to $500 million, collectively. Interest is charged to each fund, based on its borrowing. In addition, a commitment fee is charged to each fund based on the average daily unused portion of the line of credit and is allocated among the participating funds. The Fund had no borrowing activity under the line of credit during the year ended December 31, 2001. Options The Fund may enter into option contracts. Listed options will be valued at the last quoted sales price on the exchange on which they are primarily traded. Over-the-counter options are valued at the mean between the last bid and asked prices. Upon the writing of a call or put option, an amount equal to the premium received by the Fund will be included in the Statement of Assets and Liabilities as an asset and corresponding liability. The amount of the liability will be subsequently marked to market to reflect the current market value of the written option. The Fund may use option contracts to manage its exposure to the price volatility of financial instruments. Writing puts and buying calls will tend to increase the Fund's exposure to the underlying instrument, and buying puts and writing calls will tend to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. The maximum exposure to loss for any purchased options will be limited to the premium initially paid for the option. In all other cases, the face (or "notional") amount of each contract at value will reflect the maximum exposure of the Fund in these contracts, but the actual exposure will be limited to the change in value of the contract over the period the contract remains open. Risks may also arise if counterparties do not perform under the contracts' terms ("credit risk") or if the Fund is unable to offset a contract with a counterparty on a timely basis ("liquidity risk"). Exchange-traded options have minimal credit risk as the exchanges act as counterparties to each transaction, and only present liquidity risk in highly unusual market conditions. To minimize credit and liquidity risks in over-the-counter option contracts, the Fund will continuously monitor the creditworthiness of all its counterparties. At any particular time, except for purchased options, market or credit risk may involve amounts in excess of those reflected in the Fund's year-end Statements of Assets and Liabilities. Written options for the year ended December 31, 2001 were as follows: NUMBER OF OPTIONS CONTRACTS PREMIUMS RECEIVED -------------------------------------------------------------------- Outstanding, beginning of period -- -- Written 370 $137,318 Closed (105) (30,904) Expired (195) (93,844) Outstanding, end of period 70 $12,570 Summary of written options outstanding on December 31, 2001: NAME OF NUMBER OF EXERCISE EXPIRATION ISSUER CONTRACTS PRICE DATE VALUE -------------------------------------------------------------------- CALLS Amazon 11 $10.00 January 21, 2002 $1,705 Amazon 19 12.50 January 21, 2002 1,600 Altera Corp. 40 25.00 January 21, 2002 950 Total 70 $4,255 Securities lending The Fund may lend securities to certain qualified brokers who pay the Fund negotiated lender fees. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay of the loaned securities in recovery or even loss of rights in the collateral, should the borrower of the securities fail financially. At December 31, 2001, the Fund loaned securities having a market value of $485,280 collateralized by securities in the amount of $492,455. Federal income taxes The Fund qualifies as a "regulated investment company" by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income which is distributed to shareholders. Therefore, no federal income tax provision is required. For federal income tax purposes, the Fund has $3,722,037 of a capital loss carryforward available, to the extent provided by regulations, to offset future net realized capital gains. If such carryforwards are used by the Fund, no capital gain distribution will be made. The Fund's carryforwards expire as follows: December 31, 2008 -- $14,000, and December 31, 2009 -- $3,708,037. Additionally, net capital losses of $1,234,639 are attributable to security transactions incurred after October 31, 2001 and are treated as arising on the first day (January 1, 2002) of the Fund's next taxable year. Dividends, interest and distributions Dividend income on investment securities is recorded on the ex-dividend date or, in the case of some foreign securities, on the date thereafter when the Fund identifies the dividend. Interest income on investment securities is recorded on the accrual basis or, in the case of some foreign securities, on the date thereafter when the Fund identifies the dividend. Foreign income may be subject to foreign withholding taxes, which are accrued as applicable. The Fund records distributions to shareholders from net investment income and realized gains on the ex-dividend date. Such distributions are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. Use of estimates The preparation of these financial statements, in accordance with accounting principles generally accepted in the United States of America, incorporates estimates made by management in determining the reported amount of assets, liabilities, revenues and expenses of the Fund. Actual results could differ from these estimates. NOTE B Management fee and transactions with affiliates and others The Fund has an investment management contract with the Adviser. Under the investment management contract, the Fund pays a monthly management fee to the Adviser at an annual rate of 0.80% of the Fund's average daily net asset value. The Fund and the Adviser have a subadvisory contract with American Fund Advisors, Inc. The Fund is not responsible for payment of subadviser's fees. The Adviser has agreed to limit the Fund's expenses, excluding the management fee, to 0.25% of the Fund's average daily net assets, at least until April 30, 2002. Accordingly, the expense reduction amounted to $4,640 for the year ended December 31, 2001. The Adviser reserves the right to terminate this limitation in the future. The Fund has an agreement with the Adviser to perform necessary tax, accounting and legal services for the Fund. The compensation for the year was at an annual rate of 0.02% of the average net assets of the Fund. Ms. Maureen R. Ford and Mr. John M. DeCiccio are directors and/or officers of the Adviser and/or its affiliates, as well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees may elect to defer for tax purposes their receipt of this compensation under the John Hancock Group of Funds Deferred Compensation Plan. The Fund makes investments into other John Hancock funds, as applicable, to cover its liability for the deferred compensation. Investments to cover the Fund's deferred compensation liability are recorded on the Fund's books as an other asset. The deferred compensation liability and the related other asset are always equal and are marked to market on a periodic basis to reflect any income earned by the investment as well as any unrealized gains or losses. The Deferred Compensation Plan investments had no impact on the operations of the Fund. NOTE C Fund share transactions This listing illustrates the number of shares sold, reinvested and repurchased during the last two periods, along with the corresponding dollar value. The Fund has an unlimited number of shares authorized with no par value. PERIOD ENDED 12-31-00 1 YEAR ENDED 12-31-01 SHARES AMOUNT SHARES AMOUNT Sold 1,961,452 $18,589,255 4,108,680 $21,017,046 Distributions reinvested 3,292 24,458 296 1,272 Repurchased (48,490) (490,242) (677,090) (3,113,988) NET INCREASE 1,916,254 $18,123,471 3,431,886 $17,904,330 1 Began operations on 5-1-00. NOTE D Investment transactions Purchases and proceeds from sales of securities, other than short-term securities and obligations of the U.S. government, during the year ended December 31, 2001, aggregated $24,220,965 and $4,449,823, respectively. The cost of investments owned at December 31, 2001, including short-term investments, for federal income tax purposes was $31,290,734. Gross unrealized appreciation and depreciation of investments aggregated $466,884 and $9,536,645, respectively, resulting in net unrealized depreciation of $9,069,761. The difference between book basis and tax basis net unrealized depreciation of investments is attributable primarily to the tax deferral of losses on wash sales. NOTE E Reclassification of accounts During the year ended December 31, 2001, the Fund has reclassified amounts to reflect a decrease in accumulated net realized loss on investments of $35, a decrease in accumulated net investment loss of $80,262 and a decrease in capital paid-in of $80,297. This represents the amount necessary to report these balances on a tax basis, excluding certain temporary difference, as of December 31, 2001. Additional adjustments may be needed in subsequent reporting periods. These reclassifications, which have no impact on the net asset value of the Fund, are primarily attributable to the treatment of net operating losses in the computation of distributable income and capital gains under federal tax rules versus accounting principles generally accepted in the United States of America. The calculation of net investment income in the financial highlights excludes these adjustments. Report of Ernst & Young LLP, Independent Auditors To the contract owners and trustees of John Hancock Declaration Trust, We have audited the accompanying statement of assets and liabilities of the John Hancock V.A. Technology Fund (the "Fund"), one of the portfolios constituting John Hancock Declaration Trust, including the schedule of the Fund's investments, as of December 31, 2001, and the related statement of operations for the year indicated therein, the statement of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2001, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the John Hancock V.A. Technology Fund of the John Hancock Declaration Trust at December 31, 2001, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States. /S/ ERNST & YOUNG LLP Boston, Massachusetts February 8, 2002 Tax Information UNAUDITED For federal income tax purposes, the following information is furnished with respect to the distributions of the Fund for its taxable year ended December 31, 2001. With respect to the ordinary dividends paid by the Fund for the fiscal year ended December 31, 2001, 1.87% of the dividends qualify for the corporate dividends-received deduction. TRUSTEES & OFFICERS This chart provides information about the Trustees and Officers who oversee your John Hancock fund. Officers elected by the Trustees manage the day-to-day operations of the Fund and execute policies formulated by the Trustees. INDEPENDENT TRUSTEES
NUMBER OF NAME, AGE JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER TRUSTEE FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE 2 BY TRUSTEE Dennis S. Aronowitz 1, Born: 1931 2000 30 Professor of Law, Emeritus, Boston University School of Law (as of 1996); Director, Brookline Bancorp. Richard P. Chapman, Jr., Born: 1935 2000 30 Chairman, President, and Chief Executive Officer, Brookline Bancorp. (lending) (since 1972); Trustee, Northeastern University (education); Chairman and Director, Lumber Insurance Co. (insurance) (until 2000); Chairman and Director, Northeast Retirement Services, Inc. (retirement administration) (since 1998). William J. Cosgrove 1, Born: 1933 2000 30 Vice President, Senior Banker and Senior Credit Officer, Citibank, N.A. (retired 1991); Executive Vice President, Citadel Group Representatives, Inc.; Director, Hudson City Bancorp; Trustee, Scholarship Fund for Inner City Children (since 1986). Richard A. Farrell 1, Born: 1932 2000 30 President, Farrell, Healer & Co., Inc. (venture capital management firm) (since 1980) and General Partner of the Venture Capital Fund of NE (since 1980); prior to 1980, headed the venture capital group at Bank of Boston Corporation. Gail D. Fosler, Born: 1947 2000 30 Senior Vice President and Chief Economist, The Conference Board (non-profit economic and business research) (since 1989); Director, Unisys Corp. (since 1993); Director, H.B. Fuller Company (since 1992) and DBS Holdings (Singapore) (banking and financial services) (since 1999); Director, National Bureau of Economic Research (academic) (since 1989); Director, Baxter International (medical health care) (since 2001). William F. Glavin, Born: 1932 2000 30 President Emeritus, Babson College (as of 1998); Vice Chairman, Xerox Corporation (until 1989); Director, Reebok, Inc. (since 1994) and Inco Ltd. John A. Moore, Born: 1939 2000 36 President and Chief Executive Officer, Institute for Evaluating Health Risks, (nonprofit institution) (until 2001); Senior Scientist, Sciences International (health research) (since 1998); Principal, Hollyhouse (consulting) (since 2000); Director, CIIT (nonprofit research) (since 2002). Patti McGill Peterson, Born: 1943 2000 36 Executive Director, Council for International Exchange of Scholars (since 1998), Vice President, Institute of International Education (since January 1998); Senior Fellow, Cornell Institute of Public Affairs, Cornell University (until 1997); President Emerita of Wells College and St. Lawrence University; Director, Niagara Mohawk Power Corporation (electric utility). John W. Pratt 1, Born: 1931 2000 30 Professor of Business Administration Emeritus, Harvard University Graduate School of Business Administration (as of 1998). INTERESTED TRUSTEES 3 NAME, AGE NUMBER OF POSITION(S) HELD WITH FUND JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER TRUSTEE FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE 2 BY TRUSTEE John M. DeCiccio, Born: 1948 2001 66 Trustee Executive Vice President and Chief Investment Officer, John Hancock Financial Services, Inc.; Director, Executive Vice President and Chief Investment Officer, John Hancock Life Insurance Company; Chairman of the Committee of Finance of John Hancock Life Insurance Company; Director, John Hancock Subsidiaries, LLC, Hancock Natural Resource Group, Independence Investment LLC, Independence Fixed Income LLC, John Hancock Advisers, LLC (the "Adviser") and The Berkeley Financial Group, LLC ("The Berkeley Group"), John Hancock Funds, LLC ("John Hancock Funds"), Massachusetts Business Development Corporation; Director, John Hancock Insurance Agency, Inc. ("Insurance Agency, Inc.") (until 1999) and John Hancock Signature Services, Inc. ("Signature Services") (until 1997). Maureen R. Ford, Born: 1955 2000 66 Trustee, Chairman, President and Chief Executive Officer, John Hancock Financial Services, Inc., John Hancock Life Insurance Company; Chairman, Director, President and Chief Executive Officer, the Advisers and The Berkeley Group; Chairman, Director and Chief Executive Officer, John Hancock Funds, Chairman, Director and President, Insurance Agency, Inc.; Chairman, Director and Chief Executive Officer, Sovereign Asset Management Corporation ("SAMCorp."); Director, Independence Investment LLC, Independence Fixed Income LLC and Signature Services; Senior Vice President, MassMutual Insurance Co. (until 1999); Senior Vice President, Connecticut Mutual Insurance Co. (until 1996). PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES NAME, AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) AND OTHER OFFICER DIRECTORSHIPS DURING PAST 5 YEARS SINCE William L. Braman, Born: 1953 2000 Executive Vice President and Chief Investment Officer Executive Vice President and Chief Investment Officer, the Adviser and each of the John Hancock funds; Director, SAMCorp., Executive Vice President and Chief Investment Officer, Barring Asset Management, London UK (until 2000). Richard A. Brown, Born: 1949 2000 Senior Vice President and Chief Financial Officer Senior Vice President, Chief Financial Officer and Treasurer, the Adviser, John Hancock Funds, and The Berkeley Group; Second Vice President and Senior Associate Controller, Corporate Tax Department, John Hancock Financial Services, Inc. (until 2001). Thomas H. Connors, Born: 1959 2000 Vice President and Compliance Officer Vice President and Compliance Officer, the Adviser and each of the John Hancock funds; Vice President, John Hancock Funds. William H. King, Born: 1952 2000 Vice President and Treasurer Vice President and Assistant Treasurer, the Adviser; Vice President and Treasurer of each of the John Hancock funds; Assistant Treasurer of each of the John Hancock funds (until 2001). Susan S. Newton, Born: 1950 2000 Senior Vice President, Secretary and Chief Legal Officer Senior Vice President, Secretary and Chief Legal Officer, SAMCorp., the Adviser and each of the John Hancock funds, John Hancock Funds and The Berkeley Group; Vice President, Signature Services (until 2000); Director, Senior Vice President and Secretary, NM Capital. The business address for all Trustees and Officers is 101 Huntington Avenue, Boston, Massachusetts, 02199. The Statement of Additional Information of the Fund includes additional information about members of the board of Trustees of the Fund and is available, without charge, upon request, by calling 1-800-426-5523. 1 Member of Audit Committee. 2 Each Trustee serves until resignation, retirement age or until his or her successor is elected. 3 Interested Trustee holds positions with the Fund's investment adviser, underwriter and certain other affiliates.
