-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NT6djgFuprHXKOmHuu9Ou0MZ79DI6JKjpJiQR6AWtVdc9mI9YgovKUI8tVil2T96 P5ySgM+OxSw3zGBrJai/rg== 0001010521-02-000106.txt : 20020414 0001010521-02-000106.hdr.sgml : 20020414 ACCESSION NUMBER: 0001010521-02-000106 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20020219 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANCOCK JOHN DECLARATION TRUST CENTRAL INDEX KEY: 0001003457 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-64465 FILM NUMBER: 02553149 BUSINESS ADDRESS: STREET 1: 101 HUNTINGTON AVE CITY: BOSTON STATE: MA ZIP: 02199-7603 BUSINESS PHONE: 6173751702 MAIL ADDRESS: STREET 1: 101 HUNTINGTON AVE CITY: BOSTON STATE: MA ZIP: 02199-7603 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANCOCK JOHN DECLARATION TRUST CENTRAL INDEX KEY: 0001003457 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-07437 FILM NUMBER: 02553150 BUSINESS ADDRESS: STREET 1: 101 HUNTINGTON AVE CITY: BOSTON STATE: MA ZIP: 02199-7603 BUSINESS PHONE: 6173751702 MAIL ADDRESS: STREET 1: 101 HUNTINGTON AVE CITY: BOSTON STATE: MA ZIP: 02199-7603 485APOS 1 file001.txt JOHN HANCOCK DECLARATION TRUST File Nos. 33-64465 811-07437 --------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] Pre-Effective Amendment No. [ ] Post-Effective Amendment No. 15 [ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] Amendment No. 15 [X] (Check appropriate box or boxes.) ------------- John Hancock Declaration Trust (Exact Name of Registrant as Specified in Charter) 101 Huntington Avenue Boston, Massachusetts 02199-7603 (Address of Principal Executive Offices) Registrant's Telephone Number, including Area Code: (617) 375-1760 ------------- SUSAN S. NEWTON John Hancock Advisers, LLC 101 Huntington Avenue Boston, Massachusetts 02199-7603 (Name and Address of Agent for Service) APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: It is proposed that this filing will become effective: ( ) immediately upon filing pursuant to paragraph (b) of Rule 485 ( ) On (date) pursuant to paragraph (b) of Rule 485 ( ) 75 days after filing pursuant to paragraph (a) of Rule 485 (X) on May 1, 2002 pursuant to paragraph (a) of Rule 485 If appropriate, check the following box: [ ] This post-effective amendment designates a new effective date for a previously filed post-effective admendment. John Hancock Declaration Funds Prospectus May 1, 2002 - -------------------------------------------------------------------------------- Equity V.A. Relative Value Fund Sector V.A. Financial Industries Fund V.A. Technology Fund Income V.A. Strategic Income Fund As with all mutual funds, the Securities and Exchange Commission has not approved or disapproved these funds or determined whether the information in this prospectus is adequate and accurate. Anyone who indicates otherwise is committing a federal crime. [LOGO](R) ------------------ JOHN HANCOCK FUNDS Contents - -------------------------------------------------------------------------------- General information about Overview 3 the Declaration funds. A fund-by-fund summary Equity of goals, strategies, risks, V.A. Relative Value Fund 4 performance and financial highlights. Sector V.A. Financial Industries Fund 6 V.A. Technology Fund 8 Income V.A. Strategic Income Fund 10 Transaction policies and Account information other information affecting your fund investment. Buying and selling fund shares 12 Valuing fund shares 12 Fund expenses 12 Dividends and taxes 12 Further information on the Fund details Declaration funds. Business structure 13 For more information back cover Overview - -------------------------------------------------------------------------------- JOHN HANCOCK DECLARATION FUNDS These funds offer investment choices for the variable annuity and variable life insurance contracts of certain insurance companies. You should read this prospectus together with the attached prospectus of the insurance product you are considering. RISKS OF MUTUAL FUNDS Mutual funds are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Because you could lose money by investing in these funds, be sure to read all risk disclosure carefully before investing. THE MANAGEMENT FIRM All John Hancock Declaration funds are managed by John Hancock Advisers, LLC. Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock Financial Services, Inc. and manages approximately $30 billion in assets. FUND INFORMATION KEY Concise fund-by-fund descriptions begin on the next page. Each description provides the following information: [Clip Art] Goal and strategy The fund's particular investment goals and the strategies it intends to use in pursuing those goals. [Clip Art] Main risks The major risk factors associated with the fund. [Clip Art] Past performance The fund's total return, measured year-by-year and over time. [Clip Art] Financial highlights A table showing the fund's financial performance for up to five years. 3 V.A. Relative Value Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term capital appreciation. To pursue this goal, the fund invests in a diversified portfolio of stocks, bonds and money market securities. Although the fund may concentrate in any of these asset classes, under normal circumstances it invests primarily in stocks. In managing the portfolio, the managers emphasize a value-oriented approach to individual stock selection. With the aid of proprietary financial models, the management team looks for companies that are selling at what appear to be substantial discounts to their long-term intrinsic and "franchise" values. These companies often have identifiable catalysts for growth, such as new products, business reorganizations or mergers. The fund manages risk by typically holding between 50 and 150 large companies that are diversified across industry sectors. The management team also uses fundamental financial analysis to identify individual companies with substantial cash flows, reliable revenue streams, superior competitive positions and strong management. The fund may attempt to take advantage of short-term market volatility by investing in corporate restructurings or pending acquisitions. In selecting bonds of any maturity, the manager looks for the most favorable risk/return ratios. The fund may invest up to 15% of net assets in junk bonds rated as low as CC/Ca and their unrated equivalents. The fund may invest up to 25% of assets in foreign securities (35% during adverse U.S. market conditions). The fund may also make limited use of certain derivatives (investments whose value is based on indexes, securities or currencies). In abnormal market conditions, the fund may temporarily invest extensively in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. ================================================================================ PORTFOLIO MANAGERS James S. Yu, CFA - ------------------------------------- Vice president of adviser Joined fund team in 2000 Joined adviser in 2000 Analyst at Merrill Lynch Asset Management (1998-2000) Analyst at Gabelli & Company (1995-1998) Began business career in 1990 Roger C. Hamilton - ------------------------------------- Vice president of adviser Joined fund team in 1999 Joined adviser in 1994 Began business career in 1980 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1998 1999 2000 2001 21.39% 56.65% -4.80% -2.81% 2002 total return as of March 31: x.xx% Best quarter: Q4 '99, 43.25% Worst quarter: Q3 '98, -16.61% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/01 - -------------------------------------------------------------------------------- Fund Index 1 year -2.81% -11.89% Life of fund - began 1/6/98 15.24% 5.50% Index: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. 4 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock and bond market movements. The fund's management strategy has a significant influence on fund performance. Large-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform investments that focus on small- or medium-capitalization stocks. Similarly, value stocks could underperform growth stocks. In addition, if the managers' securities selection strategies do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. o Any bonds held by the fund could be downgraded in credit rating or go into default. Bond prices generally fall when interest rates rise and longer maturity will increase volatility. Junk bond prices can fall on bad news about the economy, an industry or a company. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by _____________________
- ------------------------------------------------------------------------------------------------------------------------ Period ended: 12/98(1) 12/99 12/00 12/01 - ------------------------------------------------------------------------------------------------------------------------ Per share operating performance Net asset value, beginning of period $10.00 $12.03 $18.03 Net investment income (loss)(2) 0.11 0.10 0.02 Net realized and unrealized gain (loss) on investments 2.02 6.65 (0.80) Total from investment operations 2.13 6.75 (0.78) Less distributions: Dividends from net investment income (0.10) (0.10) (0.02) Distributions from net realized gain on investments sold -- (0.65) (6.59) Total distributions (0.10) (0.75) (6.61) Net asset value, end of period $12.03 $18.03 $10.64 Total investment return(3) (%) 21.39(4,5) 56.65 (4.80) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 17,368 38,766 39,043 Ratio of expenses to average net assets (%) 0.85(6) 0.77 0.79 Ratio of adjusted expenses to average net assets(7) (%) 1.03(6) -- -- Ratio of net investment income (loss) to average net assets (%) 1.17(6) 0.66 0.13 Portfolio turnover rate (%) 242 166 164
(1) Began operations on January 6, 1998. (2) Based on the average of the shares outstanding at the end of each month. (3) Assumes dividend reinvestment. (4) Not annualized. (5) The total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. 5 V.A. Financial Industries Fund GOAL AND STRATEGY [Clip Art] The fund seeks capital appreciation. To pursue this goal, the fund normally invests at least 80% of its assets in stocks of U.S. and foreign financial services companies of any size. These companies include banks, thrifts, finance companies, brokerage and advisory firms, real estate-related firms, insurance companies and financial holding companies. In managing the portfolio, the managers focus primarily on stock selection rather than industry allocation. In choosing individual stocks, the managers use fundamental financial analysis to identify securities that appear comparatively undervalued. Given the industry-wide trend toward consolidation, the managers also invest in companies that appear to be positioned for a merger. The managers generally gather firsthand information about companies from interviews and company visits. The fund may invest in U.S. and foreign bonds, including up to 5% of net assets in junk bonds (those rated below BBB/Baa and their unrated equivalents). It may also invest up to 15% of net assets in investment-grade short-term securities. The fund may make limited use of certain derivatives (investments whose value is based on indexes, securities or currencies). In abnormal circumstances, the fund may temporarily invest up to 80% of assets in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ PORTFOLIO MANAGERS James K. Schmidt, CFA - ------------------------------------- Executive vice president of adviser Joined fund team in 1997 Joined adviser in 1985 Began business career in 1979 Thomas M. Finucane - ------------------------------------- Vice president of adviser Joined fund team in 1997 Joined adviser in 1990 Began business career in 1983 Thomas C. Goggins - ------------------------------------- Senior vice president of adviser Joined fund team in 1998 Joined adviser in 1995 Began business career in 1981 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with broad-based market indexes for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1998 1999 2000 2001 8.57% 1.23% 27.16% -17.51% 2002 total return as of March 31: xx.xx% Best quarter: Q4 '98, 16.08% Worst quarter: Q3 '98, -16.76% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/01 - -------------------------------------------------------------------------------- Fund Index 1 Index 2 1 year -17.51% -11.89% -8.95% Life of fund - began 4/30/97 9.94% 9.71% 12.85% Index 1: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. Index 2: Standard & Poor's Financial Index, an unmanaged index of financial sector stocks in the Standard & Poor's 500 Index. 6 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock market movements. The fund's management strategy has a significant influence on fund performance. Because the fund focuses on a single sector of the economy, its performance depends in large part on the performance of that sector. As a result, the value of your investment may fluctuate more widely than it would in a fund that is diversified across sectors. For instance, when interest rates fall or economic conditions deteriorate, the stocks of banks and financial services companies could suffer losses. Also, rising interest rates can reduce profits by narrowing the difference between these companies' borrowing and lending rates. Stocks of financial services companies as a group could fall out of favor with the market, causing the fund to underperform funds that focus on other types of stocks. In addition, if the managers' stock selection strategy does not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. o Any bonds held by the fund could be downgraded in credit rating or go into default. Bond prices generally fall when interest rates rise. This risk is greater for longer maturity bonds. Junk bond prices can fall on bad news about the economy, an industry or a company. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by ___________________
- ----------------------------------------------------------------------------------------------------------------------------------- Period ended: 12/97(1) 12/98 12/99 12/00 12/01 - ----------------------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $13.44 $14.45 $14.46 Net investment income (loss)(2) 0.11 0.18 0.11 0.06 Net realized and unrealized gain (loss) on investments 3.39 0.97 0.06 3.87 Total from investment operations 3.50 1.15 0.17 3.93 Less distributions: Dividends from net investment income (0.05) (0.14) (0.10) (0.05) Distributions from net realized gain on investments sold (0.01) --(3) (0.05) -- Tax return of capital -- -- (0.01) -- Total distributions (0.06) (0.14) (0.16) (0.05) Net asset value, end of period $13.44 $14.45 $14.46 $18.34 Total investment return(4) (%) 35.05(5,6) 8.55 1.23 27.16 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 18,465 54,569 49,312 71,367 Ratio of expenses to average net assets (%) 1.05(7) 0.92 0.90 0.90 Ratio of adjusted expenses to average net assets(8) (%) 1.39(7) -- -- -- Ratio of net investment income (loss) to average net assets (%) 1.32(7) 1.25 0.77 0.36 Portfolio turnover rate (%) 11 38 72 41
(1) Began operations on April 30, 1997. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment. (5) Not annualized. (6) The 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. 7 V.A. Technology Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the fund normally invests at least 80% of its assets in U.S. and foreign companies that rely extensively on technology in their product development or operations. These companies are in fields such as: computer software, hardware and Internet services; telecommunications; electronics; and data management and storage. In managing the portfolio, the managers focus primarily on stock selection rather than industry allocation. The managers invest in companies of any size whose stocks appear to be trading below their true value, as determined by fundamental financial analysis of their business models and balance sheets as well as interviews with senior management. The fund focuses on companies that are undergoing a business change that appears to signal accelerated growth or higher earnings. The fund may invest up to 10% of net assets in debt securities of any maturity, including bonds rated as low as CC/Ca and their unrated equivalents. (Bonds rated below BBB/Baa are considered junk bonds.) It may also invest in certain higher-risk securities, including securities that are not publicly offered or traded, called restricted securities. The fund may use certain derivatives (investments whose value is based on indexes, securities or currencies). In abnormal circumstances, the fund may temporarily invest more than 20% of assets in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ SUBADVISER American Fund Advisors, Inc. - ---------------------------------------- Responsible for day-to-day investments Founded in 1978 Supervised by the adviser PORTFOLIO MANAGERS Barry J. Gordon - ---------------------------------------- President of subadviser Joined fund team in 2000 Began business career in 1971 Marc H. Klee, CFA - ---------------------------------------- Executive vice president of subadviser Joined fund team in 2000 Began business career in 1977 Alan J. Loewenstein, CFA - ---------------------------------------- Senior vice president of subadviser Joined fund team in 2000 Began business career in 1979 PAST PERFORMANCE [Clip Art] This graph normally shows how the fund's total return has varied from year to year, while the table shows performance over time (along with broad-based market indexes for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not include future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 2001 -44.06% 2002 total return as of March 31: xx.xx% Best quarter: QX 'XX, xx.xx% Worst quarter: QX 'XX, xx.xx% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/01 - -------------------------------------------------------------------------------- Fund Index 1 Index 2 1 year -44.06% -11.89% -30.57% Life of fund - began 5/1/2000 -41.33% -12.03% -40.50% Index 1: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. Index 2: Russell 3000 Technology Index, an unmanaged index of technology sector stocks in the Russell 3000 Index, which represents the 3,000 largest U.S. companies based on total market capitalization. 8 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock market movements. The fund's management strategy has a significant influence on fund performance. Because the fund focuses on a single sector of the economy, its performance depends in large part on the performance of that sector. As a result, the value of your investment may fluctuate more widely than it would in a fund that is diversified across sectors. Technology companies face special risks, and could be hurt by factors such as market saturation, price competition, obsolescence and competing technologies. Many technology companies are smaller companies that may have limited product lines and financial and managerial resources, making them vulnerable to isolated business setbacks. Stocks of technology companies as a group could fall out of favor with the market, causing the fund to underperform funds that focus on other types of stocks. In addition, if the managers' security selection strategies do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. o Any bonds held by the fund could be downgraded in credit rating or go into default. Bond prices generally fall when interest rates rise. This risk is greater for longer maturity bonds. Junk bond prices can fall on bad news about the economy, an industry or a company. o In a down market, the higher-risk securities and derivatives could become harder to value or to sell at a fair price. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by ___________________
- ------------------------------------------------------------------------------------------ Period ended: 12/00(1) 12/01 - ------------------------------------------------------------------------------------------ Per share operating performance Net asset value, beginning of period $10.00 Net investment income (loss)(2) 0.03 Net realized and unrealized gain (loss) on investments (2.69) Total from investment operations (2.66) Less distributions: Dividends from net investment income (0.01) Net asset value, end of period $7.33 Total investment return at net asset value(3,4) (%) (26.56)(5) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 14,042 Ratio of expenses to average net assets (%) 1.05(6) Ratio of adjusted expenses to average net assets(7) (%) 1.99(6) Ratio of net investment income (loss) to average net assets (%) 0.62(6) Portfolio turnover rate (%) 75
(1) Began operations on May 1, 2000. (2) Based on the average of the shares outstanding at the end of each month. (3) Assumes dividend reinvestment. (4) The total return would have been lower had certain expenses not been reduced during the period shown. (5) Not annualized. (6) Annualized. (7) Does not take into consideration expense reductions during the period shown. 9 V.A. Strategic Income Fund GOAL AND STRATEGY [Clip Art] The fund seeks a high level of current income. In pursuing this goal, the fund invests primarily in the following categories of securities: o foreign government and corporate debt securities from developed and emerging markets o U.S. government and agency securities o U.S. junk bonds The fund may also invest in preferred stock and other types of debt securities. Although the fund invests in securities rated as low as CC/Ca and their unrated equivalents, it generally intends to keep its average credit quality in the investment-grade range (AAA to BBB). There is no limit on the fund's average maturity. In managing the portfolio, the managers allocate assets among the three major categories based on analysis of economic factors such as projected international interest rate movements, industry cycles and political trends. However, the managers may invest up to 100% of assets in any one sector. Within each sector, the managers look for securities that are appropriate for the overall portfolio in terms of yield, credit quality, structure and industry distribution. In selecting securities, relative yields and risk/reward ratios are the primary considerations. The fund may use certain higher-risk investments, including derivatives (investments whose value is based on indexes, securities or currencies) and restricted or illiquid securities. In addition, the fund may invest up to 10% of net assets in U.S. or foreign stocks. In abnormal market conditions, the fund may temporarily invest extensively in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ PORTFOLIO MANAGERS Frederick L. Cavanaugh, Jr. - ---------------------------------------- Senior vice president of adviser Joined fund team in 1996 Joined adviser in 1986 Began business career in 1975 Daniel S. Janis III - ---------------------------------------- Second vice president of adviser Joined fund team in 1999 Joined adviser in 1999 Senior risk manager at BankBoston (1997-1998) Manager of forward desk at Morgan Stanley (1991-1997) Began business career in 1984 Indexes: In the future, the adviser will compare the fund's performance to the Merrill Lynch High Yield Master II Index, Merrill Lynch Government Master Index and Salomon Smith Barney World Government Bond Index, since they more closely represent the fund's investment strategy. PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with broad-based market indexes for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 11.77% 4.92% 4.82% 1.40% 4.58% 2002 total return as of March 31: x.xx% Best quarter: Q2 '97, 6.28% Worst quarter: Q3 '98, -2.79% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/01 - -------------------------------------------------------------------------------- Fund Index 1 Index 2 Index 3 Index 4 1 year 4.58% 8.50% 6.27% 7.21% -0.99% 5 year 5.44% 7.37% 3.95% 7.40% 2.16% Life of fund - began 8/29/96 6.32% 7.84% 4.88% 7.83% 2.52% Index 1: Lehman Brothers Government/Credit Bond Index, an unmanaged index of U.S. government, U.S. corporate and Yankee bonds. Index 2: Merrill Lynch High Yield Master II Index, an unmanaged index consisting of U.S. dollar-denominated public corporate issues with par amounts greater than $100 million that are rated below investment grade. Index 3: Merrill Lynch Government Master Index, an unmanaged index of fixed rate U.S. Treasury and agency securities. Index 4: Salomon Smith Barney World Government Bond Index, an unmanaged index consisting of approximately 650 securities issued by 18 governments in various countries. 10 MAIN RISKS [Clip Art] The fund's risk profile depends on its sector allocation. In general, investors should expect fluctuations in share price, yield and total return that are above average for bond funds. When interest rates rise, bond prices generally fall. Generally, an increase in the fund's average maturity will make it more sensitive to interest rate risk. A fall in worldwide demand for U.S. government securities could also lower the prices of these securities. The fund could lose money if any bonds it owns are downgraded in credit rating or go into default. In general, lower-rated bonds have higher credit risks, and their prices can fall on bad news about the economy, an industry or a company. If certain allocation strategies or certain industries or investments do not perform as the fund expects, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. These risks are greater in emerging markets. o If interest rate movements cause the fund's callable securities to be paid off substantially earlier or later than expected, the fund's share price or yield could be hurt. o Stock investments may go down in value due to stock market movements or negative company or industry events. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by ___________________
- -------------------------------------------------------------------------------------------------------------------------------- Period ended: 12/96(1) 12/97 12/98 12/99 12/00 12/01 - -------------------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $10.30 $10.47 $10.10 $9.77 Net investment income (loss)(2) 0.27 0.91 0.85 0.80 0.83 Net realized and unrealized gain (loss) on investments 0.36 0.26 (0.35) (0.33) (0.71) Total from investment operations 0.63 1.17 0.50 0.47 0.12 Less distributions: Dividends from net investment income (0.27) (0.91) (0.85) (0.80) (0.83) Distributions from net realized gain on investments sold (0.06) (0.09) (0.02) -- (0.09) Total distributions (0.33) (1.00) (0.87) (0.80) (0.92) Net asset value, end of period $10.30 $10.47 $10.10 $9.77 $8.97 Total investment return(3) (%) 6.45(4,5) 11.77(5) 4.92(5) 4.82(5) 1.40 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 2,131 5,540 15,019 22,282 34,472 Ratio of expenses to average net assets (%) 0.85(6) 0.85 0.85 0.85 0.76 Ratio of adjusted expenses to average net assets(7) (%) 2.28(6) 1.37 0.93 0.87 -- Ratio of net investment income (loss) to average net assets (%) 7.89(6) 8.77 8.19 8.06 8.91 Portfolio turnover rate (%) 73 110 92 53(8) 53
(1) Began operations on August 29, 1996. (2) Based on the average of the shares outstanding at the end of each month. (3) Assumes dividend reinvestment. (4) Not annualized. (5) The total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. (8) Porfolio turnover rate excludes merger activity. 11 Account information - -------------------------------------------------------------------------------- BUYING AND SELLING FUND SHARES When you invest in a Declaration fund through a variable contract, your premium payments are used to buy units of an insurance company separate account that then buys shares of the fund. The shares are purchased at net asset value (NAV) and are generally credited to the separate account immediately after the fund accepts payment from the insurance company. In unusual circumstances or to protect shareholders, a fund may refuse a purchase order, especially when the adviser believes the order might be large enough to disrupt the fund's management. A fund may also temporarily suspend the offering of its shares. Shares are sold at the next NAV to be determined after the fund accepts the sell request. The sales proceeds are normally forwarded by bank wire to the insurance company on the next business day. In unusual circumstances, the fund may temporarily suspend the processing of sell requests. It may also postpone the payment of sales proceeds for up to seven days or longer, as allowed by federal securities laws. - -------------------------------------------------------------------------------- VALUING FUND SHARES The NAV for each fund is determined each business day at the close of business on the New York Stock Exchange (typically 4:00 P.M. Eastern Time). The Exchange is typically open Monday through Friday. Securities in a fund's portfolio are generally valued on the basis of market quotations and valuations provided by independent pricing services. The funds may also value securities at fair value, especially if market quotations are not readily available or if the securities' value has been materially affected by events following the close of a foreign market. Fair value is determined according to procedures approved by the funds' board of trustees. If a fund uses this method, the securities' prices may be higher or lower than the same securities held by another fund using market quotations. - -------------------------------------------------------------------------------- FUND EXPENSES Management fees The management fees paid to the investment adviser by the John Hancock Declaration funds last year are as follows: - -------------------------------------------------------------------------------- Equity Funds % of net assets - -------------------------------------------------------------------------------- V.A. Relative Value Fund x.xx% - -------------------------------------------------------------------------------- Sector Funds - -------------------------------------------------------------------------------- V.A. Financial Industries Fund x.xx% V.A. Technology Fund x.xx% - -------------------------------------------------------------------------------- Income Funds - -------------------------------------------------------------------------------- V.A. Strategic Income Fund x.xx% The adviser pays subadvisory fees out of its own assets and no fund is responsible for paying a fee to its sub-adviser. Expense limitation The adviser may reduce its fee or make other arrangements to limit each fund's expenses to a specified percentage of average daily net assets. The adviser has agreed to limit temporarily each fund's expenses to 0.25% of average net assets, excluding management fees, at least until April 30, 2003. If annual expenses fall below this limitation at the end of any fund's fiscal year, the adviser can impose the full fee and recover any other payments up to the amount of the limitation. - -------------------------------------------------------------------------------- DIVIDENDS AND TAXES All income and capital gain distributions are automatically reinvested in additional shares of the fund at net asset value and are includable in the separate accounts holding these shares. For a discussion of the tax status of your variable contract, including the tax consequences of withdrawals or other payments, refer to the prospectus of your insurance company's separate account. 12 ACCOUNT INFORMATION Fund details - -------------------------------------------------------------------------------- BUSINESS STRUCTURE The diagram below shows the basic business structure used by the Declaration funds. The funds' board of trustees oversees the funds' business activities and retains the services of the various firms that carry out the funds' operations. The trustees of the Declaration funds have the power to change the funds' investment goals without shareholder or contract holder approval. ----------------------- Variable contract holders ----------------------- ----------------------- Insurance company separate accounts ----------------------- ----------------------- Declaration funds ----------------------- --------------------------------------------------- Subadviser American Fund Advisors, Inc. 1415 Kellum Place, Suite 205 Garden City, NY 11530 Provides portfolio management to V.A. Technology Fund. --------------------------------------------------- --------------------------------------------------- Investment adviser John Hancock Advisers, LLC 101 Huntington Avenue Boston, MA 02199-7603 Manages the funds' business and investment activities. --------------------------------------------------- --------------------------------------------------- Custodian The Bank of New York One Wall Street New York, NY 10286 Holds the funds' assets, settles all portfolio trades and collects most of the valuation data required for calculating each fund's NAV. --------------------------------------------------- --------------------------------------------------- Trustees Oversee the funds' activities. --------------------------------------------------- FUND DETAILS 13 For more information - -------------------------------------------------------------------------------- This prospectus should be used with the variable contract/product prospectus. Two documents are available that offer further information on the John Hancock Declaration funds: Annual/Semiannual Report to Shareholders Includes financial statements, a discussion of the market conditions and investment strategies that significantly affected performance, as well as the auditors' report (in annual report only). Statement of Additional Information (SAI) The SAI contains more detailed information on all aspects of the funds. The current annual report is included in the SAI. A current SAI has been filed with the Securities and Exchange Commission and is incorporated by reference into (is legally a part of) this prospectus. To request a free copy of the current annual/semiannual report or the SAI, please contact John Hancock: By mail: John Hancock Annuity Servicing Office 529 Main St. (X-4) Charlestown, MA 02129 By phone: 1-800-824-0335 On the Internet: www.jhfunds.com Or you may view or obtain these documents from the SEC: In person: at the SEC's Public Reference Room in Washington, DC. For access to the Reference Room call 1-202-942-8090 By mail: Public Reference Section Securities and Exchange Commission Washington, DC 20549-0102 (duplicating fee required) By electronic request: publicinfo@sec.gov (duplicating fee required) On the Internet: www.sec.gov SEC file number 811-07437 [LOGO](R) [OLYMPIC LOGO] WORLDWIDE SPONSOR John Hancock Funds, LLC MEMBER NASD 101 Huntington Avenue Boston, MA 02199-7603 www.jhfunds.com Mutual Funds Institutional Services Private Managed Accounts Retirement Plans (C)2002 JOHN HANCOCK FUNDS, LLC RVA00P 5/02 John Hancock Declaration Funds Prospectus May 1, 2002 - -------------------------------------------------------------------------------- V.A. Sovereign Investors Fund As with all mutual funds, the Securities and Exchange Commission has not approved or disapproved this fund or determined whether the information in this prospectus is adequate and accurate. Anyone who indicates otherwise is committing a federal crime. [LOGO](R) ------------------ JOHN HANCOCK FUNDS Contents - -------------------------------------------------------------------------------- A summary of the fund's V.A. Sovereign Investors Fund 4 goals, strategies, risks, performance and financial highlights. Transaction policies and Account information other information affecting your fund investment. Buying and selling fund shares 6 Valuing fund shares 6 Fund expenses 6 Dividends and taxes 6 Further information on the Fund details fund. Business structure 7 For more information back cover V.A. Sovereign Investors Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term growth of capital and income without assuming undue market risks. To pursue these goals, the fund normally invests at least 80% of its stock investments in a diversified portfolio of companies with market capitalizations within the range of the Standard & Poor's 500 Index. On March 31, 2002, that range was $x.xx billion to $xxx.x billion. At least 65% of the fund's stock investments are "dividend performers" -- companies whose dividend payments have increased steadily for ten years. In managing the portfolio, the managers use fundamental financial analysis to identify individual companies with high-quality income statements, substantial cash reserves and identifiable catalysts for growth, which may be new products or benefits from industry-wide growth. The managers generally visit companies to evaluate the strength and consistency of their management strategy. Finally, the managers look for stocks that are reasonably priced relative to their earnings and industry. Historically, companies that meet these criteria have tended to have large or medium capitalizations. The fund may not invest more than 5% of assets in any one security. The fund may invest in bonds of any maturity, with up to 5% of assets in junk bonds rated as low as C and their unrated equivalents. The fund typically invests in U.S. companies but may invest in dollar-denominated foreign securities. It may also make limited use of certain derivatives (investments whose value is based on indexes). Under normal conditions, the fund may not invest more than 10% of assets in cash or cash equivalents. In abnormal market conditions, the fund may temporarily invest extensively in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. ================================================================================ PORTFOLIO MANAGERS John F. Snyder III - ------------------------------------- Executive vice president of adviser Joined fund team in 1996 Joined adviser in 1991 Began business career in 1971 Barry H. Evans, CFA - ------------------------------------- Senior vice president of adviser Joined fund team in 1996 Joined adviser in 1986 Began business career in 1986 Peter M. Schofield, CFA - ------------------------------------- Vice president of adviser Joined fund team in 1996 Joined adviser in 1996 Portfolio manager at Geewax, Terker & Co. (1984-1996) Began business career in 1984 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 28.43% 16.87% 3.84% -0.33% -5.56% 2002 total return as of March 31: x.xx% Best quarter: Q4 '98, 15.75% Worst quarter: Q3 '99, -7.43% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/01 - -------------------------------------------------------------------------------- Fund Index 1 year -5.56% -11.89% 5 year 7.97% 10.70% Life of fund - began 8/29/96 9.06% 12.39% Index: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. 4 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock and bond market movements. The fund's management strategy has a significant influence on fund performance. Large- or medium-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform funds that focus on small-capitalization stocks. Medium-capitalization stocks tend to be more volatile than stocks of larger companies. In addition, if the managers' securities selection strategies do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Any bonds held by the fund could be downgraded in credit rating or go into default. Bond prices generally fall when interest rates rise and longer maturity will increase volatility. Junk bond prices can fall on bad news about the economy, an industry or a company. o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including inadequate or inaccurate financial information and social or political instability. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by ___________________