JOHN HANCOCK FUNDS DECLARATION TRUST ANNUAL REPORT [LOGO] John Hancock [Rings] World Wide Sponsor John Hancock Funds, LLC MEMBER NASD 101 Huntington Avenue Boston, MA 02199-7603 1-800-225-5291 1-800-554-6713 TDD 1-800-338-8080 EASI-Line www.jhfunds.com Mutual Funds Institutional Services Private Managed Accounts Retirement Plans This report is for the information of the shareholders of the John Hancock V.A. Technology Fund. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE 8190A 12/01 2/02 ANNUAL REPORT John Hancock V.A. Sovereign Investors Fund A series of John Hancock Declaration Trust 12.31.01 [A 2" x 1" John Hancock (Signature)/John Hancock Funds logo at bottom left center of page. A tag line below reads "JOHN HANCOCK FUNDS."] FOR YOUR INFORMATION TRUSTEES Dennis S. Aronowitz* Richard P. Chapman, Jr. William J. Cosgrove* John M. DeCiccio Richard A. Farrell Maureen R. Ford Gail D. Fosler William F. Glavin Dr. John A. Moore Patti McGill Peterson John W. Pratt* *Members of the Audit Committee OFFICERS Maureen R. Ford Chairman, President and Chief Executive Officer William L. Braman Executive Vice President and Chief Investment Officer Richard A. Brown Senior Vice President and Chief Financial Officer Susan S. Newton Senior Vice President and Secretary William H. King Vice President and Treasurer Thomas H. Connors Vice President and Compliance Officer CUSTODIAN The Bank of New York One Wall Street New York, New York 10286 TRANSFER AGENT John Hancock Signature Services, Inc. 529 Main Street Charlestown, Massachusetts 02129 INVESTMENT ADVISER John Hancock Advisers, LLC 101 Huntington Avenue Boston, Massachusetts 02199-7603 INSURANCE PRODUCTS ISSUER John Hancock Life Insurance Company, John Hancock Variable Life Insurance Company* 200 Clarendon Street Boston, Massachusetts 02117 *Not licensed in New York FUND DISTRIBUTOR John Hancock Funds, LLC 101 Huntington Avenue Boston, Massachusetts 02199-7603 LEGAL COUNSEL Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109-1803 INDEPENDENT AUDITORS Ernst & Young LLP 200 Clarendon Street Boston, Massachusetts 02116-5072 HOW TO CONTACT US On the Internet www.jhancock.com By regular mail John Hancock Signature Services, Inc. 529 Main Street Charlestown, Massachusetts 02129 Customer service representatives 1-800-225-5291 24-hour automated information 1-800-338-8080 WELCOME [A photo of Maureen R. Ford, Chairman and CEO, flush right next to first paragraph.] Dear Shareholders, The U.S. stock market produced double-digit losses for the second year in a row in 2001 -- the first back-to-back down years for stocks since the 1973-74 bear market. The economy slipped into recession, wreaking havoc with corporate profits, and the tragic events of September 11 further rattled investors. Even a strong fourth quarter rally was not enough to lift the major indexes into positive territory. The Standard & Poor's 500 Index finished the year losing 11.88%, including reinvested dividends, and the Dow Jones Industrial Average lost 5.42%. The tech-heavy Nasdaq Composite Index fell 21.05% -- tamer than 2000's loss, thanks to a late-year rebound in the beleaguered technology and telecommunications sectors. Stock mutual fund investors didn't find many places to hide, and 83% of U.S. stock funds posted negative returns in 2001, with the average stock fund falling 10.89%, according to Lipper, Inc. In stark contrast, bonds beat stocks for the second straight year and produced positive results, buoyed by falling interest rates and investors' search for safety. These last two years couldn't have provided a more vivid example of the importance of being well diversified, since a portfolio concentrated solely in stocks would have fallen more in the last two years than one combining investments in both stocks and bonds. Two disappointing years of stock performance could also be a reason to re-evaluate with your investment professional whether you are still on track to meet your long-term financial goals. It's possible that downsized results, and modified expectations, could foster some changes in your investing strategies. And now is certainly a good time to perform this review, given the increased opportunities for retirement and college savings offered in President Bush's major tax-cut legislation enacted in June. With the market's fourth quarter rally, and the growing expectation that the economy will rebound sometime in 2002, we begin the year on a positive note, confident in the resilience of the economy, the financial markets and the nation. Sincerely, /S/ MAUREEN R. FORD Maureen R. Ford, Chairman and Chief Executive Officer Table of contents Managers' Report page 4 A Look at Performance page 5 Growth of $10,000 page 5 Financial Statements page 6 BY JOHN F. SNYDER, III, PORTFOLIO MANAGEMENT TEAM LEADER, AND BARRY H. EVANS, CFA, AND PETER M. SCHOFIELD, CFA, PORTFOLIO MANAGERS John Hancock V.A. Sovereign Investors Fund MANAGERS' REPORT [A photo of John F. Snyder, Team leader, flush right next to first paragraph.] It was a tumultuous year for stock investors. Despite widespread layoffs and drastic cost-cutting measures, U.S. corporations posted their steepest earnings decline since the 1930s. What's more, after months of speculation, the U.S. economy officially entered its first recession in more than a decade. Finally, the events of September 11 magnified the uncertainty in the market. Although the Federal Reserve cut interest rates 11 times in an effort to boost the weak economy, stock prices tumbled throughout most of 2001. The Dow Jones Industrial Average fell 5.42% and the Standard & Poor's 500 Index dropped 11.88% -- making this the second year in a row that the major market averages posted a decline. PERFORMANCE REVIEW For the 12 months ended December 31, 2001, John Hancock V.A. Sovereign Investors Fund returned -5.56% at net asset value. By comparison, the average variable annuity equity income fund returned -4.27% for the same period, according to Lipper Inc. Our relative performance was negatively impacted by some of our longtime holdings in the financial sector. Insurance giant, AFLAC, for example, suffered from weak new product introductions and the lackluster Japanese economy, from which it derives a significant portion of its revenues. With the dismal performance in capital markets, investment bank J.P. Morgan Chase experienced a sharp drop off in revenues. In addition, several of our technology holdings -- such as Cisco Systems and Compaq Computer -- tumbled under the pressure on technology stocks. On the positive side, however, stock selection boosted our performance elsewhere. IBM, for example, jumped sharply, even as most tech stocks dropped, due to its diverse product line and strong earnings. In basic materials, Air Products & Chemicals and Bemis Co. turned in strong performances, thanks to their reasonable valuations and the belief that they will rebound when the economy eventually bounces back. Despite a sharp decline in the health-care sector, our holdings in Baxter International and Johnson & Johnson posted solid returns, due to their minimal exposure to patent expirations and strong product cycles. Finally, with investors searching out stocks with reasonable valuations and steady earnings growth, our consumer staples stocks -- such as PepsiCo, Philip Morris and Kraft Foods -- outperformed in this difficult market. STRATEGIC SHIFTS Given our long-term investment strategy, we don't make drastic changes in the portfolio's holdings, but rather gradual strategic shifts as market conditions warrant. Financial stocks, including banks, insurance, mortgage banking and finance companies, remain our largest sector weighting. Within the sector, however, we shifted our emphasis to those companies well positioned to leverage an upturn in the capital markets. After an abysmal year in 2001, we expect the capital markets to bounce back at some point this year. As a result, we've added to our positions in The Bank of New York, Morgan Stanley Dean Witter and FleetBoston. [Table at bottom right hand column entitled "Top five stock holdings." The first listing is IBM 4.3%, the second is Citigroup 4.2%, the third Intel 2.9%, the fourth Johnson & Johnson 2.9% and the fifth Bank of America 2.8%. A note below the table reads "As a percentage of net assets on 12-31-01."] We've also increased our weighting in capital goods and basic materials stocks with names such as Dow Chemical, Honeywell International and Rohm & Haas. Not only do these companies have reasonable valuations, but they also have significantly pruned back their costs and successfully gained market share. With the economy likely to pick up in 2002, we believe these stocks will be among the biggest beneficiaries of the turnaround. WHAT'S AHEAD After two painful years of negative returns in the market, we're cautiously optimistic about the prospects for 2002. The sharp market rebound at the end of last year has left many investors wondering whether the gains will continue into this year. We believe investors should be prepared for more ups and downs as the market sorts out the direction of the economy, corporate earnings and stock prices. In our opinion, however, stocks will continue to be one of the most attractive investment alternatives. Although we're optimistic, we're also realistic about the market's prospects. We encourage investors to be realistic too. Even when stocks do rebound, we're not likely to see the 20% plus gains of the late 1990s. Returns are likely to be much more modest for several reasons. First of all, historical stock returns tend to average closer to 10% over the long term. Given that stocks exceeded that average in the late 1990s, some analysts suggest returns over the next few years could be below historic averages. What's more, despite the two-year decline in the market, stocks remain relatively expensive. Finally, the economic recovery is more likely to be a gradual upturn rather than a sharp rebound. In this difficult market environment, we believe that the Fund's disciplined and conservative investment approach will continue to pay off. Given the relatively high valuations in the market, stock gains will only come from earnings growth. The key will be investing in those companies that can grow their earnings in a slower economy. As a result, we believe the Fund's universe of stocks -- those with reasonable valuations and steady earnings growth -- stand to perform well. This commentary reflects the views of the portfolio managers through the end of the Fund's period discussed in this report. Of course, the managers' views are subject to change as market and other conditions warrant. A LOOK AT PERFORMANCE For the year ended 12-31-01 Cumulative total returns One year -5.56% Five years 46.71% Since inception (8-29-96) 58.88% Average annual total returns One year -5.56% Five years 7.97% Since inception (8-29-96) 9.06% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. GROWTH OF $10,000 John Hancock V.A. Sovereign Investors Fund 8-29-96 -- 12-31-01 Line chart with the heading John Hancock V.A. Sovereign Investors Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Standard & Poor's 500 Index and is equal to $19,023 as of December 31, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Sovereign Investors Fund on August 29, 1996 and is equal to $15,888 as of December 31, 2001. The chart to the left shows how much a $10,000 investment in the John Hancock V.A. Sovereign Investors Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. FINANCIAL STATEMENTS Fund's Investments Securities owned by the Fund on 12-31-01
SHARES ISSUER VALUE COMMON STOCKS 95.66% $61,659,478 (Cost $56,186,028) Banks -- United States 9.38% $6,045,675 29,000 Bank of America Corp. 1,825,550 20,000 Bank of New York Co., Inc. (The) 816,000 35,000 FleetBoston Financial Corp. 1,277,500 10,000 Mellon Financial Corp. 376,200 6,000 PNC Bank Corp. 337,200 10,000 State Street Corp. 522,500 20,500 Wells Fargo & Co. 890,725 Beverages 1.29% 827,730 17,000 PepsiCo, Inc. 827,730 Chemicals 4.71% 3,039,450 18,000 Air Products & Chemicals, Inc. 844,380 25,000 Dow Chemical Co. (The) 844,500 39,000 Rohm & Haas Co. 1,350,570 Computers 11.04% 7,118,915 8,000 Automatic Data Processing, Inc. 471,200 66,000 Cisco Systems, Inc.* 1,195,260 14,000 Electronic Data Systems Corp. 959,700 23,000 International Business Machines Corp. 2,782,080 12,500 Microsoft Corp.* 828,125 55,000 Oracle Corp.* 759,550 10,000 Sun Microsystems, Inc.* 123,000 Cosmetics & Personal Care 0.87% 558,000 12,000 Avon Products, Inc. 558,000 Diversified Operations 5.87% 3,781,950 50,000 Honeywell International, Inc. 1,691,000 35,500 Tyco International Ltd. 2,090,950 Electronics 7.50% 4,831,679 14,250 Emerson Electric Co. 813,675 43,800 General Electric Co. 1,755,504 60,000 Intel Corp. 1,887,000 25,000 Motorola, Inc. 375,500 Finance 8.92% 5,752,994 53,225 Citigroup, Inc. 2,686,798 8,031 Household International, Inc. 465,316 30,000 J.P. Morgan Chase & Co. 1,090,500 27,000 Morgan Stanley Dean Witter & Co. 1,510,380 Food 0.87% 559,283 16,435 Kraft Foods, Inc. (Class A) 559,283 Insurance 4.63% 2,987,822 24,800 AFLAC, Inc. 609,088 12,093 American International Group, Inc. 960,184 10,000 Chubb Corp. (The) 690,000 15,000 Lincoln National Corp. 728,550 Media 2.66% 1,717,220 28,800 AOL Time Warner, Inc.* 924,480 13,000 McGraw-Hill Cos., Inc. (The) 792,740 Medical 10.80% 6,960,129 21,000 Abbott Laboratories 1,170,750 23,000 American Home Products Corp. 1,411,280 22,200 Baxter International, Inc. 1,190,586 32,000 Johnson & Johnson 1,891,200 9,000 Merck & Co., Inc. 529,200 19,250 Pfizer, Inc. 767,113 Mortgage Banking 3.37% 2,173,500 15,000 Fannie Mae 1,192,500 15,000 Freddie Mac 981,000 Office 1.02% 658,575 11,650 Avery Dennison Corp. 658,575 Oil & Gas 6.54% 4,212,992 18,000 Anadarko Petroleum Corp. 1,023,300 15,000 ChevronTexaco Corp. 1,344,150 30,000 Conoco, Inc. 849,000 20,368 Exxon Mobil Corp. 800,462 4,000 Royal Dutch Petroleum Co. American Depositary Receipts (Netherlands) 196,080 Retail 3.90% 2,517,210 12,000 Home Depot, Inc. (The) 612,120 14,000 Lowe's Cos., Inc. 649,740 15,000 SYSCO Corp. 393,300 21,000 Target Corp. 862,050 Soap & Cleaning Preparations 1.54% 989,125 12,500 Procter & Gamble Co. (The) 989,125 Telecommunications 2.43% 1,566,180 33,000 Verizon Communications, Inc. 1,566,180 Tobacco 1.78% 1,146,250 25,000 Philip Morris Cos., Inc. 1,146,250 Utilities 6.54% 4,214,799 15,000 BellSouth Corp. 572,250 31,500 Duke Energy Corp. 1,236,690 28,844 SBC Communications, Inc. 1,129,819 46,000 Xcel Energy, Inc. 1,276,040 ISSUER, DESCRIPTION, INTEREST PAR VALUE MATURITY DATE RATE (000s OMITTED) VALUE SHORT-TERM INVESTMENTS 4.32% $2,782,000 (Cost $2,782,000) Joint Repurchase Agreement 4.32% Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. -- Dated 12-31-01, due 01-02-02 (Secured by U.S. Treasury Bonds 9.875% due 11-15-15 and 8.750% due 05-15-17, U.S. Treasury Notes 5.625% due 12-31-02 and 6.250% due 02-15-03, U.S. Treasury Inflation Index Bond 3.375% due 04-15-32, U.S. Treasury Inflation Index Note 3.375% due 01-15-07) 1.70% $2,782 $2,782,000 TOTAL INVESTMENTS 99.98% $64,441,478 OTHER ASSETS AND LIABILITIES, NET 0.02% $13,296 TOTAL NET ASSETS 100.00% $64,454,774 * Non-income producing security. ** Credit ratings are unaudited and rated by Moody's Investors Service or John Hancock Advisers, LLC where Standard & Poor's ratings are not available. Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements.
Statement of Assets and Liabilities 12-31-01 ASSETS Investments at value (cost $58,968,028) $64,441,478 Dividends and interest receivable 93,293 Other assets 990 Total assets 64,535,761 LIABILITIES Payable for shares repurchased 22,649 Payable to affiliates 32,539 Other payables and accrued expenses 25,799 Total liabilities 80,987 NET ASSETS Capital paid-in 64,256,712 Accumulated net realized loss on investments (5,274,889) Net unrealized appreciation of investments 5,473,450 Distributions in excess of net investment income (499) Net assets $64,454,774 NET ASSET VALUE PER SHARE (Based on 4,422,285 shares of beneficial interest outstanding -- unlimited number of shares authorized with no par value) $14.57 See notes to financial statements. Statement of Operations For the year ended 12-31-01 INVESTMENT INCOME Dividends (net of foreign withholding taxes of $2,047) $921,391 Interest (including securities lending income of $258) 535,916 Total investment income 1,457,307 EXPENSES Investment management fee 375,151 Custodian fee 19,253 Auditing fee 18,000 Accounting and legal services fee 12,758 Printing 4,462 Trustee's fee 2,980 Miscellaneous 2,467 Organization 1,413 Legal fee 664 Registration and filing fee 17 Total expenses 437,165 Less expense reductions (1,413) Net expenses 435,752 Net investment income 1,021,555 REALIZED AND UNREALIZED GAIN (LOSS) Net realized loss on investments (3,019,394) Change in unrealized depreciation on investments (1,296,552) Net realized and unrealized loss (4,315,946) Decrease in net assets from operations ($3,294,391) See notes to financial statements. Statement of Changes in Net Assets YEAR YEAR ENDED ENDED 12-31-00 12-31-01 INCREASE (DECREASE) IN NET ASSETS From operations Net investment income $675,781 $1,021,555 Net realized loss (1,886,401) (3,019,394) Change in net unrealized appreciation (depreciation) 1,083,527 (1,296,552) Decrease in net assets resulting from operations (127,093) (3,294,391) Distributions to shareholders From net investment income (678,637) (1,041,147) From fund share transactions 5,879,631 13,462,214 NET ASSETS Beginning of period 50,254,197 55,328,098 End of period 1 $55,328,098 $64,454,774 1 Includes distribution in excess of net investment income of $253 and $499, respectively. See notes to financial statements.
Financial Highlights 12-31-97 12-31-98 12-31-99 12-31-00 12-31-01 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $10.74 $13.59 $15.61 $15.96 $15.69 Net investment income 1 0.22 0.27 0.24 0.21 0.24 Net realized and unrealized gain (loss) on investments 2.82 2.00 0.35 (0.27) (1.12) Total from investment operations 3.04 2.27 0.59 (0.06) (0.88) Less distributions From net investment income (0.18) (0.25) (0.24) (0.21) (0.24) From net realized gain (0.01) -- -- -- -- Tax return of capital -- -- -- 2 -- -- (0.19) (0.25) (0.24) (0.21) (0.24) Net asset value, end of period $13.59 $15.61 $15.96 $15.69 $14.57 Total return 3 (%) 28.43 4 16.88 3.84 (0.33) (5.56) RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $12 $34 $50 $55 $64 Ratio of expenses to average net assets % 0.85 0.74 0.70 0.72 0.70 Ratio of adjusted expenses to average net assets 5 % 1.16 -- -- -- -- Ratio of net investment income to average net assets % 1.81 1.88 1.57 1.37 1.63 Portfolio turnover % 11 19 26 46 77 1 Based on the average of the shares outstanding at the end of each month. 2 Less than $0.01 per share. 3 Assumes dividend reinvestment. 4 Total return would have been lower had certain expenses not been reduced during the period shown. 5 Does not take into consideration expense reductions during the period shown. See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS NOTE A Organization John Hancock V. A. Sovereign Investors Fund (the "Fund") is a diversified series of John Hancock Declaration Trust, (the "Trust") an open-end investment management company registered under the Investment Company Act of 1940. The Trust, organized as a Massachusetts business trust in 1995, consists of five different series at December 31, 2001. The Trustees may authorize the creation of additional series from time to time to satisfy various investment objectives. An insurance company issuing a Variable Contract that participates in the Trust will vote shares of the Fund held by the insurance company's separate accounts as required by law. In accordance with current law and interpretations thereof, participating insurance companies are required to request voting instructions from policy owners and must vote shares of the Fund in proportion to the voting instructions received. The investment objective of the Fund is to seek long-term growth of capital and income without assuming undue market risks. The Fund currently has one class of shares with equal rights as to voting, redemption, dividends and liquidation. Significant accounting policies of the Fund are as follows: Valuation of investments Securities in the Fund's portfolio are valued on the basis of market quotations, valuations provided by independent pricing services or at fair value as determined in good faith in accordance with procedures approved by the Trustees. Short-term debt investments maturing within 60 days are valued at amortized cost, which approximates market value. Joint repurchase agreement Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Fund, along with other registered investment companies having a management contract with John Hancock Advisers, LLC (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, LLC, may participate in a joint repurchase agreement transaction. Aggregate cash balances are invested in one or more large repurchase agreements, whose underlying securities are obligations of the U.S. government and/or its agencies. The Fund's custodian bank receives delivery of the underlying securities for the joint account on the Fund's behalf. The Adviser is responsible for ensuring that the agreement is fully collateralized at all times. Investment transactions Investment transactions are recorded as of the date of purchase, sale or maturity. Net realized gains and losses on sales of investments are determined on the identified cost basis. Discount and premium on securities The Fund accretes discount and amortizes premium from par value on securities from either the date of issue or the date of purchase over the life of the security. Expenses The majority of the expenses are directly identifiable to an individual fund. Expenses that are not readily identifiable to a specific fund will be allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative sizes of the funds. Organization expenses Expenses incurred in connection with the organization of the Fund have been capitalized and are being charged to the Fund's operations ratably over a five-year period that began with the commencement of the investment operations of the Fund. Bank borrowings The Fund is permitted to have bank borrowings for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Fund has entered into a syndicated line of credit agreement with various banks. This agreement enables the Fund to participate with other funds managed by the Adviser in an unsecured line of credit with banks, which permit borrowings up to $500 million, collectively. Interest is charged to each fund, based on its borrowing. In addition, a commitment fee is charged to each fund based on the average daily unused portion of the line of credit and is allocated among the participating funds. The Fund had no borrowing activity under the line of credit during the year ended December 31, 2001. Securities lending The Fund may lend securities to certain qualified brokers who pay the Fund negotiated lender fees. These fees are included in net investment income. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay of the loaned securities in recovery or even loss of rights in the collateral, should the borrower of the securities fail financially. There were no securities loaned as of December 31, 2001. Federal income taxes The Fund qualifies as a "regulated investment company" by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income which is distributed to shareholders. Therefore, no federal income tax provision is required. For federal income tax purposes, at December 31, 2001, the Fund has $4,619,506 of capital loss carryforwards available, to the extent provided by regulations, to offset future net realized capital gains. If such carryforwards are used by the Fund, no capital gain distribution will be made. The Fund's carryforwards expire as follows: December 31, 2006 -- $157,877, December 31, 2007 -- $101,159, December 31, 2008 -- $1,206,695 and December 31, 2009 -- $3,153,775. Additionally, net capital losses of $491,246 attributable to security transactions occurring after October 31, 2001 are treated as arising on the first day (January 1, 2002) of the Fund's next taxable year. Dividends, interest and distributions Dividend income on investment securities is recorded on the ex-dividend date or, in the case of some foreign securities, on the date thereafter when the Fund identifies the dividend. Interest income on investment securities is recorded on the accrual basis. Interest income on investment securities is recorded on the accrual basis. Foreign income may be subject to foreign withholding taxes which are accrued as applicable. The Fund records distributions to shareholders from net investment income and realized gains on the ex-dividend date. Such distributions are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. Use of estimates The preparation of these financial statements, in accordance with accounting principles generally accepted in the United States of America, incorporates estimates made by management in determining the reported amount of assets, liabilities, revenues and expenses of the Fund. Actual results could differ from these estimates. NOTE B Management fee and transactions with affiliates and others The Fund has an investment management contract with the Adviser. Under the investment management contract, the Fund pays a monthly management fee to the Adviser at an annual rate of 0.60% of the Fund's average daily net asset value. The Adviser has agreed to limit the Fund's expenses, excluding the management fee, to 0.25% of the Fund's average daily net assets, at least until April 30, 2002. Accordingly, the expense reduction amounted to $1,413 for the year ended December 31, 2001. The Adviser reserves the right to terminate this limitation in the future. The Fund has an agreement with the Adviser to perform necessary tax, accounting and legal services for the Fund. The compensation for the year was at an annual rate of 0.02% of the average net assets of the Fund. Ms. Maureen R. Ford and Mr. John M. DeCiccio are directors and/or officers of the Adviser and/or its affiliates, as well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees may elect to defer for tax purposes their receipt of this compensation under the John Hancock Group of Funds Deferred Compensation Plan. The Fund makes investments into other John Hancock funds, as applicable, to cover its liability for the deferred compensation. Investments to cover the Fund's deferred compensation liability are recorded on the Fund's books as an other asset. The deferred compensation liability and the related other asset are always equal and are marked to market on a periodic basis to reflect any income earned by the investment as well as any unrealized gains or losses. The Deferred Compensation Plan investments had no impact on the operations of the Fund. NOTE C Fund share transactions This listing illustrates the number of shares sold, reinvested and repurchased during the last two periods, along with the corresponding dollar value. The Fund has an unlimited number of shares authorized with no par value. YEAR ENDED 12-31-00 YEAR ENDED 12-31-01 SHARES AMOUNT SHARES AMOUNT Shares sold 1,103,469 $16,811,905 1,610,786 $23,800,498 Distributions reinvested 44,976 678,636 73,840 1,041,147 Repurchased (771,887) (11,610,910) (788,014) (11,379,431) NET INCREASE 376,558 $5,879,631 896,612 $13,462,214 NOTE D Investment transactions Purchases and proceeds from sales of securities, other than short-term securities and obligations of the U.S. government, during the year ended December 31, 2001, aggregated $59,558,401 and $43,497,406, respectively. The cost of investments owned at December 31, 2001, including short-term investments, for federal income tax purposes was $59,132,166. Gross unrealized appreciation and depreciation of investments aggregated $8,122,297 and $2,812,985, respectively, resulting in net unrealized appreciation of $5,309,312. The difference between book basis and tax basis net appreciation of investments is attributable primarily to the tax deferral of losses on wash sales. NOTE E Reclassification of accounts During the year ended December 31, 2001, the Fund has reclassified amounts to reflect a decrease in accumulated net realized loss on investments of $171, a decrease in distributions in excess of net investment income of $19,346 and a decrease in capital paid-in of $19,517. This represents the amount necessary to report these balances on a tax basis, excluding certain temporary difference, as of December 31, 2001. Additional adjustments may be needed in subsequent reporting periods. These reclassifications, which have no impact on the net asset value of the Fund, are primarily attributable to net realized loss on foreign currency transactions in the computation of distributable income and capital gains under federal tax rules versus accounting principles generally accepted in the United States of America. The calculation of net investment income in the financial highlights excludes these adjustments. Report of Ernst & Young LLP, Independent Auditors To the contract owners and trustees of John Hancock Declaration Trust, We have audited the accompanying statement of assets and liabilities of the John Hancock V.A. Sovereign Investors Fund (the "Fund"), one of the portfolios constituting John Hancock Declaration Trust, including the schedule of the Fund's investments, as of December 31, 2001, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2001, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the John Hancock V.A. Sovereign Investors Fund of the John Hancock Declaration Trust at December 31, 2001, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States. /S/ ERNST & YOUNG LLP Boston, Massachusetts February 8, 2002 Tax Information UNAUDITED For federal income tax purposes, the following information is furnished with respect to the distributions of the Fund for its fiscal year ended December 31, 2001. With respect to the ordinary dividends paid by the Fund for the fiscal year ended December 31, 2001, 88.93% of the dividends qualify for the corporate dividends-received deduction. TRUSTEES & OFFICERS This chart provides information about the Trustees and Officers who oversee your John Hancock fund. Officers elected by the Trustees manage the day-to-day operations of the Fund and execute policies formulated by the Trustees. INDEPENDENT TRUSTEES
NUMBER OF NAME, AGE JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER TRUSTEE FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE 2 BY TRUSTEE Dennis S. Aronowitz 1, Born: 1931 1996 30 Professor of Law, Emeritus, Boston University School of Law (as of 1996); Director, Brookline Bancorp. Richard P. Chapman, Jr., Born: 1935 1996 30 Chairman, President, and Chief Executive Officer, Brookline Bancorp. (lending) (since 1972); Trustee, Northeastern University (education); Chairman and Director, Lumber Insurance Co. (insurance) (until 2000); Chairman and Director, Northeast Retirement Services, Inc. (retirement administration) (since 1998). William J. Cosgrove 1, Born: 1933 1996 30 Vice President, Senior Banker and Senior Credit Officer, Citibank, N.A. (retired 1991); Executive Vice President, Citadel Group Representatives, Inc.; Director, Hudson City Bancorp; Trustee, Scholarship Fund for Inner City Children (since 1986). Richard A. Farrell 1, Born: 1932 1996 30 President, Farrell, Healer & Co., Inc. (venture capital management firm) (since 1980) and General Partner of the Venture Capital Fund of NE (since 1980); prior to 1980, headed the venture capital group at Bank of Boston Corporation. Gail D. Fosler, Born: 1947 1996 30 Senior Vice President and Chief Economist, The Conference Board (non-profit economic and business research) (since 1989); Director, Unisys Corp. (since 1993); Director, H.B. Fuller Company (since 1992) and DBS Holdings (Singapore) (banking and financial services) (since 1999); Director, National Bureau of Economic Research (academic) (since 1989); Director, Baxter International (medical health care) (since 2001). William F. Glavin, Born: 1932 1996 30 President Emeritus, Babson College (as of 1998); Vice Chairman, Xerox Corporation (until 1989); Director, Reebok, Inc. (since 1994) and Inco Ltd. John A. Moore, Born: 1939 1996 36 President and Chief Executive Officer, Institute for Evaluating Health Risks, (nonprofit institution) (until 2001); Senior Scientist, Sciences International (health research) (since 1998); Principal, Hollyhouse (consulting) (since 2000); Director, CIIT (nonprofit research) (since 2002). Patti McGill Peterson, Born: 1943 1996 36 Executive Director, Council for International Exchange of Scholars (since 1998), Vice President, Institute of International Education (since January 1998); Senior Fellow, Cornell Institute of Public Affairs, Cornell University (until 1997); President Emerita of Wells College and St. Lawrence University; Director, Niagara Mohawk Power Corporation (electric utility). John W. Pratt 1, Born: 1931 1996 30 Professor of Business Administration Emeritus, Harvard University Graduate School of Business Administration (as of 1998). INTERESTED TRUSTEES 3 NAME, AGE NUMBER OF POSITION(S) HELD WITH FUND JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER TRUSTEE FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE 2 BY TRUSTEE John M. DeCiccio, Born: 1948 2001 66 Trustee Executive Vice President and Chief Investment Officer, John Hancock Financial Services, Inc.; Director, Executive Vice President and Chief Investment Officer, John Hancock Life Insurance Company; Chairman of the Committee of Finance of John Hancock Life Insurance Company; Director, John Hancock Subsidiaries, LLC, Hancock Natural Resource Group, Independence Investment LLC, Independence Fixed Income LLC, John Hancock Advisers, LLC (the "Adviser") and The Berkeley Financial Group, LLC ("The Berkeley Group"), John Hancock Funds, LLC ("John Hancock Funds"), Massachusetts Business Development Corporation; Director, John Hancock Insurance Agency, Inc. ("Insurance Agency, Inc.") (until 1999) and John Hancock Signature Services, Inc. ("Signature Services") (until 1997). Maureen R. Ford, Born: 1955 2000 66 Trustee, Chairman, President and Chief Executive Officer, John Hancock Financial Services, Inc., John Hancock Life Insurance Company; Chairman, Director, President and Chief Executive Officer, the Advisers and The Berkeley Group; Chairman, Director and Chief Executive Officer, John Hancock Funds, Chairman, Director and President, Insurance Agency, Inc.; Chairman, Director and Chief Executive Officer, Sovereign Asset Management Corporation ("SAMCorp."); Director, Independence Investment LLC, Independence Fixed Income LLC and Signature Services; Senior Vice President, MassMutual Insurance Co. (until 1999); Senior Vice President, Connecticut Mutual Insurance Co. (until 1996). PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES NAME, AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) AND OTHER OFFICER DIRECTORSHIPS DURING PAST 5 YEARS SINCE William L. Braman, Born: 1953 2000 Executive Vice President and Chief Investment Officer Executive Vice President and Chief Investment Officer, the Adviser and each of the John Hancock funds; Director, SAMCorp., Executive Vice President and Chief Investment Officer, Barring Asset Management, London UK (until 2000). Richard A. Brown, Born: 1949 2000 Senior Vice President and Chief Financial Officer Senior Vice President, Chief Financial Officer and Treasurer, the Adviser, John Hancock Funds, and The Berkeley Group; Second Vice President and Senior Associate Controller, Corporate Tax Department, John Hancock Financial Services, Inc. (until 2001). Thomas H. Connors, Born: 1959 1996 Vice President and Compliance Officer Vice President and Compliance Officer, the Adviser and each of the John Hancock funds; Vice President, John Hancock Funds. William H. King, Born: 1952 1996 Vice President and Treasurer Vice President and Assistant Treasurer, the Adviser; Vice President and Treasurer of each of the John Hancock funds; Assistant Treasurer of each of the John Hancock funds (until 2001). Susan S. Newton, Born: 1950 1996 Senior Vice President, Secretary and Chief Legal Officer Senior Vice President, Secretary and Chief Legal Officer, SAMCorp., the Adviser and each of the John Hancock funds, John Hancock Funds and The Berkeley Group; Vice President, Signature Services (until 2000); Director, Senior Vice President and Secretary, NM Capital. The business address for all Trustees and Officers is 101 Huntington Avenue, Boston, Massachusetts, 02199. The Statement of Additional Information of the Fund includes additional information about members of the board of Trustees of the Fund and is available, without charge, upon request, by calling 1-800-426-5523. 1 Member of Audit Committee. 2 Each Trustee serves until resignation, retirement age or until his or her successor is elected. 3 Interested Trustee holds positions with the Fund's investment adviser, underwriter and certain other affiliates.
JOHN HANCOCK FUNDS DECLARATION TRUST ANNUAL REPORT [LOGO] John Hancock [Rings] World Wide Sponsor John Hancock Funds, LLC MEMBER NASD 101 Huntington Avenue Boston, MA 02199-7603 1-800-225-5291 1-800-554-6713 TDD 1-800-338-8080 EASI-Line www.jhfunds.com Mutual Funds Institutional Services Private Managed Accounts Retirement Plans This report is for the information of the shareholders of the John Hancock V.A. Sovereign Investors Fund. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE 8150A 12/01 2/02 ANNUAL REPORT John Hancock V.A. Relative Value Fund A series of John Hancock Declaration Trust 12.31.01 [A 2" x 1" John Hancock (Signature)/John Hancock Funds logo at bottom left center of page. A tag line below reads "JOHN HANCOCK FUNDS."] FOR YOUR INFORMATION TRUSTEES Dennis S. Aronowitz* Richard P. Chapman, Jr. William J. Cosgrove* John M. DeCiccio Richard A. Farrell Maureen R. Ford Gail D. Fosler William F. Glavin Dr. John A. Moore Patti McGill Peterson John W. Pratt* *Members of the Audit Committee OFFICERS Maureen R. Ford Chairman, President and Chief Executive Officer William L. Braman Executive Vice President and Chief Investment Officer Richard A. Brown Senior Vice President and Chief Financial Officer Susan S. Newton Senior Vice President and Secretary William H. King Vice President and Treasurer Thomas H. Connors Vice President and Compliance Officer CUSTODIAN The Bank of New York One Wall Street New York, New York 10286 TRANSFER AGENT John Hancock Signature Services, Inc. 529 Main Street Charlestown, Massachusetts 02129 INVESTMENT ADVISER John Hancock Advisers, LLC 101 Huntington Avenue Boston, Massachusetts 02199-7603 INSURANCE PRODUCTS ISSUER John Hancock Life Insurance Company, John Hancock Variable Life Insurance Company* 200 Clarendon Street Boston, Massachusetts 02117 *Not licensed in New York FUND DISTRIBUTOR John Hancock Funds, LLC 101 Huntington Avenue Boston, Massachusetts 02199-7603 LEGAL COUNSEL Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109-1803 INDEPENDENT AUDITORS Ernst & Young LLP 200 Clarendon Street Boston, Massachusetts 02116-5072 HOW TO CONTACT US On the Internet www.jhancock.com By regular mail John Hancock Signature Services, Inc. 529 Main Street Charlestown, Massachusetts 02129 Customer service representatives 1-800-225-5291 24-hour automated information 1-800-338-8080 WELCOME [A photo of Maureen R. Ford, Chairman and CEO, flush right next to first paragraph.] Dear Shareholders, The U.S. stock market produced double-digit losses for the second year in a row in 2001 -- the first back-to-back down years for stocks since the 1973-74 bear market. The economy slipped into recession, wreaking havoc with corporate profits, and the tragic events of September 11 further rattled investors. Even a strong fourth quarter rally was not enough to lift the major indexes into positive territory. The Standard & Poor's 500 Index finished the year losing 11.88%, including reinvested dividends, and the Dow Jones Industrial Average lost 5.42%. The tech-heavy Nasdaq Composite Index fell 21.05% -- tamer than 2000's loss, thanks to a late-year rebound in the beleaguered technology and telecommunications sectors. Stock mutual fund investors didn't find many places to hide, and 83% of U.S. stock funds posted negative returns in 2001, with the average stock fund falling 10.89%, according to Lipper, Inc. In stark contrast, bonds beat stocks for the second straight year and produced positive results, buoyed by falling interest rates and investors' search for safety. These last two years couldn't have provided a more vivid example of the importance of being well diversified, since a portfolio concentrated solely in stocks would have fallen more in the last two years than one combining investments in both stocks and bonds. Two disappointing years of stock performance could also be a reason to re-evaluate with your investment professional whether you are still on track to meet your long-term financial goals. It's possible that downsized results, and modified expectations, could foster some changes in your investing strategies. And now is certainly a good time to perform this review, given the increased opportunities for retirement and college savings offered in President Bush's major tax-cut legislation enacted in June. With the market's fourth quarter rally, and the growing expectation that the economy will rebound sometime in 2002, we begin the year on a positive note, confident in the resilience of the economy, the financial markets and the nation. Sincerely, /S/ MAUREEN R. FORD Maureen R. Ford, Chairman and Chief Executive Officer Table of contents Managers' Report page 4 A Look at Performance page 5 Growth of $10,000 page 5 Financial Statements page 6 BY JAMES S. YU, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND ROGER C. HAMILTON, PORTFOLIO MANAGER John Hancock V.A. Relative Value Fund MANAGERS' REPORT [A photo of James Yu, Team leader, flush right next to first paragraph.] James S. Yu recently assumed the role of portfolio management team leader. Mr. Yu has been a member of the team since joining John Hancock in 2000. Previously, he worked as an analyst at Gabelli & Company and Merrill Lynch Asset Management. The year 2001 was a disappointment for investors. The stock market remained choppy, as the economic outlook repeatedly shifted direction. The Federal Reserve aggressively cut interest rates throughout the year, periodically boosting investors' hopes that economic growth would pick up. But disappointing mid-year earnings reports, weak corporate spending, and the tragic events of September 11 dashed hopes of a recovery before year end. The market bottomed on September 21, shortly before investors learned that the economy had officially been in a recession since March. By the fourth quarter, many investors began believing the worst might be over. Stock prices rallied, but the Standard & Poor's 500 Index still returned a disappointing -11.88% for 2001. PERFORMANCE AND STRATEGY REVIEW John Hancock V.A. Relative Value Fund returned -2.81% at net asset value for the year ended December 31, 2001. By comparison, the average variable annuity multi-cap value fund returned -0.22%, according to Lipper, Inc. Our long-term strategy of buying great companies when their share prices were selling at bargain prices resulted in strong stock selection. However, our lower-than-average stake in some of the better-performing, more defensive sectors, such as financials, somewhat hampered relative performance. TOP GAINERS Roughly half of the Fund's assets were in technology-related industries. Concord Communications, a small-cap company that sells software to maximize the performance of large computer networks, more than doubled in price, as investors finally recognized the value of the company's business. Microsoft and Dell Computer also did well, thanks to strong business models, skilled management teams and market share gains at both companies. We took profits midyear. Computer Associates International, which develops software applications for mainframes, rallied nicely, thanks to a shift in its business model and ongoing demand for its services. In other sectors, Cendant, a company that operates hotel, car rental, and real estate franchises, excelled as the company exceeded investor expectations. We decided to sell. NEAR-TERM DISAPPOINTMENTS As the technology sector continued to slide in 2001, several of our investments suffered steep losses. Among them were Lucent Technologies, which makes telecommunications equipment; Parametric Technology, which develops design software; and Vicor, which makes electrical power components. We held on, believing each is taking the right measures to strengthen its operations and prepare for an economic recovery. Pegasus Communications, a direct satellite broadcast company serving rural markets, also saw its stock price sink as the company shifted business models and as competitor Hughes Electronics accepted a disappointingly low buyout offer from another rival. Agere Systems, an optical equipment stock that was our largest investment, declined as well, dogged by its former association with Lucent. [Table at bottom right hand column entitled "Top five stock holdings." The first listing is Agere Systems 4.7%, the second is Parametrics Technology 4.3%, the third Citigroup 4.2%, the fourth Liberty Media 4.2% and the fifth Pegasus Communications 3.6%. A note below the table reads "As a percentage of net assets on 12-31-01."] MORE ECONOMIC SENSITIVITY We built a sizable stake in media stocks, which we expect to benefit once the economy's outlook improves and ad spending picks up. Among our investments were Liberty Media, a holding company that was recently spun off from AT&T; Cumulus Media, a radio broadcaster focused on small and midsize markets; and XM Satellite Radio, which provides digital radio service to subscribers. All were positive contributors to performance. During the second half of the year, we also added some new retail names, including CVS Stores and Gap, Inc., both of which stand to benefit from improved economic conditions as well as more realistic earnings expectations. BUYING OPPORTUNITIES In the health-care sector, we stepped up our investment in large pharmaceutical companies, including Schering-Plough, Pharmacia and Merck. We liked the fact that each of these companies had finally set realistic earnings expectations and was investing in the development of new drugs to rejuvenate their pipeline. The market's weakness also gave us a great opportunity to add new positions in premier financial companies like J.P. Morgan Chase and Morgan Stanley Dean Witter, both of which tend to do well when the stock market rallies. OPTIMISTIC OUTLOOK We expect lower interest rates and fiscal stimulus measures to help the economy toward recovery during the first half of 2002. We believe large-company stocks have the strongest potential. They are coming off two difficult years in which they have lagged their smaller-cap counterparts. In addition, many large companies have taken the right steps and restructured. Many others have also gained market share during the recession, strengthening even further their competitive positions. Going forward, we expect the winners will be companies with the most credible business plans and realistic expectations. This commentary reflects the views of the portfolio managers through the end of the Fund's period discussed in this report. Of course, the managers' views are subject to change as market and other conditions warrant. A LOOK AT PERFORMANCE For the year ended 12-31-01 Cumulative total returns One Year -2.81% Since inception (1-6-98) 75.94% Average annual total returns One Year -2.81% Since inception (1-6-98) 15.24% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. GROWTH OF $10,000 John Hancock V.A. Relative Value Fund 1-6-98 -- 12-31-01 Line chart with the heading John Hancock V.A. Relative Value Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Relative Value Fund on January 6, 1998 and is equal to $17,954 as of December 31, 2001. The second line represents the Standard & Poor's 500 Index and is equal to $12,468 as of December 31, 2001. The chart to the left shows how much a $10,000 investment in the John Hancock V.A. Relative Value Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. FINANCIAL STATEMENTS Fund's Investments Securities owned by the Fund on 12-31-01
SHARES ISSUER VALUE COMMON STOCKS 97.23% $62,288,992 (Cost $68,503,331) Computers 11.77% $7,542,594 31,600 Computer Associates International, Inc. 1,089,884 78,000 Concord Communications, Inc.* 1,610,700 9,000 Hyperion Solutions Corp.* 178,740 50,000 MicroStrategy, Inc.* 192,500 350,000 Parametric Technology Corp.* 2,733,500 97,000 Wind River Systems, Inc.* 1,737,270 Cosmetics & Personal Care 2.09% 1,336,000 40,000 Gillette Co. (The) 1,336,000 Diversified Operations 1.89% 1,213,340 20,600 Tyco International, Ltd. 1,213,340 Electronics 17.16% 10,991,226 533,990 Agere Systems, Inc. (Class A)* 3,038,403 40,700 Alpha Industries, Inc. 887,260 57,750 Arris Group, Inc.* 563,640 148,000 Conexant Systems, Inc.* 2,125,280 6,000 Flextronics International, Ltd.* (Singapore) 143,940 16,871 MKS Instruments, Inc.* 456,023 27,000 Sanmina Corp.* 537,300 4,800 Sony Corp. (Japan) 219,380 50,000 Texas Instruments, Inc. 1,400,000 100,000 Vicor Corp.* 1,620,000 Fiber Optics 1.10% 706,815 69,500 Finisar Corp.* 706,815 Finance 6.56% 4,205,644 53,341 Citigroup, Inc. 2,692,654 17,000 J.P. Morgan Chase & Co. 617,950 16,000 Morgan Stanley Dean Witter & Co. 895,040 Food 1.97% 1,263,160 46,000 Hain Celestial Group, Inc.* 1,263,160 Insurance 3.76% 2,409,205 28,505 ACE, Ltd. (Bermuda) 1,144,476 12,334 Ambac Financial Group, Inc. 713,645 6,032 XL Capital, Ltd. (Class A) (Bermuda) 551,084 Media 15.98% 10,236,210 7,800 Clear Channel Communications, Inc.* 397,098 106,000 Cumulus Media, Inc. (Class A)* 1,715,080 190,000 Liberty Media Corp. (Class A)* 2,660,000 220,700 Pegasus Communications Corp.* 2,297,487 16,500 USA Networks, Inc.* 450,615 27,000 Viacom, Inc. (Class B)* 1,192,050 83,000 XM Satellite Radio Holdings, Inc. (Class A)* 1,523,880 Medical 15.11% 9,678,780 17,500 Abbott Laboratories 975,625 22,000 Alpharma, Inc. (Class A) 581,900 19,000 Bristol-Myers Squibb Co. 969,000 180,000 I-STAT Corp.* 1,420,200 26,200 Merck & Co., Inc. 1,540,560 45,800 Pharmacia Corp. 1,953,370 62,500 Schering-Plough Corp. 2,238,125 Retail 4.43% 2,834,650 24,000 CVS Corp. 710,400 60,000 Gap, Inc. (The) 836,400 30,000 Kroger Co. (The) 626,100 25,000 McDonald's Corp. 661,750 Schools 1.22% 782,375 27,500 DeVry, Inc.* 782,375 Telecommunications 14.19% 9,088,993 10,000 CenturyTel, Inc. 328,000 35,000 Corning, Inc. 312,200 60,000 CTC Communications Group, Inc.* 309,000 97,000 General Motors Corp. (Class H) Hughes 1,498,650 174,253 Lucent Technologies, Inc. 1,096,051 148,200 Nextel Communications, Inc. (Class A)* 1,624,272 65,000 Nextel Partners, Inc. (Class A)* 780,000 5,000 QUALCOMM, Inc.* 252,500 100,000 SBA Communications Corp.* 1,302,000 79,000 Sprint Corp. 1,586,320 ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE MATURITY DATE RATE RATING** (000s OMITTED) VALUE BONDS 0.06% $39,480 (Cost $441,174) Office 0.06% Danka Business Systems Plc, Gtd Sr Sub Note (Great Britain) 04-01-04 Zero N/R $197 39,480 SHORT-TERM INVESTMENTS 2.63% $1,684,000 (Cost $1,684,000) Joint Repurchase Agreement 2.63% Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. -- Dated 12-31-01, due 01-02-02 (Secured by U.S. Treasury Bonds, 3.375% thru 9.875%, due 11-15-15 thru 04-15-32 and U.S. Treasury Notes, 3.375% thru 6.250%, due 12-31-02 thru 01-15-07) 1.70% 1,684 1,684,000 TOTAL INVESTMENTS 99.92% $64,012,472 OTHER ASSETS AND LIABILITIES, NET 0.08% $53,530 TOTAL NET ASSETS 100.00% $64,066,002 * Non-income producing security. ** Credit ratings are unaudited and rated by Standard & Poor's where available, or Moody's Investor Services or John Hancock Advisers, LLC, where Standard & Poor's ratings are not available. Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. The percentage shown for each investment category is the total of that category as a percentage of the net assets of the Fund. See notes to financial statements.
Statement of Assets and Liabilities 12-31-01 ASSETS Investments at value (cost $70,628,505) $64,012,472 Cash 101,405 Dividends and interest receivable 5,877 Other assets 618 Total assets 64,120,372 LIABILITIES Payable to affiliates 32,481 Other payables and accrued expenses 21,889 Total liabilities 54,370 NET ASSETS Capital paid-in 72,482,704 Accumulated net realized loss on investments and foreign currency transactions (1,813,560) Net unrealized depreciation of investments (6,616,033) Undistributed net investment income 12,891 Net assets $64,066,002 NET ASSET VALUE PER SHARE (Based on 6,590,066 shares of beneficial interest outstanding -- unlimited number of shares authorized with no par value) $9.72 See notes to financial statements. Statement of Operations For the year ended 12-31-01 INVESTMENT INCOME Dividends (net of foreign withholding taxes of $174) $241,930 Securities lending income 119,411 Interest 97,537 Total investment income 458,878 EXPENSES Investment management fee 283,176 Custodian fee 19,955 Auditing fee 18,000 Interest expense 10,744 Accounting and legal services fee 9,669 Printing 3,432 Trustee's fee 2,293 Miscellaneous 1,310 Legal fee 503 Registration and filing fee 17 Total expenses 349,099 Net investment income 109,779 REALIZED AND UNREALIZED LOSS Net realized loss on Investments (461,390) Foreign currency transactions (13) Change in unrealized depreciation on Investments (929,271) Net realized and unrealized loss (1,390,674) Decrease in net assets from operations ($1,280,895) See notes to financial statements. Statement of Changes in Net Assets YEAR YEAR ENDED ENDED 12-31-00 12-31-01 INCREASE (DECREASE) IN NET ASSETS From operations Net investment income $54,327 $109,779 Net realized gain (loss) 13,434,131 (461,403) Change in net unrealized appreciation (depreciation) (15,296,586) (929,271) Decrease in net assets resulting from operations (1,808,128) (1,280,895) Distributions to shareholders From net investment income (42,822) (103,992) From net realized gain (15,128,734) (3,603,363) (15,171,556) (3,707,355) From fund share transactions 17,256,192 30,011,640 NET ASSETS Beginning of period 38,766,104 39,042,612 End of period 1 $39,042,612 $64,066,002 1 Includes undistributed net investment income of $7,190 and $12,891, respectively. See notes to financial statements. Financial Highlights 12-31-98 1 12-31-99 12-31-00 12-31-01 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $10.00 $12.03 $18.03 $10.64 Net investment income 2 0.11 0.10 0.02 0.02 Net realized and unrealized gain (loss) on investments 2.02 6.65 (0.80) (0.32) Total from investment operations 2.13 6.75 (0.78) (0.30) Less distributions: From net investment income (0.10) (0.10) (0.02) (0.02) From net realized gain -- (0.65) (6.59) (0.60) (0.10) (0.75) (6.61) (0.62) Net asset value, end of period $12.03 $18.03 $10.64 $9.72 Total return 3 (%) 21.39 4,5 56.65 (4.80) (2.81) RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $17 $39 $39 $64 Ratio of expenses to average net assets % 0.85 6 0.77 0.79 0.74 Ratio of adjusted expenses to average net assets 7 % 1.03 6 -- -- -- Ratio of net investment income to average net assets % 1.17 6 0.66 0.13 0.23 Portfolio turnover % 242 166 164 59 1 Began operations on 1-6-98. 2 Based on the average of the shares outstanding at the end of each month. 3 Assumes dividend reinvestment. 4 Not annualized. 5 The total return would have been lower had certain expenses not been reduced during the period shown. 6 Annualized. 7 Does not take into consideration expense reductions during the period shown. See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS NOTE A Organization John Hancock V.A. Relative Value Fund (the "Fund") is a diversified series of John Hancock Declaration Trust (the "Trust"), an open-end investment management company registered under the Investment Company Act of 1940. The Trust, organized as a Massachusetts business trust in 1995, consists of five different series at December 31, 2001. The Trustees may authorize the creation of additional series from time to time to satisfy various investment objectives. An insurance company issuing a Variable Contract that participates in the Trust will vote shares of the Fund held by the insurance company's separate accounts as required by law. In accordance with current law and interpretations thereof, participating insurance companies are required to request voting instructions from policy owners and must vote shares of the Fund in proportion to the voting instructions received. The investment objective of the Fund is to seek the highest total return (capital appreciation plus current income) that is consistent with reasonable safety of capital. The Fund's Board of Trustees has voted to change the Fund's investment objective to long-term capital appreciation effective May 1, 2002. The Fund currently has one class of shares with equal rights as to voting, redemption, dividends and liquidation. Significant accounting policies of the Fund are as follows: Valuation of investments Securities in the Fund's portfolio are valued on the basis of market quotations, valuations provided by independent pricing services or at fair value as determined in good faith in accordance with procedures approved by the Trustees. Short-term debt investments maturing within 60 days are valued at amortized cost, which approximates market value. Joint repurchase agreement Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Fund, along with other registered investment companies having a management contract with John Hancock Advisers, LLC (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, LLC, may participate in a joint repurchase agreement transaction. Aggregate cash balances are invested in one or more large repurchase agreements, whose underlying securities are obligations of the U.S. government and/or its agencies. The Fund's custodian bank receives delivery of the underlying securities for the joint account on the Fund's behalf. The Adviser is responsible for ensuring that the agreement is fully collateralized at all times. Investment transactions Investment transactions are recorded as of the date of purchase, sale or maturity. Net realized gains and losses on sales of investments are determined on the identified cost basis. Discount and premium on securities The Fund accretes discount and amortizes premium from par value on securities from either the date of issue or the date of purchase over the life of the security. Expenses The majority of the expenses are directly identifiable to an individual fund. Expenses that are not readily identifiable to a specific fund will be allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative sizes of the funds. Bank borrowings The Fund is permitted to have bank borrowings for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Fund has entered into a syndicated line of credit agreement with various banks. This agreement enables the Fund to participate with other funds managed by the Adviser in an unsecured line of credit with banks, which permit borrowings up to $500 million, collectively. Interest is charged to each fund, based on its borrowing. In addition, a commitment fee is charged to each fund based on the average daily unused portion of the line of credit and is allocated among the participating funds. The Fund had no borrowing activity under the line of credit during the year ended December 31, 2001. Securities lending The Fund may lend securities to certain qualified brokers who pay the Fund negotiated lender fees. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay of the loaned securities in recovery or even loss of rights in the collateral, should the borrower of the securities fail financially. At December 31, 2001, the Fund loaned securities having a market value of $2,844,777 collateralized by securities in the amount of $2,861,705. Federal income taxes The Fund qualifies as a "regulated investment company" by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income which is distributed to shareholders. Therefore, no federal income tax provision is required. For federal income tax purposes, net currency gains and losses from sales of foreign debt securities may be treated as ordinary income even though such items are capital gains and losses for accounting purposes. For federal income tax purposes, net capital losses of $1,680,742 attributable to security transactions incurred after October 31, 2001 are treated as arising on the first day (January 1, 2002) of the Fund's next taxable year. Dividends, interest and distributions Dividend income on investment securities is recorded on the ex-dividend date or, in the case of some foreign securities, on the date thereafter when the Fund identifies the dividend. Interest income on investment securities is recorded on the accrual basis. Foreign income may be subject to foreign withholding taxes which are accrued as applicable. The Fund records distributions to shareholders from net investment income and realized gains on the ex-dividend date. Such distributions are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. Use of estimates The preparation of these financial statements, in accordance with accounting principles generally accepted in the United States of America, incorporates estimates made by management in determining the reported amount of assets, liabilities, revenues and expenses of the Fund. Actual results could differ from these estimates. NOTE B Management fee and transactions with affiliates and others The Fund has an investment management contract with the Adviser. Under the investment management contract, the Fund pays a monthly management fee to the Adviser at an annual rate of 0.60% of the Fund's average daily net asset value. The Adviser has agreed to limit the Fund's expenses, excluding the management fee, to 0.25% of the Fund's average daily net assets, at least until April 30, 2002. There was no expense reduction for the year ended December 31, 2001. The Adviser reserves the right to terminate this limitation in the future. The Fund has an agreement with the Adviser to perform necessary tax, accounting and legal services for the Fund. The compensation for the year was at an annual rate of 0.02% of the average net assets of the Fund. Ms. Maureen R. Ford and Mr. John M. DeCiccio are directors and/or officers of the Adviser and/or its affiliates, as well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees may elect to defer for tax purposes their receipt of this compensation under the John Hancock Group of Funds Deferred Compensation Plan. The Fund makes investments into other John Hancock funds, as applicable, to cover its liability for the deferred compensation. Investments to cover the Fund's deferred compensation liability are recorded on the Fund's books as an other asset. The deferred compensation liability and the related other asset are always equal and are marked to market on a periodic basis to reflect any income earned by the investment as well as any unrealized gains or losses. The Deferred Compensation Plan investments had no impact on the operations of the Fund. NOTE C Fund share transactions This listing illustrates the number of shares sold, reinvested and repurchased during the last two period, along with the corresponding dollar value. The Fund has an unlimited number of shares authorized with no par value.