- ---------------------------------------------------------------------------------------------------------------------------------- Period ended: 12/96(1) 12/97 12/98 12/99 12/00 12/01 - ---------------------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $10.74 $13.59 $15.61 $15.96 Net investment income (loss)(2) 0.07 0.22 0.27 0.24 0.21 Net realized and unrealized gain (loss) on investments 0.76 2.82 2.00 0.35 (0.27) Total from investment operations 0.83 3.04 2.27 0.59 (0.06) Less distributions: Dividends from net investment income (0.07) (0.18) (0.25) (0.24) (0.21) Distributions in excess of net investment income -- -- -- --(3) -- Distributions from net realized gain on investments sold (0.02) (0.01) -- -- -- Tax return of capital -- -- -- --(3) -- Total distributions (0.09) (0.19) (0.25) (0.24) (0.21) Net asset value, end of period $10.74 $13.59 $15.61 $15.96 $15.69 Total investment return(4) (%) 8.30(5,6) 28.43(6) 16.88 3.84 (0.33) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 1,111 12,187 34,170 50,254 55,328 Ratio of expenses to average net assets (%) 0.85(7) 0.85 0.74 0.70 0.72 Ratio of adjusted expenses to average net assets(8) (%) 3.78(7) 1.16 -- -- -- Ratio of net investment income (loss) to average net assets (%) 1.90(7) 1.81 1.88 1.57 1.37 Portfolio turnover rate (%) 17 11 19 26 46
(1) Began operations on August 29, 1996. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment. (5) Not annualized. (6) The total returns would have been lower had certain expenses not been reduced during the periods shown. (7) Annualized. (8) Does not take into consideration expense reductions during the periods shown. 5 Account information - -------------------------------------------------------------------------------- BUYING AND SELLING FUND SHARES When you invest in the fund through a variable contract, your premium payments are used to buy units of an insurance company separate account that then buys shares of the fund. The shares are purchased at net asset value (NAV) and are generally credited to the separate account immediately after the fund accepts payment from the insurance company. In unusual circumstances or to protect shareholders, the fund may refuse a purchase order, especially when the adviser believes the order might be large enough to disrupt the fund's management. The fund may also temporarily suspend the offering of its shares. Shares are sold at the next NAV to be determined after the fund accepts the sell request. The sales proceeds are normally forwarded by bank wire to the insurance company on the next business day. In unusual circumstances, the fund may temporarily suspend the processing of sell requests. It may also postpone the payment of sales proceeds for up to seven days or longer, as allowed by federal securities laws. - -------------------------------------------------------------------------------- VALUING FUND SHARES The NAV for the fund is determined each business day at the close of business on the New York Stock Exchange (typically 4:00 P.M. Eastern Time). The Exchange is typically open Monday through Friday. Securities in the fund's portfolio are generally valued on the basis of market quotations and valuations provided by independent pricing services. The fund may also value securities at fair value, especially if market quotations are not readily available or if the securities' value has been materially affected by events following the close of a foreign market. Fair value is determined according to procedures approved by the fund's board of trustees. If the fund uses this method, the securities' prices may be higher or lower than the same securities held by another fund using market quotations. - -------------------------------------------------------------------------------- FUND EXPENSES Management fees For the period ended December 31, 2001, the fund paid the investment adviser management fees at an annual rate of x.xx% of average net assets. Expense limitation The adviser may reduce its fee or make other arrangements to limit the fund's expenses to a specified percentage of average daily net assets. The adviser has agreed to limit temporarily the fund's expenses to 0.25% of average net assets, excluding management fees, at least until April 30, 2003. If annual expenses fall below this limitation at the end of the fund's fiscal year, the adviser can impose the full fee and recover any other payments up to the amount of the limitation. - -------------------------------------------------------------------------------- DIVIDENDS AND TAXES All income and capital gain distributions are automatically reinvested in additional shares of the fund at net asset value and are includable in the separate accounts holding these shares. For a discussion of the tax status of your variable contract, including the tax consequences of withdrawals or other payments, refer to the prospectus of your insurance company's separate account. 6 ACCOUNT INFORMATION Fund details - -------------------------------------------------------------------------------- BUSINESS STRUCTURE The diagram below shows the basic business structure used by the fund. The fund's board of trustees oversees the fund's business activities and retains the services of the various firms that carry out the fund's operations. The trustees of the fund have the power to change the fund's investment goals without shareholder or contract holder approval. The management firm The fund is managed by John Hancock Advisers, LLC. Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock Financial Services, Inc. and manages approximately $30 billion in assets. ----------------------- Variable contract holders ----------------------- ----------------------- Insurance company separate accounts ----------------------- ----------------------- Declaration funds ----------------------- --------------------------------------------------- Investment adviser John Hancock Advisers, LLC 101 Huntington Avenue Boston, MA 02199-7603 Manages the fund's business and investment activities. --------------------------------------------------- --------------------------------------------------- Custodian The Bank of New York One Wall Street New York, NY 10286 Holds the fund's assets, settles all portfolio trades and collects most of the valuation data required for calculating the fund's NAV. --------------------------------------------------- --------------------------------------------------- Trustees Oversee the fund's activities. --------------------------------------------------- FUND DETAILS 7 For more information - -------------------------------------------------------------------------------- This prospectus should be used with the variable contract/product prospectus. Two documents are available that offer further information on the John Hancock V.A. Sovereign Investors Fund: Annual/Semiannual Report to Shareholders Includes financial statements, a discussion of the market conditions and investment strategies that significantly affected performance, as well as the auditors' report (in annual report only). Statement of Additional Information (SAI) The SAI contains more detailed information on all aspects of the fund. The current annual report is included in the SAI. A current SAI has been filed with the Securities and Exchange Commission and is incorporated by reference into (is legally a part of) this prospectus. To request a free copy of the current annual/semiannual report or the SAI, please contact John Hancock: By mail: John Hancock Annuity Servicing Office 529 Main St. (X-4) Charlestown, MA 02129 By phone: 1-800-824-0335 On the Internet: www.jhfunds.com Or you may view or obtain these documents from the SEC: In person: at the SEC's Public Reference Room in Washington, DC. For access to the Reference Room call 1-202-942-8090 By mail: Public Reference Section Securities and Exchange Commission Washington, DC 20549-0102 (duplicating fee required) By electronic request: publicinfo@sec.gov (duplicating fee required) On the Internet: www.sec.gov SEC file number: 811-07437 [LOGO](R) [OLYMPIC LOGO] WORLDWIDE SPONSOR John Hancock Funds, LLC MEMBER NASD 101 Huntington Avenue Boston, MA 02199-7603 www.jhfunds.com Mutual Funds Institutional Services Private Managed Accounts Retirement Plans (C)2002 JOHN HANCOCK FUNDS, LLC VA815PN 5/02 John Hancock Declaration Funds Prospectus May 1, 2002 - -------------------------------------------------------------------------------- Equity V.A. Relative Value Fund V.A. Sovereign Investors Fund Sector V.A. Financial Industries Fund Income V.A. Strategic Income Fund As with all mutual funds, the Securities and Exchange Commission has not approved or disapproved these funds or determined whether the information in this prospectus is adequate and accurate. Anyone who indicates otherwise is committing a federal crime. [LOGO](R) ------------------ JOHN HANCOCK FUNDS Contents - -------------------------------------------------------------------------------- General information about Overview 3 the Declaration funds. A fund-by-fund summary Equity of goals, strategies, risks, V.A. Relative Value Fund 4 performance and financial V.A. Sovereign Investors Fund 6 highlights. Sector V.A. Financial Industries Fund 8 Income V.A. Strategic Income Fund 10 Transaction policies and Account information other information affecting your fund investment. Buying and selling fund shares 12 Valuing fund shares 12 Fund expenses 12 Dividends and taxes 12 Further information on the Fund details Declaration funds. Business structure 13 For more information back cover Overview - -------------------------------------------------------------------------------- JOHN HANCOCK DECLARATION FUNDS These funds offer investment choices for the variable annuity and variable life insurance contracts of certain insurance companies. You should read this prospectus together with the attached prospectus of the insurance product you are considering. RISKS OF MUTUAL FUNDS Mutual funds are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Because you could lose money by investing in these funds, be sure to read all risk disclosure carefully before investing. THE MANAGEMENT FIRM All John Hancock Declaration funds are managed by John Hancock Advisers, LLC. Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock Financial Services, Inc. and manages approximately $30 billion in assets. FUND INFORMATION KEY Concise fund-by-fund descriptions begin on the next page. Each description provides the following information: [Clip Art] Goal and strategy The fund's particular investment goals and the strategies it intends to use in pursuing those goals. [Clip Art] Main risks The major risk factors associated with the fund. [Clip Art] Past performance The fund's total return, measured year-by-year and over time. [Clip Art] Financial highlights A table showing the fund's financial performance for up to five years. 3 V.A. Relative Value Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term capital appreciation. To pursue this goal, the fund invests in a diversified portfolio of stocks, bonds and money market securities. Although the fund may concentrate in any of these asset classes, under normal circumstances it invests primarily in stocks. In managing the portfolio, the managers emphasize a value-oriented approach to individual stock selection. With the aid of proprietary financial models, the management team looks for companies that are selling at what appear to be substantial discounts to their long-term intrinsic and "franchise" values. These companies often have identifiable catalysts for growth, such as new products, business reorganizations or mergers. The fund manages risk by typically holding between 50 and 150 large companies that are diversified across industry sectors. The management team also uses fundamental financial analysis to identify individual companies with substantial cash flows, reliable revenue streams, superior competitive positions and strong management. The fund may attempt to take advantage of short-term market volatility by investing in corporate restructurings or pending acquisitions. In selecting bonds of any maturity, the manager looks for the most favorable risk/return ratios. The fund may invest up to 15% of net assets in junk bonds rated as low as CC/Ca and their unrated equivalents. The fund may invest up to 25% of assets in foreign securities (35% during adverse U.S. market conditions). The fund may also make limited use of certain derivatives (investments whose value is based on indexes, securities or currencies). In abnormal market conditions, the fund may temporarily invest extensively in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. - -------------------------------------------------------------------------------- Portfolio Managers James S. Yu, CFA - ----------------------------------- Vice president of adviser Joined fund team in 2000 Joined adviser in 2000 Analyst at Merrill Lynch Asset Management (1998-2000) Analyst at Gabelli & Company (1995-1998) Began business career in 1990 Roger C. Hamilton - ----------------------------------- Vice president of adviser Joined fund team in 1999 Joined adviser in 1994 Began business career in 1980 ================================================================================ PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1998 1999 2000 2001 21.39% 56.65% -4.80% -2.81% 2002 total return as of March 31: x.xx% Best quarter: Q4 '99, 43.25% Worst quarter: Q3 '98, -16.61% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/01 - -------------------------------------------------------------------------------- Fund Index 1 year -2.81% -11.89% Life of fund - began 1/6/98 15.24% 5.50% Index: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. 4 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock and bond market movements. The fund's management strategy has a significant influence on fund performance. Large-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform investments that focus on small- or medium-capitalization stocks. Similarly, value stocks could underperform growth stocks. In addition, if the managers' securities selection strategies do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. o Any bonds held by the fund could be downgraded in credit rating or go into default. Bond prices generally fall when interest rates rise and longer maturity will increase volatility. Junk bond prices can fall on bad news about the economy, an industry or a company. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by ____________________
- ----------------------------------------------------------------------------------------------------------- Period ended: 12/98(1) 12/99 12/00 12/01 - ----------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $12.03 $18.03 Net investment income (loss)(2) 0.11 0.10 0.02 Net realized and unrealized gain (loss) on investments 2.02 6.65 (0.80) Total from investment operations 2.13 6.75 (0.78) Less distributions: Dividends from net investment income (0.10) (0.10) (0.02) Distributions from net realized gain on investments sold -- (0.65) (6.59) Total distributions (0.10) (0.75) (6.61) Net asset value, end of period $12.03 $18.03 $10.64 Total investment return(3) (%) 21.39(4,5) 56.65 (4.80) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 17,368 38,766 39,043 Ratio of expenses to average net assets (%) 0.85(6) 0.77 0.79 Ratio of adjusted expenses to average net assets(7) (%) 1.03(6) -- -- Ratio of net investment income (loss) to average net assets (%) 1.17(6) 0.66 0.13 Portfolio turnover rate (%) 242 166 164
(1) Began operations on January 6, 1998. (2) Based on the average of the shares outstanding at the end of each month. (3) Assumes dividend reinvestment. (4) Not annualized. (5) The total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. 5 V.A. Sovereign Investors Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term growth of capital and income without assuming undue market risks. To pursue these goals, the fund normally invests at least 80% of its stock investments in a diversified portfolio of companies with market capitalizations within the range of the Standard & Poor's 500 Index. On March 31, 2002, that range was $x.xx billion to $xxx.x billion. At least 65% of the fund's stock investments are "dividend performers" -- companies whose dividend payments have increased steadily for ten years. In managing the portfolio, the managers use fundamental financial analysis to identify individual companies with high-quality income statements, substantial cash reserves and identifiable catalysts for growth, which may be new products or benefits from industry-wide growth. The managers generally visit companies to evaluate the strength and consistency of their management strategy. Finally, the managers look for stocks that are reasonably priced relative to their earnings and industry. Historically, companies that meet these criteria have tended to have large or medium capitalizations. The fund may not invest more than 5% of assets in any one security. The fund may invest in bonds of any maturity, with up to 5% of assets in junk bonds rated as low as C and their unrated equivalents. The fund typically invests in U.S. companies but may invest in dollar-denominated foreign securities. It may also make limited use of certain derivatives (investments whose value is based on indexes). Under normal conditions, the fund may not invest more than 10% of assets in cash or cash equivalents. In abnormal market conditions, the fund may temporarily invest extensively in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. ================================================================================ PORTFOLIO MANAGERS John F. Snyder III - ---------------------------------------- Executive vice president of adviser Joined fund team in 1996 Joined adviser in 1991 Began business career in 1971 Barry H. Evans, CFA - ---------------------------------------- Senior vice president of adviser Joined fund team in 1996 Joined adviser in 1986 Began business career in 1986 Peter M. Schofield, CFA - ---------------------------------------- Vice president of adviser Joined fund team in 1996 Joined adviser in 1996 Portfolio manager at Geewax, Terker & Co. (1984-1996) Began business career in 1984 ================================================================================ PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 28.43% 16.87% 3.84% -0.33% -5.56% 2002 total return as of March 31: x.xx% Best quarter: Q4 '98, 15.75% Worst quarter: Q3 '99, -7.43% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/01 - -------------------------------------------------------------------------------- Fund Index 1 year -5.56% -11.89% 5 year 7.97% 10.70% Life of fund - began 8/29/96 9.06% 12.39% Index: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. 6 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock and bond market movements. The fund's management strategy has a significant influence on fund performance. Large- or medium-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform funds that focus on small-capitalization stocks. Medium-capitalization stocks tend to be more volatile than stocks of larger companies. In addition, if the managers' securities selection strategies do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Any bonds held by the fund could be downgraded in credit rating or go into default. Bond prices generally fall when interest rates rise and longer maturity will increase volatility. Junk bond prices can fall on bad news about the economy, an industry or a company. o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including inadequate or inaccurate financial information and social or political instability. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by ___________________
- ---------------------------------------------------------------------------------------------------------------------------------- Period ended: 12/96(1) 12/97 12/98 12/99 12/00 12/01 - ---------------------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $10.74 $13.59 $15.61 $15.96 Net investment income (loss)(2) 0.07 0.22 0.27 0.24 0.21 Net realized and unrealized gain (loss) on investments 0.76 2.82 2.00 0.35 (0.27) Total from investment operations 0.83 3.04 2.27 0.59 (0.06) Less distributions: Dividends from net investment income (0.07) (0.18) (0.25) (0.24) (0.21) Distributions in excess of net investment income -- -- -- --(3) -- Distributions from net realized gain on investments sold (0.02) (0.01) -- -- -- Tax return of capital -- -- -- --(3) -- Total distributions (0.09) (0.19) (0.25) (0.24) (0.21) Net asset value, end of period $10.74 $13.59 $15.61 $15.96 $15.69 Total investment return(4) (%) 8.30(5,6) 28.43(6) 16.88 3.84 (0.33) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 1,111 12,187 34,170 50,254 55,328 Ratio of expenses to average net assets (%) 0.85(7) 0.85 0.74 0.70 0.72 Ratio of adjusted expenses to average net assets(8) (%) 3.78(7) 1.16 -- -- -- Ratio of net investment income (loss) to average net assets (%) 1.90(7) 1.81 1.88 1.57 1.37 Portfolio turnover rate (%) 17 11 19 26 46
(1) Began operations on August 29, 1996. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment. (5) Not annualized. (6) The total returns would have been lower had certain expenses not been reduced during the periods shown. (7) Annualized. (8) Does not take into consideration expense reductions during the periods shown. 7 V.A. Financial Industries Fund GOAL AND STRATEGY [Clip Art] The fund seeks capital appreciation. To pursue this goal, the fund normally invests at least 80% of its assets in stocks of U.S. and foreign financial services companies of any size. These companies include banks, thrifts, finance companies, brokerage and advisory firms, real estate-related firms, insurance companies and financial holding companies. In managing the portfolio, the managers focus primarily on stock selection rather than industry allocation. In choosing individual stocks, the managers use fundamental financial analysis to identify securities that appear comparatively undervalued. Given the industry-wide trend toward consolidation, the managers also invest in companies that appear to be positioned for a merger. The managers generally gather firsthand information about companies from interviews and company visits. The fund may invest in U.S. and foreign bonds, including up to 5% of net assets in junk bonds (those rated below BBB/Baa and their unrated equivalents). It may also invest up to 15% of net assets in investment-grade short-term securities. The fund may make limited use of certain derivatives (investments whose value is based on indexes, securities or currencies). In abnormal circumstances, the fund may temporarily invest up to 80% of assets in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ PORTFOLIO MANAGERS James K. Schmidt, CFA - --------------------------------------- Executive vice president of adviser Joined fund team in 1997 Joined adviser in 1985 Began business career in 1979 Thomas M. Finucane - --------------------------------------- Vice president of adviser Joined fund team in 1997 Joined adviser in 1990 Began business career in 1983 Thomas C. Goggins - --------------------------------------- Senior vice president of adviser Joined fund team in 1998 Joined adviser in 1995 Began business career in 1981 ================================================================================ PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with broad-based market indexes for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1998 1999 2000 2001 8.57% 1.23% 27.16% -17.51% 2002 total return as of March 31: xx.xx% Best quarter: Q4 '98, 16.08% Worst quarter: Q3 '98, -16.76% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/01 - -------------------------------------------------------------------------------- Fund Index 1 Index 2 1 year -17.51% -11.89% -8.95% Life of fund - began 4/30/97 9.94% 9.71% 12.85% Index 1: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. Index 2: Standard & Poor's Financial Index, an unmanaged index of financial sector stocks in the Standard & Poor's 500 Index. 8 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock market movements. The fund's management strategy has a significant influence on fund performance. Because the fund focuses on a single sector of the economy, its performance depends in large part on the performance of that sector. As a result, the value of your investment may fluctuate more widely than it would in a fund that is diversified across sectors. For instance, when interest rates fall or economic conditions deteriorate, the stocks of banks and financial services companies could suffer losses. Also, rising interest rates can reduce profits by narrowing the difference between these companies' borrowing and lending rates. Stocks of financial services companies as a group could fall out of favor with the market, causing the fund to underperform funds that focus on other types of stocks. In addition, if the managers' stock selection strategy does not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. o Any bonds held by the fund could be downgraded in credit rating or go into default. Bond prices generally fall when interest rates rise. This risk is greater for longer maturity bonds. Junk bond prices can fall on bad news about the economy, an industry or a company. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by ___________________
- --------------------------------------------------------------------------------------------------------------------- Period ended: 12/97(1) 12/98 12/99 12/00 12/01 - --------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $13.44 $14.45 $14.46 Net investment income (loss)(2) 0.11 0.18 0.11 0.06 Net realized and unrealized gain (loss) on investments 3.39 0.97 0.06 3.87 Total from investment operations 3.50 1.15 0.17 3.93 Less distributions: Dividends from net investment income (0.05) (0.14) (0.10) (0.05) Distributions from net realized gain on investments sold (0.01) --(3) (0.05) -- Tax return of capital -- -- (0.01) -- Total distributions (0.06) (0.14) (0.16) (0.05) Net asset value, end of period $13.44 $14.45 $14.46 $18.34 Total investment return(4) (%) 35.05(5,6) 8.55 1.23 27.16 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 18,465 54,569 49,312 71,367 Ratio of expenses to average net assets (%) 1.05(7) 0.92 0.90 0.90 Ratio of adjusted expenses to average net assets(8) (%) 1.39(7) -- -- -- Ratio of net investment income (loss) to average net assets (%) 1.32(7) 1.25 0.77 0.36 Portfolio turnover rate (%) 11 38 72 41
(1) Began operations on April 30, 1997. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment. (5) Not annualized. (6) The 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 V.A. Strategic Income Fund GOAL AND STRATEGY [Clip Art] The fund seeks a high level of current income. In pursuing this goal, the fund invests primarily in the following categories of securities: o foreign government and corporate debt securities from developed and emerging markets o U.S. government and agency securities o U.S. junk bonds The fund may also invest in preferred stock and other types of debt securities. Although the fund invests in securities rated as low as CC/Ca and their unrated equivalents, it generally intends to keep its average credit quality in the investment-grade range (AAA to BBB). There is no limit on the fund's average maturity. In managing the portfolio, the managers allocate assets among the three major categories based on analysis of economic factors such as projected international interest rate movements, industry cycles and political trends. However, the managers may invest up to 100% of assets in any one sector. Within each sector, the managers look for securities that are appropriate for the overall portfolio in terms of yield, credit quality, structure and industry distribution. In selecting securities, relative yields and risk/reward ratios are the primary considerations. The fund may use certain higher-risk investments, including derivatives (investments whose value is based on indexes, securities or currencies) and restricted or illiquid securities. In addition, the fund may invest up to 10% of net assets in U.S. or foreign stocks. In abnormal market conditions, the fund may temporarily invest extensively in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ PORTFOLIO MANAGERS Frederick L. Cavanaugh, Jr. - ----------------------------------- Senior vice president of adviser Joined fund team in 1996 Joined adviser in 1986 Began business career in 1975 Daniel S. Janis III - ----------------------------------- Second vice president of adviser Joined fund team in 1999 Joined adviser in 1999 Senior risk manager at BankBoston (1997-1998) Manager of forward desk at Morgan Stanley (1991-1997) Began business career in 1984 Indexes: In the future, the adviser will compare the fund's performance to the Merrill Lynch High Yield Master II Index, Merrill Lynch Government Master Index and Salomon Smith Barney World Government Bond Index, since they more closely represent the fund's investment strategy. PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with broad-based market indexes for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 11.77% 4.92% 4.82% 1.40% 4.58% 2002 total return as of March 31: x.xx% Best quarter: Q2 '97, 6.28% Worst quarter: Q3 '98, -2.79% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/01 - -------------------------------------------------------------------------------- Fund Index 1 Index 2 Index 3 Index 4 1 year 4.58% 8.50% 6.27% 7.21% -0.99% 5.year 5.44% 7.37% 3.95% 7.40% 2.16% Life of fund - began 8/29/96 6.32% 7.84% 4.88% 7.83% 2.52% Index 1: Lehman Brothers Government/Credit Bond Index, an unmanaged index of U.S. government, U.S. corporate and Yankee bonds. Index 2: Merrill Lynch High Yield Master II Index, an unmanaged index consisting of U.S. dollar-denominated public corporate issues with par amounts greater than $100 million that are rated below investment grade. Index 3: Merrill Lynch Government Master Index, an unmanaged index of fixed rate U.S. Treasury and agency securities. Index 4: Salomon Smith Barney World Government Bond Index, an unmanaged index consisting of approximately 650 securities issued by 18 governments in various countries. 10 MAIN RISKS [Clip Art] The fund's risk profile depends on its sector allocation. In general, investors should expect fluctuations in share price, yield and total return that are above average for bond funds. When interest rates rise, bond prices generally fall. Generally, an increase in the fund's average maturity will make it more sensitive to interest rate risk. A fall in worldwide demand for U.S. government securities could also lower the prices of these securities. The fund could lose money if any bonds it owns are downgraded in credit rating or go into default. In general, lower-rated bonds have higher credit risks, and their prices can fall on bad news about the economy, an industry or a company. If certain allocation strategies or certain industries or investments do not perform as the fund expects, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. These risks are greater in emerging markets. o If interest rate movements cause the fund's callable securities to be paid off substantially earlier or later than expected, the fund's share price or yield could be hurt. o Stock investments may go down in value due to stock market movements or negative company or industry events. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by ___________________
- -------------------------------------------------------------------------------------------------------------------------------- Period ended: 12/96(1) 12/97 12/98 12/99 12/00 12/01 - -------------------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $10.30 $10.47 $10.10 $9.77 Net investment income (loss)(2) 0.27 0.91 0.85 0.80 0.83 Net realized and unrealized gain (loss) on investments 0.36 0.26 (0.35) (0.33) (0.71) Total from investment operations 0.63 1.17 0.50 0.47 0.12 Less distributions: Dividends from net investment income (0.27) (0.91) (0.85) (0.80) (0.83) Distributions from net realized gain on investments sold (0.06) (0.09) (0.02) -- (0.09) Total distributions (0.33) (1.00) (0.87) (0.80) (0.92) Net asset value, end of period $10.30 $10.47 $10.10 $9.77 $8.97 Total investment return(3) (%) 6.45(4,5) 11.77(5) 4.92(5) 4.82(5) 1.40 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 2,131 5,540 15,019 22,282 34,472 Ratio of expenses to average net assets (%) 0.85(6) 0.85 0.85 0.85 0.76 Ratio of adjusted expenses to average net assets(7) (%) 2.28(6) 1.37 0.93 0.87 -- Ratio of net investment income (loss) to average net assets (%) 7.89(6) 8.77 8.19 8.06 8.91 Portfolio turnover rate (%) 73 110 92 53(8) 53
(1) Began operations on August 29, 1996. (2) Based on the average of the shares outstanding at the end of each month. (3) Assumes dividend reinvestment. (4) Not annualized. (5) The total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. (8) Porfolio turnover rate excludes merger activity. 11 Account information - -------------------------------------------------------------------------------- BUYING AND SELLING FUND SHARES When you invest in a Declaration fund through a variable contract, your premium payments are used to buy units of an insurance company separate account that then buys shares of the fund. The shares are purchased at net asset value (NAV) and are generally credited to the separate account immediately after the fund accepts payment from the insurance company. In unusual circumstances or to protect shareholders, a fund may refuse a purchase order, especially when the adviser believes the order might be large enough to disrupt the fund's management. A fund may also temporarily suspend the offering of its shares. Shares are sold at the next NAV to be determined after the fund accepts the sell request. The sales proceeds are normally forwarded by bank wire to the insurance company on the next business day. In unusual circumstances, the fund may temporarily suspend the processing of sell requests. It may also postpone the payment of sales proceeds for up to seven days or longer, as allowed by federal securities laws. - -------------------------------------------------------------------------------- VALUING FUND SHARES The NAV for each fund is determined each business day at the close of business on the New York Stock Exchange (typically 4:00 P.M. Eastern Time). The Exchange is typically open Monday through Friday. Securities in a fund's portfolio are generally valued on the basis of market quotations and valuations provided by independent pricing services. The funds may also value securities at fair value, especially if market quotations are not readily available or if the securities' value has been materially affected by events following the close of a foreign market. Fair value is determined according to procedures approved by the funds' board of trustees. If a fund uses this method, the securities' prices may be higher or lower than the same securities held by another fund using market quotations. - -------------------------------------------------------------------------------- FUND EXPENSES Management fees The management fees paid to the investment adviser by the John Hancock Declaration funds last year are as follows: - -------------------------------------------------------------------------------- Equity Funds % of net assets - -------------------------------------------------------------------------------- V.A. Relative Value Fund x.xx% V.A. Sovereign Investors Fund x.xx% - -------------------------------------------------------------------------------- Sector Funds - -------------------------------------------------------------------------------- V.A. Financial Industries Fund x.xx% - -------------------------------------------------------------------------------- Income Funds - -------------------------------------------------------------------------------- V.A. Strategic Income Fund x.xx% The adviser pays subadvisory fees out of its own assets and no fund is responsible for paying a fee to its sub-adviser. Expense limitation The adviser may reduce its fee or make other arrangements to limit each fund's expenses to a specified percentage of average daily net assets. The adviser has agreed to limit temporarily each fund's expenses to 0.25% of average net assets, excluding management fees, at least until April 30, 2003. If annual expenses fall below this limitation at the end of any fund's fiscal year, the adviser can impose the full fee and recover any other payments up to the amount of the limitation. - -------------------------------------------------------------------------------- DIVIDENDS AND TAXES All income and capital gain distributions are automatically reinvested in additional shares of the fund at net asset value and are includable in the separate accounts holding these shares. For a discussion of the tax status of your variable contract, including the tax consequences of withdrawals or other payments, refer to the prospectus of your insurance company's separate account. 