YEAR ENDED 12-31-00 YEAR ENDED 12-31-01 SHARES AMOUNT SHARES AMOUNT Shares sold 744,370 $13,227,216 5,398,455 $56,971,452 Distributions reinvested 1,406,946 15,171,557 383,527 3,707,355 Repurchased (631,982) (11,142,581) (2,861,752) (30,667,167) NET INCREASE 1,519,334 $17,256,192 2,920,230 $30,011,640
NOTE D Investment transactions Purchases and proceeds from sales of securities, other than short-term securities and obligations of the U.S. government, during the year ended December 31, 2001, aggregated $53,136,803 and $27,293,155, respectively. The cost of investments owned at December 31, 2001, including short-term investments, for federal income tax purposes was $70,852,532. Gross unrealized appreciation and depreciation of investments aggregated $5,964,165 and $12,804,225, respectively, resulting in net unrealized depreciation of $6,840,060. The difference between book basis and tax basis net unrealized depreciation of investments is attributable primarily to the tax deferral of losses on wash sales. NOTE E Reclassification of accounts During the year ended December 31, 2001, the Fund has reclassified amounts to reflect a decrease in accumulated net realized loss on investments of $149, a decrease in undistributed net investment income of $86 and a decrease in capital paid-in of $63. This represents the amount necessary to report these balances on a tax basis, excluding certain temporary difference, as of December 31, 2001. Additional adjustments may be needed in subsequent reporting periods. These reclassifications, which have no impact on the net asset value of the Fund, are primarily attributable to net realized loss on foreign currency transactions in the computation of distributable income and capital gains under federal tax rules versus accounting principles generally accepted in the United States of America. The calculation of net investment income in the financial highlights excludes these adjustments. Report of Ernst & Young LLP, Independent Auditors To the contract owners and trustees of John Hancock Declaration Trust, We have audited the accompanying statement of assets and liabilities of the John Hancock V.A. Relative Value Fund (the "Fund"), one of the portfolios constituting John Hancock Declaration Trust, including the schedule of the Fund's investments, as of December 31, 2001, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2001, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the John Hancock V.A. Relative Value Fund of the John Hancock Declaration Trust at December 31, 2001, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States. /S/ ERNST & YOUNG LLP Boston, Massachusetts February 8, 2002 Tax Information UNAUDITED For federal income tax purposes, the following information is furnished with respect to the distributions of the Fund for its taxable year ended December 31, 2001. The Fund has designated distributions to shareholders of $788,355 as a long-term capital gain dividend. These amounts were reported on the 2001 U.S. Treasury Department Form 1099-DIV. With respect to the ordinary dividends paid by the Fund for the fiscal year ended December 31, 2001, 8.17% of the dividends qualify for the corporate dividends-received deduction. TRUSTEES & OFFICERS This chart provides information about the Trustees and Officers who oversee your John Hancock fund. Officers elected by the Trustees manage the day-to-day operations of the Fund and execute policies formulated by the Trustees. INDEPENDENT TRUSTEES
NUMBER OF NAME, AGE JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER TRUSTEE FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE 2 BY TRUSTEE Dennis S. Aronowitz 1, Born: 1931 1998 30 Professor of Law, Emeritus, Boston University School of Law (as of 1996); Director, Brookline Bancorp. Richard P. Chapman, Jr., Born: 1935 1998 30 Chairman, President, and Chief Executive Officer, Brookline Bancorp. (lending) (since 1972); Trustee, Northeastern University (education); Chairman and Director, Lumber Insurance Co. (insurance) (until 2000); Chairman and Director, Northeast Retirement Services, Inc. (retirement administration) (since 1998). William J. Cosgrove 1, Born: 1933 1998 30 Vice President, Senior Banker and Senior Credit Officer, Citibank, N.A. (retired 1991); Executive Vice President, Citadel Group Representatives, Inc.; Director, Hudson City Bancorp; Trustee, Scholarship Fund for Inner City Children (since 1986). Richard A. Farrell 1, Born: 1932 1998 30 President, Farrell, Healer & Co., Inc. (venture capital management firm) (since 1980) and General Partner of the Venture Capital Fund of NE (since 1980); prior to 1980, headed the venture capital group at Bank of Boston Corporation. Gail D. Fosler, Born: 1947 1998 30 Senior Vice President and Chief Economist, The Conference Board (non-profit economic and business research) (since 1989); Director, Unisys Corp. (since 1993); Director, H.B. Fuller Company (since 1992) and DBS Holdings (Singapore) (banking and financial services) (since 1999); Director, National Bureau of Economic Research (academic) (since 1989); Director, Baxter International (medical health care) (since 2001). William F. Glavin, Born: 1932 1998 30 President Emeritus, Babson College (as of 1998); Vice Chairman, Xerox Corporation (until 1989); Director, Reebok, Inc. (since 1994) and Inco Ltd. John A. Moore, Born: 1939 1998 36 President and Chief Executive Officer, Institute for Evaluating Health Risks, (nonprofit institution) (until 2001); Senior Scientist, Sciences International (health research) (since 1998); Principal, Hollyhouse (consulting) (since 2000); Director, CIIT (nonprofit research) (since 2002). Patti McGill Peterson, Born: 1943 1998 36 Executive Director, Council for International Exchange of Scholars (since 1998), Vice President, Institute of International Education (since January 1998); Senior Fellow, Cornell Institute of Public Affairs, Cornell University (until 1997); President Emerita of Wells College and St. Lawrence University; Director, Niagara Mohawk Power Corporation (electric utility). John W. Pratt 1, Born: 1931 1998 30 Professor of Business Administration Emeritus, Harvard University Graduate School of Business Administration (as of 1998). INTERESTED TRUSTEES 3 NAME, AGE NUMBER OF POSITION(S) HELD WITH FUND JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER TRUSTEE FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE 2 BY TRUSTEE John M. DeCiccio, Born: 1948 2001 66 Trustee Executive Vice President and Chief Investment Officer, John Hancock Financial Services, Inc.; Director, Executive Vice President and Chief Investment Officer, John Hancock Life Insurance Company; Chairman of the Committee of Finance of John Hancock Life Insurance Company; Director, John Hancock Subsidiaries, LLC, Hancock Natural Resource Group, Independence Investment LLC, Independence Fixed Income LLC, John Hancock Advisers, LLC (the "Adviser") and The Berkeley Financial Group, LLC ("The Berkeley Group"), John Hancock Funds, LLC ("John Hancock Funds"), Massachusetts Business Development Corporation; Director, John Hancock Insurance Agency, Inc. ("Insurance Agency, Inc.") (until 1999) and John Hancock Signature Services, Inc. ("Signature Services") (until 1997). Maureen R. Ford, Born: 1955 2000 66 Trustee, Chairman, President and Chief Executive Officer, John Hancock Financial Services, Inc., John Hancock Life Insurance Company; Chairman, Director, President and Chief Executive Officer, the Advisers and The Berkeley Group; Chairman, Director and Chief Executive Officer, John Hancock Funds, Chairman, Director and President, Insurance Agency, Inc.; Chairman, Director and Chief Executive Officer, Sovereign Asset Management Corporation ("SAMCorp."); Director, Independence Investment LLC, Independence Fixed Income LLC and Signature Services; Senior Vice President, MassMutual Insurance Co. (until 1999); Senior Vice President, Connecticut Mutual Insurance Co. (until 1996). PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES NAME, AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) AND OTHER OFFICER DIRECTORSHIPS DURING PAST 5 YEARS SINCE William L. Braman, Born: 1953 2000 Executive Vice President and Chief Investment Officer Executive Vice President and Chief Investment Officer, the Adviser and each of the John Hancock funds; Director, SAMCorp., Executive Vice President and Chief Investment Officer, Barring Asset Management, London UK (until 2000). Richard A. Brown, Born: 1949 2000 Senior Vice President and Chief Financial Officer Senior Vice President, Chief Financial Officer and Treasurer, the Adviser, John Hancock Funds, and The Berkeley Group; Second Vice President and Senior Associate Controller, Corporate Tax Department, John Hancock Financial Services, Inc. (until 2001). Thomas H. Connors, Born: 1959 1998 Vice President and Compliance Officer Vice President and Compliance Officer, the Adviser and each of the John Hancock funds; Vice President, John Hancock Funds. William H. King, Born: 1952 1998 Vice President and Treasurer Vice President and Assistant Treasurer, the Adviser; Vice President and Treasurer of each of the John Hancock funds; Assistant Treasurer of each of the John Hancock funds (until 2001). Susan S. Newton, Born: 1950 1998 Senior Vice President, Secretary and Chief Legal Officer Senior Vice President, Secretary and Chief Legal Officer, SAMCorp., the Adviser and each of the John Hancock funds, John Hancock Funds and The Berkeley Group; Vice President, Signature Services (until 2000); Director, Senior Vice President and Secretary, NM Capital. The business address for all Trustees and Officers is 101 Huntington Avenue, Boston, Massachusetts, 02199. The Statement of Additional Information of the Fund includes additional information about members of the board of Trustees of the Fund and is available, without charge, upon request, by calling 1-800-426-5523. 1 Member of Audit Committee. 2 Each Trustee serves until resignation, retirement age or until his or her successor is elected. 3 Interested Trustee holds positions with the Fund's investment adviser, underwriter and certain other affiliates.
JOHN HANCOCK FUNDS DECLARATION TRUST ANNUAL REPORT [LOGO] John Hancock [Rings] World Wide Sponsor John Hancock Funds, LLC MEMBER NASD 101 Huntington Avenue Boston, MA 02199-7603 1-800-225-5291 1-800-554-6713 TDD 1-800-338-8080 EASI-Line www.jhfunds.com Mutual Funds Institutional Services Private Managed Accounts Retirement Plans This report is for the information of the shareholders of the John Hancock V.A. Relative Value Fund. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE 8290A 12/01 2/02 ANNUAL REPORT John Hancock V.A. Strategic Income Fund A series of John Hancock Declaration Trust 12.31.01 [A 2" x 1" John Hancock (Signature)/John Hancock Funds logo at bottom left center of page. A tag line below reads "JOHN HANCOCK FUNDS."] FOR YOUR INFORMATION TRUSTEES Dennis S. Aronowitz* Richard P. Chapman, Jr. William J. Cosgrove* John M. DeCiccio Richard A. Farrell Maureen R. Ford Gail D. Fosler William F. Glavin Dr. John A. Moore Patti McGill Peterson John W. Pratt* *Members of the Audit Committee OFFICERS Maureen R. Ford Chairman, President and Chief Executive Officer William L. Braman Executive Vice President and Chief Investment Officer Richard A. Brown Senior Vice President and Chief Financial Officer Susan S. Newton Senior Vice President and Secretary William H. King Vice President and Treasurer Thomas H. Connors Vice President and Compliance Officer CUSTODIAN The Bank of New York One Wall Street New York, New York 10286 TRANSFER AGENT John Hancock Signature Services, Inc. 529 Main Street Charlestown, Massachusetts 02129 INVESTMENT ADVISER John Hancock Advisers, LLC 101 Huntington Avenue Boston, Massachusetts 02199-7603 INSURANCE PRODUCTS ISSUER John Hancock Life Insurance Company, John Hancock Variable Life Insurance Company* 200 Clarendon Street Boston, Massachusetts 02117 *Not licensed in New York FUND DISTRIBUTOR John Hancock Funds, LLC 101 Huntington Avenue Boston, Massachusetts 02199-7603 LEGAL COUNSEL Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109-1803 INDEPENDENT AUDITORS Ernst & Young LLP 200 Clarendon Street Boston, Massachusetts 02116-5072 HOW TO CONTACT US On the Internet www.jhancock.com By regular mail John Hancock Signature Services, Inc. 529 Main Street Charlestown, Massachusetts 02129 Customer service representatives 1-800-225-5291 24-hour automated information 1-800-338-8080 WELCOME [A photo of Maureen R. Ford, Chairman and CEO, flush right next to first paragraph.] Dear Shareholders, The U.S. stock market produced double-digit losses for the second year in a row in 2001 -- the first back-to-back down years for stocks since the 1973-74 bear market. The economy slipped into recession, wreaking havoc with corporate profits, and the tragic events of September 11 further rattled investors. Even a strong fourth quarter rally was not enough to lift the major indexes into positive territory. The Standard & Poor's 500 Index finished the year losing 11.88%, including reinvested dividends, and the Dow Jones Industrial Average lost 5.42%. The tech-heavy Nasdaq Composite Index fell 21.05% -- tamer than 2000's loss, thanks to a late-year rebound in the beleaguered technology and telecommunications sectors. Stock mutual fund investors didn't find many places to hide, and 83% of U.S. stock funds posted negative returns in 2001, with the average stock fund falling 10.89%, according to Lipper, Inc. In stark contrast, bonds beat stocks for the second straight year and produced positive results, buoyed by falling interest rates and investors' search for safety. These last two years couldn't have provided a more vivid example of the importance of being well diversified, since a portfolio concentrated solely in stocks would have fallen more in the last two years than one combining investments in both stocks and bonds. Two disappointing years of stock performance could also be a reason to re-evaluate with your investment professional whether you are still on track to meet your long-term financial goals. It's possible that downsized results, and modified expectations, could foster some changes in your investing strategies. And now is certainly a good time to perform this review, given the increased opportunities for retirement and college savings offered in President Bush's major tax-cut legislation enacted in June. With the market's fourth quarter rally, and the growing expectation that the economy will rebound sometime in 2002, we begin the year on a positive note, confident in the resilience of the economy, the financial markets and the nation. Sincerely, /S/ MAUREEN R. FORD Maureen R. Ford, Chairman and Chief Executive Officer Table of contents Managers' Report page 4 A Look at Performance page 5 Growth of $10,000 page 5 Financial Statements page 6 BY FREDERICK L. CAVANAUGH, JR., MANAGEMENT TEAM LEADER, AND ARTHUR N. CALAVRITINOS, CFA, AND DANIEL S. JANIS, III, PORTFOLIO MANAGERS John Hancock V.A. Strategic Income Fund MANAGERS' REPORT [A photo of Frederick Cavanaugh, Team leader, flush right next to first paragraph.] On December 14, 2001, John Hancock V.A. High Yield Bond Fund was merged into John Hancock V.A. Strategic Income Fund. A slowing economy, falling interest rates and the tragic events of September 11 had a decidedly mixed effect on U.S. Treasury securities, high-yield corporate bonds and foreign government bonds during the 12-month period ended December 31, 2001. U.S. Treasury securities enjoyed substantial gains throughout most of the period, fueled by a dramatic series of 11 interest-rate cuts intended to revive an ailing economy. As interest rates declined, bond yields dropped and bond prices, which move in the opposite direction from their yields, generally moved higher. But after a nearly year-long ascent, Treasuries lost some ground in November and December when investors began to harbor hopes for a 2002 rebound, despite a steady drumbeat of mostly negative economic news and the official pronouncement that the economy had been in recession since March 2001. High-yield corporate bonds spent much of the year underperforming most other bonds, struggling against weak economic conditions, rising defaults among high-yield issuers and a general lack of demand. But in November and December, hopes for a 2002 economic recovery drove high-yield bonds to very strong returns. (An improving economy often serves to improve the health -- and credit ratings -- of low-quality issuers.) When all was said and done, high-yield bonds ended up posting small gains for the year. As typically is the case, foreign bond markets were mixed. Many emerging-market bonds posted very strong gains. The catalyst for their strong performance was a growing recognition by global investors that these countries were in much better fundamental shape than they had been in some time, characterized by declining debt levels, improving trade numbers and better economic growth. High-quality European and Canadian bonds also posted decent gains. FUND PERFORMANCE For the 12 months ended December 31, 2001, John Hancock V.A. Strategic Income Fund had a total return of 4.58%, at net asset value. This compared with the 5.76% return of the average variable annuity general bond fund, which has a greater emphasis on investment-grade bonds. OPPORTUNISTIC APPROACH BENEFITS PERFORMANCE Our relatively large weighting in dollar-denominated emerging-market bonds helped performance. Despite ongoing problems in Argentina, other Latin American countries -- including Mexico, Brazil, Chile, Colombia and Panama -- continued to enjoy improving economic and fiscal conditions, helping to attract yield-hungry investors. Our