12 ACCOUNT INFORMATION Fund details - -------------------------------------------------------------------------------- BUSINESS STRUCTURE The diagram below shows the basic business structure used by the Declaration funds. The funds' board of trustees oversees the funds' business activities and retains the services of the various firms that carry out the funds' operations. The trustees of the Declaration funds have the power to change the funds' investment goals without shareholder or contract holder approval. ----------------------- Variable contract holders ----------------------- ----------------------- Insurance company separate accounts ----------------------- ----------------------- Declaration funds ----------------------- --------------------------------------------------- Investment adviser John Hancock Advisers, LLC 101 Huntington Avenue Boston, MA 02199-7603 Manages the funds' business and investment activities. --------------------------------------------------- --------------------------------------------------- Custodian The Bank of New York One Wall Street New York, NY 10286 Holds the funds' assets, settles all portfolio trades and collects most of the valuation data required for calculating each fund's NAV. --------------------------------------------------- --------------------------------------------------- Trustees Oversee the funds' activities. --------------------------------------------------- FUND DETAILS 13 For more information - -------------------------------------------------------------------------------- This prospectus should be used with the variable contract/product prospectus. Two documents are available that offer further information on the John Hancock Declaration funds: Annual/Semiannual Report to Shareholders Includes financial statements, a discussion of the market conditions and investment strategies that significantly affected performance, as well as the auditors' report (in annual report only). Statement of Additional Information (SAI) The SAI contains more detailed information on all aspects of the funds. The current annual report is included in the SAI. A current SAI has been filed with the Securities and Exchange Commission and is incorporated by reference into (is legally a part of) this prospectus. To request a free copy of the current annual/semiannual report or the SAI, please contact John Hancock: By mail: John Hancock Annuity Servicing Office 529 Main St. (X-4) Charlestown, MA 02129 By phone: 1-800-824-0335 On the Internet: www.jhfunds.com Or you may view or obtain these documents from the SEC: In person: at the SEC's Public Reference Room in Washington, DC. For access to the Reference Room call 1-202-942-8090 By mail: Public Reference Section Securities and Exchange Commission Washington, DC 20549-0102 (duplicating fee required) By electronic request: publicinfo@sec.gov (duplicating fee required) On the Internet: www.sec.gov SEC file number 811-07437 [LOGO](R) [OLYMPIC LOGO] WORLDWIDE SPONSOR John Hancock Funds, LLC Member NASD 101 Huntington Avenue Boston, MA 02199-7603 www.jhfunds.com Mutual Funds Institutional Services Private Managed Accounts Retirement Plans (C)2002 JOHN HANCOCK FUNDS, LLC PVA00P 5/02 John Hancock Declaration Funds Prospectus May 1, 2002 - -------------------------------------------------------------------------------- Equity V.A. Relative Value Fund V.A. Sovereign Investors Fund Sector V.A. Financial Industries Fund Income V.A. Strategic Income Fund As with all mutual funds, the Securities and Exchange Commission has not approved or disapproved these funds or determined whether the information in this prospectus is adequate and accurate. Anyone who indicates otherwise is committing a federal crime. [LOGO](R) ------------------ JOHN HANCOCK FUNDS Contents - -------------------------------------------------------------------------------- General information about Overview 3 the Declaration funds. A fund-by-fund summary of Equity goals, strategies, risks, V.A. Relative Value Fund 4 performance and financial V.A. Sovereign Investors Fund 6 highlights. Sector V.A. Financial Industries Fund 8 Income V.A. Strategic Income Fund 10 Transaction policies and Account information other information affecting your fund investment. Buying and selling fund shares 12 Valuing fund shares 12 Fund expenses 12 Dividends and taxes 12 Further information on the Fund details Declaration funds. Business structure 13 For more information back cover Overview - -------------------------------------------------------------------------------- JOHN HANCOCK DECLARATION FUNDS These funds offer investment choices for the variable annuity and variable life insurance contracts of certain insurance companies. You should read this prospectus together with the attached prospectus of the insurance product you are considering. RISKS OF MUTUAL FUNDS Mutual funds are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Because you could lose money by investing in these funds, be sure to read all risk disclosure carefully before investing. THE MANAGEMENT FIRM All John Hancock Declaration funds are managed by John Hancock Advisers, LLC. Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock Financial Services, Inc. and manages approximately $30 billion in assets. FUND INFORMATION KEY Concise fund-by-fund descriptions begin on the next page. Each description provides the following information: [Clip Art] Goal and strategy The fund's particular investment goals and the strategies it intends to use in pursuing those goals. [Clip Art] Main risks The major risk factors associated with the fund. [Clip Art] Past performance The fund's total return, measured year-by-year and over time. [Clip Art] Financial highlights A table showing the fund's financial performance for up to five years. 3 V.A. Relative Value Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term capital appreciation. To pursue this goal, the fund invests in a diversified portfolio of stocks, bonds and money market securities. Although the fund may concentrate in any of these asset classes, under normal circumstances it invests primarily in stocks. In managing the portfolio, the managers emphasize a value-oriented approach to individual stock selection. With the aid of proprietary financial models, the management team looks for companies that are selling at what appear to be substantial discounts to their long-term intrinsic and "franchise" values. These companies often have identifiable catalysts for growth, such as new products, business reorganizations or mergers. The fund manages risk by typically holding between 50 and 150 large companies that are diversified across industry sectors. The management team also uses fundamental financial analysis to identify individual companies with substantial cash flows, reliable revenue streams, superior competitive positions and strong management. The fund may attempt to take advantage of short-term market volatility by investing in corporate restructurings or pending acquisitions. In selecting bonds of any maturity, the manager looks for the most favorable risk/return ratios. The fund may invest up to 15% of net assets in junk bonds rated as low as CC/Ca and their unrated equivalents. The fund may invest up to 25% of assets in foreign securities (35% during adverse U.S. market conditions). The fund may also make limited use of certain derivatives (investments whose value is based on indexes, securities or currencies). In abnormal market conditions, the fund may temporarily invest extensively in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. ================================================================================ PORTFOLIO MANAGERS James S. Yu, CFA - ------------------------------- Vice president of adviser Joined fund team in 2000 Joined adviser in 2000 Analyst at Merrill Lynch Asset Management (1998-2000) Analyst at Gabelli & Company (1995-1998) Began business career in 1990 Roger C. Hamilton - ------------------------------- Vice president of adviser Joined fund team in 1999 Joined adviser in 1994 Began business career in 1980 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1998 1999 2000 2001 21.39% 56.65% -4.80% -2.81% 2002 total return as of March 31: x.xx% Best quarter: Q4 '99, 43.25% Worst quarter: Q3 '98, -16.61% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/01 - -------------------------------------------------------------------------------- Fund Index 1 year -2.81% -11.89% Life of fund - began 1/6/98 15.24% 5.50% Index: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. 4 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock and bond market movements. The fund's management strategy has a significant influence on fund performance. Large-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform investments that focus on small- or medium-capitalization stocks. Similarly, value stocks could underperform growth stocks. In addition, if the managers' securities selection strategies do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. o Any bonds held by the fund could be downgraded in credit rating or go into default. Bond prices generally fall when interest rates rise and longer maturity will increase volatility. Junk bond prices can fall on bad news about the economy, an industry or a company. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by _____________________
- ----------------------------------------------------------------------------------------------------------- Period ended: 12/98(1) 12/99 12/00 12/01 - ----------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $12.03 $18.03 Net investment income (loss)(2) 0.11 0.10 0.02 Net realized and unrealized gain (loss) on investments 2.02 6.65 (0.80) Total from investment operations 2.13 6.75 (0.78) Less distributions: Dividends from net investment income (0.10) (0.10) (0.02) Distributions from net realized gain on investments sold -- (0.65) (6.59) Total distributions (0.10) (0.75) (6.61) Net asset value, end of period $12.03 $18.03 $10.64 Total investment return(3) (%) 21.39(4,5) 56.65 (4.80) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 17,368 38,766 39,043 Ratio of expenses to average net assets (%) 0.85(6) 0.77 0.79 Ratio of adjusted expenses to average net assets(7) (%) 1.03(6) -- -- Ratio of net investment income (loss) to average net assets (%) 1.17(6) 0.66 0.13 Portfolio turnover rate (%) 242 166 164
(1) Began operations on January 6, 1998. (2) Based on the average of the shares outstanding at the end of each month. (3) Assumes dividend reinvestment. (4) Not annualized. (5) The total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. 5 V.A. Sovereign Investors Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term growth of capital and income without assuming undue market risks. To pursue these goals, the fund normally invests at least 80% of its stock investments in a diversified portfolio of companies with market capitalizations within the range of the Standard & Poor's 500 Index. On March 31, 2002, that range was $x.xx billion to $xxx.x billion. At least 65% of the fund's stock investments are "dividend performers" -- companies whose dividend payments have increased steadily for ten years. In managing the portfolio, the managers use fundamental financial analysis to identify individual companies with high-quality income statements, substantial cash reserves and identifiable catalysts for growth, which may be new products or benefits from industry-wide growth. The managers generally visit companies to evaluate the strength and consistency of their management strategy. Finally, the managers look for stocks that are reasonably priced relative to their earnings and industry. Historically, companies that meet these criteria have tended to have large or medium capitalizations. The fund may not invest more than 5% of assets in any one security. The fund may invest in bonds of any maturity, with up to 5% of assets in junk bonds rated as low as C and their unrated equivalents. The fund typically invests in U.S. companies but may invest in dollar-denominated foreign securities. It may also make limited use of certain derivatives (investments whose value is based on indexes). Under normal conditions, the fund may not invest more than 10% of assets in cash or cash equivalents. In abnormal market conditions, the fund may temporarily invest extensively in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. ================================================================================ PORTFOLIO MANAGERS John F. Snyder III - --------------------------------------- Executive vice president of adviser Joined fund team in 1996 Joined adviser in 1991 Began business career in 1971 Barry H. Evans, CFA - --------------------------------------- Senior vice president of adviser Joined fund team in 1996 Joined adviser in 1986 Began business career in 1986 Peter M. Schofield, CFA - --------------------------------------- Vice president of adviser Joined fund team in 1996 Joined adviser in 1996 Portfolio manager at Geewax, Terker & Co. (1984-1996) Began business career in 1984 ================================================================================ PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 28.43% 16.87% 3.84% -0.33% -5.56% 2002 total return as of March 31: x.xx% Best quarter: Q4 '98, 15.75% Worst quarter: Q3 '99, -7.43% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/01 - -------------------------------------------------------------------------------- Fund Index 1 year -5.56% -11.89% 5 year 7.97% 10.70% Life of fund - began 8/29/96 9.06% 12.39% Index: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. 6 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock and bond market movements. The fund's management strategy has a significant influence on fund performance. Large- or medium-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform funds that focus on small-capitalization stocks. Medium-capitalization stocks tend to be more volatile than stocks of larger companies. In addition, if the managers' securities selection strategies do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Any bonds held by the fund could be downgraded in credit rating or go into default. Bond prices generally fall when interest rates rise and longer maturity will increase volatility. Junk bond prices can fall on bad news about the economy, an industry or a company. o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including inadequate or inaccurate financial information and social or political instability. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by ___________________
- ---------------------------------------------------------------------------------------------------------------------------------- Period ended: 12/96(1) 12/97 12/98 12/99 12/00 12/01 - ---------------------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $10.74 $13.59 $15.61 $15.96 Net investment income (loss)(2) 0.07 0.22 0.27 0.24 0.21 Net realized and unrealized gain (loss) on investments 0.76 2.82 2.00 0.35 (0.27) Total from investment operations 0.83 3.04 2.27 0.59 (0.06) Less distributions: Dividends from net investment income (0.07) (0.18) (0.25) (0.24) (0.21) Distributions in excess of net investment income -- -- -- --(3) -- Distributions from net realized gain on investments sold (0.02) (0.01) -- -- -- Tax return of capital -- -- -- --(3) -- Total distributions (0.09) (0.19) (0.25) (0.24) (0.21) Net asset value, end of period $10.74 $13.59 $15.61 $15.96 $15.69 Total investment return(4) (%) 8.30(5,6) 28.43(6) 16.88 3.84 (0.33) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 1,111 12,187 34,170 50,254 55,328 Ratio of expenses to average net assets (%) 0.85(7) 0.85 0.74 0.70 0.72 Ratio of adjusted expenses to average net assets(8) (%) 3.78(7) 1.16 -- -- -- Ratio of net investment income (loss) to average net assets (%) 1.90(7) 1.81 1.88 1.57 1.37 Portfolio turnover rate (%) 17 11 19 26 46
(1) Began operations on August 29, 1996. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment. (5) Not annualized. (6) The total returns would have been lower had certain expenses not been reduced during the periods shown. (7) Annualized. (8) Does not take into consideration expense reductions during the periods shown. 7 V.A. Financial Industries Fund GOAL AND STRATEGY [Clip Art] The fund seeks capital appreciation. To pursue this goal, the fund normally invests at least 80% of its assets in stocks of U.S. and foreign financial services companies of any size. These companies include banks, thrifts, finance companies, brokerage and advisory firms, real estate-related firms, insurance companies and financial holding companies. In managing the portfolio, the managers focus primarily on stock selection rather than industry allocation. In choosing individual stocks, the managers use fundamental financial analysis to identify securities that appear comparatively undervalued. Given the industry-wide trend toward consolidation, the managers also invest in companies that appear to be positioned for a merger. The managers generally gather firsthand information about companies from interviews and company visits. The fund may invest in U.S. and foreign bonds, including up to 5% of net assets in junk bonds (those rated below BBB/Baa and their unrated equivalents). It may also invest up to 15% of net assets in investment-grade short-term securities. The fund may make limited use of certain derivatives (investments whose value is based on indexes, securities or currencies). In abnormal circumstances, the fund may temporarily invest up to 80% of assets in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ PORTFOLIO MANAGERS James K. Schmidt, CFA - -------------------------------------- Executive vice president of adviser Joined fund team in 1997 Joined adviser in 1985 Began business career in 1979 Thomas M. Finucane - -------------------------------------- Vice president of adviser Joined fund team in 1997 Joined adviser in 1990 Began business career in 1983 Thomas C. Goggins - -------------------------------------- Senior vice president of adviser Joined fund team in 1998 Joined adviser in 1995 Began business career in 1981 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with broad-based market indexes for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1998 1999 2000 2001 8.57% 1.23% 27.16% -17.51% 2002 total return as of March 31: xx.xx% Best quarter: Q4 '98, 16.08% Worst quarter: Q3 '98, -16.76% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/01 - -------------------------------------------------------------------------------- Fund Index 1 Index 2 1 year -17.51% -11.89% -8.95% Life of fund - began 4/30/97 9.94% 9.71% 12.85% Index 1: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. Index 2: Standard & Poor's Financial Index, an unmanaged index of financial sector stocks in the Standard & Poor's 500 Index. 8 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock market movements. The fund's management strategy has a significant influence on fund performance. Because the fund focuses on a single sector of the economy, its performance depends in large part on the performance of that sector. As a result, the value of your investment may fluctuate more widely than it would in a fund that is diversified across sectors. For instance, when interest rates fall or economic conditions deteriorate, the stocks of banks and financial services companies could suffer losses. Also, rising interest rates can reduce profits by narrowing the difference between these companies' borrowing and lending rates. Stocks of financial services companies as a group could fall out of favor with the market, causing the fund to underperform funds that focus on other types of stocks. In addition, if the managers' stock selection strategy does not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. o Any bonds held by the fund could be downgraded in credit rating or go into default. Bond prices generally fall when interest rates rise. This risk is greater for longer maturity bonds. Junk bond prices can fall on bad news about the economy, an industry or a company. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by ___________________
- --------------------------------------------------------------------------------------------------------------------- Period ended: 12/97(1) 12/98 12/99 12/00 12/01 - --------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $13.44 $14.45 $14.46 Net investment income (loss)(2) 0.11 0.18 0.11 0.06 Net realized and unrealized gain (loss) on investments 3.39 0.97 0.06 3.87 Total from investment operations 3.50 1.15 0.17 3.93 Less distributions: Dividends from net investment income (0.05) (0.14) (0.10) (0.05) Distributions from net realized gain on investments sold (0.01) --(3) (0.05) -- Tax return of capital -- -- (0.01) -- Total distributions (0.06) (0.14) (0.16) (0.05) Net asset value, end of period $13.44 $14.45 $14.46 $18.34 Total investment return(4) (%) 35.05(5,6) 8.55 1.23 27.16 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 18,465 54,569 49,312 71,367 Ratio of expenses to average net assets (%) 1.05(7) 0.92 0.90 0.90 Ratio of adjusted expenses to average net assets(8) (%) 1.39(7) -- -- -- Ratio of net investment income (loss) to average net assets (%) 1.32(7) 1.25 0.77 0.36 Portfolio turnover rate (%) 11 38 72 41
(1) Began operations on April 30, 1997. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment. (5) Not annualized. (6) The 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 V.A. Strategic Income Fund GOAL AND STRATEGY [Clip Art] The fund seeks a high level of current income. In pursuing this goal, the fund invests primarily in the following categories of securities: o foreign government and corporate debt securities from developed and emerging markets o U.S. government and agency securities o U.S. junk bonds The fund may also invest in preferred stock and other types of debt securities. Although the fund invests in securities rated as low as CC/Ca and their unrated equivalents, it generally intends to keep its average credit quality in the investment-grade range (AAA to BBB). There is no limit on the fund's average maturity. In managing the portfolio, the managers allocate assets among the three major categories based on analysis of economic factors such as projected international interest rate movements, industry cycles and political trends. However, the managers may invest up to 100% of assets in any one sector. Within each sector, the managers look for securities that are appropriate for the overall portfolio in terms of yield, credit quality, structure and industry distribution. In selecting securities, relative yields and risk/reward ratios are the primary considerations. The fund may use certain higher-risk investments, including derivatives (investments whose value is based on indexes, securities or currencies) and restricted or illiquid securities. In addition, the fund may invest up to 10% of net assets in U.S. or foreign stocks. In abnormal market conditions, the fund may temporarily invest extensively in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ PORTFOLIO MANAGERS Frederick L. Cavanaugh, Jr. - ----------------------------------- Senior vice president of adviser Joined fund team in 1996 Joined adviser in 1986 Began business career in 1975 Daniel S. Janis III - ----------------------------------- Second vice president of adviser Joined fund team in 1999 Joined adviser in 1999 Senior risk manager at BankBoston (1997-1998) Manager of forward desk at Morgan Stanley (1991-1997) Began business career in 1984 Indexes: In the future, the adviser will compare the fund's performance to the Merrill Lynch High Yield Master II Index, Merrill Lynch Government Master Index and Salomon Smith Barney World Government Bond Index, since they more closely represent the fund's investment strategy. PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with broad-based market indexes for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 11.77% 4.92% 4.82% 1.40% 4.58% 2002 total return as of March 31: x.xx% Best quarter: Q2 '97, 6.28% Worst quarter: Q3 '98, -2.79% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/01 - -------------------------------------------------------------------------------- Fund Index 1 Index 2 Index 3 Index 4 1 year 4.58% 8.50% 6.27% 7.21% -0.99% 5 year 5.44% 7.37% 3.95% 7.40% 2.16% Life of fund - began 8/29/96 6.32% 7.84% 4.88% 7.83% 2.52% Index 1: Lehman Brothers Government/Credit Bond Index, an unmanaged index of U.S. government, U.S. corporate and Yankee bonds. Index 2: Merrill Lynch High Yield Master II Index, an unmanaged index consisting of U.S. dollar-denominated public corporate issues with par amounts greater than $100 million that are rated below investment grade. Index 3: Merrill Lynch Government Master Index, an unmanaged index of fixed rate U.S. Treasury and agency securities. Index 4: Salomon Smith Barney World Government Bond Index, an unmanaged index consisting of approximately 650 securities issued by 18 governments in various countries. 10 MAIN RISKS [Clip Art] The fund's risk profile depends on its sector allocation. In general, investors should expect fluctuations in share price, yield and total return that are above average for bond funds. When interest rates rise, bond prices generally fall. Generally, an increase in the fund's average maturity will make it more sensitive to interest rate risk. A fall in worldwide demand for U.S. government securities could also lower the prices of these securities. The fund could lose money if any bonds it owns are downgraded in credit rating or go into default. In general, lower-rated bonds have higher credit risks, and their prices can fall on bad news about the economy, an industry or a company. If certain allocation strategies or certain industries or investments do not perform as the fund expects, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. These risks are greater in emerging markets. o If interest rate movements cause the fund's callable securities to be paid off substantially earlier or later than expected, the fund's share price or yield could be hurt. o Stock investments may go down in value due to stock market movements or negative company or industry events. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by ___________________
- -------------------------------------------------------------------------------------------------------------------------------- Period ended: 12/96(1) 12/97 12/98 12/99 12/00 12/01 - -------------------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $10.30 $10.47 $10.10 $9.77 Net investment income (loss)(2) 0.27 0.91 0.85 0.80 0.83 Net realized and unrealized gain (loss) on investments 0.36 0.26 (0.35) (0.33) (0.71) Total from investment operations 0.63 1.17 0.50 0.47 0.12 Less distributions: Dividends from net investment income (0.27) (0.91) (0.85) (0.80) (0.83) Distributions from net realized gain on investments sold (0.06) (0.09) (0.02) -- (0.09) Total distributions (0.33) (1.00) (0.87) (0.80) (0.92) Net asset value, end of period $10.30 $10.47 $10.10 $9.77 $8.97 Total investment return(3) (%) 6.45(4,5) 11.77(5) 4.92(5) 4.82(5) 1.40 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 2,131 5,540 15,019 22,282 34,472 Ratio of expenses to average net assets (%) 0.85(6) 0.85 0.85 0.85 0.76 Ratio of adjusted expenses to average net assets(7) (%) 2.28(6) 1.37 0.93 0.87 -- Ratio of net investment income (loss) to average net assets (%) 7.89(6) 8.77 8.19 8.06 8.91 Portfolio turnover rate (%) 73 110 92 53(8) 53
(1) Began operations on August 29, 1996. (2) Based on the average of the shares outstanding at the end of each month. (3) Assumes dividend reinvestment. (4) Not annualized. (5) The total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. (8) Porfolio turnover rate excludes merger activity. 11 Account information - -------------------------------------------------------------------------------- BUYING AND SELLING FUND SHARES When you invest in a Declaration fund through a variable contract, your premium payments are used to buy units of an insurance company separate account that then buys shares of the fund. The shares are purchased at net asset value (NAV) and are generally credited to the separate account immediately after the fund accepts payment from the insurance company. In unusual circumstances or to protect shareholders, a fund may refuse a purchase order, especially when the adviser believes the order might be large enough to disrupt the fund's management. A fund may also temporarily suspend the offering of its shares. Shares are sold at the next NAV to be determined after the fund accepts the sell request. The sales proceeds are normally forwarded by bank wire to the insurance company on the next business day. In unusual circumstances, the fund may temporarily suspend the processing of sell requests. It may also postpone the payment of sales proceeds for up to seven days or longer, as allowed by federal securities laws. - -------------------------------------------------------------------------------- VALUING FUND SHARES The NAV for each fund is determined each business day at the close of business on the New York Stock Exchange (typically 4:00 P.M. Eastern Time). The Exchange is typically open Monday through Friday. Securities in a fund's portfolio are generally valued on the basis of market quotations and valuations provided by independent pricing services. The funds may also value securities at fair value, especially if market quotations are not readily available or if the securities' value has been materially affected by events following the close of a foreign market. Fair value is determined according to procedures approved by the funds' board of trustees. If a fund uses this method, the securities' prices may be higher or lower than the same securities held by another fund using market quotations. - -------------------------------------------------------------------------------- FUND EXPENSES Management fees The management fees paid to the investment adviser by the John Hancock Declaration funds last year are as follows: - -------------------------------------------------------------------------------- Equity Funds % of net assets - -------------------------------------------------------------------------------- V.A. Relative Value Fund x.xx% V.A. Sovereign Investors Fund x.xx% - -------------------------------------------------------------------------------- Sector Funds - -------------------------------------------------------------------------------- V.A. Financial Industries Fund x.xx% - -------------------------------------------------------------------------------- Income Funds - -------------------------------------------------------------------------------- V.A. Strategic Income Fund x.xx% The adviser pays subadvisory fees out of its own assets, and no fund is responsible for paying a fee to its subadviser. Expense limitation The adviser may reduce its fee or make other arrangements to limit each fund's expenses to a specified percentage of average daily net assets. The adviser has agreed to limit temporarily each fund's expenses to 0.25% of average net assets, excluding management fees, at least until April 30, 2003. If annual expenses fall below this limitation at the end of any fund's fiscal year, the adviser can impose the full fee and recover any other payments up to the amount of the limitation. - -------------------------------------------------------------------------------- DIVIDENDS AND TAXES All income and capital gain distributions are automatically reinvested in additional shares of the fund at net asset value and are includable in the separate accounts holding these shares. For a discussion of the tax status of your variable contract, including the tax consequences of withdrawals or other payments, refer to the prospectus of your insurance company's separate account. 12 ACCOUNT INFORMATION Fund details - -------------------------------------------------------------------------------- BUSINESS STRUCTURE The diagram below shows the basic business structure used by the Declaration funds. The funds' board of trustees oversees the funds' business activities and retains the services of the various firms that carry out the funds' operations. The trustees of the Declaration funds have the power to change the funds' investment goals without shareholder or contract holder approval. ----------------------- Variable contract holders ----------------------- ----------------------- Insurance company separate accounts ----------------------- ----------------------- Declaration funds ----------------------- --------------------------------------------------- Investment adviser John Hancock Advisers, LLC 101 Huntington Avenue Boston, MA 02199-7603 Manages the funds' business and investment activities. --------------------------------------------------- --------------------------------------------------- Custodian The Bank of New York One Wall Street New York, NY 10286 Holds the funds' assets, settles all portfolio trades and collects most of the valuation data required for calculating each fund's NAV. --------------------------------------------------- --------------------------------------------------- Trustees Oversee the funds' activities. --------------------------------------------------- FUND DETAILS 13 For more information - -------------------------------------------------------------------------------- This prospectus should be used with the variable contract/product prospectus. Two documents are available that offer further information on the John Hancock Declaration funds: Annual/Semiannual Report to Shareholders Includes financial statements, a discussion of the market conditions and investment strategies that significantly affected performance, as well as the auditors' report (in annual report only). Statement of Additional Information (SAI) The SAI contains more detailed information on all aspects of the funds. The current annual report is included in the SAI. A current SAI has been filed with the Securities and Exchange Commission and is incorporated by reference into (is legally a part of) this prospectus. To request a free copy of the current annual/semiannual report or the SAI, please contact John Hancock: By mail: John Hancock Annuity Servicing Office 529 Main St. (X-4) Charlestown, MA 02129 By phone: 1-800-824-0335 On the Internet: www.jhfunds.com Or you may view or obtain these documents from the SEC: In person: at the SEC's Public Reference Room in Washington, DC. For access to the Reference Room call 1-202-942-8090 By mail: Public Reference Section Securities and Exchange Commission Washington, DC 20549-0102 (duplicating fee required) By electronic request: publicinfo@sec.gov (duplicating fee required) On the Internet: www.sec.gov SEC file number 811-07437 [LOGO](R) [OLYMPIC LOGO] WORLDWIDE SPONSOR John Hancock Funds, LLC MEMBER NASD 101 Huntington Avenue Boston, MA 02199-7603 www.jhfunds.com Mutual Funds Institutional Services Private Managed Accounts Retirement Plans (C)2002 JOHN HANCOCK FUNDS, LLC VA00P 5/02 John Hancock Declaration Funds Prospectus May 1, 2002 - -------------------------------------------------------------------------------- V.A. Relative Value Fund As with all mutual funds, the Securities and Exchange Commission has not approved or disapproved this fund or determined whether the information in this prospectus is adequate and accurate. Anyone who indicates otherwise is committing a federal crime. [LOGO](R) ------------------ JOHN HANCOCK FUNDS Contents - -------------------------------------------------------------------------------- A summary of the fund's V.A. Relative Value Fund 4 goals, strategies, risks, performance and financial highlights. Transaction policies and Account information other information affecting your fund investment. Buying and selling fund shares 6 Valuing fund shares 6 Fund expenses 6 Dividends and taxes 6 Further information on the Fund details fund. Business structure 7 For more information back cover V.A. Relative Value Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term capital appreciation. To pursue this goal, the fund invests in a diversified portfolio of stocks, bonds and money market securities. Although the fund may concentrate in any of these asset classes, under normal circumstances it invests primarily in stocks. In managing the portfolio, the managers emphasize a value-oriented approach to individual stock selection. With the aid of proprietary financial models, the management team looks for companies that are selling at what appear to be substantial discounts to their long-term intrinsic and "franchise" values. These companies often have identifiable catalysts for growth, such as new products, business reorganizations or mergers. The fund manages risk by typically holding between 50 and 150 large companies that are diversified across industry sectors. The management team also uses fundamental financial analysis to identify individual companies with substantial cash flows, reliable revenue streams, superior competitive positions and strong management. The fund may attempt to take advantage of short-term market volatility by investing in corporate restructurings or pending acquisitions. In selecting bonds of any maturity, the manager looks for the most favorable risk/return ratios. The fund may invest up to 15% of net assets in junk bonds rated as low as CC/Ca and their unrated equivalents. The fund may invest up to 25% of assets in foreign securities (35% during adverse U.S. market conditions). The fund may also make limited use of certain derivatives (investments whose value is based on indexes, securities or currencies). In abnormal market conditions, the fund may temporarily invest extensively in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. ================================================================================ PORTFOLIO MANAGERS James S. Yu, CFA - --------------------------------- Vice president of adviser Joined fund team in 2000 Joined adviser in 2000 Analyst at Merrill Lynch Asset Management (1998-2000) Analyst at Gabelli & Company (1995-1998) Began business career in 1990 Roger C. Hamilton - --------------------------------- Vice president of adviser Joined fund team in 1999 Joined adviser in 1994 Began business career in 1980 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1998 1999 2000 2001 21.39% 56.65% -4.80% -2.81% 2002 total return as of March 31: x.xx% Best quarter: Q4 '99, 43.25% Worst quarter: Q3 '98, -16.61% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/01 - -------------------------------------------------------------------------------- Fund Index 1 year -2.81% -11.89% Life of fund - began 1/6/98 15.24% 5.50% Index: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. 4 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock and bond market movements. The fund's management strategy has a significant influence on fund performance. Large-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform investments that focus on small- or medium-capitalization stocks. Similarly, value stocks could underperform growth stocks. In addition, if the managers' securities selection strategies do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. o Any bonds held by the fund could be downgraded in credit rating or go into default. Bond prices generally fall when interest rates rise and longer maturity will increase volatility. Junk bond prices can fall on bad news about the economy, an industry or a company. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by _____________________
- ----------------------------------------------------------------------------------------------------------- Period ended: 12/98(1) 12/99 12/00 12/01 - ----------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $12.03 $18.03 Net investment income (loss)(2) 0.11 0.10 0.02 Net realized and unrealized gain (loss) on investments 2.02 6.65 (0.80) Total from investment operations 2.13 6.75 (0.78) Less distributions: Dividends from net investment income (0.10) (0.10) (0.02) Distributions from net realized gain on investments sold -- (0.65) (6.59) Total distributions (0.10) (0.75) (6.61) Net asset value, end of period $12.03 $18.03 $10.64 Total investment return(3) (%) 21.39(4,5) 56.65 (4.80) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 17,368 38,766 39,043 Ratio of expenses to average net assets (%) 0.85(6) 0.77 0.79 Ratio of adjusted expenses to average net assets(7) (%) 1.03(6) -- -- Ratio of net investment income (loss) to average net assets (%) 1.17(6) 0.66 0.13 Portfolio turnover rate (%) 242 166 164
(1) Began operations on January 6, 1998. (2) Based on the average of the shares outstanding at the end of each month. (3) Assumes dividend reinvestment. (4) Not annualized. (5) The total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. 5 Account information - -------------------------------------------------------------------------------- BUYING AND SELLING FUND SHARES When you invest in the fund through a variable contract, your premium payments are used to buy units of an insurance company separate account that then buys shares of the fund. The shares are purchased at net asset value (NAV) and are generally credited to the separate account immediately after the fund accepts payment from the insurance company. In unusual circumstances or to protect shareholders, the fund may refuse a purchase order, especially when the adviser believes the order might be large enough to disrupt the fund's management. The fund may also temporarily suspend the offering of its shares. Shares are sold at the next NAV to be determined after the fund accepts the sell request. The sales proceeds are normally forwarded by bank wire to the insurance company on the next business day. In unusual circumstances, the fund may temporarily suspend the processing of sell requests. It may also postpone the payment of sales proceeds for up to seven days or longer, as allowed by federal securities laws. - -------------------------------------------------------------------------------- VALUING FUND SHARES The NAV for the fund is determined each business day at the close of business on the New York Stock Exchange (typically 4:00 P.M. Eastern Time). The Exchange is typically open Monday through Friday. Securities in the fund's portfolio are generally valued on the basis of market quotations and valuations provided by independent pricing services. The fund may also value securities at fair value, especially if market quotations are not readily available or if the securities' value has been materially affected by events following the close of a foreign market. Fair value is determined according to procedures approved by the fund's board of trustees. If the fund uses this method, the securities' prices may be higher or lower than the same securities held by another fund using market quotations. - -------------------------------------------------------------------------------- FUND EXPENSES Management fees For the period ended December 31, 2001, the fund paid the investment adviser management fees at an annual rate of x.xx% of average net assets. Expense limitation The adviser may reduce its fee or make other arrangements to limit the fund's expenses to a specified percentage of average daily net assets. The adviser has agreed to limit temporarily the fund's expenses to 0.25% of average net assets, excluding management fees, at least until April 30, 2003. If annual expenses fall below this limitation at the end of the fund's fiscal year, the adviser can impose the full fee and recover any other payments up to the amount of the limitation. - -------------------------------------------------------------------------------- DIVIDENDS AND TAXES All income and capital gain distributions are automatically reinvested in additional shares of the fund at net asset value and are includable in the separate accounts holding these shares. For a discussion of the tax status of your variable contract, including the tax consequences of withdrawals or other payments, refer to the prospectus of your insurance company's separate account. 6 ACCOUNT INFORMATION Fund details - -------------------------------------------------------------------------------- BUSINESS STRUCTURE The diagram below shows the basic business structure used by the fund. The fund's board of trustees oversees the fund's business activities and retains the services of the various firms that carry out the fund's operations. The trustees of the fund have the power to change the fund's investment goals without shareholder or contract holder approval. The management firm The fund is managed by John Hancock Advisers, LLC. Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock Financial Services, Inc. and manages approximately $30 billion in assets. ----------------------- Variable contract holders ----------------------- ----------------------- Insurance company separate accounts ----------------------- ----------------------- Declaration funds ----------------------- --------------------------------------------------- Investment adviser John Hancock Advisers, LLC 101 Huntington Avenue Boston, MA 02199-7603 Manages the fund's business and investment activities. --------------------------------------------------- --------------------------------------------------- Custodian The Bank of New York One Wall Street New York, NY 10286 Holds the fund's assets, settles all portfolio trades and collects most of the valuation data required for calculating the fund's NAV. --------------------------------------------------- --------------------------------------------------- Trustees Oversee the fund's activities. --------------------------------------------------- FUND DETAILS 7 For more information - -------------------------------------------------------------------------------- This prospectus should be used with the variable contract/product prospectus. Two documents are available that offer further information on the John Hancock V.A. Relative Value Fund: Annual/Semiannual Report to Shareholders Includes financial statements, a discussion of the market conditions and investment strategies that significantly affected performance, as well as the auditors' report (in annual report only). Statement of Additional Information (SAI) The SAI contains more detailed information on all aspects of the fund. The current annual report is included in the SAI. A current SAI has been filed with the Securities and Exchange Commission and is incorporated by reference into (is legally a part of) this prospectus. To request a free copy of the current annual/semiannual report or the SAI, please contact John Hancock: By mail: John Hancock Annuity Servicing Office 529 Main St. (X-4) Charlestown, MA 02129 By phone: 1-800-824-0335 On the Internet: www.jhfunds.com Or you may view or obtain these documents from the SEC: In person: at the SEC's Public Reference Room in Washington, DC. For access to the Reference Room call 1-202-942-8090 By mail: Public Reference Section Securities and Exchange Commission Washington, DC 20549-0102 (duplicating fee required) By electronic request: publicinfo@sec.gov (duplicating fee required) On the Internet: www.sec.gov SEC file number: 811-07437 [LOGO](R) [OLYMPIC LOGO] WORLDWIDE SPONSOR John Hancock Funds, LLC MEMBER NASD 101 Huntington Avenue Boston, MA 02199-7603 www.jhfunds.com Mutual Funds Institutional Services Private Managed Accounts Retirement Plans (C)2002 JOHN HANCOCK FUNDS, LLC VA829PN 5/02 JOHN HANCOCK DECLARATION TRUST Statement of Additional Information May 1, 2002 John Hancock V.A. Relative Value Fund John Hancock V.A. Sovereign Investors Fund John Hancock V.A. Financial Industries Fund John Hancock V.A. Technology Fund John Hancock V.A. Strategic Income Fund (each, a "Fund" and collectively, the "Funds") This Statement of Additional Information provides information about John Hancock Declaration Trust (the "Trust") and the Funds, in addition to the information that is contained in the Funds' current Prospectuses. (the "Prospectuses"). This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Prospectuses, a copy of which can be obtained free of charge by writing or telephoning: John Hancock Annuity Servicing Office 529 Main Street (X-4) Charlestown, Massachusetts 02129 1-800-824-0335 Table of Contents Page Organization of the Trust................................................. 2 Eligible Investors........................................................ 2 Investment Policies and Strategies........................................ 2 Equity.................................................................... 3 Sector.................................................................... 4 Income.................................................................... 5 Risk Factors Investments and Techniques................................... 6 Investment Restrictions................................................... 24 Those Responsible for Management.......................................... 26 Investment Advisory and Other Services.................................... 32 Distribution Contracts.................................................... 37 Net Asset Value........................................................... 37 Special Redemptions....................................................... 37 Description of the Trust's Shares......................................... 38 Dividends................................................................. 39 Tax Status................................................................ 39 Calculation of Performance................................................ 42 Brokerage Allocation...................................................... 44 Shareholder Servicing Agent............................................... 46 Custody of Portfolio...................................................... 46 Independent Auditors ..................................................... 47 Appendix - Description of Bond Ratings.................................... A-1 Financial Statements...................................................... F-1 ORGANIZATION OF THE TRUST John Hancock Declaration Trust (the "Trust") is an open-end investment management company organized as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts. The Trust currently has five series of shares designated as: John Hancock V.A. Financial Industries Fund ("Financial Industries Fund"); John Hancock V.A. Technology Fund ("Technology Fund"); John Hancock V.A. Relative Value Fund ("Relative Value Fund") (formerly John Hancock V.A. Large Cap Value Fund and before that, John Hancock V.A. Growth and Income Fund); John Hancock V.A. Sovereign Investors Fund ("Sovereign Investors Fund") and V.A. Strategic Income Fund ("Strategic Income Fund"). The investment adviser of each Fund is John Hancock Advisers, LLC (prior to February 1, 2002, John Hancock Advisers, Inc.) (the "Adviser"). The Adviser is an indirect wholly-owned subsidiary of John Hancock Life Insurance Company (formerly John Hancock Mutual Life Insurance Company); (the "Life Company"), a Massachusetts life insurance company chartered in 1862, with national headquarters at John Hancock Place, Boston, Massachusetts. The Life Company is wholly owned by John Hancock Financial Services, Inc., a Delaware Corporation, organized in February, 2000. The Technology Fund's Sub-adviser is American Fund Advisors, Inc. ("AFA"). AFA is referred to herein as the "Sub-adviser." AFA is responsible for providing investment advice to the Technology Fund, subject to the review of the trustees and overall supervision of the Adviser. ELIGIBLE INVESTORS The following information supplements the discussion of each Fund's investment objective and policies discussed in the Prospectuses. The Funds are designed to serve as investment vehicles for variable annuity and variable life insurance contracts (the "Variable Contracts") offered by the separate accounts of various insurance companies. Participating insurance companies are the owners of shares of beneficial interest in each Fund of the Trust. In accordance with any limitations set forth in their Variable Contracts, contract holders may direct, through their participating insurance companies, the allocation of amounts available for investment among the Funds. Instructions for any such allocation, or for the purchase or redemption of shares of a Fund, must be made by the investor's participating insurance company's separate account as the owner of the Fund's shares. The rights of participating insurance companies as owners of shares of a Fund are different from the rights of contract holders under their Variable Contracts. The term "shareholder" in this Statement of Additional Information refers only to participating insurance companies, and not to contract holders. INVESTMENT POLICIES AND STRATEGIES Each Fund has its own distinct investment objective and policies. In striving to meet its objective, each Fund will face the challenges of changing business, economic and market conditions. There is no assurance that the Funds will achieve their investment objectives. The following information supplements the discussion of each Fund's investment objective and policies as discussed in the prospectuses. Each Fund has adopted investment restrictions detailed in the "Investment Restrictions" section of this Statement of Additional Information. Some of these restrictions may help to reduce investment risk. Those restrictions designated as fundamental may not be changed without shareholder approval. Each Fund's investment objective, investment policies and non-fundamental restrictions, however, may be changed by a vote of the Trustees without shareholder approval. If there is a change in a Fund's investment objective, investors should consider whether the Fund remains an appropriate investment in light of their current financial position and needs. 2 EQUITY Relative Value Fund The RELATIVE VALUE FUND seeks long-term capital appreciation. To pursue this goal, the Fund invests in a diversified portfolio of stocks, bonds and money market securities. Although the Fund may concentrate in any of these asset classes, under normal circumstances it invests primarily in stocks. In selecting equity securities for the Fund, the portfolio manager emphasizes issuers whose equity securities trade at valuation ratios lower than comparable issuers. Some of the valuation tools used include price to earnings, price to cash flow and price to sales ratios and earnings discount models. The Fund's portfolio will also include securities that the manager considers to have the potential for capital appreciation, due to potential recognition of earnings power or asset value which is not fully reflected in the securities' current market value. The manager attempts to identify investments which possess characteristics such as high relative value, intrinsic value, going concern value, net asset value and replacement book value. The manager also considers an issuer's financial strength, competitive position, projected future earnings and dividends and other investment criteria. The Fund may invest in U.S. Government securities and corporate bonds, notes and other debt securities of any maturity. The Fund may invest up to 15% of its net assets in junk bonds, including convertible securities, that may be rated as low as CC by S&P, Ca by Moody's or their unrated equivalents. The Fund may also invest up to 25% of its total assets in foreign securities (35% during adverse U.S. market conditions). Sovereign Investors Fund The SOVEREIGN INVESTORS FUND seeks long-term growth of capital and income without assuming undue market risks. To pursue these goals, the Fund typically invests most of its assets in a diversified portfolio of stocks. Under normal conditions, at least 80% of the Fund's stock investments are in companies within the capitalization range of the Standard & Poor's 500 Index. On March 31, 2002, that range was $x.xx million to $xxx.xx billion. While there is considerable flexibility in the investment grade and type of security in which the Fund may invest, the Fund currently uses a strategy of investing at least 65% of stock investments in companies which have a record of having increased their dividend payout in each of the preceding ten or more years. This "dividend performers" strategy can be changed at any time. The Fund may also invest a smaller portion of its assets in corporate and U.S. Government fixed income securities. For defensive purposes, however, the Fund may temporarily hold a larger percentage of high grade liquid preferred stock or fixed income securities. The amount of the Fund's assets that may be invested in either equity or fixed income securities is not restricted and is based upon the judgement of the management team of what might best achieve the Fund's investment objective. The Fund's portfolio securities are selected mainly for their investment character based upon generally accepted elements of intrinsic value, including industry position, management, financial strength, earning power, marketability and prospects for future growth. The distribution or mix of various types of investments is based on general market conditions, the level of interest rates, business and economic conditions, and the availability of investments in the equity and fixed income markets. The Fund may not invest more than 5% of total assets at time of purchase in any one security (other than U.S. government securities). Under normal conditions, the Fund may not invest more than 10% of assets in cash or cash equivalents (except cash segregated in relation to futures, forward and option contracts). 3 Fixed income securities held by the Fund may be rated as low as C by S&P or Moody's. No more than 5% of the Fund's assets will be invested in fixed income securities rated lower than BBB by S&P or Baa by Moody's or, if unrated, determined to be of comparable quality by the Adviser. If any security in Sovereign Investors Fund's portfolio falls below the Fund's minimum credit quality standards, as a result of a rating downgrade or the Adviser's determination, the Fund will dispose of the security as promptly as possible while attempting to minimize any loss. SECTOR Financial Industries Fund The FINANCIAL INDUSTRIES FUND seeks capital appreciation. Under ordinary circumstances, the Fund will invest at least 80% of its Assets in equity securities of financial services companies. With respect to the Fund's investment policy of investing at least 80% of its Assets in financial services companies, "Assets" is defined as net assets plus the amount of any borrowing for investment purposes. In addition, the Fund will notify shareholders at least 60 days prior to any change in this policy. A financial services company is a firm that in its most recent fiscal year either (i) derived at least 50% of its revenues or earnings from financial services activities, or (ii) devoted at least 50% of its assets to such activities. Financial services companies provide financial services to consumers and businesses and include the following types of U.S. and foreign firms: commercial banks, thrift institutions and their holding companies; consumer and industrial finance companies; diversified financial services companies; investment banks; securities brokerage and investment advisory firms; financial holding companies; financial technology companies; real estate-related firms; leasing firms; insurance brokerages; and various firms in all segments of the insurance industry such as multi-line, property and casualty, and life insurance companies and insurance holding companies. In managing the portfolio, the managers focus primarily on stock selection rather than industry allocation. The managers use a strategy of investing in financial services companies that are currently undervalued, appear to be positioned for a merger, or are in a position to benefit from regulatory changes. This strategy can be changed at any time. For a description of the investment characteristics of the Financial Industries, see "Financial Industries." To avoid the need to sell equity securities to meet redemption requests, and to provide flexibility to take advantage of investment opportunities, the Fund may invest up to 15% of its net assets in investment grade short-term securities. The Fund may invest in debt securities of financial services companies and in debt and equity securities of companies outside of the financial services sector. The Fund may invest up to 5% of its net assets in below-investment grade debt securities, rated as low as CCC by S&P or Caa by Moody's or, if unrated, determined to be of comparable quality by the Adviser. In abnormal circumstances, such as situations where the Fund experiences unusually large cash inflows or anticipates unusually large redemptions, and in adverse market, economic, political, or other conditions, the Fund may temporarily invest up to 80% of its Assets in investment-grade short-term securities. Technology Fund The TECHNOLOGY FUND seeks long-term growth of capital. The Fund invests principally in equity securities of companies that rely extensively on technology in their product development or operations. Under ordinary circumstances, at least 80% of the Fund's Assets are invested in 4 securities of technology companies as noted above. The Fund's portfolio is primarily comprised of U.S. and foreign common stocks and securities convertible into common stocks, including convertible bonds, convertible preferred stocks and warrants. With respect to the Fund's investment policy of investing at least 80% of Assets in companies that rely extensively on technology in their product development or operations, "Assets" is defined as net assets plus the amount of any borrowings for investment purposes. In addition, the Fund will notify shareholders at least 60 days prior to any change in this policy. Investments in U.S. and foreign companies that rely extensively on technology in product development or operations may be expected to benefit from scientific developments and the application of technical advances resulting from improving technology in many different fields, such as computer software and hardware (including internet-related technology), semiconductors, telecommunications, defense and commercial electronics, data storage and retrieval, biotechnology and others. Generally, investments will be made in securities of a company that relies extensively on technology in product development or operations only if a significant part of its assets are invested in, or a significant part of its total revenue or net income is derived from, technology. For a description of the investment characteristics of the technology industry, see "Technology-Intensive Companies." The Fund may invest up to 10% of its net assets in fixed income securities that, at the time of investment, are rated CC or higher by Standard & Poor's Ratings Group ("Standard & Poor's") or Ca or higher be Moody's Investors Service, Inc. ("Moody's") or their equivalent, and unrated fixed income securities of comparable quality as determined by the Adviser. In abnormal circumstances, such as situations where the Fund experiences unusually large cash inflows or anticipates unusually large redemptions, and in adverse market, economic, political, or other conditions, the Fund may temporarily invest more than 20% of its Assets in investment-grade short-term securities, cash and cash equivalents. INCOME Strategic Income Fund The STRATEGIC INCOME FUND seeks a high level of current income. In pursuing this goal, the Fund invests primarily in the following categories of securities: foreign government and foreign corporate securities from developed and emerging countries, U.S. Government and agency securities and lower-rated high yield, high risk, fixed income securities of U.S. issuers. Under normal circumstances, the Fund's assets are invested in each of the foregoing three categories. However, from time to time the Fund may invest up to 100% of its total assets in any one category. The Fund may invest up to 10% of its net assets in common stocks and similar equity securities of U.S. and foreign companies. No more than 25% of the Fund's total assets, at the time of purchase, will be invested in government securities of any one foreign country. The fixed income securities in which the Fund may invest include bonds, debentures, notes (including variable and floating rate instruments), preferred and preference stock, zero coupon bonds, payment-in-kind securities, increasing rate note securities, participation interests, multiple class passthrough securities, collateralized mortgage obligations, stripped debt securities, other mortgage-backed securities, asset-backed securities and other derivative debt securities. Variable and floating rate instruments, mortgage-backed securities and asset-backed securities are derivative instruments that derive their value from an underlying security. Derivative securities are subject to additional risks. See "Risks Associated With Specific Types of Derivative Debt Securities." The Fund generally intends to keep its average credit quality in the investment grade range. However, the Fund may invest up to 100% of total assets in fixed income securities rated below Baa by Moody's or below BBB by S&P, or in securities which are unrated. The Fund may invest 5 in securities rated as low as Ca or CC, which may indicate that the obligations are highly speculative and in default. Fixed income securities rated below Baa or BBB are commonly called "junk bonds." See "Lower Rated High Yield / High Risk Debt Obligations." for a description of the risks and characteristics of the various ratings categories. RISK FACTORS, INVESTMENTS AND TECHNIQUES Financial Industries. Since the Fund's investments will be concentrated in the financial services sector, it will be subject to risks in addition to those that apply to the general equity and debt markets. Events may occur which significantly affect the sector as a whole or a particular segment in which the Fund invests. Accordingly, the Fund may be subject to greater market volatility than a fund that does not concentrate in a particular economic sector or industry. Thus, it is recommended that an investment in the Fund be only a portion of your overall investment portfolio. In addition, most financial services companies are subject to extensive governmental regulation which limits their activities and may (as with insurance rate regulation) affect the ability to earn a profit from a given line of business. Certain financial services businesses are subject to intense competitive pressures, including market share and price competition. The removal of regulatory barriers to participation in certain segments of the financial services sector may also increase competitive pressures on different types of firms. For example, recent legislation removing traditional barriers between banking and investment banking activities will allow large commercial banks to compete for business that previously was the exclusive domain of securities firms. Similarly, the removal of regional barriers in the banking industry has intensified competition within the industry. The availability and cost of funds to financial services firms is crucial to their profitability. Consequently, volatile interest rates and general economic conditions can adversely affect their financial performance. Financial services companies in foreign countries are subject to similar regulatory and interest rate concerns. In particular, government regulation in certain foreign countries may include controls on interest rates, credit availability, prices and currency movements. In some cases, foreign governments have taken steps to nationalize the operations of banks and other financial services companies. See "Foreign Securities & Emerging Countries." Technology-Intensive Companies. Since the Technology Fund's investments will be concentrated in technology-intensive companies, it will be subject to risks in addition to those that apply to the general equity and debt markets. Securities prices of technology-intensive companies have tended to be subject to greater volatility than securities prices in many other industries, due to particular factors affecting these industries. Competitive pressures may also have a significant effect on the financial condition of technology-intensive companies. For example, if the development of new technology continues to advance at an accelerated rate, and the number of companies and product offerings continues to expand, the companies could become increasingly sensitive to short product cycles and aggressive pricing. Accordingly, the Fund's performance will be particularly susceptible to factors affecting these companies as well as the economy as a whole. Smaller Capitalization Companies. Smaller capitalization companies may have limited product lines, market and financial resources, or they may be dependent on smaller or less experienced management groups. In addition, trading volume for these securities may be limited. Historically, the market price for these securities has been more volatile than for securities of companies with greater capitalization. However, securities of companies with smaller capitalization may offer greater potential for capital appreciation since they may be overlooked and thus undervalued by investors. 6 Common Stocks. Common stocks are shares of a corporation or other entity that entitle the holder to a pro rata share of the profits of the corporation, if any, without preference over any other shareholder or class of shareholders, including holders of such entity's preferred stock and other senior equity. Ownership of common stock usually carries with it the right to vote and, frequently, an exclusive right to do so. Each Fund (other than Financial Industries Fund and Technology Fund) will diversify its investments in common stocks of companies in a number of industry groups. Common stocks have the potential to outperform fixed income securities over the long term. Common stocks provide the most potential for growth, yet are the more volatile of the two asset classes. Fixed Income Securities. Fixed income investments of each Fund may include bonds, notes, preferred stock and convertible fixed income securities issued by U.S. corporations or the U.S. Government and its political subdivisions. Fixed income securities of corporate and governmental issuers are subject to the risk of an issuer's inability to meet principal and interest payments on the obligations (credit risk) and may also be subject to price volatility due to factors such as interest rate sensitivity, market perception of the issuer's creditworthiness and general market liquidity (market risk). Debt securities will be selected based upon credit risk analysis of issuers, the characteristics of the security and interest rate sensitivity of the various debt issues available from a particular issuer as well as analysis of the anticipated volatility and liquidity of the fixed income instruments. The longer a Fund's average portfolio maturity, the more the value of the portfolio and the net asset value of the Fund's shares will fluctuate in response to changes in interest rates. An increase in rates will generally decrease the value of the Fund's securities, while a decline in interest rates will generally increase their value. Preferred Stocks. Each Fund may invest in preferred stock. Preferred stock generally has a preference as to dividends and upon liquidation over an issuer's common stock but ranks junior to debt securities in an issuer's capital structure. Preferred stock generally pays dividends in cash (or additional shares of preferred stock) at a defined rate but, unlike interest payments on debt securities, preferred stock dividends are payable only if declared by the issuer's board of directors. Dividends on preferred stock may be cumulative, meaning that, in the event the issuer fails to make one or more dividend payments on the preferred stock, no dividends may be paid on the issuer's common stock until all unpaid preferred stock dividends have been paid. Preferred stock also may be subject to optional or mandatory redemption provisions. Convertible Securities. Each Fund may invest in convertible securities, which may include corporate notes or preferred stock but are ordinarily long-term debt obligations of the issuer convertible at a stated exchange rate into common stock of the same or another issuer. As with all debt securities, the market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. The market value of convertible securities can also be heavily dependent upon the changing value of the equity securities into which these securities are convertible depending on whether the market price of the underlying security exceeds the conversion price. Convertible securities generally rank senior to common stocks in an issuer's capital structure and consequently entail less risk than the issuer's common stock. However, the extent of such risk reduction depends upon the degree to which the convertible security sells above its value as a fixed income security. In evaluating a convertible security, the Adviser or relevant Sub-adviser will give primary emphasis to the attractiveness of the underlying common stock. Foreign Securities and Emerging Countries. Each Fund (other than Sovereign Investors Fund) may invest in U.S. Dollar and foreign denominated securities of foreign issuers. The Sovereign Investors Fund may only invest in U.S. dollar denominated securities including those of foreign issuers which are traded on a U.S. Exchange. The Technology Fund and Strategic Income Fund 7 may also invest securities of foreign issuers located in countries with emerging economies or securities markets. Investing in obligations of non-U.S. issuers and foreign banks, particularly securities of issuers located in emerging countries, may entail greater risks than investing in similar securities of U.S. issuers. These risks include (i) social, political and economic instability; (ii) the small current size of the markets for many such securities and the currently low or nonexistent volume of trading, which may result in a lack of liquidity and in greater price volatility; (iii) certain national policies which may restrict a Fund's investment opportunities, including restrictions on investment in issuers or industries deemed sensitive to national interests; (iv) foreign taxation; and (v) the absence of developed structures governing private or foreign investment or allowing for judicial redress for injury to private property. Investing in securities of non-U.S. companies may entail additional risks due to the potential political and economic instability of certain countries and the risks of expropriation, nationalization, confiscation or the imposition of restrictions on foreign investment and on repatriation of capital invested. In the event of such expropriation, nationalization or other confiscation by any country, a Fund could lose its entire investment in any such country. In addition, even though opportunities for investment may exist in foreign countries, and in particular emerging markets, any change in the leadership or policies of the governments of those countries or in the leadership or policies of any other government which exercises a significant influence over those countries, may halt the expansion of or reverse the liberalization of foreign investment policies now occurring and thereby eliminate any investment opportunities which may currently exist. Investors should note that upon the accession to power of authoritarian regimes, the governments of a number of Latin American countries previously expropriated large quantities of real and personal property similar to the property which may be represented by the securities purchased by the Funds. The claims of property owners against those governments were never finally settled. There can be no assurance that any property represented by foreign securities purchased by a Fund will not also be expropriated, nationalized, or otherwise confiscated. If such confiscation were to occur, a Fund could lose a substantial portion of its investments in such countries. A Fund's investments would similarly be adversely affected by exchange control regulations in any of those countries. Certain countries in which the Funds may invest may have vocal minorities that advocate radical religious or revolutionary philosophies or support ethnic independence. Any disturbance on the part of such individuals could carry the potential for widespread destruction or confiscation of property owned by individuals and entities foreign to such country and could cause the loss of a Fund's investment in those countries. Certain countries prohibit or impose substantial restrictions on investments in their capital markets, particularly their equity markets, by foreign entities such as the Funds. As illustrations, certain countries require governmental approval prior to investments by foreign persons, or limit the amount of investment by foreign persons in a particular company, or limit the investment by foreign persons to only a specific class of securities of a company that may have less advantageous terms than securities of the company available for purchase by nationals. Moreover, the national policies of certain countries may restrict investment opportunities in issuers or industries deemed sensitive to national interests. In addition, some countries require governmental approval for the repatriation of investment income, capital or the proceeds of securities sales by foreign investors. A Fund could be adversely affected by delays in, or a refusal to grant, any required governmental approval for repatriation, as well as by the application to it of other restrictions on investments. Foreign companies are subject to accounting, auditing and financial standards and requirements that differ, in some cases significantly, from those applicable to U.S. companies. In particular, the assets, liabilities and profits appearing on the financial statements of such a company may not reflect its financial position or results of operations in the way they would be reflected had such financial statements been prepared in accordance with U.S. generally accepted accounting principles. Most foreign securities held by the Funds will not be registered with the SEC and 8 such issuers thereof will not be subject to the SEC's reporting requirements. Thus, there will be less available information concerning foreign issuers of securities held by the Funds than is available concerning U.S. issuers. In instances where the financial statements of an issuer are not deemed to reflect accurately the financial situation of the issuer, the Adviser or relevant Sub-adviser will take appropriate steps to evaluate the proposed investment, which may include on-site inspection of the issuer, interviews with its management and consultations with accountants, bankers and other specialists. There is substantially less publicly available information about foreign companies than there are reports and ratings published about U.S. companies and the U.S. Government. In addition, where public information is available, it may be less reliable than such information regarding U.S. issuers. Because the Funds (other than Sovereign Investors Fund) may invest a portion of their total assets in securities which are denominated or quoted in foreign currencies, the strength or weakness of the U.S. dollar against such currencies may account for part of the Funds' investment performance. A decline in the value of any particular currency against the U.S. dollar will cause a decline in the U.S. dollar value of a Fund's holdings of securities denominated in such currency and, therefore, will cause an overall decline in the Fund's net asset value and any net investment income and capital gains to be distributed in U.S. dollars to shareholders of the Fund. The rate of exchange between the U.S. dollar and other currencies is determined by several factors including the supply and demand for particular currencies, central bank efforts to support particular currencies, the movement of interest rates, the pace of business activity in certain other countries and the U.S., and other economic and financial conditions affecting the world economy. Although the Funds value their respective assets daily in terms of U.S. dollars, the Funds do not intend to convert their holdings of foreign currencies into U.S. dollars on a daily basis. However, the Funds may do so from time to time, and investors should be aware of the costs of currency conversion. Although currency dealers do not charge a fee for conversion, they do realize a profit based on the difference ("spread") between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, while offering a lesser rate of exchange should the Fund desire to sell that currency to the dealer. Securities of foreign issuers, and in particular many emerging country issuers, may be less liquid and their prices more volatile than securities of comparable U.S. issuers. In addition, foreign securities exchanges and brokers are generally subject to less governmental supervision and regulation than in the U.S., and foreign securities exchange transactions are usually subject to fixed commissions, which are generally higher than negotiated commissions on U.S. transactions. In addition, foreign securities exchange transactions may be subject to difficulties associated with the settlement of such transactions. Delays in settlement could result in temporary periods when assets of a Fund are uninvested and no return is earned thereon. The inability of a Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of a portfolio security due to settlement problems either could result in losses to a Fund due to subsequent declines in value of the portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser. The Funds' investment income or, in some cases, capital gains from stock or securities of foreign issuers may be subject to foreign withholding or other foreign taxes, thereby reducing the Funds' net investment income and/or net realized capital gains. See "Tax Status." Foreign Currency Transactions. Each Fund (other than Sovereign Investors Fund) may engage in foreign currency transactions. Foreign currency transactions may be conducted on a spot (i.e., cash) basis at the spot rate for purchasing or selling currency prevailing in the foreign exchange market. 