holdings in Russian government bonds also benefited from similar trends. [Table at bottom right hand column entitled "Top five industry groups." The first listing is Foreign governments 33%, the second is U.S. government 30%, the third Media 5%, the fourth Telecommunications 4% and the fifth Oil & gas 3%. A note below the table reads "As a percentage of net assets on 12-31-01."] HIGH-YIELD WINNERS AND LOSERS Against a stubbornly weak investment backdrop, some of our high-yield corporate holdings performed well. TeleCorp PCS and Tritel PCS were boosted when they were taken over by AT&T. Colombia's Comunicacion Celular and Occidente y Caribe Cellular were buoyed by a planned merger with American Mobile. Cable company Fox Family Worldwide performed well on the announcement that the company would be taken over by Disney. However, doubts continued to plague the telecommunications sector overall, and it was the source of some of our biggest disappointments during the period. Canada's MetroNet Communications faltered on fears that AT&T Canada would walk away from its planned acquisition of the company. McCaw International was hurt by the news that its Nextel parent wouldn't provide much-needed funding going forward. In addition, our holdings in broadband provider XO Communications were a disappointment when the company filed for bankruptcy. EUROPE OFFERS OPPORTUNITIES Early in the period, European bond yields were below U.S. Treasury bond yields. More recently, however, European interest rates haven't fallen nearly as quickly as U.S. rates, presenting us with the opportunity to purchase high-quality bonds at attractive yields. And given that the European economic cycle tends to mirror ours, but with a six-month or so lag, we expect that falling interest rates on that continent may likely allow these bonds to appreciate. OUTLOOK Our view is that the economy is at or near a bottom, although the Fed will likely continue to cut rates in order to ensure a recovery. But unless we're convinced that a vibrant economic rebound is in the cards, we're likely to hold onto our Treasury holdings, anticipating that long-term interest rates can decline. It's unlikely that high-yield corporate bonds will really take off until more investors are convinced that the economy is healthy and liquidity returns to the marketplace. Looking abroad, we see further economic weakening in Europe and, as a result, lower interest rates. We believe that emerging-market bonds can continue to perform well, although we believe that 2002 will require far more selectivity. This commentary reflects the views of the portfolio managers through the end of the Fund's period discussed in this report. Of course, the managers' views are subject to change as market and other conditions warrant. International investing involves special risks such as political, economic and currency risks and differences in accounting standards and financial reporting. See the prospectus for the risks of investing in high-yield bonds. A LOOK AT PERFORMANCE For the period ended 12-31-01 Cumulative total returns One year 4.58% Five years 30.30% Since inception (8-29-96) 38.70% Average annual total returns One year 4.58% Five years 5.44% Since inception (8-29-96) 6.32% Yield SEC 30-Day Yield 6.45% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. See the prospectus for details. GROWTH OF $10,000 John Hancock V.A. Strategic Income Fund 8-29-96 -- 12-31-01 Line chart with the heading John Hancock V.A. Strategic Income Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Lehman Brothers Government/Credit Bond Index and is equal to $14,967 as of December 31, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Strategic Income Fund on August 29, 1996 and is equal to $13,871 as of December 31, 2001. The chart to the left shows how much a $10,000 investment in the John Hancock V.A. Strategic Income Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Lehman Brothers Government/Credit Bond Index -- an unmanaged index that measures the performance of U.S. govern ment bonds, U.S. corporate bonds and Yankee bonds. It is not possible to invest in an index. FINANCIAL STATEMENTS Fund's Investments Securities owned by the Fund on 12-31-01
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE MATURITY DATE RATE RATING* (000s OMITTED) VALUE BONDS 85.16% $58,669,207 (Cost $62,396,101) Advertising 0.15% $106,055 Go Outdoor Systems Holding S.A., Sr Sub Note (France) 07-15-09 (E) 10.500% B- $100 106,055 Agricultural Operations 0.01% 3,900 Iowa Select Farms L.P./ ISF Finance, Inc., Jr Sec Sub Note 12-01-06 (R) 10.750 Ca 6 3,900 Automobile/Trucks 0.08% 54,825 AM General Corp., Sr Note Ser B 05-01-02 12.875 B 35 34,825 J.B. Poindexter & Co., Inc., Sr Note 05-15-04 12.500 B 25 20,000 Banks 0.30% 208,934 Colonial Bank, Sub Note 06-01-11 9.375 BBB- 200 208,934 Building 0.47% 322,508 Amatek Industries Property Ltd., Sr Sub Note (Australia) 02-15-08 (Y) 12.000 B 25 22,500 Celulosa Arauco y Constitucion S.A., Bond (Chile) 09-13-11 (Y) 7.750 BBB+ 300 300,008 Business Services -- Misc. 0.06% 42,500 Sotheby's Holdings, Inc., Note 02-01-09 6.875 BB+ 50 42,500 Chemicals 0.82% 564,050 American Pacific Corp., Sr Note 03-01-05 9.250 BB- 30 30,300 Applied Extrusion Technologies, Inc., Sr Note Ser B 07-01-11 10.750 B 50 52,875 Equistar Chemical/Funding Sr Note 09-01-08 10.125 BBB- 100 101,000 Huntsman ICI Chemicals LLC, Sr Disc Note 12-31-09 Zero B- 75 19,125 Sr Sub Note 07-01-09 10.125 B- 150 136,500 Trikem S.A., Bond (Brazil) 07-24-07 (R) (Y) 10.625 BB- 325 224,250 Consumer Products Misc. 0.03% 17,000 Diamond Brands Operating Corp., Sr Sub Note 04-15-08 (B) 10.125 D 100 10,000 Indesco International, Inc., Sr Sub Note 04-15-08 (B) 9.750 Ca 100 7,000 Containers 0.49% 337,461 Gaylord Container Corp., Sr Sub Note Ser B 02-15-08 9.875 CCC 100 39,750 Kappa Beheer B.V., Sr Sub Bond (Netherlands) 07-15-09 (Y) 10.625 B 75 81,750 Sr Sub Bond (Netherlands) 07-15-09 (E) (R) 10.625 B 150 144,911 Riverwood International Corp., Gtd Sr Sub Note 04-01-08 10.875 CCC+ 70 71,050 Cosmetics & Personal Care 0.01% 7,500 Global Health Sciences, Inc., Gtd Sr Note 05-01-08 (B) 11.000 D 75 7,500 Electronics 0.15% 100,500 Communications Instruments, Inc., Sr Sub Note Ser B 09-15-04 10.000 B- 100 100,500 Energy 0.27% 186,740 AEI Resources, Inc./AEI Resources Holdings, Inc., Note 12-15-05 (B) (R) 10.500 D 175 105,000 Great Lakes Carbon Corp., Sr Sub Note 05-15-08 Zero B- 53 31,740 Port Arthur Finance Corp., Gtd Sr Sec Note 01-15-09 12.500 BB 50 50,000 Finance 0.17% 119,959 Finova Group, Inc. (The) Note 11-15-09 7.500 B2 15 6,300 PTC International Finance II S.A., Sr Sub Note (Luxembourg) 12-01-09 (E) (R) 11.250 B+ 125 113,659 Food 0.41% 280,222 Dean Foods Co., Sr Note 08-01-07 8.150 BB- 200 196,972 Mastellone Hermanos S.A., Sr Note (Argentina) 04-01-08 (Y) 11.750 CCC 125 41,250 RAB Holdings, Inc., Sr Note 05-01-08 (R) 13.000 Ca 120 42,000 Funeral Services & Related 0.55% 378,000 Service Corp. International Sr Note 03-15-20 6.300 BB- 400 378,000 Government -- Foreign 32.99% 22,726,909 Australia, Government of, Bond (Australia) 06-15-11 # 5.750 AAA 600 301,735 Brazil, Federative Republic of, Unsub Note (Brazil) 10-15-09 (Y) 14.500 BB- 1,500 1,605,000 Bulgaria, Republic of, Floating Rate Bond (Bulgaria) 07-28-12 (Y) 2.813*** BB- 250 225,313 Buoni Poliennali Del Tes, Bond (Italy) 08-01-11 (E) 5.250 Aa3 975 873,081 Canada, Government of, Bond (Canada) 12-01-02 # 6.000 AA+ 275 178,182 Bond (Canada) 12-01-05 # 8.750 AAA 1,900 1,380,526 Bond (Canada) 12-01-06 # 7.000 AAA 2,300 1,592,498 Bond (Canada) 06-01-08 # 6.000 AAA 500 329,327 Bond (Canada) 06-01-09 # 5.500 AAA 2,500 1,593,685 Bond (Canada) 06-01-10 # 5.500 AA+ 1,675 1,061,946 Bond (Canada) 06-01-29 # 5.750 AA+ 3,425 2,173,479 Chile, Republic of, Note (Chile) 01-11-12 (Y) 7.125 A- 600 616,782 Colombia, Republic of, Note (Colombia) 01-31-08 (E) 11.375 BB 350 326,440 Bond (Colombia) 02-25-20 (Y) 11.750 BB 300 301,500 Note (Colombia) 04-09-11 (Y) 9.750 BBB 751 786,935 Note (Colombia) 01-23-12 (Y) 10.000 BB 100 98,750 Mexican, United States, Note (Mexico) 01-14-11 (Y) 8.375 BB+ 800 830,000 Note (Mexico) 08-15-31 (Y) 8.300 BB+ 300 294,000 Sr Note (Mexico) 03-12-08 (Y) 8.625 BB+ 200 214,500 New Zealand, Government of, Bond (New Zealand) 11-15-11 # 6.000 AAA 2,525 991,547 Norway, Government of, Bond (Norway) 10-31-02 # 9.500 AAA 5,250 601,602 Panama, Republic of, Bond (Panama) 02-08-11 (Y) 9.625 BB 1,450 1,479,000 Peru, Republic of, Deb (Variable Rate after 03-07-07) (Peru) 03-07-17 (Y) 4.000 BB- 765 544,509 Russia, Federation of, Unsub Note (Russia) 06-26-07 (Y) 10.000 B+ 635 621,665 Unsub Note (Russia) 03-31-10 (Y) 8.250 B+ 1,845 1,593,157 Unsub Note (Russia) 07-24-18 (Y) 11.000 B+ 850 816,000 Unsub Note (Russia) 06-24-28 (Y) 12.750 B+ 600 651,000 Uruguay, Republic of, Note (Uruguay) 01-20-12 (Y) 7.625 BBB- 500 500,505 Venezuela, Republic of, Bond (Venezuela) 08-15-18 (Y) 13.625 B 170 144,245 Government -- U.S. 29.71% 20,466,130 United States Treasury, Bond 08-15-05 6.500 AAA 400 432,748 Bond 08-15-05 10.750 AAA 400 488,936 Bond 02-15-16 9.250 AAA 615 831,788 Bond 08-15-19 8.125 AAA 3,590 4,532,949 Bond 08-15-23 6.250 AAA 2,100 2,221,737 Bond 11-15-28 5.250 AAA 2,600 2,428,166 Note 08-31-02 6.250 AAA 3,870 3,981,263 Note 08-15-04 7.250 AAA 590 644,020 Note 05-15-05 6.500 AAA 1,300 1,402,778 Note 08-15-07 6.125 AAA 940 1,010,500 Note 02-15-11 5.000 AAA 1,500 1,494,375 Note 08-15-11 5.000 AAA 1,000 996,870 Insurance 0.07% 51,500 Willis Corroon Corp., Gtd Sr Sub Note 02-01-09 9.000 B+ 50 51,500 Leisure 2.46% 1,695,910 Ameristar Casinos, Inc., Sr Sub Note 02-15-09 (R) 10.750 B- 200 217,000 Claridge Hotel & Casino Corp., 1st Mtg Note 02-01-02 (B) 11.750 D 50 1,500 Fitzgeralds Gaming Corp., Gtd Sr Sec Note Ser B 12-15-04 (B) 12.250 D 50 3,500 HMH Properties, Inc., Sr Note Ser B 08-01-08 7.875 BB- 100 92,500 Jupiters Ltd., Sr Note (Australia) 03-01-06 (Y) 8.500 BB+ 150 150,000 Majestic Investor Holdings LLC/ Majestic Investor Capital Corp., Gtd Sr Sec Note 11-30-07 (R) 11.653 B 300 285,000 Mandalay Resort Group, Sr Sub Note 02-15-10 (R) 9.375 BB- 100 99,375 Penn National Gaming, Inc., Sr Sub Note 03-01-08 (R) 11.125 B- 225 240,750 Station Casinos, Inc., Sr Note 02-15-08 (R) 8.375 BB- 200 202,750 Sun International Hotels Ltd., Sr Sub Note (Bahamas) 12-15-07 (Y) 8.625 B+ 55 51,975 Sr Sub Note (Bahamas) 08-15-11 (R) (Y) 8.875 B+ 110 103,950 Waterford Gaming LLC, Sr Note 03-15-10 (R) 9.500 B+ 193 196,860 Wheeling Island Gaming, Inc., Sr Note 12-15-09 (R) 10.125 B+ 50 50,750 Machinery 0.02% 13,750 Glasstech, Inc., Sr Note Ser B 07-01-04 12.750 B3 25 13,750 Manufacturing 0.03% 19,536 ICON Health & Fitness, Inc., Gtd Note 09-27-05 12.000 B 22 19,536 Media 4.72% 3,253,905 AMFM Operating, Inc., Sr Sub Deb 10-31-06 12.625 B- 64 67,522 Antenna TV S.A., Sr Note (Greece) 07-01-08 (E) 9.750 BB- 50 37,842 Callahan Nordrhein- Westfalen GmbH, Sr Note (Germany) 07-15-11 (E) 14.125 B- 500 267,118 Charter Communications Holdings, LLC/Charter Comm. Holdings Capital Corp., Sr Note 01-15-11 11.125 B+ 300 318,000 Sr Note 05-15-11 (R) 10.000 B+ 200 204,000 Diamond Holdings Plc, Bond (United Kingdom) 02-01-08 # 10.000 B- 100 102,605 EchoStar DBS Corp., Sr Note 02-01-09 9.375 B+ 200 205,000 Fox Family Worldwide, Inc., Sr Disc Note, Step Coupon (10.25%, 11-15-02) 11-01-07 (A) Zero A- 400 400,000 Garden State Newspapers, Inc., Sr Sub Note Ser B 10-01-09 8.750 B+ 200 196,000 Sr Sub Note 07-01-11 8.625 B+ 200 194,000 Grupo Televisa S.A., Note (Mexico) 09-13-11 (R) (Y) 8.000 BB+ 300 300,000 Innova S. de R.L., Sr Note (Mexico) 04-01-07 (Y) 12.875 B- 200 191,000 Orion Network Systems, Sr Note 01-15-07 11.250 B 100 50,000 Pegasus Communications Corp., Sr Note Ser B 08-01-07 12.500 CCC+ 435 439,350 Pegasus Satellite Communications Corp., Sr Disc Note, Step Coupon (13.50%, 03-10-04) 03-01-07 (A) Zero CCC+ 60 34,800 Regional Independent Media Group Plc, Sr Disc Note, Step Coupon (12.875%, 07-01-03) (United Kingdom) 07-01-08 (A) # Zero B- 20 23,868 Sr Note (United Kingdom) 07-01-08 (Y) 10.500 B- 5 5,150 Sinclair Broadcast Group Sr Sub Note 12-15-11 (R) 8.750 B 50 50,750 Sirius Satellite Radio, Inc., Sr Disc Note, Step Coupon (15.00%, 12-01-02) 12-01-07 (A) Zero CCC+ 110 48,400 XM Satellite Radio, Inc., Sr Sec Note 03-15-10 14.000 CCC+ 150 118,500 Medical 0.25% 174,125 Select Medical Corp., Sr Sub Note 06-15-09 (R) 9.500 B 175 174,125 Metal 0.23% 156,750 Doe Run Resources Corp., Gtd Sr Note Ser B 03-15-03 9.380*** CCC- 25 4,500 Gtd Sr Note Ser B 03-15-05 11.250 CCC- 10 2,000 Freeport-McMoRan Copper & Gold, Inc., Sr Note 11-15-06 7.500 CCC 75 54,750 Golden Northwest Aluminum, Inc., 1st Mtg Note 12-15-06 12.000 B- 25 15,500 Great Lakes Acquisition Corp., Sr Disc Deb, Step Coupon (13.125%, 05-15-03) 05-15-09 (A) Zero B- 200 80,000 Oil & Gas 2.80% 1,929,356 Chesapeake Energy Corp., Sr Note 04-01-11 (R) 8.125 B+ 300 292,500 Comstock Resources, Inc., Sr Note 05-01-07 11.250 B 175 172,813 Frontier Oil Corp., Sr Note 11-15-09 11.750 B 50 53,000 Key Energy Services, Inc., Sr Sub Note Ser B 01-15-09 14.000 B 93 107,415 Mariner Energy, Inc., Sr Sub Note Ser B 08-01-06 10.500 C 10 9,250 Ocean Rig Norway A.S., Sr Sec Note (Norway) 06-01-08 (Y) 10.250 CCC 255 229,500 Parker Drilling Co., Sr Note 11-15-06 9.750 B+ 300 297,000 Pemex Project Funding Master Trust, Gtd Note 02-15-08 (R) 8.500 BB+ 400 417,000 Pennzoil-Quaker State Co., Note 12-01-02 9.400 BB+ 250 256,878 Universal Compression, Inc., Sr Disc Note, Step Coupon (9.875%, 02-15-03) 02-15-08 (A) Zero B+ 100 94,000 Paper & Paper Products 1.21% 834,208 APP China Group Ltd., Sr Disc Note (Indonesia) 03-15-10 (B) (R) (Y) 14.000 D 250 30,000 APP Finance (VII) Mauritius Ltd., Gtd Note (Indonesia) 04-30-03 (B) (R) (Y) 3.500 D 10 800 Corporacion Durango S.A. de C.V., Sr Note (Mexico) 08-01-06 (Y) 13.125 BB- 631 588,408 Stone Container Corp., Sr Note 02-01-11 (R) 9.750 B 200 215,000 Real Estate Operations 0.00% $1,050 Signature Resorts, Inc., Conv Sub Note 01-15-07 (B) 5.750 D 35 1,050 Retail 0.00% Imperial Home Decor Group, Inc, 125 Gtd Sr Sub Note 03-15-08 11.000 C 125 125 Steel 0.12% 80,167 Gulf States Steel, Inc. of Alabama, 1st Mtg Bond 04-15-03 (B) 13.500 Caa3 100 0 LTV Corp. (The), Gtd Sr Sub Note 11-15-09 (B) 11.750 Ca 50 1,500 Metallurg Holdings, Inc., Sr Disc Note, Step Coupon (12.75%, 07-15-03) 07-15-08 (A) Zero CCC+ 50 19,000 Metallurg, Inc., Gtd Sr Note Ser B 12-01-07 11.000 B- 30 25,500 NSM Steel, Inc./NSM Steel Ltd., Gtd Sr Sub Mtg Note Ser B 02-01-08 (B) (R) 12.250 D 75 0 Oregon Steel CF&I, Note 03-31-03 (r) 9.500 B 35 34,167 Telecommunications 2.44% 1,678,816 American Cellular Corp., Sr Sub Note 10-15-09 (R) 9.500 B 200 196,000 Comunicacion Celular S.A., Sr Def Bond (Colombia) 03-01-05 (R) (Y) 14.125 B 100 101,000 Esprit Telecom Group Plc, Sr Note (United Kingdom) 12-15-07 (B) (Y) 11.500 D 100 1,300 Sr Note (Germany) 06-15-08 (B) # 11.000 D 180 205 Grupo Iusacell S.A. de C.V., Sr Note (Mexico) 12-01-06 (Y) 14.250 B+ 300 322,500 GT Group Telecom, Inc., Sr Disc Note, Step Coupon (13.25%, 02-01-05) (Canada) 02-01-10 (A) (Y) Zero B- 300 39,000 Ionica Plc, Sr Disc Note, Step Coupon (15.00%, 05-01-02) (United Kingdom) 05-01-07 (A) (Y) Zero Ca 200 1,898 McCaw International Ltd., Sr Disc Note, Step Coupon (13.00%, 04-15-02) 04-15-07 (A) Zero B- 500 30,000 MetroNet Communications Corp., Sr Discount Note, Step Coupon (10.75%, 11-01-02) (Canada) 11-01-07 (A) (Y) Zero BBB 200 108,000 Sr Note (Canada) 08-15-07 (Y) 12.000 BBB 50 35,500 Nextel International, Inc., Sr Note 08-01-10 (R) 12.750 B- 100 10,000 Occidente y Caribe Celular S.A., Sr Disc Note Ser B (Colombia) 03-15-04 (Y) 14.000 B 150 147,075 ONO Finance Plc, Sr Sub Note (United Kingdom) 05-01-09 (E) 13.000 CCC+ 100 70,341 Sr Note (United Kingdom) 07-15-10 (E) 14.000 CCC+ 250 169,175 Pronet, Inc., Sr Sub Note 06-15-05 11.875 D 280 5,600 TeleCorp PCS, Inc., Sr Sub Disc Note, Step Coupon (11.625%, 04-15-04) 04-15-09 (A) Zero B3 175 154,000 Triton PCS, Inc., Sr Sub Note 02-01-11 (R) 9.375 CCC+ 100 103,500 Versatel Telecom International NV, Sr Note (Netherlands) 05-15-08 (Y) 13.250 B- 100 32,000 Sr Note Ser EU (Netherlands) 07-15-09 (E) 11.875 B- 100 32,722 VoiceStream Wireless Corp., Sr Note 09-15-09 11.500 A- 100 119,000 Telecommunications -- Services 1.67% 1,153,113 Crown Castle International Corp., Sr Disc Note, Step Coupon (10.625%, 11-15-02) 11-15-07 (A) Zero B 150 131,250 CTI Holdings S.A., Sr Note, Step Coupon (11.25%, 04-15-03) (Argentina) 04-15-08 (A) (Y) Zero C 75 12,000 Energis Plc, Sr Note (United Kingdom) 06-15-09 (R) # 9.500 B+ 130 145,685 Jazztel Plc, Sr Note (United Kingdom) 12-15-09 (E) 13.250 CCC 50 17,363 Nextel Partners, Inc., Sr Disc Note, Step Coupon (14.00%, 02-01-04) 02-01-09 (A) Zero CCC+ 405 256,163 Telewest Communications Plc, Sr Disc Note, Step Coupon (9.875%, 04-15-04) (United Kingdom) 04-15-09 (A) # Zero B 125 80,047 Sr Note (United Kingdom) 02-01-10 # 9.875 B 100 102,605 Time Warner Telecom, Inc., Sr Note 02-01-11 10.125 B- 200 161,000 Time Warner Telecom LLC, Sr Note 07-15-08 9.750 B 200 161,000 Tritel PCS, Inc., Sr Sub Disc Note, Step Coupon (12.75%, 05-15-04) 05-15-09 (A) Zero B3 100 86,000 Textile 0.09% 64,750 Coyne International Enterprises Corp., Sr Sub Note 06-01-08 11.250 Caa1 75 15,000 Steel Heddle Group, Inc., Sr Disc Deb, Step Coupon (13.75%, 06-01-03) 06-01-09 (A) (B) Zero Caa2 200 0 Steel Heddle Manufacturing Co., Gtd Sr Sub Note Ser B 06-01-08 (B) 10.625 Caa1 50 0 Tropical Sportswear International Corp., Sr Sub Note Ser A 06-15-08 11.000 B- 50 49,750 Transportation 1.04% 715,824 Amtran, Inc., Sr Note 08-01-04 10.500 CCC 50 40,000 Cenargo International Plc, 1st Mtg Note (United Kingdom) 06-15-08 (Y) 9.750 B+ 20 15,200 CHC Helicopter Corp., Sr Sub