9 Each Fund (other than Sovereign Investors Fund) may also enter into forward foreign currency exchange contracts to hedge against fluctuations in currency exchange rates affecting a particular transaction or portfolio position. Forward contracts are agreements to purchase or sell a specified currency at a specified future date and price set at the time of the contract. Transaction hedging is the purchase or sale of forward foreign currency contracts with respect to specific receivables or payables of a Fund accruing in connection with the purchase and sale of its portfolio securities quoted or denominated in the same or related foreign currencies. Portfolio hedging is the use of forward foreign currency contracts to offset portfolio security positions denominated or quoted in the same or related foreign currencies. A Fund may elect to hedge less than all of its foreign portfolio positions as deemed appropriate by the Adviser. The Funds will not engage in speculative forward foreign currency exchange transactions. If a Fund purchases a forward contract, the Fund will segregate cash or liquid securities in a separate account in an amount equal to the value of the Fund's total assets committed to the consummation of such forward contract. The assets in the segregated account will be valued at market daily and if the value of the securities in the separate account declines, additional cash or securities will be placed in the account so that the value of the account will be equal the amount of the Fund's commitment in forward contracts. Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency rises. Moreover, it may not be possible for the Funds to hedge against a devaluation that is so generally anticipated that the Fund is not able to contract to sell the currency at a price above the devaluation level it anticipates. Repurchase Agreements. Each Fund may enter into repurchase agreements. In a repurchase agreement the Fund buys a security for a relatively short period (usually not more than seven days) subject to the obligation to sell it back to the issuer at a fixed time and price plus accrued interest. Each Fund will enter into repurchase agreements only with member banks of the Federal Reserve System and with "primary dealers" in U.S. government securities. The Adviser or relevant Sub-adviser will continuously monitor the creditworthiness of the parties with whom a Fund enters into repurchase agreements. Each Fund has established a procedure providing that the securities serving as collateral for each repurchase agreement must be delivered to the Fund's custodian either physically or in book-entry form and that the collateral must be marked to market daily to ensure that each repurchase agreement is fully collateralized at all times. In the event of bankruptcy or other default by a seller of a repurchase agreement, a Fund could experience delays in liquidating the underlying securities and could experience losses, including the possible decline in the value of the underlying securities during the period in which the Fund seeks to enforce its rights thereto, possible subnormal levels of income or lack of access to income during this period, as well as the expense of enforcing its rights. A Fund will not invest in a repurchase agreement maturing in more than seven days, if such investment, together with other illiquid securities held by the Fund would exceed 15% of the Fund's net assets. Reverse Repurchase Agreements. Each Fund may also enter into reverse repurchase agreements which involve the sale of U.S. Government securities held in its portfolio to a bank with an agreement that the Fund will buy back the securities at a fixed future date at a fixed price plus an agreed amount of "interest" which may be reflected in the repurchase price. Reverse repurchase agreements are considered to be borrowings by a Fund. Reverse repurchase agreements involve the risk that the market value of securities purchased by a Fund with proceeds of the transaction may decline below the repurchase price of the securities sold by a Fund which it is obligated to repurchase. A Fund will also continue to be subject to the risk of a decline in the market value of the securities sold under the agreements because it will reacquire those securities upon effecting 10 their repurchase. To minimize various risks associated with reverse repurchase agreements, a Fund will establish and maintain a separate account consisting of highly liquid securities, of any type or maturity, in an amount at least equal to the repurchase prices of the securities (plus any accrued interest thereon) under such agreements. In addition, a Fund will not enter into reverse repurchase agreements and other borrowings exceeding in the aggregate 33 1/3% of the market value of its total assets. A Fund will enter into reverse repurchase agreements only with selected registered broker/dealers or with federally insured banks or savings and loan associations which are approved in advance as being creditworthy by the Trustees. Under procedures established by the Trustees, the Adviser will monitor the creditworthiness of the firms involved. Restricted Securities. Each Fund may purchase securities that are not registered ("restricted securities") under the Securities Act of 1933 ("1933 Act"), including commercial paper issued in reliance on section 4(2) of the 1933 Act and securities offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. The Fund will not invest more than 15% of its net assets in illiquid investments. If the Trustees determine, based upon a continuing review of the trading markets for specific Section 4(2) paper or Rule 144A securities, that they are liquid, they will not be subject to the 15% limit on illiquid investments. The Trustees have adopted guidelines and delegated to the Adviser the daily function of determining and monitoring the liquidity of restricted securities. The Trustees, however, will retain sufficient oversight and be ultimately responsible for the determinations. The Trustees will carefully monitor the Fund's investments in these securities, focusing on such important factors, among others, as valuation, liquidity and availability of information. This investment practice could have the effect of increasing the level of illiquidity in the Fund if qualified institutional buyers become for a time uninterested in purchasing these restricted securities. Options on Securities, Securities Indices and Currency. Sovereign Investors Fund may purchase and write (sell) call and put options on any index based on securities in which it may invest. Each other Fund may purchase and write (sell) call and put options on any securities in which it may invest, on any securities index based on securities in which it may invest or on any currency in which Fund investments may be denominated. These options may be listed on national domestic securities exchanges or foreign securities exchanges or traded in the over-the-counter market. Each Fund may write covered put and call options and purchase put and call options as a substitute for the purchase or sale of securities or currency, or to protect against declines in the value of portfolio securities and against increases in the cost of securities to be acquired. Each Fund, other than Sovereign Investors Fund, may also write and purchase options to enhance total return. Writing Covered Options. A call option on securities or currency written by a Fund obligates the Fund to sell specified securities or currency to the holder of the option at a specified price if the option is exercised at any time before the expiration date. A put option on securities or currency written by a Fund obligates the Fund to purchase specified securities or currency from the option holder at a specified price if the option is exercised at any time before the expiration date. Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash settlement payments and does not involve the actual purchase or sale of securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security. Writing covered call options may deprive a Fund of the opportunity to profit from an increase in the market price of the securities or foreign currency assets in its portfolio. Writing covered put options may deprive a Fund of the opportunity to profit from a decrease in the market price of the securities or foreign currency assets to be acquired for its portfolio. All call and put options written by the Funds are covered. A written call option or put option may be covered by (i) maintaining cash or liquid securities, either of which may be quoted or denominated in any currency, in a segregated account maintained by the affected Fund's custodian with a value at least equal to the Fund's obligation under the option, (ii) entering into 11 an offsetting forward commitment and/or (iii) purchasing an offsetting option or any other option which, by virtue of its exercise price or otherwise, reduces the Fund's net exposure on its written option position. A written call option on securities is typically covered by maintaining the securities that are subject to the option in a segregated account. Each Fund may cover call options on a securities index by owning securities whose price changes are expected to be similar to those of the underlying index. Each Fund may terminate its obligations under an exchange traded call or put option by purchasing an option identical to the one it has written. Obligations under over-the-counter options may be terminated only by entering into an offsetting transaction with the counterparty to such option. Such purchases are referred to as "closing purchase transactions." Purchasing Options. A Fund would normally purchase call options in anticipation of an increase, or put options in anticipation of a decrease ("protective puts"), in the market value of securities or currencies of the type in which it may invest. Each Fund may also sell call and put options to close out its purchased options. The purchase of a call option would entitle Fund, in return for the premium paid, to purchase specified securities or currency at a specified price during the option period. A Fund would ordinarily realize a gain on the purchase of a call option if, during the option period, the value of such securities or currency exceeded the sum of the exercise price, the premium paid and transaction costs; otherwise the Fund would realize either no gain or a loss on the purchase of the call option. The purchase of a put option would entitle a Fund, in exchange for the premium paid, to sell specified securities or currency at a specified price during the option period. The purchase of protective puts is designed to offset or hedge against a decline in the market value of the Fund's portfolio securities or the currencies in which they are denominated. Put options may also be purchased by a Fund for the purpose of affirmatively benefiting from a decline in the price of securities or currencies which it does not own. A Fund would ordinarily realize a gain if, during the option period, the value of the underlying securities or currency decreased below the exercise price sufficiently to cover the premium and transaction costs; otherwise the Fund would realize either no gain or a loss on the purchase of the put option. Gains and losses on the purchase of put options may be offset by countervailing changes in the value of a Fund's portfolio securities. Each Fund's options transactions will be subject to limitations established by each of the exchanges, boards of trade or other trading facilities on which such options are traded. These limitations govern the maximum number of options in each class which may be written or purchased by a single investor or group of investors acting in concert, regardless of whether the options are written or purchased on the same or different exchanges, boards of trade or other trading facilities or are held or written in one or more accounts or through one or more brokers. Thus, the number of options which a Fund may write or purchase may be affected by options written or purchased by other investment advisory clients of the Adviser. An exchange, board of trade or other trading facility may order the liquidation of positions found to be in excess of these limits, and it may impose certain other sanctions. Risks Associated with Options Transactions. There is no assurance that a liquid secondary market on a domestic or foreign options exchange will exist for any particular exchange-traded option or at any particular time. If a Fund is unable to effect a closing purchase transaction with respect to covered options it has written, the Fund will not be able to sell the underlying securities or currencies or dispose of assets held in a segregated account until the options expire or are exercised. Similarly, if a Fund is unable to effect a closing sale transaction with respect to options it has purchased, it would have to exercise the options in order to realize any profit and will incur transaction costs upon the purchase or sale of underlying securities or currencies. 12 Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options). If trading were discontinued, the secondary market on that exchange (or in that class or series of options) would cease to exist. However, outstanding options on that exchange that had been issued by the Options Clearing Corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. A Fund's ability to terminate over-the-counter options is more limited than with exchange-traded options and may involve the risk that broker-dealers participating in such transactions will not fulfill their obligations. The Adviser will determine the liquidity of each over-the-counter option in accordance with guidelines adopted by the Trustees. The writing and purchase of options is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The successful use of options depends in part on the Adviser's ability to predict future price fluctuations and, for hedging transactions, the degree of correlation between the options and securities or currency markets. Futures Contracts and Options on Futures Contracts. Sovereign Investors Fund may purchase and sell futures contracts on any index based on securities in which it may invest for hedging or other non-speculative purposes. To seek to increase total return or hedge against changes in interest rates, securities prices or currency exchange rates, each other Fund may purchase and sell various kinds of futures contracts, and purchase and write call and put options on these futures contracts. Each Fund may also enter into closing purchase and sale transactions with respect to any of these contracts and options. The futures contracts may be based on various securities (such as U.S. Government securities), securities indices, foreign currencies and any other financial instruments and indices. All futures contracts entered into by a Fund are traded on U.S. or foreign exchanges or boards of trade that are licensed, regulated or approved by the Commodity Futures Trading Commission ("CFTC"). Futures Contracts. A futures contract may generally be described as an agreement between two parties to buy and sell particular financial instruments or currencies for an agreed price during a designated month (or to deliver the final cash settlement price, in the case of a contract relating to an index or otherwise not calling for physical delivery at the end of trading in the contract). Positions taken in the futures markets are not normally held to maturity but are instead liquidated through offsetting transactions which may result in a profit or a loss. While futures contracts on securities or currency will usually be liquidated in this manner, a Fund may instead make, or take, delivery of the underlying securities or currency whenever it appears economically advantageous to do so. A clearing corporation associated with the exchange on which futures contracts are traded guarantees that, if still open, the sale or purchase will be performed on the settlement date. Hedging and Other Strategies. Hedging is an attempt to establish with more certainty than would otherwise be possible the effective price or rate of return on portfolio securities or securities that a Fund proposes to acquire or the exchange rate of currencies in which portfolio securities are quoted or denominated. When securities prices are falling, a Fund can seek to offset a decline in the value of its current portfolio securities through the sale of futures contracts. When securities prices are rising, a Fund, through the purchase of futures contracts, can attempt to secure better rates or prices than might later be available in the market when it effects anticipated purchases. 13 A Fund may seek to offset anticipated changes in the value of a currency in which its portfolio securities, or securities that it intends to purchase, are quoted or denominated by purchasing and selling futures contracts on such currencies. A Fund may, for example, take a "short" position in the futures market by selling futures contracts in an attempt to hedge against an anticipated decline in market prices or foreign currency rates that would adversely affect the dollar value of the Fund's portfolio securities. Such futures contracts may include contracts for the future delivery of securities held by a Fund or securities with characteristics similar to those of a Fund's portfolio securities. Similarly, a Fund may sell futures contracts on any currencies in which its portfolio securities are quoted or denominated or in one currency to hedge against fluctuations in the value of securities denominated in a different currency if there is an established historical pattern of correlation between the two currencies. If, in the opinion of the Adviser, there is a sufficient degree of correlation between price trends for a Fund's portfolio securities and futures contracts based on other financial instruments, securities indices or other indices, the Fund may also enter into such futures contracts as part of its hedging strategy. Although under some circumstances prices of securities in a Fund's portfolio may be more or less volatile than prices of such futures contracts, the Adviser will attempt to estimate the extent of this volatility difference based on historical patterns and compensate for any differential by having the Fund enter into a greater or lesser number of futures contracts or by attempting to achieve only a partial hedge against price changes affecting the Fund's portfolio securities. When a short hedging position is successful, any depreciation in the value of portfolio securities will be substantially offset by appreciation in the value of the futures position. On the other hand, any unanticipated appreciation in the value of a Fund's portfolio securities would be substantially offset by a decline in the value of the futures position. On other occasions, a Fund may take a "long" position by purchasing futures contracts. This would be done, for example, when a Fund anticipates the subsequent purchase of particular securities when it has the necessary cash, but expects the prices or currency exchange rates then available in the applicable market to be less favorable than prices that are currently available. Subject to the limitations imposed on Sovereign Investors Fund, as described above, a Fund may also purchase futures contracts as a substitute for transactions in securities or foreign currency, to alter the investment characteristics of or currency exposure associated with portfolio securities or to gain or increase its exposure to a particular securities market or currency. Options on Futures Contracts. Each Fund may purchase and write options on the futures contracts described above for the same purposes as its transactions in futures contracts. The purchase of put and call options on futures contracts will give a Fund the right (but not the obligation) for a specified price to sell or to purchase, respectively, the underlying futures contract at any time during the option period. As the purchaser of an option on a futures contract, a Fund obtains the benefit of the futures position if prices move in a favorable direction but limits its risk of loss in the event of an unfavorable price movement to the loss of the premium and transaction costs. The writing of a call option on a futures contract generates a premium which may partially offset a decline in the value of a Fund's assets. By writing a call option, a Fund becomes obligated, in exchange for the premium (upon exercise of the option) to sell a futures contract if the option is exercised, which may have a value higher than the exercise price. Conversely, the writing of a put option on a futures contract generates a premium which may partially offset an increase in the price of securities that a Fund intends to purchase. However, a Fund becomes obligated (upon exercise of the option) to purchase a futures contract if the option is exercised, which may have a value lower than the exercise price. The loss incurred by each Fund in writing options on futures is potentially unlimited and may exceed the amount of the premium received. 14 The holder or writer of an option on a futures contract may terminate its position by selling or purchasing an offsetting option of the same series. There is no guarantee that such closing transactions can be effected. A Fund's ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid market. Other Considerations. The Sovereign Investors Fund may engage in futures and related options transactions for hedging or other non-speculative purposes. Each other Fund will engage in futures and related options transactions either for bona fide hedging purposes or to seek to increase total return as permitted by the CFTC. To the extent that a Fund is using futures and related options for hedging purposes, futures contracts will be sold to protect against a decline in the price of securities (or the currency in which they are quoted or denominated) that the Fund owns or futures contracts will be purchased to protect the Fund against an increase in the price of securities (or the currency in which they are quoted or denominated) it intends to purchase. Each Fund will determine that the price fluctuations in the futures contracts and options on futures used for hedging purposes are substantially related to price fluctuations in securities held by the Fund or securities or instruments which it expects to purchase. As evidence of its hedging intent, each Fund expects that on 75% or more of the occasions on which it takes a long futures or option position (involving the purchase of futures contracts), the Fund will have purchased, or will be in the process of purchasing, equivalent amounts of related securities (or assets denominated in the related currency) in the cash market at the time when the futures or option position is closed out. However, in particular cases, when it is economically advantageous for the Fund to do so, a long futures position may be terminated or an option may expire without the corresponding purchase of securities or other assets. To the extent that a Fund engages in nonhedging transactions in futures contracts and options on futures, the aggregate initial margin and premiums required to establish these nonhedging positions will not exceed 5% of the net asset value of the Fund's portfolio, after taking into account unrealized profits and losses on any such positions and excluding the amount by which such options were in-the-money at the time of purchase. Transactions in futures contracts and options on futures involve brokerage costs, require margin deposits and, in the case of contracts and options obligating a Fund to purchase securities or currencies, require the Fund to establish with the custodian a segregated account consisting of cash or liquid securities in an amount equal to the underlying value of such contracts and options. While transactions in futures contracts and options on futures may reduce certain risks, these transactions themselves entail certain other risks. For example, unanticipated changes in interest rates, securities prices or currency exchange rates may result in a poorer overall performance for a Fund than if it had not entered into any futures contracts or options transactions. Perfect correlation between a Fund's futures positions and portfolio positions will be impossible to achieve. In the event of an imperfect correlation between a futures position and a portfolio position which is intended to be protected, the desired protection may not be obtained and a Fund may be exposed to risk of loss. In addition, it is not possible to hedge fully or protect against currency fluctuations affecting the value of securities denominated in foreign currencies because the value of such securities is likely to fluctuate as a result of independent factors not related to currency fluctuations. Some futures contracts or options on futures may become illiquid under adverse market conditions. In addition, during periods of market volatility, a commodity exchange may suspend or limit trading in a futures contract or related option, which may make the instrument temporarily illiquid and difficult to price. Commodity exchanges may also establish daily limits on the amount that the price of a futures contract or related option can vary from the previous day's settlement price. Once the daily limit is reached, no trades may be made that day at a price beyond the limit. This may prevent a Fund from closing out positions and limiting its losses. 15 Rights and Warrants. Each Fund may purchase warrants and rights which are securities permitting, but not obligating, their holder to purchase the underlying securities at a predetermined price, subject to the Fund's Investment Restrictions. Generally, warrants and stock purchase rights do not carry with them the right to receive dividends or exercise voting rights with respect to the underlying securities, and they do not represent any rights in the assets of the issuer. As a result, an investment in warrants and rights may be considered to entail greater investment risk than certain other types of investments. In addition, the value of warrants and rights does not necessarily change with the value of the underlying securities, and they cease to have value if they are not exercised on or prior to their expiration date. Investment in warrants and rights increases the potential profit or loss to be realized from the investment of a given amount of Fund's assets as compared with investing the same amount in the underlying stock. Government Securities. Each Fund may invest in government securities. Certain U.S. Government securities, including U.S. Treasury bills, notes and bonds, and Government National Mortgage Association certificates ("GNMA"), are supported by the full faith and credit of the United States. Certain other U.S. Government securities, issued or guaranteed by Federal agencies or government sponsored enterprises, are not supported by the full faith and credit of the United States, but may be supported by the right of the issuer to borrow from the U.S. Treasury. These securities include obligations of the Federal Home Loan Mortgage Corporation ("FHLMC"), and obligations supported by the credit of the instrumentality, such as Federal National Mortgage Association Bonds ("FNMA"). No assurance can be given that the U.S. Government will provide financial support to such Federal agencies, authorities, instrumentalities and government sponsored enterprises in the future. Swaps, Caps, Floors and Collars. As one way of managing exposure to different types of investments, Strategic Income Fund may enter into interest rate swaps and other types of swap agreements such as caps, collars and floors. Strategic Income Fund may also enter into currency swaps. In a typical interest rate swap, one party agrees to make regular payments equal to a floating interest rate times a "notional principal amount," in return for payments equal to a fixed rate times the same amount, for a specified period of time. If a swap agreement provides for payments in different currencies, the parties might agree to exchange the notional principal amount as well. Swaps may also depend on other prices or rates, such as the value of an index or mortgage prepayment rates. In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specified interest rate exceeds an agreed-upon level, while the seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of buying a cap and selling a floor. Swap agreements will tend to shift a Fund's investment exposure from one type of investment to another. For example, if a Fund agrees to exchange payments in dollars for payments in a foreign currency, the swap agreement would tend to decrease the Fund's exposure to U.S. interest rates and increase its exposure to foreign currency and interest rates. Caps and floors have an effect similar to buying or writing options. Depending on how they are used, swap agreements may increase or decrease the overall volatility of a Fund's investments and its share price and yield. Swap agreements are sophisticated hedging instruments that typically involve a small investment of cash relative to the magnitude of risks assumed. As a result, swaps can be highly volatile and may have a considerable impact on a Fund's performance. Swap agreements are subject to the risk of a counterparty's failure to perform, and may decline in value if the counterparty's creditworthiness deteriorates. A Fund may also suffer losses if it is unable to terminate outstanding swap agreements or reduce its exposure through offsetting transactions. A Fund will maintain in a segregated account or liquid debt securities equal to the net amount, if any, of the 16 excess of the Fund's obligations over its entitlements with respect to swap, cap, collar or floor transactions. Participation Interests. The Technology Fund and Strategic Income Fund may invest in participation interests. Participation interests, which may take the form of interests in or assignments of certain loans, are acquired from banks who have made these loans or are members of a lending syndicate. A Fund's investments in participation interests may be subject to its 15% limitation on investments in illiquid securities. The Technology Fund may purchase only those participation interests that mature in 60 days or less, or, if maturing in more than 60 days, that have a floating rate that is automatically adjusted at least once every 60 days. Pay-In-Kind, Delayed and Zero Coupon Bonds. The Strategic Income Fund and Technology Fund may invest in pay-in-kind, delayed and zero coupon bonds. These are securities issued at a discount from their face value because interest payments are typically postponed until maturity. The amount of the discount rate varies depending on factors including the time remaining until maturity, prevailing interest rates, the security's liquidity and the issuer's credit quality. These securities also may take the form of debt securities that have been stripped of their interest payments. The market prices of pay-in-kind, delayed and zero coupon bonds generally are more volatile than the market prices of interest-bearing securities and are likely to respond to a greater degree to changes in interest rates than interest-bearing securities having similar maturities and credit quality. The Funds' investments in pay-in-kind, delayed and zero coupon bonds may require a Fund to sell certain of its portfolio securities to generate sufficient cash to satisfy certain income distribution requirements. Structured or Hybrid Notes. The Strategic Income Fund, and Technology Fund may invest in "structured" or "hybrid" notes. The distinguishing feature of a structured or hybrid note is that the amount of interest and/or principal payable on the note is based on the performance of a benchmark asset or market other than fixed income securities or interest rates. Examples of these benchmarks include stock prices, currency exchange rates and physical commodity prices. Investing in a structured note allows a Fund to gain exposure to the benchmark market while fixing the maximum loss that the Fund may experience in the event that market does not perform as expected. Depending on the terms of the note, a Fund may forego all or part of the interest and principal that would be payable on a comparable conventional note; a Fund's loss cannot exceed this foregone interest and/or principal. An investment in structured or hybrid notes involves risks similar to those associated with a direct investment in the benchmark asset. Custodial Receipts. Each Fund may acquire custodial receipts with respect to U.S. Government securities. Such custodial receipts evidence ownership of future interest payments, principal payments or both on certain notes or bonds. These custodial receipts are known by various names, including Treasury Receipts, Treasury Investors Growth Receipts ("TIGRs"), and Certificates of Accrual on Treasury Securities ("CATS"). For certain securities law purposes, custodial receipts are not considered U.S. Government securities. Bank and Corporate Obligations. Each of the Funds may invest in commercial paper. Commercial paper represents short-term unsecured promissory notes issued in bearer form by banks or bank holding companies, corporations and finance companies. The commercial paper purchased by the Funds consists of direct U.S. Dollar denominated obligations of domestic or foreign issuers. Bank obligations in which a Fund may invest include certificates of deposit, bankers' acceptances and fixed time deposits. Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank for a definite period of time and earning a specified return. Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are "accepted" by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity. Fixed time deposits are bank obligations payable at a stated maturity date and bearing interest at a fixed rate. 17 Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early withdrawal penalties which vary depending upon market conditions and the remaining maturity of the obligation. There are no contractual restrictions on the right to transfer a beneficial interest in a fixed time deposit to a third party, although there is no market for such deposits. Bank notes and bankers' acceptances rank junior to domestic deposit liabilities of the bank and pari passu with other senior, unsecured obligations of the bank. Bank notes are not insured by the Federal Deposit Insurance Corporation or any other insurer. Deposit notes are insured by the Federal Deposit Insurance Corporation only to the extent of $100,000 per depositor per bank. Mortgage-Backed Securities. Each Fund may invest in mortgage pass-through certificates and multiple-class pass-through securities, such as real estate mortgage investment conduits ("REMIC") pass-through certificates, collateralized mortgage obligations ("CMOs") and stripped mortgage-backed securities ("SMBS"), and other types of "Mortgage-Backed Securities" that may be available in the future. Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-through securities represent participation interests in pools of residential mortgage loans and are issued by U.S. Governmental or private lenders and guaranteed by the U.S. Government or one of its agencies or instrumentalities, including but not limited to the Government National Mortgage Association ("Ginnie Mae"), the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). Ginnie Mae certificates are guaranteed by the full faith and credit of the U.S. Government for timely payment of principal and interest on the certificates. Fannie Mae certificates are guaranteed by Fannie Mae, a federally chartered and privately owned corporation, for full and timely payment of principal and interest on the certificates. Freddie Mac certificates are guaranteed by Freddie Mac, a corporate instrumentality of the U.S. Government, for timely payment of interest and the ultimate collection of all principal of the related mortgage loans. Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations. CMOs and REMIC pass-through or participation certificates may be issued by, among others, U.S. Government agencies and instrumentalities as well as private issuers. CMOs and REMIC certificates are issued in multiple classes and the principal of and interest on the mortgage assets may be allocated among the several classes of CMOs or REMIC certificates in various ways. Each class of CMOs or REMIC certificates, often referred to as a "tranche," is issued at a specific adjustable or fixed interest rate and must be fully retired no later than its final distribution date. Generally, interest is paid or accrues on all classes of CMOs or REMIC certificates on a monthly basis. Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac certificates but also may be collateralized by other mortgage assets such as whole loans or private mortgage pass- through securities. Debt service on CMOs is provided from payments of principal and interest on collateral of mortgaged assets and any reinvestment income thereon. A REMIC is a CMO that qualifies for special tax treatment under the Internal Revenue Code of 1986, as amended (the "Code"), invests in certain mortgages primarily secured by interests in real property and other permitted investments and issues "regular" and "residual" interests. The Funds do not intend to acquire REMIC residual interests. Stripped Mortgage-Backed Securities. SMBS are derivative multiple-class mortgage-backed securities. SMBS are usually structured with two classes that receive different proportions of interest and principal distributions on a pool of mortgage assets. A typical SMBS will have one class receiving some of the interest and most of the principal, while the other class will receive most of the interest and the remaining principal. In the most extreme case, one class will receive all of the interest (the "interest only" class) while the other class will receive all of the principal (the "principal only" class). The yields and market risk of interest only and principal only SMBS, respectively, may be more volatile than those of other fixed income securities. The staff 18 of the Securities and Exchange Commission ("SEC") considers privately issued SMBS to be illiquid. Risk Factors Associated with Mortgage-Backed Securities. Investing in Mortgage-Backed Securities involves certain risks, including the failure of a counterparty to meet its commitments, adverse interest rate changes and the effects of prepayments on mortgage cash flows. In addition, investing in the lowest tranche of CMOs and REMIC certificates involves risks similar to those associated with investing in equity securities. Further, the yield characteristics of Mortgage-Backed Securities differ from those of traditional fixed income securities. The major differences typically include more frequent interest and principal payments (usually monthly), the adjustability of interest rates, and the possibility that prepayments of principal may be made substantially earlier than their final distribution dates. Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic, social and other factors and cannot be predicted with certainty. Both adjustable rate mortgage loans and fixed rate mortgage loans may be subject to a greater rate of principal prepayments in a declining interest rate environment and to a lesser rate of principal prepayments in an increasing interest rate environment. Under certain interest rate and prepayment rate scenarios, a Fund may fail to recoup fully its investment in Mortgage-Backed Securities notwithstanding any direct or indirect governmental, agency or other guarantee. When a Fund reinvests amounts representing payments and unscheduled prepayments of principal, it may receive a rate of interest that is lower than the rate on existing adjustable rate mortgage pass-through securities. Thus, Mortgage-Backed Securities, and adjustable rate mortgage pass-through securities in particular, may be less effective than other types of U.S. Government securities as a means of "locking in" interest rates. Conversely, in a rising interest rate environment, a declining prepayment rate will extend the average life of many Mortgage-Backed Securities. This possibility is often referred to as extension risk. Extending the average life of a Mortgage-Backed Security increases the risk of depreciation due to future increases in market interest rates. Asset-Backed Securities. The Strategic Income Fund may invest in securities that represent individual interests in pools of consumer loans and trade receivables similar in structure to Mortgage-Backed Securities. The assets are securitized either in a pass-through structure (similar to a mortgage pass-through structure) or in a pay-through structure (similar to a CMO structure). Although the collateral supporting asset-backed securities generally is of a shorter maturity than mortgage loans and historically has been less likely to experience substantial prepayments, no assurance can be given as to the actual maturity of an asset-backed security because prepayments of principal may be made at any time. Payments of principal and interest typically are supported by some form of credit enhancement, such as a letter of credit, surety bond, limited guarantee by another entity or having a priority to certain of the borrower's other securities. The degree of credit enhancement varies, and generally applies to only a fraction of the asset-backed security's par value until exhausted. If the credit enhancement of an asset-backed security held by a Fund has been exhausted, and if any required payments of principal and interest are not made with respect to the underlying loans, a Fund may experience losses or delays in receiving payment. Asset-backed securities are often subject to more rapid repayment than their stated maturity date would indicate as a result of the pass-through of prepayments of principal on the underlying loans. During periods of declining interest rates, prepayment of loans underlying asset-backed securities can be expected to accelerate. Accordingly, a Fund's ability to maintain positions in these securities will be affected by reductions in the principal amount of such securities resulting from prepayments, and its ability to reinvest the returns of principal at comparable yields is subject to generally prevailing interest rates at that time. 19 Credit card receivables are generally unsecured and the debtors on such receivables are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set-off certain amounts owed on the credit cards, thereby reducing the balance due. Automobile receivables generally are secured, but by automobiles rather than residential real property. Most issuers of automobile receivables permit the loan servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the asset-backed securities. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in the underlying automobiles. Therefore, there is the possibility that, in some cases, recoveries on repossessed collateral may not be available to support payments on these securities. Risks Associated With Specific Types of Derivative Debt Securities. Different types of derivative debt securities are subject to different combinations of prepayment, extension and/or interest rate risk. Conventional mortgage pass-through securities and sequential pay CMOs are subject to all of these risks, but are typically not leveraged. Thus, the magnitude of exposure may be less than for more leveraged Mortgage-Backed Securities. The risk of early prepayments is the primary risk associated with interest only debt securities ("IOs"), leveraged floating rate securities whose yield changes in the same direction, rather than inversely to, a referenced interest rate ("super floaters"), other leveraged floating rate instruments and Mortgage-Backed Securities purchased at a premium to their par value. In some instances, early prepayments may result in a complete loss of investment in certain of these securities. The primary risks associated with certain other derivative debt securities are the potential extension of average life and/or depreciation due to rising interest rates. These securities include floating rate securities based on the Cost of Funds Index ("COFI floaters"), other "lagging rate" floating rate securities, floating rate securities that are subject to a maximum interest rate ("capped floaters"), Mortgage-Backed Securities purchased at a discount, leveraged inverse floating rate securities ("inverse floaters"), principal only debt securities ("POs"), certain residual or support tranches of CMOs and index amortizing notes. Index amortizing notes are not Mortgage-Backed Securities, but are subject to extension risk resulting from the issuer's failure to exercise its option to call or redeem the notes before their stated maturity date. Leveraged inverse IOs combine several elements of the Mortgage-Backed Securities described above and thus present an especially intense combination of prepayment, extension and interest rate risks. Planned amortization class ("PAC") and target amortization class ("TAC") CMO bonds involve less exposure to prepayment, extension and interest rate risks than other Mortgage-Backed Securities, provided that prepayment rates remain within expected prepayment ranges or "collars." To the extent that prepayment rates remain within these prepayment ranges, the residual or support tranches of PAC and TAC CMOs assume the extra prepayment, extension and interest rate risks associated with the underlying mortgage assets. Other types of floating rate derivative debt securities present more complex types of interest rate risks. For example, range floaters are subject to the risk that the coupon will be reduced to below market rates if a designated interest rate floats outside of a specified interest rate band or collar. Dual index or yield curve floaters are subject to depreciation in the event of an unfavorable change in the spread between two designated interest rates. X-reset floaters have a coupon that remains fixed for more than one accrual period. Thus, the type of risk involved in these securities depends on the terms of each individual X-reset floater. Brady Bonds. The Strategic Income Fund may invest in Brady Bonds and other sovereign debt securities of countries that have restructured or are in the process of restructuring sovereign debt pursuant to the Brady Plan. Brady Bonds are debt securities described as part of a restructuring plan created by U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor 20 nations to restructure their outstanding external indebtedness (generally, commercial bank debt). In restructuring its external debt under the Brady Plan framework, a debtor nation negotiates with its existing bank lenders as well as multilateral institutions such as the World Bank and the International Monetary Fund (the "IMF"). The Brady Plan facilitates the exchange of commercial bank debt for newly issued bonds (known as Brady Bonds). The World Bank and the IMF provide funds pursuant to loan agreements or other arrangements which enable the debtor nation to collateralize the new Brady Bonds or to repurchase outstanding bank debt at a discount. Under these arrangements the IMF debtor nations are required to implement domestic monetary and fiscal reforms. These reforms have included the liberalization of trade and foreign investment, the privatization of state-owned enterprises and the setting of targets for public spending and borrowing. These policies and programs seek to promote the debtor country's ability to service its external obligations and promote its economic growth and development. The Brady Plan only sets forth general guiding principles for economic reform and debt reduction, emphasizing that solutions must be negotiated on a case-by-case basis between debtor nations and their creditors. The Adviser believes that economic reforms undertaken by countries in connection with the issuance of Brady Bonds make the debt of countries which have issued or have announced plans to issue Brady Bonds an attractive opportunity for investment. Brady Bonds may involve a high degree of risk, may be in default or present the risk of default. Agreements implemented under the Brady Plan to date are designed to achieve debt and debt-service reduction through specific options negotiated by a debtor nation with its creditors. As a result, the financial packages offered by each country differ. The types of options have included the exchange of outstanding commercial bank debt for bonds issued at 100% of face value of such debt, bonds issued at a discount of face value of such debt, bonds bearing an interest rate which increases over time and bonds issued in exchange for the advancement of new money by existing lenders. Certain Brady Bonds have been collateralized as to principal due at maturity by U.S. Treasury zero coupon bonds with a maturity equal to the final maturity of such Brady Bonds, although the collateral is not available to investors until the final maturity of the Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and the debtor nations' reserves. In addition, the first two or three interest payments on certain types of Brady Bonds may be collateralized by cash or securities agreed upon by creditors. Although Brady Bonds may be collateralized by U.S. Government securities, repayment of principal and interest is not guaranteed by the U.S. Government. Ratings as Investment Criteria. In general, the ratings of Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P") and Fitch Investors Service ("Fitch") represent the opinions of these agencies as to the quality of the securities which they rate. It should be emphasized, however, that such ratings are relative and subjective and are not absolute standards of quality. These ratings will be used by the Funds as initial criteria for the selection of debt securities. Among the factors which will be considered are the long-term ability of the issuer to pay principal and interest and general economic trends. Appendix A contains further information concerning the ratings of Moody's, S&P and Fitch and their significance. Subsequent to its purchase by a Fund, an issue of securities may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. Neither of these events will require the sale of the securities by the Fund (other than Sovereign Investors Fund), but the Adviser will consider the event in its determination of whether the Fund should continue to hold the securities. If any security in Sovereign Investors Fund's portfolio falls below the Fund's minimum credit quality standards, as a result of a rating downgrade or the Adviser's or Sub-adviser's determination, the Fund will dispose of the security as promptly as possible while attempting to minimize any loss. Lower Rated High Yield/High Risk Debt Obligations. Strategic Income Fund, Financial Industries Fund, Relative Value Fund, Sovereign Investors Fund, and Technology Fund may invest in high yield/high risk, fixed income securities rated below investment grade (e.g., rated below Baa by Moody's or below BBB by S&P). 21 Ratings are based largely on the historical financial condition of the issuer. Consequently, the rating assigned to any particular security is not necessarily a reflection of the issuer's current financial condition, which may be better or worse than the rating would indicate. See the Appendix to this Statement of Additional Information which describes the characteristics of corporate bonds in the various rating categories. These Funds may invest in comparable quality unrated securities which, in the opinion of the Adviser or relevant Sub-adviser, offer comparable yields and risks to those securities which are rated. Debt obligations rated in the lower ratings categories, or which are unrated, involve greater volatility of price and risk of loss of principal and income. In addition, lower ratings reflect a greater possibility of an adverse change in financial condition affecting the ability of the issuer to make payments of interest and principal. The market price and liquidity of lower rated fixed income securities generally respond to short term corporate and market developments to a greater extent than do the price and liquidity of higher rated securities because such developments are perceived to have a more direct relationship to the ability of an issuer of such lower rated securities to meet its ongoing debt obligations. Reduced volume and liquidity in the high yield/high risk bond market or the reduced availability of market quotations will make it more difficult to dispose of the bonds and to value accurately a Fund's assets. The reduced availability of reliable, objective data may increase a Fund's reliance on management's judgment in valuing high yield/high risk bonds. In addition, a Fund's investments in high yield/high risk securities may be susceptible to adverse publicity and investor perceptions, whether or not justified by fundamental factors. In the past, economic downturns and increases in interest rates have caused a higher incidence of default by the issuers of lower-rated securities and may do so in the future, particularly with respect to highly leveraged issuers Each Fund may acquire individual securities of any maturity and is not subject to any limits as to the average maturity of its overall portfolio. The longer the Fund's average portfolio maturity, the more the value of the portfolio and the net asset value of the Fund's shares will fluctuate in response to changes in interest rates. An increase in interest rates will generally reduce the value of the Fund's portfolio securities and the Fund's shares, while a decline in interest rates will generally increase their value. Lending of Securities. Each Fund may lend portfolio securities to brokers, dealers, and financial institutions if the loan is collateralized by cash or U.S. Government securities according to applicable regulatory requirements. A Fund may reinvest any cash collateral in short-term securities and money market funds. When a Fund lends portfolio securities, there is a risk that the borrower may fail to return the securities involved in the transaction. As a result, the Fund may incur a loss or, in the event of the borrower's bankruptcy, the Fund may be delayed in or prevented from liquidating the collateral. It is a fundamental policy of the Funds not to lend portfolio securities having a total value exceeding 33 1/3% of its total assets. Short Sales. Financial Industries Fund may engage in short sales in order to profit from an anticipated decline in the value of a security. Each Fund (except for Sovereign Investors Fund and Technology Fund) may also engage in short sales to attempt to limit its exposure to a possible market decline in the value of its portfolio securities through short sales of securities which the Adviser believes possess volatility characteristics similar to those being hedged. To effect such a transaction, a Fund must borrow the security sold short to make delivery to the buyer. A Fund then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. Until the security is replaced, a Fund is required to pay to the lender any accrued interest or dividends and may be required to pay a premium. A Fund will realize a gain if the security declines in price between the date of the short sale and the date on which the Fund replaces the borrowed security. On the other hand, a Fund will incur 22 a loss as a result of the short sale if the price of the security increases between those dates. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium, interest or dividends a Fund may be required to pay in connection with a short sale. The successful use of short selling as a hedging device may be adversely affected by imperfect correlation between movements in the price of the security sold short and the securities being hedged. Under applicable guidelines of the staff of the SEC, if a Fund engages in short sales, it must put in a segregated account (not with the broker) an amount of cash or liquid securities equal to the difference between (a) the market value of the securities sold short and (b) any cash or U.S. Government securities required to be deposited as collateral with the broker in connection with the short sale (not including the proceeds from the short sale). In addition, until a Fund replaces the borrowed security, it must daily maintain the segregated account at such a level that the amount deposited in it plus the amount deposited with the broker as collateral will equal the current market value of the securities sold short. Except for short sales against the box, the amount of the Fund's net assets that may be committed to short sales is limited and the securities in which short sales are made must be listed on a national securities exchange. Short selling may produce higher than normal portfolio turnover which may result in increased transaction costs to a Fund. Forward Commitment and When-Issued Securities. Each Fund may purchase securities on a when-issued or forward commitment basis. "When-issued" refers to securities whose terms are available and for which a market exists, but which have not been issued. A Fund will engage in when- issued transactions with respect to securities purchased for its portfolio in order to obtain what is considered to be an advantageous price and yield at the time of the transaction. For when-issued transactions, no payment is made until delivery is due, often a month or more after the purchase. In a forward commitment transaction, a Fund contracts to purchase securities for a fixed price at a future date beyond customary settlement time. When a Fund engages in forward commitment and when-issued transactions, it relies on the seller to consummate the transaction. The failure of the issuer or seller to consummate the transaction may result in the Fund's losing the opportunity to obtain a price and yield considered to be advantageous. The purchase of securities on a when-issued or forward commitment basis also involves a risk of loss if the value of the security to be purchased declines prior to the settlement date. On the date a Fund enters into an agreement to purchase securities on a when-issued or forward commitment basis, the Fund will segregate in a separate account cash or liquid securities, of any type or maturity, equal in value to the Fund's commitment. These assets will be valued daily at market, and additional cash or securities will be segregated in a separate account to the extent that the total value of the assets in the account declines below the amount of the when-issued commitments. Alternatively, a Fund may enter into offsetting contracts for the forward sale of other securities that it owns. Short-Term Trading and Portfolio Turnover. Short-term trading means the purchase and subsequent sale of a security after it has been held for a relatively brief period of time. The Relative Value Fund, Technology Fund, and Strategic Income Fund engage in short-term trading in response to stock market conditions, changes in interest rates or other economic trends and developments, or to take advantage of yield disparities between various fixed income securities in order to realize capital gains or improve income. Short term trading may have the effect of increasing portfolio turnover rate. The remaining Funds do not intend to invest for the purpose of seeking short-term profits. These Funds' particular portfolio securities may be changed, however, without regard to the holding period of these securities when the Adviser or relevant Sub-adviser deems that this action will 23 help achieve the Fund's objective given a change in an issuer's operations or in general market conditions. The portfolio turnover rate for each Fund is shown in the section captioned "Financial Highlights" in the prospectuses. A high rate of portfolio turnover (100% or greater) involves corresponding higher transaction expenses and may make it more difficult for a Fund to qualify as a regulated investment company for Federal income tax purposes. INVESTMENT RESTRICTIONS Fundamental Investment Restrictions. Each Fund has adopted the following fundamental investment restrictions which will not be changed without the approval of a majority of the applicable Fund's outstanding voting securities. Under the Investment Company Act of 1940, as amended (the "1940 Act"), and as used in the Prospectuses and this Statement of Additional Information, a "majority of the outstanding voting securities" means approval by the lesser of (1) the holders of 67% or more of the Fund represented at a meeting if the more than 50% of the Fund's outstanding shares of the Fund are present in person or by proxy or (2) more than 50% of the outstanding shares. Each Fund may not: 1. Issue senior securities, except as permitted by paragraphs 2, 5 and 6 below. For purposes of this restriction, the issuance of shares of beneficial interest in multiple classes or series, the deferral of the Trustees' fees and the purchase or sale of options, futures contracts, forward commitments, swaps and repurchase agreements entered into in accordance with the Fund's investment policies within the meaning of paragraph 6 below, are not deemed to be senior securities. 2. Borrow money, except for the following extraordinary or emergency purposes: (i) from banks for temporary or short-term purposes or for the clearance of transactions; (ii) in connection with the redemption of Fund shares or to finance failed settlements of portfolio trades without immediately liquidating portfolio securities or other assets; and (iii) in order to fulfill commitments or plans to purchase additional securities pending the anticipated sale of other portfolio securities or assets, but only if after each such borrowing there is asset coverage of at least 300% as defined in the 1940 Act. For purposes of this investment restriction, the deferral of trustees' fees and short sales, transactions in futures contracts and options on futures contracts, securities or indices and forward commitment transactions shall not constitute borrowing. This restriction does not apply to transactions in reverse repurchase agreements in amounts not to exceed 33 1/3% of the value of the Fund's total assets (including the amount borrowed) taken at market value. 3. Act as an underwriter, except to the extent that, in connection with the disposition of portfolio securities, the Fund may be deemed to be an underwriter for purposes of the Securities Act of 1933 (the "1933 Act"). 4. Purchase or sell real estate except that the Fund may (i) acquire or lease office space for its own use, (ii) invest in securities of issuers that invest in real estate or interests therein, (iii) invest in securities that are secured by real estate or interests therein, (iv) purchase and sell mortgage-related securities and (v) hold and sell real estate acquired by the Fund as a result of the ownership of securities. 5. Invest in commodities, except the Fund may purchase and sell options on securities, securities indices and currency, futures contracts on securities, securities indices and currency and options on such futures, forward foreign 24 currency exchange contracts, forward commitments, securities index put or call warrants, interest rate and currency swaps, interest rate caps, floors and collars and repurchase agreements entered into in accordance with the Fund's investment policies. 6. Make loans, except that the Fund (1) may lend portfolio securities in accordance with the Fund's investment policies up to 33 1/3% of the Fund's total assets taken at market value, (2) enter into repurchase agreements, and (3) purchase all or a portion of an issue of debt securities, bank loan participation interests, bank certificates of deposit, bankers' acceptances, debentures or other securities, whether or not the purchase is made upon the original issuance of the securities. 7. Purchase the securities of issuers conducting their principal activity in the same industry if, immediately after such purchase, the value of its investments in such industry would equal or exceed 25% of its total assets taken at market value at the time of such investment. The Financial Industries Fund will ordinarily invest more than 25% of its assets in the financial services sector. The Technology Fund will ordinarily invest more than 25% of its total assets in the technology industry. This limitation does not apply to investments in obligations of the U.S. Government or any of its agencies, instrumentalities or authorities. 8. For each Fund, with respect to 75% of total assets [see non-fundamental investment restriction (f)], purchase securities of an issuer (other than the U.S. Government, its agencies, instrumentalities or authorities), if: (a) such purchase would cause more than 5% of the Fund's total assets taken at market value to be invested in the securities of such issuer; or (b) such purchase would at the time result in more than 10% of the outstanding voting securities of such issuer being held by the Fund. Non-Fundamental Investment Restrictions. The following restrictions are designated as non-fundamental and may be changed by the Trustees without shareholder approval. Each Fund may not: (a) Purchase securities on margin or make short sales, unless, by virtue of its ownership of other securities, the Fund has the right to obtain securities equivalent in kind and amount to the securities sold and, if the right is conditional, the sale is made upon the same conditions, except (i) in connection with arbitrage transactions, (ii) for hedging the Fund's exposure to an actual or anticipated market decline in the value of its securities, (iii) to profit from an anticipated decline in the value of a security, and (iv) for obtaining such short-term credits as may be necessary for the clearance of purchases and sales of securities. The Sovereign Investors Fund and Technology Fund may not make short sales. (b) Purchase a security if, as a result, (i) more than 10% of the Fund's total assets would be invested in the securities of other investment companies, (ii) the Fund would hold more than 3% of the total outstanding voting securities of any one investment company, or (iii) more than 5% of the Fund's total assets would be invested in the securities of any one investment company. These limitations do not apply to (a) the investment of cash collateral, received by the Fund in connection with lending the Fund's portfolio securities, in the securities of open-end investment companies or (b) the purchase of shares of any investment company in connection with a merger, consolidation, reorganization or purchase of substantially all of the assets of another investment company. Subject to the 25 above percentage limitations the Fund may, in connection with the John Hancock Group of Funds Deferred Compensation Plan for Independent Trustees/Directors, purchase securities of other investment companies within the John Hancock Group of Funds. (c) Invest in securities which are illiquid if, as a result, more than 15% of its net assets would consist of such securities, including repurchase agreements maturing in more than seven days, securities that are not readily marketable, restricted securities not eligible for resale pursuant to Rule 144A under the 1933 Act and privately issued stripped mortgage-backed securities. The adviser will determine on a case by case basis whether a particular OTC option is illiquid. (d) Invest for the purpose of exercising control over or management of any company. In addition: (e) Under normal conditions, Sovereign Investors Fund may not invest more than 10% of total assets in cash and/or cash equivalents (except cash segregated in relation to futures, forward and option contracts). (f) Sovereign Investors Fund may not invest more than 5% of total assets at time of purchase in any one security (other than U.S. government securities). If a percentage restriction on investment or utilization of assets as set forth above is adhered to at the time on investment is made, a later change in percentage resulting from changes in the value of each Fund's assets will not be considered a violation of the restriction. The Funds will invest only in countries on the Adviser's Approved Country Listing. The Approved Country Listing is a list maintained by the Adviser's investment department that outlines all countries, including the United States, that have been approved for investment by Funds managed by the Adviser. In addition, no Fund may invest either directly or indirectly in any Russian equity. Only certain funds can invest in certain types of Russian debt. These funds are: Active Bond, Income, Investors, High Income, Bond, High Yield Bond, Strategic Income and VA Strategic Income. Each of these funds may invest only up to 5% of total assets in: (1) Sovereign Russian Debt and Municipal Fixed Income Securities; (2) that are NOT ruble- denominated; (3) that are held physically outside of Russia; and (4) have Euroclear settlement. THOSE RESPONSIBLE FOR MANAGEMENT The business of the Fund is managed by its Trustees, who elect officers who are responsible for the day-to-day operations of the Fund and who execute policies formulated by the Trustees. Several of the officers and Trustees of the Fund are also officers or Directors of the Adviser, or officers and Directors of the Fund's principal distributor, John Hancock Funds, LLC (prior to February 1, 2002, John Hancock Funds, Inc.) ("John Hancock Funds"). 26
- ----------------------------------------------------------------------------------------------------------------------- Principal Occupation(s) Number of John Position(s) Trustee/ and other Hancock Funds Name, Address (1) Held with Officer Directorships Overseen by And Age Funds since(2) During Past 5 Years Trustee - ----------------------------------------------------------------------------------------------------------------------- Independent Trustees - ----------------------------------------------------------------------------------------------------------------------- Dennis S. Aronowitz Trustee *1998 Professor of Law, Emeritus, Boston 30 Born: 1931 1996 University School of Law (as of 1996); 1997 Director, Brookline Bancorp. 2000 1996 - ----------------------------------------------------------------------------------------------------------------------- Richard P. Chapman, Jr. Trustee *1998 Chairman, President and Chief Executive 30 Born: 1935 1996 Officer, Brookline Bancorp. (lending) 1997 (since 1972); Trustee, Northeastern 2000 University (education); Chairman and 1996 Director, Lumber Insurance Co. (insurance) (until 2000); Chairman and Director, Northeast Retirement Services, Inc. (retirement administration) (since 1998). - ----------------------------------------------------------------------------------------------------------------------- William J. Cosgrove Trustee *1998 Vice President, Senior Banker and Senior 30 Born: 1933 1996 Credit Officer, Citibank, N.A. (retired 1997 1991); Executive Vice President, Citadel 2000 Group Representatives, Inc.; Director, 1996 Hudson City Bancorp; Trustee, Scholarship Fund for Inner City Children (since 1986). - ----------------------------------------------------------------------------------------------------------------------- Richard A. Farrell Trustee *1998 President, Farrell, Healer & Co., Inc., 30 Born: 1932 1996 (venture capital management firm)(since 1997 1980) and General Partner of the Venture 2000 Capital Fund of NE (since 1980); Prior to 1996 1980, headed the venture capital group at Bank of Boston Corporation. - -----------------------------------------------------------------------------------------------------------------------
* Relative Value, Sovereign Investors, Financial Industries, Technology and Strategic Income Funds, respectively. (1) Business address for independent and interested Trustees and officers is 101 Huntington Avenue, Boston, Massachusetts 02119. (2) Each Trustee serves until resignation, retirement age or until her or his successor is elected. (3) Interested Trustee: holds positions with the Fund's investment adviser, underwriter, and or certain other affiliates. 27
- ----------------------------------------------------------------------------------------------------------------------- Principal Occupation(s) Number of John Position(s) Trustee/ and other Hancock Funds Name, Address (1) Held with Officer Directorships Overseen by And Age Funds since(2) During Past 5 Years Trustee - ----------------------------------------------------------------------------------------------------------------------- Gail D. Fosler Trustee *1998 Senior Vice President and Chief Economist, 30 Born: 1947 1996 The Conference Board (non-profit economic 1997 and business research)(since 1989); 2000 Director, Unisys Corp. (since 1993); 1996 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 Trustee *1998 President Emeritus, Babson College (as of 30 Born: 1932 1996 1998); Vice Chairman, Xerox Corporation 1997 (until 1989); Director, Reebok, Inc. 2000 (since 1994) and Inco Ltd. 1996 - ----------------------------------------------------------------------------------------------------------------------- John A. Moore Trustee *1998 President and Chief Executive Officer, 36 Born: 1939 1996 Institute for Evaluating Health Risks, 1997 (nonprofit institution) (until 2001); 2000 Senior Scientist, Sciences International 1996 (health research)(since 1998); Principal, Hollyhouse (consulting)(since 2000); Director, CIIT(nonprofit research) (since 2002). - ----------------------------------------------------------------------------------------------------------------------- Patti McGill Peterson Trustee *1998 Executive Director, Council for 36 Born: 1943 1996 International Exchange of Scholars (since 1997 1998); Vice President, Institute of 2000 International Education (since 1998); 1996 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 Trustee *1998 Professor of Business Administration 30 Born: 1931 1996 Emeritus, Harvard University Graduate 1997 School of Business Administration (as of 2000 1998). 1996 - -----------------------------------------------------------------------------------------------------------------------
* Relative Value, Sovereign Investors, Financial Industries, Technology and Strategic Income Funds, respectively. (1) Business address for independent and interested Trustees and officers is 101 Huntington Avenue, Boston, Massachusetts 02119. (2) Each Trustee serves until resignation, retirement age or until her or his successor is elected. (3) Interested Trustee: holds positions with the Fund's investment adviser, underwriter, and or certain other affiliates. 28
- ----------------------------------------------------------------------------------------------------------------------- Principal Occupation(s) Number of John Position(s) Trustee/ and other Hancock Funds Name, Address (1) Held with Officer Directorships Overseen by And Age Funds since(2) During Past 5 Years Trustee - ----------------------------------------------------------------------------------------------------------------------- Interested Trustees - ----------------------------------------------------------------------------------------------------------------------- John M. DeCiccio (3) Trustee *2001 Executive Vice President and Chief 66 Born: 1948 2001 Investment Officer, John Hancock Financial 2001 Services, Inc.; Director, Executive Vice 2001 President and Chief Investment Officer, 2001 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 (3) Trustee, *2000 Executive Vice President, John Hancock 66 Born: 1955 Chairman, 2000 Financial Services, Inc., John Hancock Life President 2000 Insurance Company; Chairman, Director, and Chief 2000 President and Chief Executive Officer, the Executive 2000 Advisers and The Berkeley Group; Chairman, Officer 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). - -----------------------------------------------------------------------------------------------------------------------