Note (Canada) 07-15-07 (E) 11.750 B2 200 191,212 Fine Air Services, Corp., Sr Note 06-01-08 (B) 9.875 D 210 262 North American Van Lines, Inc., Sr Sub Note 12-01-09 (R) 13.375 B- 300 288,000 Northwest Airlines Inc., Gtd Note 03-15-07 8.700 B+ 100 83,000 Pacer International, Inc., Sr Sub Note 06-01-07 11.750 B- 50 40,000 Pacific & Atlantic Holdings, Inc., Sr Sec Note (Greece) 12-31-07 (R) (Y) 10.500 CC 23 10,150 US Airways, Inc., Pass Thru Ctf Ser 1993-A3 03-01-13 10.375 B 75 48,000 Utilities 1.34% 920,129 CMS Energy Corp., Sr Note 10-15-07 9.875 BB 200 212,000 Midland Funding Corp. II, Deb Ser A 07-23-05 11.750 BB 200 221,000 Deb Ser B 07-23-06 13.250 BB 150 174,750 Monterrey Power S.A. de C.V., Sr Sec Bond (Mexico) 11-15-09 (R) (Y) 9.625 BB+ 158 164,222 Niagara Mohawk Power Corp., Sec Fac Bond 01-01-18 8.770 A 141 148,157 Waste Disposal Service & Equip 0.00% 3,000 Waste Systems International, Inc., Gtd Sr Note 01-15-06 (B) 11.500 C 15 3,000 SHARES ISSUER VALUE COMMON STOCK 0.44% $302,506 (Cost $464,789) Food 0.12% 78,200 1,540 Kraft Foods, Inc. (Class A) 52,406 1,046 Pathmark Stores, Inc. ** 25,794 Metal 0.08% 55,587 128,600 TVX Gold, Inc. (Canada) (Y) ** 55,587 Oil & Gas 0.14% 98,059 1,872 Chesapeake Energy Corp. ** 12,374 28,850 Grey Wolf, Inc. ** 85,685 Retail 0.01% 7,306 660 SpinCycle, Inc. ** 7,306 Telecommunications 0.09% 63,354 2,000 AT&T Canada, Inc., (Canada) (Y) ** 60,352 982 GT Group Telecom, Inc. (Class B) (Canada) (Y) ** 1,070 2,417 International Wireless Communications Holdings, Inc. ** 665 1,333 Versatel Telecom International N.V., American Depositary Receipt (ADR) (Netherlands) (Y) ** 1,267 Waste Disposal Service & Equip 0.00% 0 8,715 Waste Systems International, Inc. (B) ** 0 PREFERRED STOCKS AND WARRANTS 0.35% $239,808 (Cost $680,312) Manufacturing 0.00% 106 212 HF Holdings, Inc. Warrant ** 106 Media 0.01% 5,509 50 ONO Finance Plc, Warrant (United Kingdom) (E) (R) ** 9 100 ONO Finance Plc, Warrant (United Kingdom) (R) (Y) ** 1,000 150 XM Satellite Radio Holdings, Inc., Warrant (R) ** 4,500 Oil & Gas 0.00% 26 79 Gothic Energy Corp., Warrant ** 26 Paper & Paper Products 0.12% 82,003 250 Asia Pulp & Paper Co. Ltd., Warrant (R) ** 3 4,100 Smurfit-Stone Container Corp., 7.00%, Ser A, Preferred Stock 82,000 Retail 0.01% 6,771 35,000 Hills Stores Co., Warrant ** 0 740 Pathmark Stores, Inc. Warrant** 6,771 Steel 0.00% 1 63,309 Nakornthai Strip Mill Plc, Warrant (Thailand) (R) (Y) ** 1 Telecommunications 0.20% 139,528 250 Allegiance Telecom, Inc., Warrant ** 11,250 100 Comunicacion Celular S.A., Warrant (Colombia) (Y) ** 1 100 Loral Space & Communications Ltd., Warrant ** 1 218 Nextel Communications, Inc., 11.125%, Payment-In-Kind, Ser E, Preferred Stock 106,820 2,682 XO Communications Inc., 14%, Preferred Stock 21,456 Transport 0.01% 5,860 1,172 Pacific & Atlantic Holdings, Inc., 7.50% Preferred Stock (Greece) (Y) 5,860 Waste Disposal Service & Equip 0.00% 4 160 Waste Systems International, Inc., 8.00%, Ser E, Preferred Stock (B) ** 2 225 Waste Systems International, Inc., Warrant (B) (R) ** 2 ISSUER, DESCRIPTION, INTEREST PAR VALUE MATURITY DATE RATE (000S OMITTED) VALUE SHORT-TERM INVESTMENTS 11.82% $8,147,000 (Cost $8,147,000) Joint Repurchase Agreement 11.82% 8,147,000 Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. -- Dated 12-31-01, due 01-02-02 (Secured by U.S. Treasury Bonds, 9.875% due 11-15-15, 8.750% due 05-15-17, 3.375% due 04-15-32, U.S. Treasury Notes 5.625% due 12-31-02, 6.250% due 02-15-03, and 3.375% due 01-15-07) 1.70% $8,147 8,147,000 TOTAL INVESTMENTS 97.77% $67,358,521 OTHER ASSETS AND LIABILITIES, NET 2.23% $1,535,877 TOTAL NET ASSETS 100.00% $68,894,398 * Credit Ratings are unaudited and rated by Moody's Investor Service or John Hancock Advisers, LLC where Standard & Poor's ratings are not available. ** Non-income producing security. *** Represents rate in effect on December 31, 2001. # Par value of foreign bonds is expressed in local currency, as shown parenthetically in security description. (A) Cash interest will be paid on this obligation at the stated rate beginning on the stated date. (B) Non-income producing issuer, filed for protection under Federal Bankruptcy Code or is in default on interest payment. (E) Parenthetical disclosure of a foreign country in the security description represents country of issuer; however, security is euro denominated. (R) These securities are exempt from registration under rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers, in transactions exempt from registration. Rule 144A securities amounted to $5,126,316 or 7.44% of the fund's net assets as of December 31, 2001. (Y) Parenthetical disclosure of a foreign country in the security description represents country of foreign issuer, however, security is U. S. dollar denominated. (r) Direct placement securities are restricted as to resale. They have been valued in accordance with procedures approved by the Trustees after consideration of restrictions as to resale, financial condition and prospects of the issuer, general market conditions and pertinent information in accordance with the Fund's By- Laws and the Investment Company Act of 1940, as amended. The Fund has limited rights to registration under the Securities Act of 1933 with respect to these restricted securities. Additional information on each restricted security is as follows: VALUE AS A ACQUISITION ACQUISITION % OF FUND'S VALUE AT ISSUER, DESCRIPTION DATE COST NET ASSETS 12-31-01 ----------------------------------------------------------------------------------- Oregon Steel CF&I 05-14-98 34,696 0.05 34,167 The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the fund. PORTFOLIO CONCENTRATION VALUE AS A PERCENTAGE COUNTRY DIVERSIFICATION OF FUND'S NET ASSETS Argentina 0.08% Australia 0.69 Bahamas 0.23 Brazil 2.65 Bulgaria 0.33 Canada 12.77 Chile 1.33 Colombia 2.56 France 0.15 Germany 0.39 Greece 0.08 Indonesia 0.04 Italy 1.27 Luxembourg 0.16 Mexico 4.22 Netherlands 0.42 New Zealand 1.44 Norway 1.21 Panama 2.15 Peru 0.79 Russia 5.34 Thailand 0.00 United Kingdom 1.07 United States 57.46 Uruguay 0.73 Venezuela 0.21 Total investments 97.77% VALUE AS A PERCENTAGE QUALITY DISTRIBUTION OF FUND'S NET ASSETS AAA 39.57% AA 6.22 A 1.86 BBB 2.96 BB 14.16 B 17.43 CCC 2.58 CC 0.10 C 0.04 D 0.24 Total bonds 85.16% See notes to financial statements.
Statement of Assets and Liabilities 12-31-01 ASSETS Investments at value (cost $63,541,202) $59,211,521 Joint repurchase agreements (cost $8,147,000) 8,147,000 Cash 229,271 Foreign currency at value (cost $10,188) 10,093 Receivable for forward foreign currency exchange contracts 5,283 Dividends and interest receivable 1,383,289 Other assets 1,863 Total assets 68,988,320 LIABILITIES Dividends payable 40,126 Payable for forward currency exchange contracts 5,093 Payable to affiliates 34,494 Other payables and accrued expenses 14,209 Total liabilities 93,922 NET ASSETS Capital paid-in 76,006,244 Accumulated net realized loss on investments and foreign currency transactions (2,125,070) Net unrealized depreciation of investments and translation of assets and liabilities in foreign currencies (4,332,679) Distributions in excess of net investment income (654,097) Net assets $68,894,398 NET ASSET VALUE PER SHARE (Based on 7,969,629 shares of beneficial interest outstanding -- unlimited number of shares authorized with no par value) $8.64 See notes to financial statements. Statement of Operations For the year ended 12-31-01 INVESTMENT INCOME Interest $3,905,400 Dividends (net of foreign withholding taxes of $31) 17,827 Total investment income 3,923,227 EXPENSES Investment management fee 298,966 Custodian fee 30,743 Accounting and legal services fee 10,237 Auditing fee 9,000 Trustee's fee 2,027 Organization 1,413 Miscellaneous 1,394 Printing 557 Legal fee 547 Registration and filing fee 69 Total expenses 354,953 Net investment income 3,568,274 REALIZED AND UNREALIZED GAIN (LOSS) Net realized loss on Investments (1,344,235) Foreign currency transactions (9,948) Change in unrealized appreciation (depreciation) on Investments 35,671 Translation of assets and liabilities in foreign currencies 29,086 Net realized and unrealized loss (1,289,426) Increase in net assets from operations $2,278,848 See notes to financial statements. Statement of Changes in Net Assets YEAR YEAR ENDED ENDED 12-31-00 12-31-01 INCREASE (DECREASE) IN NET ASSETS From operations Net investment income $2,451,388 $3,568,274 Net realized loss (700,276) (1,354,183) Change in net unrealized appreciation (depreciation) (1,322,235) 64,757 Increase in net assets resulting from operations 428,877 2,278,848 Distributions to shareholders From net investment income (2,359,734) (3,986,158) From net realized gain (350,215) -- Tax return of capital (91,654) -- (2,801,603) (3,986,158) From fund share transactions 14,562,542 36,129,909 NET ASSETS Beginning of period 22,281,983 34,471,799 End of period 1 $34,471,799 $68,894,398 1 Includes distributions in excess of net investment income of $126,198 and $654,097, respectively. See notes to financial statements. Financial Highlights 12-31-97 12-31-98 12-31-99 12-31-00 12-31-01 1 PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $10.30 $10.47 $10.10 $9.77 $8.97 Net investment income 2 0.91 0.85 0.80 0.83 0.65 Net realized and unrealized gain (loss) on investments 0.26 (0.35) (0.33) (0.71) (0.26) Total from investment operations 1.17 0.50 0.47 0.12 0.39 Less distributions: From net investment income (0.91) (0.85) (0.80) (0.83) (0.72) From net realized gain (0.09) (0.02) -- (0.09) -- (1.00) (0.87) (0.80) (0.92) (0.72) Net asset value, end of period $10.47 $10.10 $9.77 $8.97 $8.64 Total return 3 (%) 11.77 4 4.92 4 4.82 4 1.40 4.58 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in millions) $6 $15 $22 $34 $69 Ratio of expenses to average net assets % 0.85 0.85 0.85 0.76 0.71 Ratio of adjusted expenses to average net assets 5 % 1.37 0.93 0.87 -- -- Ratio of net investment income to average net assets % 8.77 8.19 8.06 8.91 7.16 Portfolio turnover % 110 92 53 6 53 101 6 1 As required, effective January 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, and began amortizing premiums on debt securities. The effect of this change for the year ended December 31, 2001 was to decrease net investment income per share by $0.07, decrease net realized and unrealized losses per share by $0.07, and, had the Fund not amortized premiums on debt securities, the annualized ratio of net investment income to average net assets would have been 8.00%. Per share ratios and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. 2 Based on the average of the shares outstanding at the end of each month. 3 Assumes dividend reinvestment. 4 Total returns would have been lower had certain expenses not been reduced during the periods shown. 5 Does not take into consideration expense reductions during the periods shown. 6 Excludes merger activity. See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS NOTE A Organization John Hancock V.A. Strategic Income Fund (the "Fund") is a diversified series of John Hancock Declaration Trust, (the "Trust") an open-end investment management company registered under the Investment Company Act of 1940. The Trust, organized as a Massachusetts business trust in 1995, consists of five different series at December 31, 2001. The Trustees may authorize the creation of additional series from time to time to satisfy various investment objectives. An insurance company issuing a Variable Contract that participates in the Trust will vote shares of the Fund held by the insurance company's separate accounts as required by law. In accordance with current law and interpretations thereof, participating insurance companies are required to request voting instructions from policy owners and must vote shares of the Fund in proportion to the voting instructions received. The investment objective of the Fund is to seek a high level of current income. The Fund has one class of shares with equal rights as to voting, redemption, dividends and liquidation. Significant accounting policies of the Fund are as follows: Valuation of investments Securities in the Fund's portfolio are valued on the basis of market quotations, valuations provided by independent pricing services or, if quotations are not readily available, or the value has been materially affected by events occurring after the closing of a foreign market, at fair value as determined in good faith in accordance with procedures approved by the Trustees. Short-term debt investments maturing within 60 days are valued at amortized cost, which approximates market value. All portfolio transactions initially expressed in terms of foreign currencies have been translated into U.S. dollars as described in "Foreign currency translation" below. Joint repurchase agreement Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Fund, along with other registered investment companies having a management contract with John Hancock Advisers, LLC (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, Inc., may participate in a joint repurchase agreement transaction. Aggregate cash balances are invested in one or more large repurchase agreements, whose underlying securities are obligations of the U.S. government and/or its agencies. The Fund's custodian bank receives delivery of the underlying securities for the joint account on the Fund's behalf. The Adviser is responsible for ensuring that the agreement is fully collateralized at all times. Foreign currency translation All assets or liabilities initially expressed in terms of foreign currencies are translated into U.S. dollars based on London currency exchange quotations as of 5:00 P.M., London time, on the date of any determination of the net asset value of the Fund. Transactions affecting statement of operations accounts and net realized gain (loss) on investments are translated at the rates prevailing at the dates of the transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Reported net realized foreign exchange gains or losses arise from sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities, other than investments in securities, resulting from changes in the exchange rates. Investment transactions Investment transactions are recorded as of the date of purchase, sale or maturity. Net realized gains and losses on sales of investments are determined on the identified cost basis. Capital gains realized on some foreign securities are subject to foreign taxes, which are accrued as applicable. Discount and premium on securities The Fund accretes discount and amortizes premium from par value on securities from either the date of issue or the date of purchase over the life of the security. Expenses The majority of the expenses are directly identifiable to an individual fund. Expenses that are not readily identifiable to a specific fund will be allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative sizes of the funds. Organization expenses Expenses incurred in connection with the organization of the Fund have been capitalized and are being charged to the Fund's operations ratably over a five-year period that began with the commencement of the investment operations of the Fund. Bank borrowings The Fund is permitted to have bank borrowings for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Fund has entered into a syndicated line of credit agreement with various banks. This agreement enables the Fund to participate with other funds managed by the Adviser in an unsecured line of credit with banks, which permit borrowings up to $500 million, collectively. Interest is charged to each fund, based on its borrowing. In addition, a commitment fee is charged to each fund based on the average daily unused portion of the line of credit and is allocated among the participating funds. The Fund had no borrowing activity under the line of credit during the year ended December 31, 2001. Securities lending The Fund may lend securities to certain qualified brokers who pay the Fund negotiated lender fees. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay of the loaned securities in recovery or even loss of rights in the collateral, should the borrower of the securities fail financially. There were no securities loaned as of December 31, 2001. Forward foreign currency exchange contracts The Fund may enter into forward foreign currency exchange contracts as a hedge against the effect of fluctuations in currency exchange rates. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date at a set price. The aggregate principal amounts of the contracts are marked to market daily at the applicable foreign currency exchange rates. Any resulting unrealized gains and losses are included in the determination of the Fund's daily net assets. The Fund records realized gains and losses at the time the forward foreign currency exchange contract is closed out or offset by a matching contract. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of the contract and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. These contracts involve market or credit risk in excess of the unrealized gain or loss reflected in the Fund's statement of assets and liabilities. The Fund may also purchase and sell forward contracts to facilitate the settlement of foreign currency denominated portfolio transactions, under which it intends to take delivery of the foreign currency. Such contracts normally involve no market risk if they are offset by the currency amount of the underlying transaction. The Fund had the following open forward foreign currency exchange contracts at December 31, 2001: PRINCIPAL AMOUNT UNREALIZED COVERED BY EXPIRATION APPRECIATION CURRENCY CONTRACT MONTH (DEPRECIATION) ----------------------------------------------------------- BUYS Pound Sterling 234,000 FEB 02 ($446) Pound Sterling 106,000 MAR 02 (2,564) Pound Sterling 243,000 APR 02 (2,083) ($5,093) SELLS Euro 702,000 JAN 02 $1,124 Euro 96,000 FEB 02 1,257 Euro 70,000 APR 02 441 Pound Sterling 65,000 JAN 02 124 Pound Sterling 138,648 FEB 02 1,990 Pound Sterling 10,000 APR 02 347 $5,283 Federal income taxes The Fund qualifies as a "regulated investment company" by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income which is distributed to shareholders. Therefore, no federal income tax provision is required. For federal income tax purposes, net currency gains and losses from sales of foreign debt securities may be treated as ordinary income even though such items are capital gains and losses for accounting purposes. For federal income tax purposes, at December 31, 2001, the Fund has $3,403,688 of capital loss carryforwards available, to the extent provided by regulations, to offset future net realized capital gains. To the extent such carryforwards are used by the Fund, no capital gain distribution will be made. The Fund's carryforwards expire as follows: December 31, 2006 -- $4,130, December 31, 2007 -- $136,493, December 31, 2008 -- $1,506,009, December 31, 2009 -- $1,757,056. Expired capital loss carryforwards are reclassified to capital paid-in, in the year of expiration. Additionally, net capital losses of $224,972 attributable to security transactions occurring after October 31, 2001 are treated as arising on the first day (January 1, 2002) of the Fund's next taxable year. Availability on $4,130 and $1,050,232 of capital loss carryforwards which were acquired by the Fund from the mergers of the V.A. World Bond Fund on March 26, 1999 and the V.A. High Yield Bond Fund on December 14, 2001, may be limited in a given year. Dividends, interest and distributions Dividend income on investment securities is recorded on the ex-dividend date or, in the case of some foreign securities, on the date thereafter when the Fund identifies the dividend. Interest income on investment securities is recorded on the accrual basis. The Fund may place a debt obligation on non-accrual status and reduce related interest income by ceasing current accruals and writing off interest receivables when the collection of interest has become doubtful. Foreign income may be subject to foreign withholding taxes, which are accrued as applicable. The Fund records distributions to shareholders from net investment income and realized gains on the ex-dividend date. Such distributions are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. Use of estimates The preparation of these financial statements, in accordance with accounting principles generally accepted in the United States of America, incorporates estimates made by management in determining the reported amount of assets, liabilities, revenues and expenses of the Fund. Actual results could differ from these estimates NOTE B Management fee and transactions with affiliates and others The Fund has an investment management contract with the Adviser. Under the investment management contract, the Fund pays a monthly management fee to the Adviser at an annual rate of 0.60% of the Fund's average daily net asset value. The Adviser has agreed to limit the Fund's expenses, excluding the management fee, to 0.25% of the Fund's average daily net assets, at least until April 30, 2002. There was no expense reduction for the year ended December 31, 2001. The Adviser reserves the right to terminate this limitation in the future. The Fund has an agreement with the Adviser to perform necessary tax, accounting and legal services for the Fund. The compensation for the year was at an annual rate of 0.02% of the average net assets of the Fund. Ms. Maureen R. Ford and Mr. John M. DeCiccio are directors and/or officers of the Adviser and/or its affiliates, as well as Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the Fund. The unaffiliated Trustees may elect to defer for tax purposes their receipt of this compensation under the John Hancock Group of Funds Deferred Compensation Plan. The Fund makes investments into other John Hancock funds, as applicable, to cover its liability for the deferred compensation. Investments to cover the Fund's deferred compensation liability are recorded on the Fund's books as an other asset. The deferred compensation liability and the related other asset are always equal and are marked to market on a periodic basis to reflect any income earned by the investment as well as any unrealized gains or losses. The Deferred Compensation Plan investments had no impact on the operations of the Fund. NOTE C Fund share transactions This listing illustrates the number of shares sold, reinvested and repurchased during the last two periods, along with the corresponding dollar value. The Fund has an unlimited number of shares authorized with no par value.
YEAR ENDED 12-31-00 YEAR ENDED 12-31-01 SHARES AMOUNT SHARES AMOUNT Shares sold 1,598,355 $14,978,386 4,745,566 $41,571,562 Distributions reinvested 302,236 2,801,603 454,719 3,986,158 Issued in reorganization -- -- 402,919 3,482,022 Repurchased (339,848) (3,217,447) (1,475,346) (12,909,833) NET INCREASE 1,560,743 $14,562,542 4,127,858 $36,129,909
NOTE D Investment transactions Purchases and proceeds from sales of securities, other than short-term securities and obligations of the U.S. government, during the year ended December 31, 2001, aggregated $75,925,994 and $43,378,844, respectively. The cost of investments owned at December 31, 2001, including short-term investments, for federal income tax purposes was $71,875,037. Gross unrealized appreciation and depreciation of investments aggregated $1,577,402 and $6,093,918, respectively, resulting in net unrealized depreciation of $4,516,516. The difference between book basis and tax basis net unrealized depreciation of investments is attributable primarily to the tax deferral of losses on wash sales. NOTE E Reclassification of accounts During the year ended December 31, 2001, the Fund has reclassified amounts to reflect a decrease in accumulated net realized loss on investments of $258,132, a decrease in distributions in excess of net investment income of $120,423 and a decrease in capital paid-in of $378,555. This represents the amount necessary to report these balances on a tax basis, excluding certain temporary difference, as of December 31, 2001. Additional adjustments may be needed in subsequent reporting periods. These reclassifications, which have no impact on the net asset value of the Fund, are primarily attributable to differences in the treatment of foreign currency gains and losses under federal tax rules versus accounting principles generally accepted in the United States of America. The calculation of net investment income in the financial highlights excludes these adjustments. NOTE F Change in accounting principle Effective January 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, and began amortizing premiums on debt securities. Prior to this date, the Fund did not amortize premiums on debt securities. The cumulative effect of this accounting change had no impact on the total net assets of the Fund, but resulted in a $230,438 reduction in the cost of investments and a corresponding decrease in net unrealized depreciation on investments, based on securities held as of December 31, 2000. The effect of this change for the year ended December 31, 2001 was to decrease net investment income by $417,884, increase unrealized depreciation on investments by $47,891 and decrease net realized loss on investments by $465,775. The statement of changes in net assets and the financial highlights for prior periods have not been restated to reflect this change in presentation. NOTE G On December 5, 2001, the shareholders of John Hancock V.A. High Yield Bond Fund ("V.A. High Yield Bond Fund") approved a plan of reorganization between V.A. High Yield Bond Fund and the Fund providing for the transfer of substantially all of the assets and liabilities of the V.A. High Yield Bond Fund to the Fund in exchange solely for shares of beneficial interest in the Fund. The acquisition was accounted for as a tax-free exchange of 402,919 shares of the Fund for the net assets of V.A. High Yield Bond Fund, which amounted to $3,482,022, including $2,437,674 of unrealized depreciation of investments, after the close of business on December 14, 2001. Report of Ernst & Young LLP, Independent Auditors To the contract owners and trustees of John Hancock Declaration Trust, We have audited the accompanying statement of assets and liabilities of the John Hancock V.A. Strategic Income Fund (the "Fund"), one of the portfolios constituting John Hancock Declaration Trust, including the schedule of the Fund's investments, as of December 31, 2001, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2001, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the John Hancock V.A. Strategic Income Fund of the John Hancock Declaration Trust at December 31, 2001, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States. /S/ ERNST & YOUNG LLP Boston, Massachusetts February 8, 2002 Tax Information UNAUDITED For federal income tax purposes, the following information is furnished with respect to the distributions of the Fund for its taxable year ended December 31, 2001. With respect to the ordinary dividends paid by the Fund for the fiscal year ended December 31, 2001, 0.57% of the dividends qualify for the corporate dividends-received deduction. TRUSTEES & OFFICERS This chart provides information about the Trustees and Officers who oversee your John Hancock fund. Officers elected by the Trustees manage the day-to-day operations of the Fund and execute policies formulated by the Trustees. INDEPENDENT TRUSTEES
NUMBER OF NAME, AGE JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER TRUSTEE FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE 2 BY TRUSTEE Dennis S. Aronowitz 1, Born: 1931 1996 30 Professor of Law, Emeritus, Boston University School of Law (as of 1996); Director, Brookline Bancorp. Richard P. Chapman, Jr., Born: 1935 1996 30 Chairman, President, and Chief Executive Officer, Brookline Bancorp. (lending) (since 1972); Trustee, Northeastern University (education); Chairman and Director, Lumber Insurance Co. (insurance) (until 2000); Chairman and Director, Northeast Retirement Services, Inc. (retirement administration) (since 1998). William J. Cosgrove 1, Born: 1933 1996 30 Vice President, Senior Banker and Senior Credit Officer, Citibank, N.A. (retired 1991); Executive Vice President, Citadel Group Representatives, Inc.; Director, Hudson City Bancorp; Trustee, Scholarship Fund for Inner City Children (since 1986). Richard A. Farrell 1, Born: 1932 1996 30 President, Farrell, Healer & Co., Inc. (venture capital management firm) (since 1980) and General Partner of the Venture Capital Fund of NE (since 1980); prior to 1980, headed the venture capital group at Bank of Boston Corporation. Gail D. Fosler, Born: 1947 1996 30 Senior Vice President and Chief Economist, The Conference Board (non-profit economic and business research) (since 1989); Director, Unisys Corp. (since 1993); Director, H.B. Fuller Company (since 1992) and DBS Holdings (Singapore) (banking and financial services) (since 1999); Director, National Bureau of Economic Research (academic) (since 1989); Director, Baxter International (medical health care) (since 2001). William F. Glavin, Born: 1932 1996 30 President Emeritus, Babson College (as of 1998); Vice Chairman, Xerox Corporation (until 1989); Director, Reebok, Inc. (since 1994) and Inco Ltd. John A. Moore, Born: 1939 1996 36 President and Chief Executive Officer, Institute for Evaluating Health Risks, (nonprofit institution) (until 2001); Senior Scientist, Sciences International (health research) (since 1998); Principal, Hollyhouse (consulting) (since 2000); Director, CIIT (nonprofit research) (since 2002). Patti McGill Peterson, Born: 1943 1996 36 Executive Director, Council for International Exchange of Scholars (since 1998), Vice President, Institute of International Education (since January 1998); Senior Fellow, Cornell Institute of Public Affairs, Cornell University (until 1997); President Emerita of Wells College and St. Lawrence University; Director, Niagara Mohawk Power Corporation (electric utility). John W. Pratt 1, Born: 1931 1996 30 Professor of Business Administration Emeritus, Harvard University Graduate School of Business Administration (as of 1998). INTERESTED TRUSTEES 3 NAME, AGE NUMBER OF POSITION(S) HELD WITH FUND JOHN HANCOCK PRINCIPAL OCCUPATION(S) AND OTHER TRUSTEE FUNDS OVERSEEN DIRECTORSHIPS DURING PAST 5 YEARS SINCE 2 BY TRUSTEE John M. DeCiccio, Born: 1948 2001 66 Trustee Executive Vice President and Chief Investment Officer, John Hancock Financial Services, Inc.; Director, Executive Vice President and Chief Investment Officer, John Hancock Life Insurance Company; Chairman of the Committee of Finance of John Hancock Life Insurance Company; Director, John Hancock Subsidiaries, LLC, Hancock Natural Resource Group, Independence Investment LLC, Independence Fixed Income LLC, John Hancock Advisers, LLC (the "Adviser") and The Berkeley Financial Group, LLC ("The Berkeley Group"), John Hancock Funds, LLC ("John Hancock Funds"), Massachusetts Business Development Corporation; Director, John Hancock Insurance Agency, Inc. ("Insurance Agency, Inc.") (until 1999) and John Hancock Signature Services, Inc. ("Signature Services") (until 1997). Maureen R. Ford, Born: 1955 2000 66 Trustee, Chairman, President and Chief Executive Officer, John Hancock Financial Services, Inc., John Hancock Life Insurance Company; Chairman, Director, President and Chief Executive Officer, the Advisers and The Berkeley Group; Chairman, Director and Chief Executive Officer, John Hancock Funds, Chairman, Director and President, Insurance Agency, Inc.; Chairman, Director and Chief Executive Officer, Sovereign Asset Management Corporation ("SAMCorp."); Director, Independence Investment LLC, Independence Fixed Income LLC and Signature Services; Senior Vice President, MassMutual Insurance Co. (until 1999); Senior Vice President, Connecticut Mutual Insurance Co. (until 1996). PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES NAME, AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) AND OTHER OFFICER DIRECTORSHIPS DURING PAST 5 YEARS SINCE William L. Braman, Born: 1953 2000 Executive Vice President and Chief Investment Officer Executive Vice President and Chief Investment Officer, the Adviser and each of the John Hancock funds; Director, SAMCorp., Executive Vice President and Chief Investment Officer, Barring Asset Management, London UK (until 2000). Richard A. Brown, Born: 1949 2000 Senior Vice President and Chief Financial Officer Senior Vice President, Chief Financial Officer and Treasurer, the Adviser, John Hancock Funds, and The Berkeley Group; Second Vice President and Senior Associate Controller, Corporate Tax Department, John Hancock Financial Services, Inc. (until 2001). Thomas H. Connors, Born: 1959 1996 Vice President and Compliance Officer Vice President and Compliance Officer, the Adviser and each of the John Hancock funds; Vice President, John Hancock Funds. William H. King, Born: 1952 1996 Vice President and Treasurer Vice President and Assistant Treasurer, the Adviser; Vice President and Treasurer of each of the John Hancock funds; Assistant Treasurer of each of the John Hancock funds (until 2001). Susan S. Newton, Born: 1950 1996 Senior Vice President, Secretary and Chief Legal Officer Senior Vice President, Secretary and Chief Legal Officer, SAMCorp., the Adviser and each of the John Hancock funds, John Hancock Funds and The Berkeley Group; Vice President, Signature Services (until 2000); Director, Senior Vice President and Secretary, NM Capital. The business address for all Trustees and Officers is 101 Huntington Avenue, Boston, Massachusetts, 02199. The Statement of Additional Information of the Fund includes additional information about members of the board of Trustees of the Fund and is available, without charge, upon request, by calling 1-800-426-5523. 1 Member of Audit Committee. 2 Each Trustee serves until resignation, retirement age or until his or her successor is elected. 3 Interested Trustee holds positions with the Fund's investment adviser, underwriter and certain other affiliates.
JOHN HANCOCK FUNDS DECLARATION TRUST ANNUAL REPORT [LOGO] John Hancock [Rings] World Wide Sponsor John Hancock Funds, LLC MEMBER NASD 101 Huntington Avenue Boston, MA 02199-7603 1-800-225-5291 1-800-554-6713 TDD 1-800-338-8080 EASI-Line www.jhfunds.com Mutual Funds Institutional Services Private Managed Accounts Retirement Plans This report is for the information of the shareholders of the John Hancock V.A. Strategic Income Fund. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE 8230A 12/01 2/02 Not all of the funds described in this report are available on every product. Please refer to the prospectus for additional information about the investment options on your variable product. These reports may be used as sales literature when preceded or accompanied by the funds' current prospectus, which details charges, investment objectives and operating policies. John Hancock Variable Products are issued by John Hancock Life Insurance Company or its subsidiary, John Hancock Variable Life Insurance Company,* Boston, MA 02117 and are distributed by John Hancock Funds, LLC, 101 Huntington Avenue, Boston, MA 02199-7603, or Signator Investors, Inc., 200 Clarendon Street, John Hancock Place, Boston, MA 02117. * Not licensed in New York. DEC0A 12/01