* Relative Value, Sovereign Investors, Financial Industries, Technology and Strategic Income Funds, respectively. (1) Business address for independent and interested Trustees and officers is 101 Huntington Avenue, Boston, Massachusetts 02119. (2) Each Trustee serves until resignation, retirement age or until her or his successor is elected. (3) Interested Trustee: holds positions with the Fund's investment adviser, underwriter, and or certain other affiliates. 29
- ----------------------------------------------------------------------------------------------------------------------- Principal Occupation(s) Number of John Position(s) Trustee/ and other Hancock Funds Name, Address (1) Held with Officer Directorships Overseen by And Age Funds since(2) During Past 5 Years Trustee - ----------------------------------------------------------------------------------------------------------------------- Principal Officers who are not Trustees - ----------------------------------------------------------------------------------------------------------------------- William L. Braman Executive *2000 Executive Vice President and Chief Born: 1953 Vice 2000 Investment Officer, the Adviser and each President 2000 of the John Hancock funds; Director, and Chief 2000 SAMCorp., Executive Vice President and Investment 2000 Chief Investment Officer, Barring Asset Officer Management, London U.K. (until 2000). - ----------------------------------------------------------------------------------------------------------------------- Richard A. Brown Senior Vice *2000 Senior Vice President, Chief Financial Born: 1949 President 2000 Officer and Treasurer, the Adviser, John and Chief 2000 Hancock Funds, and The Berkeley Group; Financial 2000 Second Vice President and Senior Associate Officer 2000 Controller, Corporate Tax Department, John Hancock Financial Services, Inc. (until 2001). - ----------------------------------------------------------------------------------------------------------------------- Thomas H. Connors Vice *1998 Vice President and Compliance Officer, the Born: 1959 President 1996 Adviser and each of the John Hancock and 1997 funds; Vice President, John Hancock Funds. Compliance 2000 Officer 1996 - ----------------------------------------------------------------------------------------------------------------------- William H. King Vice *2001 Vice President and Assistant Treasurer, Born: 1952 President 1996 the Adviser; Vice President and Treasurer and 1997 of each of the John Hancock funds; Treasurer 2000 Assistant Treasurer of each of the John 1996 Hancock funds (until 2001). - ----------------------------------------------------------------------------------------------------------------------- Susan S. Newton Senior Vice *1998 Senior Vice President, Secretary and Chief Born: 1950 President, 1996 Legal Officer, SAMCorp., the Adviser and Secretary 1997 each of the John Hancock funds, John and Chief 2000 Hancock Funds and The Berkeley Group; Vice Legal 1996 President, Signature Services (until Officer 2000), Director, Senior Vice President and Secretary, NM Capital. - -----------------------------------------------------------------------------------------------------------------------
* Relative Value, Sovereign Investors, Financial Industries, Technology and Strategic Income Funds, respectively (1) Business address for independent and interested Trustees and officers is 101 Huntington Avenue, Boston, Massachusetts 02119. (2) Each Trustee serves until resignation, retirement age or until her or his successor is elected. (3) Interested Trustee: holds positions with the Fund's investment adviser, underwriter, and or certain other affiliates. 30 The Fund's Board of Trustees currently has five standing Committees: the Audit Committee, the Administration Committee, the Contracts/Operations Committee, the Investment Performance Committee and the Coordinating Committee. Each Committee is comprised of Independent Trustees who are not "interested persons". The Audit Committee members are Messrs. Moore, Farrell and Ms. Fosler. The Audit Committee recommends to the full board auditors for the Fund, monitors and oversees the audits of the Fund, communicates with both independent auditors and internal auditors on a regular basis and provides a forum for the auditors to report and discuss any matters they deem appropriate at any time. The Audit Committee held four meetings during the fiscal year ended December 31, 2001. The Administration Committee's members are all of the Independent Trustees of the Fund. The Administration Committee reviews the activities of the other four standing committees and makes the final selection and nomination of candidates to serve as Independent Trustees. The Administration Committee will consider nominees recommended by shareholders to serve as Independent Trustees, provided that shareholders submit recommendations in compliance with all of the pertinent provisions of Rule 14a-8 under the Securities Exchange Act of 1934. The Administration Committee also works with all Trustees on the selection and election of officers of the Fund. The Administration Committee held four meetings during the fiscal year ended December 31, 2001. The Contracts/Operations Committee members are Messrs. Chapman, Cosgrove and Pratt. The Contracts/Operations Committee oversees the initiation, operation, and renewal of contracts between the Fund and other entities. These contracts include advisory and subadvisory agreements, custodial and transfer agency agreements and arrangements with other service providers. The Contracts/Operations Committee held five meetings during the fiscal year ended December 31, 2001. The Investment Performance Committee consists of Messrs. Aronowitz, Glavin and Ms. Peterson. The Investment Performance Committee monitors and analyzes the performance of the Fund generally, consults with the adviser as necessary if the Fund requires special attention, and reviews peer groups and other comparative standards as necessary. The Investment Performance Committee held four meetings during the fiscal year ended December 31, 2001. The Coordinating Committee members are the chairpersons of the other four standing committees. The Coordinating Committee assures consistency of action among committees, reviews Trustee compensation, evaluates Trustee performance and considers committee membership rotations as well as relevant corporate governance issues. 31 The following table provides information regarding the compensation paid by the Fund and the other investment companies in the John Hancock Fund Complex to the Independent Trustees for their services. Mr. DeCiccio and Ms. Ford, each a non-Independent Trustee, and each of the officers of the Fund who are interested persons of the Adviser, are compensated by the Adviser and/or affiliates and receive no compensation from the Fund for their services. Aggregate Total Compensation From the Compensation Fund and John Hancock Fund Independent Trustees from the Fund (1) Complex to Trustees (2) - -------------------- ---------------- ----------------------- Dennis J. Aronowitz $ $ 75,000 Richard P. Chapman* 78,100 William J. Cosgrove* 72,000 Leland O. Erdahl+ 18,000 Richard A. Farrell 72,000 Gail D. Fosler 75,000 William F. Glavin* 72,000 Dr. John A. Moore* 75,100 Patti McGill Peterson 72,000 John Pratt 72,000 --------- Total $ $681,200 (1) Compensation is for the current fiscal year ending December 31, 2001. (2) Total compensation paid by the John Hancock Funds Complex to the Independent Trustees is as of December 31, 2001. As of this date, there were sixty-six funds in the John Hancock Fund Complex , with Mr. Moore and Ms Peterson serving on thirty-six funds and each other Independent Trustees serving on thirty funds.. + As of February 28, 2001, Mr. Erdahl resigned as Trustee of the Complex. * As of December 31, 2001, the value of the aggregate accrued deferred compensation amount from all funds in the John Hancock Funds Complex for Mr. Chapman was $71,309, Mr. Cosgrove was $207,842, Mr. Glavin was $280,742 and for Dr. Moore was $238,982 under the John Hancock Group of Funds Deferred Compensation Plan for Independent Trustees (the "Plan"). All of the officers listed are officers or employees of the Adviser or Affiliated Companies. Some of the Trustees and officers may also be officers or Trustees of one or more of the other funds for which the Adviser serves as investment adviser. As of December 31, 2001, all shares were held by the Life Co. and the Variable Life Co. INVESTMENT ADVISORY AND OTHER SERVICES The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603, was organized in 1968 and has approximately $30 billion in assets under management in its capacity as investment adviser to the Funds and the other funds and publicly traded investment companies in the John Hancock group of funds as well as institutional accounts. The Adviser is an affiliate of the Life Company, one of the most recognized and respected financial institutions in the nation. With total assets under management of more than $100 billion, the Life Company is one of the ten largest life insurance companies in the United States, and carries a high rating from Standard & Poor's and A.M. Best. Founded in 1862, the Life Company has been serving clients for over 130 years. 32 Each Fund has entered into an investment management contract (the "Advisory Agreement") with the Adviser, which was approved by the Funds' shareholders. Pursuant to the Advisory Agreements, the Adviser will: (a) furnish continuously an investment program for the Funds and determine, subject to the overall supervision and review of the Trustees, which investments should be purchased, held, sold or exchanged, and (b) provide supervision over all aspects of the Funds' operations except those which are delegated to a custodian, transfer agent or other agent. The Funds bear all costs of their organization and operation, including but not limited to expenses of preparing, printing and mailing all shareholders' reports, notices, prospectuses, proxy statements and reports to regulatory agencies; expenses relating to the issuance, registration and qualification of shares; government fees; interest charges; expenses of furnishing to shareholders their account statements; taxes; expenses of redeeming shares; brokerage and other expenses connected with the execution of portfolio securities transactions; expenses pursuant to the Funds' plan of distribution; fees and expenses of custodians including those for keeping books and accounts maintaining a committed line of credit and calculating the net asset value of shares; fees and expenses of transfer agents and dividend disbursing agents; legal, accounting, financial, management, tax and auditing fees and expenses of the Funds (including an allocable portion of the cost of the Adviser's employees rendering such services to the Funds); the compensation and expenses of Trustees who are not otherwise affiliated with the Trust, the Adviser or any of their affiliates; expenses of Trustees' and shareholders' meetings; trade association membership; insurance premiums; and any extraordinary expenses. With respect to Technology Fund, the Adviser has entered into a Sub-advisory agreement with American Fund Advisors, Inc. ("AFA"). AFA is located at 1415 Kellum Place, Suite 205 Garden City, New York 11530 and was incorporated under the laws of New York in 1978. AFA, subject to the supervision of the Adviser, manages the Technology Fund's investments. AFA also provides investment advisory and management services to individual and institutional clients. Under the Sub-advisory agreement, the Sub-adviser, subject to the review of the Trustees and the overall supervision of the Adviser, is responsible for managing the investment operations of the Technology Fund and the composition of the Fund's portfolio and furnishing the Fund with advice and recommendations with respect to investments, investment policies and the purchase and sale of securities. As provided by the Advisory Agreements, each Fund pays the Adviser a fee, which is accrued daily and paid monthly in arrears and is equal on an annual basis to a stated percentage of the respective Fund's average daily net asset value. - -------------------------------------------------------- Technology Fund x.xx% - -------------------------------------------------------- Financial Industries Fund x.xx% - -------------------------------------------------------- Relative Value Fund x.xx% - -------------------------------------------------------- Sovereign Investors Fund x.xx% - -------------------------------------------------------- Strategic Income Fund x.xx% - -------------------------------------------------------- With respect to Technology Fund, the Adviser (not the Fund) pays a sub-advisory fee to AFA equal to 0.10% of the Technology Fund's average daily net assets. From time to time, the Adviser may reduce its fee or make other arrangements to limit the Fund's expenses to a specified percentage of average daily net assets. The adviser has voluntarily agreed to limit each Fund's expenses, excluding the management fee, to 0.25% of each Fund's average daily net assets. The Adviser retains the right to reimpose a fee and recover any other payments to the extent that, at the end of any fiscal year, the Fund's annual expenses fall below this limit. 33 Securities held by a Fund may also be held by other funds or investment advisory clients for which the Adviser or any of its affiliates provides investment advice. Because of different investment objectives or other factors, a particular security may be bought for one or more funds or clients when one or more are selling the same security. If opportunities for purchase or sale of securities by the Adviser or Sub-adviser for a Fund or for other funds or clients for which the Adviser or Sub-adviser renders investment advice arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective funds or clients in a manner deemed equitable to all of them. To the extent that transactions on behalf of more than one client of the Adviser or its affiliates may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. Pursuant to each Advisory Agreement, and, where applicable, Sub-advisory agreement, neither the Adviser nor any Sub-adviser is liable for any error of judgment or mistake of law or for any loss suffered by the Funds in connection with the matters to which its respective contract relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Adviser or any Sub-adviser in the performance of its duties or from its reckless disregard of the obligations and duties under the applicable agreement. Under the Advisory Agreements, each Fund may use the name "John Hancock" or any name derived from or similar to it only for as long as the applicable advisory agreement or any extension, renewal or amendment thereof remains in effect. If a Fund's advisory agreement is no longer in effect, the Fund (to the extent that it lawfully can) will cease to use such name or any other name indicating that it is advised by or otherwise connected with the Adviser. In addition, the Adviser or the Life Company may grant the non-exclusive right to use the name John Hancock or any similar name to any other corporation or entity, including but not limited to any investment company of which the Life Company or any subsidiary or affiliate thereof or any successor to the business of any subsidiary or affiliate thereof shall be the investment adviser. For the fiscal years ended December 31, 1999, 2000 and 2001, the Adviser's management fee for each Fund is listed below.
1999 2000 2001 Management Fee Management Fee Management Fee Funds received by the Adviser received by the Adviser received by the Adviser ----- ----------------------- ----------------------- ----------------------- Technology $ -- $33,261 $xxxxx Financial Industries 398,471 434,813 $xxxxx Relative Value 147,515 257,116 $xxxxx Sovereign Investors 248,937 295,467 $xxxxx Strategic Income 117,404 165,020 $xxxxx
Board Review of Investment Advisory Agreements Each Fund's Board of Trustees is responsible for overseeing the performance of the Fund's investment adviser (and Sub-adviser with respect to Technology Fund) and determining whether to approve and renew the Fund's Advisory Agreement (and Sub-advisory Agreement for Technology Fund). The Board has a standing request that the Adviser provide the Board with certain information the Board has deemed important to evaluating the short- and long-term performance of the Adviser and Sub-adviser. This information includes periodic performance analysis and status reports from the Adviser and quarterly Portfolio and Investment Performance Reports. Each Fund's portfolio managers meet with the Board from time to time to discuss the management and performance of the Fund and respond to the Board's questions concerning the performance of the Adviser. When the Board considers whether to renew an investment advisory contract or sub-advisory contract, the Board takes into account numerous factors, including: (1) the nature, extent and quality of the services provided by the Adviser and Sub-adviser; (2) the investment performance of the Fund's assets managed by the Adviser or Sub-adviser; (3) the fair market value of the services provided by the Adviser or Sub-adviser; (4) a comparative analysis of expense ratios of, and advisory fees paid by, similar funds; (5) the extent to which the Adviser has realized or will realize economies of 34 scale as the Fund grows; (6) other sources of revenue to the Adviser or its affiliates from its relationship with the Fund and intangible or "fall-out" benefits that accrue to the Adviser and its affiliates, if relevant; and (7) the Adviser's control of the operating expenses of the fund, such as transaction costs, including ways in which portfolio transactions for the fund are conducted and brokers are selected. Financial Industries Fund: The primary factors underlying the Board's decision to renew the Financial Industries Fund's Advisory Agreement were as follows: o The Board determined that the performance results of the Fund and the Adviser's responsive actions were reasonable, as compared with relevant performance standards, including the performance results of comparable variable insurance product specialty and miscellaneous funds derived from data provided by Lipper Inc. and appropriate market indexes. o The Board decided that the advisory fee paid by the Fund was reasonable based on the average advisory fee for comparable funds. o The Board evaluated the Adviser's investment staff and portfolio management process, and reviewed the composition and overall performance of the Fund's portfolio on both a short-term and long-term basis. The Board considered whether the Fund should obtain alternative portfolio management services and concluded that, under all the circumstances and based on its informed business judgement, the most appropriate course of action in the best interest of the Fund's shareholders was to renew the agreement with the Adviser. Relative Value Fund: The primary factors underlying the Board's decision to renew the Relative Value Fund's Advisory Agreement were as follows: o The Board determined that the performance results of the Fund and the Adviser's responsive actions were reasonable, as compared with relevant performance standards, including the performance results of comparable variable insurance product growth and income funds derived from data provided by Lipper Inc. and appropriate market indexes. o The Board decided that the advisory fee paid by the Fund was reasonable based on the average advisory fee for comparable funds. o The Board evaluated the Adviser's investment staff and portfolio management process, and reviewed the composition and overall performance of the Fund's portfolio on both a short-term and long-term basis. The Board considered whether the Fund should obtain alternative portfolio management services and concluded that, under all the circumstances and based on its informed business judgement, the most appropriate course of action in the best interest of the Fund's shareholders was to renew the agreement with the Adviser. Sovereign Investors Fund: The primary factors underlying the Board's decision to renew the Sovereign Investors Fund's Advisory Agreement were as follows: o The Board determined that the performance results of the Fund and the Adviser's responsive actions were reasonable, as compared with relevant performance standards, including the performance results of comparable variable insurance product equity income funds and balanced funds derived from data provided by Lipper Inc. and appropriate market indexes. o The Board decided that the advisory fee paid by the Fund was reasonable based on the average advisory fee for comparable funds. o The Board evaluated the Adviser's investment staff and portfolio management process, and reviewed the composition and overall performance of the Fund's portfolio on both a short-term and long-term basis. The Board considered whether the Fund should obtain alternative portfolio management services and concluded that, under all the circumstances and based on its informed business judgement, the most appropriate course of action in the best interest of the Fund's shareholders was to renew the agreement with the Adviser. 35 Strategic Income Fund: The primary factors underlying the Board's decision to renew the Strategic Income Fund's Advisory Agreement were as follows: o The Board determined that the performance results of the Fund and the Adviser's responsive actions were reasonable, as compared with relevant performance standards, including the performance results of comparable variable insurance product general bond funds derived from data provided by Lipper Inc. and appropriate market indexes. o The Board decided that the advisory fee paid by the Fund was reasonable based on the average advisory fee for comparable funds. o The Board evaluated the Adviser's investment staff and portfolio management process, and reviewed the composition and overall performance of the Fund's portfolio on both a short-term and long-term basis. The Board considered whether the Fund should obtain alternative portfolio management services and concluded that, under all the circumstances and based on its informed business judgement, the most appropriate course of action in the best interest of the Fund's shareholders was to renew the agreement with the Adviser. Technology Fund: The primary factors underlying the Board's decision to renew the Technology Fund's Advisory Agreement and Sub-Advisory Agreement were as follows: o The Board determined that the performance results of the Fund and the Adviser's and Sub-adviser's responsive actions were reasonable, as compared with relevant performance standards, including the performance results of comparable variable insurance specialty and miscellaneous funds derived from data provided by Lipper Inc. and appropriate market indexes. o The Board decided that the advisory fee paid by the Fund was reasonable based on the average advisory fee for comparable funds. o The Board evaluated the Adviser's and Sub-adviser's investment staff and portfolio management process, and reviewed the composition and overall performance of the Fund's portfolio on both a short-term and long-term basis. The Board considered whether the Fund should obtain alternative portfolio management services and concluded that, under all the circumstances and based on its informed business judgement, the most appropriate course of action in the best interest of the Fund's shareholders was to renew the agreements with the Adviser and Sub-adviser. Each Advisory Agreement, Sub-advisory agreement and Distribution Agreement will continue in effect from year to year if approved by either the vote of the Fund's shareholders or the Trustees, including a vote of a majority of the Trustees who are not parties to the agreement or "interested persons" of any such party, cast at a meeting called for such purposes. These agreements may be terminated on 60 days written notice by any party or by a vote of a majority of the outstanding voting securities of the affected Fund and will terminate automatically if assigned. Accounting and Legal Services Agreement. The Trust, on behalf of the Fund, is a party to an Accounting and Legal Services Agreement with the Adviser. Pursuant to this agreement, the Adviser provides the Fund with certain tax, accounting and legal services. - ------------------------------------------------------------------------------ Funds 1999 2000 2001 - ------------------------------------------------------------------------------ Technology $ -- $ 810+ $ - ------------------------------------------------------------------------------ Financial Industries 8,707 10,269 - ------------------------------------------------------------------------------ Relative Value 4,476 8,056 - ------------------------------------------------------------------------------ Sovereign Investors 7,445 9,273 - ------------------------------------------------------------------------------ Strategic Income 3,504 5,193 - ------------------------------------------------------------------------------ + From commencement of operations on May 1, 2000. 36 Personnel of the Adviser, Sub-Advisers, and their affiliates may trade securities for their personal accounts. The Funds also may hold, or may be buying or selling, the same securities. To prevent the Funds from being disadvantaged, the Adviser, the Sub-Adviser, the principal underwriter and the Funds have adopted a code of ethics which restricts the trading activity of those personnel. DISTRIBUTION CONTRACTS Distribution Agreement. John Hancock Funds, a wholly owned subsidiary of the Adviser, serves as the principal underwriter for the Trust in connection with the continuous offering of the shares of the Funds. John Hancock Funds has the exclusive right, pursuant to the Distribution Agreement, to purchase shares from the Funds at net asset value for resale to the separate accounts of insurance companies at the public offering price. NET ASSET VALUE For purposes of calculating the net asset value ("NAV") of the Funds' shares, the following procedures are utilized wherever applicable. Debt securities are valued on the basis of valuations furnished by a principal market maker or a pricing service, both of which generally utilize electronic data processing techniques to determine valuations for normal institutional size trading units of debt securities without exclusive reliance upon quoted prices. Equity securities traded on a principal exchange or NASDAQ National Market issues are generally valued at last sale price on the day of valuation. Securities in the aforementioned category for which no sales are reported and other securities traded over-the-counter are generally valued at the last available bid price. Short-term debt instruments which have a remaining maturity of 60 days or less are generally valued at amortized cost which approximates market value. If market quotations are not readily available or if in the opinion of the Adviser any quotation or price is not representative of true market value, the fair value of any security may be determined in good faith in accordance with procedures approved by the Trustees. Foreign securities are valued on the basis of quotations from the primary market in which they are traded. Any assets or liabilities expressed in terms of foreign currencies are translated into U.S. dollars by the Funds' custodian based on London currency exchange quotations as of 5:00 p.m., London time (12:00 noon, New York time) on the date of any determination of a Fund's NAV. If quotations are not readily available, or the value has been materially affected by events occurring after the closing of a foreign market, assets are valued by a method that the Trustees believe accurately reflects fair value. The NAV for each Fund is determined each business day at the close of regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern Time) by dividing the Fund's net assets by the number of its shares outstanding. On any day an international market is closed and the New York Stock Exchange is open, any foreign securities will be valued at the prior day's close with the current day's exchange rate. Trading of foreign securities may take place on Saturdays and U.S. business holidays on which a Fund's NAV is not calculated. Consequently, a Fund's portfolio securities may trade and the NAV of that Fund's shares may be significantly affected on days when a shareholder has no access to that Fund. SPECIAL REDEMPTIONS Although the Funds would not normally do so, each Fund has the right to pay the redemption price of shares of the Fund in whole or in part in portfolio securities as prescribed by the Trustees. When the shareholder sells portfolio securities received in this fashion, a brokerage 37 charge would be incurred. Any such securities would be valued for the purpose of making such payment at the same value as used in determining net asset value. Each Fund has elected to be governed by Rule 18f-1 under the 1940 Act. Under that rule, each Fund must redeem its shares solely for cash, except to the extent that redemption payments during any 90-day period for any one account, would exceed the lesser of $250,000 or 1% of the net asset value. DESCRIPTION OF THE TRUST'S SHARES The Trustees of the Trust are responsible for the management and supervision of the Funds. The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest of the Funds, without par value. Under the Declaration of Trust, the Trustees have the authority to create and classify shares of beneficial interest in separate series and classes, without further action by shareholders. As of the date of this Statement of Additional Information, the Trustees have only authorized shares of the Funds. Additional series may be added in the future. The Trustees have not authorized the issuance of additional classes of shares of the Funds. Each share of a Fund represents an equal proportionate interest in the assets belonging to that Fund. When issued, shares are fully paid and nonassessable except as provided in the Prospectuses under the caption "Organization and Management of the Funds." In the event of liquidation of a Fund, shareholders are entitled to share pro rata in the net assets of the Fund available for distribution to such shareholders. Shares of a Fund are freely transferable and have no preemptive, subscription or conversion rights. In accordance with the provisions of the Declaration of Trust, the Trustees have initially determined that shares entitle their holders to one vote per share on any matter on which such shares are entitled to vote. The Trustees may determine in the future, without the vote or consent of shareholders, that each dollar of net asset value (number of shares owned times net asset value per share) will be entitled to one vote on any matter on which such shares are entitled to vote. The rights, if any, of Variable Contract holders to vote the shares of a Fund are governed by the relevant Variable Contract. For information on these voting rights, see the Prospectuses describing the Variable Contract. Unless otherwise required by the 1940 Act or the Declaration of Trust, each Fund has no intention of holding annual meetings of shareholders. Fund shareholders may remove a Trustee by the affirmative vote of at least two-thirds of the Trust's outstanding shares and the Trustees shall promptly call a meeting for such purpose when requested to do so in writing by the record holders of not less than 10% of the outstanding shares of the Trust. Shareholders may, under certain circumstances, communicate with other shareholders in connection with requesting a special meeting of shareholders. However, at any time that less than a majority of the Trustees holding office were elected by the shareholders, the Trustees will call a special meeting of shareholders for the purpose of electing Trustees. Under Massachusetts law, shareholders of a Massachusetts business trust could, under certain circumstances, be held personally liable for acts or obligations of the Trust. However, each Fund's Declaration of Trust contains an express disclaimer of shareholder liability for acts, obligations or affairs of the Funds. The Declaration of Trust also provides for indemnification out of the Funds' assets for all losses and expenses of any shareholder held personally liable by reason of being or having been a shareholder. The Declaration of Trust also provides that no series of the Funds shall be liable for the liabilities of any other series. Furthermore, no fund included in the Funds' Prospectuses shall be liable for the liabilities of any other series. Liability is therefore limited to circumstances in which the Funds would be unable to meet their obligations, and the possibility of this occurrence is remote. 38 The Fund reserves the right to reject any application which conflicts with the Fund's internal policies or the policies of any regulatory authority. John Hancock Funds does not accept starter, credit card or third party checks. All checks returned by the post office as undeliverable will be reinvested at net asset value in the fund or funds from which a redemption was made or dividend paid. Information provided on the account application may be used by the Funds to verify the accuracy of the information or for background or financial history purposes. A joint account will be administered as a joint tenancy with right of survivorship, unless the joint owners notify John Hancock Servicing Center of a different intent. A shareholder's account is governed by the laws of The Commonwealth of Massachusetts. For telephone transactions, the transfer agent will take measures to verify the identity of the caller, such as asking for name, account number, Social Security or other taxpayer ID number and other relevant information. If appropriate measures are taken, the transfer agent is not responsible for any losses that may occur to any account due to an unauthorized telephone call. Also for your protection telephone transactions are not permitted on accounts whose names or addresses have changed within the past 30 days. Proceeds from telephone transactions can only be mailed to the address of record. Selling activities for the Fund may not take place outside the U.S., except with U.S. military bases, APO addresses and U.S. diplomats. Brokers of record on Non-U.S. investors' accounts with foreign mailing addresses are required to certify that all sales activities have occurred, and in the future will occur, only in the U.S. A foreign corporation may purchase shares of the Fund only if it has a U.S. mailing address. DIVIDENDS Dividends from net investment income are declared and paid as follows: FUND DECLARED PAID - ---- -------- ---- Technology Fund Annually Annually Financial Industries Fund Annually Annually Relative Value Fund Quarterly Quarterly Sovereign Investors Fund Quarterly Quarterly Strategic Income Fund Daily Monthly Capital gains distributions are generally declared annually. Dividends are automatically reinvested in additional shares of the Funds. TAX STATUS Each Fund is treated as a separate entity for accounting and tax purposes, has elected or intends to elect to be treated, as a separate "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and intends to continue to qualify for each taxable year. As such and by complying with the applicable provisions of the Code regarding the sources of its income, the timing of its distributions, and the diversification of its assets, each Fund will not be subject to Federal income tax on taxable income (including net realized capital gains) which is distributed to shareholders in accordance with the timing requirements of the Code. Qualification of a Fund for treatment as a regulated investment company under the Code requires, among other things, that (a) at least 90% of a Fund's annual gross income, without being offset for losses from the sale or other disposition of stock or securities or other transactions, be derived from interest, dividends, payments with respect to securities loans and gains from the sale or other disposition of stock or securities or foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its 39 business of investing in such stock, securities or currencies; (b) each Fund distributes to its shareholders for each taxable year (in compliance with certain timing requirements) as dividends at least 90% of the sum of its taxable and tax-exempt net investment income, the excess of net short-term capital gain over net long-term capital loss earned in each year and any other net income (except for the excess, if any, of net long-term capital gain over net short-term capital loss, which need not be distributed in order for the Fund to qualify as a regulated investment company but is taxed to the Fund if it is not distributed); and (c) each Fund diversifies its assets so that, at the close of each quarter of its taxable year, (i) at least 50% of the fair market value of its total (gross) assets is comprised of cash, cash items, U.S. Government securities, securities of other regulated investment companies and other securities limited in respect of any one issuer to no more than 5% of the fair market value of the Fund's total assets and 10% of the outstanding voting securities of such issuer and (ii) no more than 25% of the fair market value of its total assets is invested in the securities of any one issuer (other than U.S. Government securities and securities of other regulated investment companies) or of two or more issuers controlled by the Fund and engaged in the same, similar, or related trades or businesses. Each Fund also must, and intends to, comply with the diversification requirements imposed by Section 817(h) of the Code and the regulations thereunder on certain insurance company separate accounts. These requirements, which are in addition to the diversification requirements imposed on a Fund by the 1940 Act and Subchapter M of the Code, place certain limitations on assets of each insurance company separate account used to fund variable contracts and, because Section 817(h) and those regulations treat the assets of the Fund as assets of the related separate account, the assets of a Fund that may be invested in securities of any one, two, three and four issuers. Specifically, the regulations provide that, except as permitted by the "safe harbor" described below, as of the end of each calendar quarter or within 30 days thereafter no more than 55% of the total assets of a Fund may be represented by any one investment, no more than 70% by any two investments, no more than 80% by any three investments and no more than 90% by any four investments. For this purpose, all securities of the same issuer are considered a single investment, and each U.S. Government agency and instrumentality is considered a separate issuer. Section 817(h) provides, as a safe harbor, that a separate account will be treated as being adequately diversified if the diversification requirements under Subchapter M are satisfied and no more than 55% of the value of the account's total assets is attributable to cash and cash items (including receivables), U.S. Government securities and securities of other regulated investment companies. Failure by a Fund to both qualify as a regulated investment company and satisfy the Section 817(h) requirements would generally result in treatment of the variable contract holders other than as described in the applicable variable contract prospectuses, including possible current inclusion in ordinary income of income accrued under the contracts for the current and all prior taxable years. Under certain circumstances described in the applicable Treasury regulations, inadvertent failure to satisfy the applicable diversification requirements may be corrected, but such a correction would require a payment to the Internal Revenue Service (the "I.R.S.") based on the tax contract holders would have incurred if they were treated as receiving the income on the contract for the period during which the diversification requirements were not satisfied. Any such failure may also result in adverse tax consequences for the insurance company issuing the contracts. Failure by a Fund to qualify as a regulated investment company would also subject the Fund to federal and state income taxation of all of its taxable income and gain, whether or not distributed to shareholders. If a Fund acquires stock in certain non-U.S. corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends, certain rents and royalties or capital gain) or hold at least 50% of their assets in investments producing such passive income ("passive foreign investment companies"), that Fund could be subject to Federal income tax and additional interest charges on "excess distributions" received from such companies or gain from the sale of stock in such companies, even if all income or gain actually received by the Fund is timely distributed to its shareholders. The Fund would not be able to pass through to its shareholders any credit or deduction for such a tax. Certain elections may ameliorate these adverse tax consequences, but any such election could require the applicable Fund to recognize 40 taxable income or gain without the concurrent receipt of cash. Any Fund that is permitted to acquire stock in foreign corporations may limit and/or manage its holdings in passive foreign investment companies to minimize its tax liability or maximize its return from these investments. Foreign exchange gains and losses realized by a Fund in connection with certain transactions involving foreign currency-denominated debt securities, certain foreign currency futures and options, foreign currency forward contracts, foreign currencies, or payables or receivables denominated in a foreign currency are subject to Section 988 of the Code, which generally causes such gains and losses to be treated as ordinary income and losses and may affect the amount, timing and character of distributions to shareholders. Any such transactions that are not directly related to a Fund's investment in stock or securities, possibly including speculative currency positions or currency derivatives not used for hedging purposes, and could under future Treasury regulations produce income not among the types of "qualifying income" from which the Fund must derive at least 90% of its annual gross income. Income from investments in commodities, such as gold and certain related derivative instruments, is also not treated as qualifying income under this test. If the net foreign exchange loss for a year treated as ordinary loss under Section 988 were to exceed a Fund's investment company taxable income computed without regard to such loss but after considering the post-October loss regulations (i.e., all of the Fund's net income other than any excess of net long-term capital gain over net short-term capital loss) the resulting overall ordinary loss for such year would not be deductible by the Fund or its shareholders in future years. A Fund may be subject to withholding and other taxes imposed by foreign countries with respect to its investments in foreign securities. Tax conventions between certain countries and the U.S. may reduce or eliminate such taxes in some cases. For Federal income tax purposes, each Fund is generally permitted to carry forward a net realized capital loss in any year to offset its own net realized capital gains, if any, during the eight years following the year of the loss. To the extent subsequent net realized capital gains are offset by such losses, they would not result in Federal income tax liability to the applicable Fund and would not be distributed as such to shareholders. As of December 31, 2001, the following Funds had capital loss carryforwards: - -------------------------------------------------------------------------------- 2006 2007 2008 - -------------------------------------------------------------------------------- Technology $ $ $ - -------------------------------------------------------------------------------- Financial Industries - -------------------------------------------------------------------------------- Relative Value - -------------------------------------------------------------------------------- Sovereign Investors - -------------------------------------------------------------------------------- Strategic Income - -------------------------------------------------------------------------------- Each Fund that invests in certain pay in-kind securities ("PIKs") (debt securities whose interest payments may be made either in cash or in-kind), zero coupon securities or certain increasing rate securities (and, in general, any other securities with original issue discount or with market discount if the Fund elects to include market discount in income currently) must accrue income on such investments prior to the receipt of the corresponding cash payments. However, each Fund must distribute, at least annually, all or substantially all of its net income, including such accrued income, to shareholders to qualify as a regulated investment company under the Code and avoid Federal income tax. Therefore, a Fund may have to dispose of its portfolio securities under disadvantageous circumstances to generate cash, or may have to leverage itself by borrowing the cash, to satisfy distribution requirements. Investments in debt obligations that are at risk of or are in default present special tax issues for any Fund that may hold such obligations, such as Relative Value Fund, Sovereign Investors Fund, Strategic Income Fund, Technology Fund and Financial Industries. Tax rules are not entirely clear about issues such as when the Funds may cease to accrue interest, original issue 41 discount, or market discount, when and to what extent deductions may be taken for bad debts or worthless securities, how payments received on obligations in default should be allocated between principal and income, and whether exchanges of debt obligations in a workout context are taxable. These and other issues will be addressed by any Fund that may hold such obligations in order to reduce the risk of distributing insufficient income to preserve its status as a regulated investment company and seek to avoid becoming subject to Federal income tax. Certain options, futures and forward foreign currency transactions undertaken by a Fund may cause such Fund to recognize gains or losses from marking to market even though its securities or other positions have not been sold or terminated and affect the character as long-term or short-term (or, in the case of certain currency forwards, options and futures, as ordinary income or loss) and timing of some capital gains and losses realized by the Fund. Also, certain of a Fund's losses on its transactions involving options, futures and forward foreign currency contracts and/or offsetting or successor portfolio positions may be deferred rather than being taken into account currently in calculating the Fund's taxable income or gains. These transactions may therefore affect the amount, timing and character of a Fund's distributions to shareholders. Certain of the applicable tax rules may be modified if the Fund is eligible and chooses to make one or more of certain tax elections that may be available. The Funds will take into account the special tax rules (including consideration of available elections) applicable to options, futures or forward contracts in order to minimize any potential adverse tax consequences. The tax rules applicable to dollar rolls, currency swaps and interest rate swaps, caps, floors and collars may be unclear in some respects, and the Funds may be required to limit participation in such transactions in order to qualify as regulated investment companies. Additionally, the Fund may be required to recognize gain, but not loss, if a swap or other transaction is treated as a constructive sale of an appreciated financial position in the Fund's portfolio. The Fund may have to sell portfolio securities under disadvantageous circumstances to generate cash, or borrow cash, to satisfy these distribution requirements. The foregoing discussion relates solely to U.S. Federal income tax law as applicable to the Funds and certain aspects of their distributions. The discussion does not address special tax rules applicable to insurance companies. Shareholders should consult their own tax advisers as to the Federal, state or local tax consequences of ownership or redemption of shares of, and receipt of distributions from, a Fund in their particular circumstances. The Funds are not subject to Massachusetts corporate excise or franchise taxes. Provided that each Fund qualifies as a regulated investment company under the Code, it will also not be required to pay any Massachusetts income tax. CALCULATION OF PERFORMANCE For the 30-day period ended December 31, 2001, the annualized yield was: Strategic Income Fund x.xx% Yield. The yield of each Fund is computed by dividing net investment income per share determined for a 30-day period by the net asset value per share on the last day of the period and annualizing the result. While this is the standard accounting method for calculating yield, it does not reflect the Fund's actual bookkeeping; as a result, the income reported or paid by the Fund may be different. The Fund's yield is computed according to the following standard formula: 42 Yield = 2 ([((a-b)/cd) + 1 ]^6 - 1) Where: a = dividends and interest earned during the period. b = net expenses accrued during the period. c = the average daily number of fund shares outstanding during the period that would be entitled to receive dividends. d = the net asset value per share on the last day of the period. If the Fund reports its annualized yield, it will also furnish information as to the average portfolio maturities of the Fund. It will also report any material effect of realized gains or losses or unrealized appreciation on dividends which have been excluded from the computation of yield. Total Return. Each Fund's total return is computed by finding the average annual compounded rate of return over the indicated period that would equate the initial amount invested to the ending redeemable value according to the following formula The average annual total return for each Fund for the 1 year period ended December 31, 2001, the 5 year period for Sovereign Investors Fund and Strategic Income Fund and since the commencement of operations through December 31, 2001 is as follows:
Commencement of 1 year period ended 5 year period ended Operations to Funds December 31, 2001 December 31, 2001 December 31, 2001* - ----- ----------------- ----------------- ------------------ Technology Fund % % % Financial Industries % % % Relative Value % % % Sovereign Investors % % % Strategic Income % % %
* Financial Industries Fund commenced operations on April 30, 1997. Relative Value Fund commenced operations on January 6, 1998. Technology Fund commenced operations on May 2, 2000. Each of the other funds commenced operations on August 29, 1996. T = ((ERV/P)^(1/n)) - 1 P = a hypothetical initial payment of $1,000. T = average annual total return. n = number of years. ERV = ending redeemable value of a hypothetical $1,000 investment made at the beginning of the indicated period. This calculation assumes that all dividends and distributions are reinvested at net asset value on the reinvestment dates during the period. The "distribution rate" is determined by annualizing the result of dividing the declared dividends of a Fund during the period stated by the net asset value at the end of the period. In addition to average annual total returns, a Fund may quote unaveraged or cumulative total returns reflecting the simple change in value of an investment over a stated period. Cumulative 43 total returns may be quoted as a percentage or as a dollar amount, and may be calculated for a single investment, a series of investments, and/or a series of redemptions, over any time period. From time to time, in reports and promotional literature, a Fund's yield and total return will be compared to indices of mutual funds and bank deposit vehicles such as Lipper Analytical Services, Inc.'s "Lipper--Fixed Income Fund Performance Analysis," a monthly publication which tracks net assets, total return, and yield on fixed income mutual funds in the United States. Ibottson and Associates, CDA Weisenberger and F.C. Towers are also used for comparison purposes, as well as the Russell and Wilshire Indices. Performance rankings and ratings reported periodically in, and excerpts from, national financial publications such as MONEY MAGAZINE, FORBES, BUSINESS WEEK, THE WALL STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will also be utilized. A Fund's promotional and sales literature may make reference to the Fund's "beta." Beta reflects the market-related risk of the Fund by showing how responsive the Fund is to the market. The performance of a Fund is not fixed or guaranteed. Performance quotations should not be considered to be representations of performance of a Fund for any period in the future. The performance of a Fund is a function of many factors including its earnings, expenses and number of outstanding shares. Fluctuating market conditions; purchases, sales and maturities of portfolio securities; sales and redemptions of shares of beneficial interest; and changes in operating expenses are all examples of items that can increase or decrease a Fund's performance. BROKERAGE ALLOCATION Decisions concerning the purchase and sale of portfolio securities and the allocation of brokerage commissions are made by the Adviser, any Sub-adviser and the officers of the Trust pursuant to recommendations made by its investment committee, which consists of officers and directors of the Adviser and affiliates and officers and Trustees who are interested persons of the Funds. Orders for purchases and sales of securities are placed in a manner which, in the opinion of the Adviser or Sub-adviser, will offer the best price and market for the execution of each such transaction. Purchases from underwriters of portfolio securities may include a commission or commissions paid by the issuer and transactions with dealers serving as market makers reflect a "spread." Debt securities are generally traded on a net basis through dealers acting for their own account as principals and not as brokers; no brokerage commissions are payable on these transactions. In the U.S. Government securities market, securities are generally traded on a "net" basis with dealers acting as principal for their own account without a stated commission, although the price of the security usually includes a profit to the dealer. On occasion, certain money market instruments and agency securities may be purchased directly from the issuer, in which case no commissions or premiums are paid. In other countries, both debt and equity securities are traded on exchanges at fixed commission rates. Commissions on foreign transactions are generally higher than the negotiated commission rates available in the U.S. There is generally less government supervision and regulation of foreign stock exchanges and broker-dealers than in the U.S. Each Fund's primary policy is to execute all purchases and sales of portfolio instruments at the most favorable prices consistent with best execution, considering all of the costs of the transaction including brokerage commissions. This policy governs the selection of brokers and dealers and the market in which a transaction is executed. Consistent with the foregoing primary policy, the Conduct Rules of the NASDAQ and other policies that the Trustees may determine, the Adviser or Sub-Adviser may consider sales of shares of the Funds as a factor in the selection of broker-dealers to execute a Fund's portfolio transactions. 44 Purchases of securities for the Strategic Income Fund are normally principal transactions made directly from the issuer or from an underwriter or market maker for which no brokerage commissions are usually paid. Purchases from underwriters will include a commission or concession paid by the issuer to the underwriter, and purchases and sales from dealers serving as market makers will usually include a mark up or mark down. Purchases and sales of exchange-traded options and futures will be effected through brokers who charge a commission for their services. To the extent consistent with the foregoing, each Fund will be governed in the selection of brokers and dealers, and the negotiation of brokerage commission rates and dealer spreads, by the reliability and quality of the services, including primarily the availability and value of research information and to a lesser extent statistical assistance furnished to the Adviser or relevant Sub-adviser of the Fund, and their value and expected contribution to the performance of the Fund. It is not possible to place a dollar value on information and services to be received from brokers and dealers, since it is only supplementary to the research efforts of the Adviser or relevant Sub-adviser. The receipt of research information is not expected to reduce significantly the expenses of the Adviser or relevant Sub-adviser. The research information and statistical assistance furnished by brokers and dealers may benefit the Life Company or other advisory clients of the Adviser or relevant Sub-adviser, and conversely, brokerage commissions and spreads paid by other advisory clients of the Adviser or relevant Sub-adviser may result in research information and statistical assistance beneficial to the Funds. The Funds will not make commitments to allocate portfolio transactions on any prescribed basis. While the Adviser's officers will be primarily responsible for the allocation of each Fund's brokerage business, the policies and practices of the Adviser in this regard must be consistent with the foregoing and will at all times be subject to review by the Trustees. - -------------------------------------------------------------------------------- 1999 Broker 2000 Broker 2001 Broker Funds Commissions Commissions Commissions - -------------------------------------------------------------------------------- Financial Industries $107,541 $16,755 $ - -------------------------------------------------------------------------------- Relative Value 113,466 49,360 - -------------------------------------------------------------------------------- Sovereign Investors 38,021 49,746 - -------------------------------------------------------------------------------- Strategic Income 12 120 - -------------------------------------------------------------------------------- Technology 0 10,693 - -------------------------------------------------------------------------------- As permitted by Section 28(e) of the Securities Exchange Act of 1934, a Fund may pay to a broker which provides brokerage and research services to the Fund an amount of disclosed commission in excess of the commission which another broker would have charged for effecting that transaction. This practice is subject to a good faith determination by the Trustees that the price is reasonable in light of the services provided and to policies that the Trustees may adopt from time to time. During the fiscal year ended December 31, 2001, Relative Value, Sovereign Investors and Financial Industries paid no commissions to compensate brokers for research services such as industry and company reviews and evaluations of securities, but Strategic Income and Technology paid commissions of $7,691 and $306, respectively. The Adviser's indirect parent, the Life Company, is the indirect sole shareholder of Signator Investors, Inc., a broker-dealer (until January 1, 1999, John Hancock Distributors, Inc.) ("Signator" or "Affiliated Broker"). Pursuant to procedures determined by the Trustees and consistent with the above policy of obtaining best net results, the Funds may execute portfolio transactions with or through Affiliated Brokers. During the fiscal years ending December 31, 1999, 2000 and 2001, the Funds did not execute any portfolio transactions with Affiliated Brokers. Affiliated Brokers may act as broker for a Fund on exchange transactions, subject, however, to the general policy of the Funds set forth above and the procedures adopted by the Trustees pursuant to the Investment Company Act. Commissions paid to an Affiliated Broker must be at 45 least as favorable as those which the Trustees believe to be contemporaneously charged by other brokers in connection with comparable transactions involving similar securities being purchased or sold. A transaction would not be placed with an Affiliated Broker if a Fund would have to pay a commission rate less favorable than the Affiliated Broker's contemporaneous charges for comparable transactions for its other most favored, but unaffiliated, customers except for accounts for which the Affiliated Broker acts as clearing broker for another brokerage firm, and any customers of the Affiliated Broker not comparable to a Fund as determined by a majority of the Trustees who are not interested persons (as defined in the Investment Company Act) of the Fund, the Adviser or the Affiliated Broker. Because the Adviser, which is affiliated with the Affiliated Broker, has, as an investment adviser to the Funds, the obligation to provide investment management services, which includes elements of research and related investment skills such research and related skills will not be used by the Affiliated Broker as a basis for negotiating commissions at a rate higher than that determined in accordance with the above criteria. Other investment advisory clients advised by the Adviser may also invest in the same securities as the Funds. When these clients buy or sell the same securities at substantially the same time, the Adviser may average the transactions as to price and allocate the amount of available investments in a manner which the Adviser believes to be equitable to each client, including the Funds. Because of this, client accounts in a particular style may sometimes not sell or acquire securities as quickly or at the same prices as they might if each were managed and traded individually. For purchases of equity securities, when a complete order is not filled, a partial allocation will be made to each account pro rata based on the order size. For high demand issues (for example, initial public offerings), shares will be allocated pro rata by account size as well as on the basis of account objective, account size ( a small account's allocation may be increased to provide it with a meaningful position), and the account's other holdings. In addition, an account's allocation may be increased if that account's portfolio manager was responsible for generating the investment idea or the portfolio manager intends to buy more shares in the secondary market. For fixed income accounts, generally securities will be allocated when appropriate among accounts based on account size, except if the accounts have different objectives or if an account is too small to get a meaningful allocation. For new issues, when a complete order is not filled, a partial allocation will be made to each account pro rata based on the order size. However, if a partial allocation is too small to be meaningful, it may be reallocated based on such factors as account objectives, duration benchmarks and credit and sector exposure. In some instances, this investment procedure may adversely affect the price paid or received by the Fund or the size of the position obtainable for it. On the other hand, to the extent permitted by law, the Adviser or Sub-Adviser may aggregate securities to be sold or purchased for the Fund with those to be sold or purchased for other clients managed by it in order to obtain best execution. SHAREHOLDER SERVICING AGENT John Hancock Annuity Servicing Office, 529 Main Street, (X-4) Charlestown, MA 02129, a division of the Life Company, is the shareholder servicing agent for the Funds. Currently, the Funds pay no fee. CUSTODY OF PORTFOLIO Portfolio securities of the Funds are held pursuant to a custodian agreement between each Fund and The Bank of New York, One Wall Street, New York, New York 10286. Under the custodian agreement, The Bank of New York is performing custody, Foreign Custody Manager and fund accounting services. 46 INDEPENDENT AUDITORS xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx, is the independent auditor of the Trust. The financial statements of the Funds have been audited by xxxxxxxxxxxxxx for the periods indicated in their report thereon appearing elsewhere herein, and have been included in reliance on their report given on their authority as experts in accounting and auditing. 47 APPENDIX Description of Bond Ratings The ratings of Moody's Investors Service, Inc. and Standard & Poor's Ratings Group represent their opinions as to the quality of various debt instruments they undertake to rate. It should be emphasized that ratings are not absolute standards of quality. Consequently, debt instruments with the same maturity, coupon and rating may have different yields while debt instruments of the same maturity and coupon with different ratings may have the same yield. MOODY'S INVESTORS SERVICE, INC. Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa: Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuations of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A: Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment at some time in the future. Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba: Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B: Bonds which are rated B generally lack the characteristics of desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa: Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca: Bonds which are rated Ca represented obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C: Bonds which are rated C are the lowest rated class of bonds and issues as rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. A-1 STANDARD & POOR'S RATINGS GROUP AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA: Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in small degree. A: Debt rated A has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. BB, B: Debt rated BB, and B is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. CCC: Debt rated 'CCC' has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The 'CCC' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied 'B' or 'B-' rating. CC: The rating 'CC' is typically applied to debt subordinated to senior debt that is assigned an actual or implied 'CCC' rating. C: The rating 'C' is typically applied to debt subordinated to senior debt which is assigned an active or implied 'CCC-' debt rating. The 'C' debt rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. FITCH INVESTORS SERVICE ("Fitch") AAA, AA, A, BBB - Bonds rated AAA are considered to be investment grade and of the highest quality. The obligor has an extraordinary ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. Bonds rated AA are considered to be investment grade and high quality. The obligor's ability to pay interest and repay principal, while very strong, is somewhat less than for AAA rated securities or more subject to possible change over the term of the issue. Bonds rated A are considered to be investment grade and of good quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. Bonds rated BBB are considered to be investment grade and of satisfactory quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to weaken this ability than bonds with higher ratings. A-2 CORPORATE AND TAX-EXEMPT COMMERCIAL PAPER RATINGS Moody's - Commercial Paper ratings are opinions of the ability of issuers to repay punctually promissory obligations not having an original maturity in excess of nine months. Prime-1, indicates highest quality repayment capacity of rated issue and Prime-2 indicates higher quality. S&P - Commercial Paper ratings are a current assessment of the likelihood of timely payment of debts having an original maturity of no more than 365 days. Issuers rated A have the greatest capacity for a timely payment and the designation 1,2 and 3 indicates the relative degree of safety. Issues rated "A-1=" are those with an "overwhelming degree of credit protection." Fitch - Commercial Paper ratings reflect current appraisal of the degree of assurance of timely payment. F-1 issues are regarded as having the strongest degree of assurance for timely payment. (=) is used to designate the relative position of an issuer within the rating category. F-2 issues reflect an assurance of timely payment only slightly less in degree than the strongest issues. The symbol (LOC) may follow either category and indicates that a letter of credit issued by a commercial bank is attached to the commercial paper note. Other Considerations - The ratings of S&P, Moody's, and Fitch represent their respective opinions of the quality of the municipal securities they undertake to rate. It should be emphasized, however, that ratings are general and are not absolute standards of quality. Consequently, municipal securities with the same maturity, coupon and ratings may have different yields and municipal securities of the same maturity and coupon with different ratings may have the same yield. A-3 FINANCIAL STATEMENTS F-1 JOHN HANCOCK DECLARATION TRUST PART C. OTHER INFORMATION Item 23. Exhibits: The exhibits to this Registration Statement are listed in the Exhibit Index hereto and are incorporated herein by reference. Item 24. Persons Controlled by or under Common Control with Registrant. No person is directly or indirectly controlled by or under common control with Registrant. Item 25. Indemnification. Indemnification provisions relating to the Registrant's Trustees, officers, employees and agents is set forth in Article IV of the Registrant's Declaration of Trust included as Exhibit 1 herein. Under Section 12 of the Distribution Agreement, John Hancock Funds, Inc. ("John Hancock Funds") has agreed to indemnify the Registrant and its Trustees, officers and controlling persons against claims arising out of certain acts and statements of John Hancock Funds. Section 9(a) of the By-Laws of John Hancock Life Insurance Company ("the Insurance Company") provides, in effect, that the Insurance Company will, subject to limitations of law, indemnify each present and former director, officer and employee of the Insurance Company who serves as a Trustee or officer of the Registrant at the direction or request of the Insurance Company against litigation expenses and liabilities incurred while acting as such, except that such indemnification does not cover any expense or liability incurred or imposed in connection with any matter as to which such person shall be finally adjudicated not to have acted in good faith in the reasonable belief that his action was in the best interests of the Insurance Company. In addition, no such person will be indemnified by the Insurance Company in respect of any final adjudication unless such settlement shall have been approved as in the best interests of the Insurance Company either by vote of the Board of Directors at a meeting composed of directors who have no interest in the outcome of such vote, or by vote of the policyholders. The Insurance Company may pay expenses incurred in defending an action or claim in advance of its final disposition, but only upon receipt of an undertaking by the person indemnified to repay such payment if he should be determined not to be entitled to indemnification. Article IX of the respective By-Laws of John Hancock Advisers, LLC ("the Adviser") provide as follows: "Section 9.01. Indemnity. Any person made or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was at any time since the inception of the Corporation a director, officer, employee or agent of the Corporation or is or was at any time since the inception of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified by the Corporation against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and the liability was not incurred by reason of gross negligence or reckless disregard of the duties involved in the conduct of his office, and expenses in connection therewith may be advanced by the Corporation, all to the full extent authorized by the law." C-1 "Section 9.02. Not Exclusive; Survival of Rights: The indemnification provided by Section 9.01 shall not be deemed exclusive of any other right to which those indemnified may be entitled, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person." Insofar as indemnification for liabilities under the Securities Act of 1933 (the "Act") may be permitted to Trustees, officers and controlling persons of the Registrant pursuant to the Registrant's Declaration of Trust and By-Laws of John Hancock Funds, the Adviser, or the Insurance Company or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant in the successful defense of any action, suit or proceeding) is asserted by such Trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Item 26. Business and Other Connections of Investment Advisers. For information as to the business, profession, vocation or employment of a substantial nature of each of the officers and Directors of the Adviser, reference is made to Form ADV (801-8124) filed under the Investment Advisers Act of 1940, which is incorporated herein by reference. Item 27. Principal Underwriters. (a) John Hancock Funds acts as principal underwriter for the Registrant and also serves as principal underwriter or distributor of shares for John Hancock Cash Reserve, Inc., John Hancock Bond Trust, John Hancock Current Interest, John Hancock Series Trust, John Hancock Tax-Free Bond Trust, John Hancock California Tax-Free Income Fund, John Hancock Capital Series, John Hancock Bond Fund, John Hancock Tax-Exempt Series, John Hancock Strategic Series, John Hancock World Fund, John Hancock Investment Trust, John Hancock Institutional Series Trust, John Hancock Investment Trust II, John Hancock Equity Trust and John Hancock Investment Trust III. (b) The following table lists, for each director and officer of John Hancock Funds, the information indicated. C-2
Name and Principal Positions and Offices Positions and Offices Business Address with Underwriter with Registrant ---------------- ---------------- --------------- Maureen R. Ford Director, Chairman and Trustee, Chairman, President and 101 Huntington Avenue Chief Executive Officer Chief Executive Officer Boston, Massachusetts Robert H. Watts Director, Executive Vice None John Hancock Place President and Chief Compliance P.O. Box 111 Officer Boston, Massachusetts Robert A. Brown Senior Vice President, Chief Senior Vice President 101 Huntington Avenue Financial Officer and Treasurer and Chief Financial Officer Boston, Massachusetts Susan S. Newton Senior Vice President, Senior Vice President, 101 Huntington Avenue Chief Legal Officer Chief Legal Officer Boston, Massachusetts and Secretary and Secretary William H. King Vice President Vice President and 101 Huntington Avenue and Assistant Treasurer Treasurer Boston, Massachusetts Jeffrey H. Long Vice President, Controller None 101 Huntington Avenue and Assistant Treasurer Boston, Massachusetts Thomas E. Moloney Director None John Hancock Place P.O. Box 111 Boston, Massachusetts Jeanne M. Livermore Director None John Hancock Place P.O. Box 111 Boston, Massachusetts John M. DeCiccio Director Trustee John Hancock Place P.O. Box 111 Boston, Massachusetts C-3 Name and Principal Positions and Offices Positions and Offices Business Address with Underwriter with Registrant ---------------- ---------------- --------------- David D'Alessandro Director None John Hancock Place P.O. Box 111 Boston, Massachusetts Mark C. Lapman Director None 53 State Street Boston, Massachusetts James V. Bowhers President None 101 Huntington Avenue Boston, Massachusetts Keith F. Hartstein Executive Vice President None 101 Huntington Avenue Boston, Massachusetts Thomas H. Connors Vice President and Vice President and 101 Huntington Avenue Compliance Officer Compliance Officer Boston, Massachusetts Karen F. Walsh Vice President None 101 Huntington Avenue Boston, Massachusetts Gary Cronin Vice President None 101 Huntington Avenue Boston, Massachusetts Kristine McManus Vice President None 101 Huntington Avenue Boston, Massachusetts (c) None. Item 28. Location of Accounts and Records. The Registrant maintains the records required to be maintained by it under Rules 31a-1 (a), 31a-a(b), and 31a-2(a) under the Investment Company Act of 1940 at its principal executive offices at 101 Huntington Avenue, Boston Massachusetts 02199-7603. Certain records, including records relating to Registrant's shareholders and the physical possession of its securities, may be maintained pursuant to Rule 31a-3 at the main office of Registrant's Transfer Agent and Custodian. Item 29. Management Services. Not applicable. Item 30. Undertakings. Not applicable C-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Boston, and The Commonwealth of Massachusetts on the 19th day of February, 2002. JOHN HANCOCK DECLARATION TRUST By: * -------------------------- Maureen R. Ford Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- * Trustee, Chairman, President February 19, 2002 - ------------------------- and Chief Executive Officer Maureen R. Ford * - ------------------------- Trustee, Vice Chairman, President and Richard A. Brown Chief Financial Officer /s/William H. King Vice President and Treasurer - ------------------------- (Chief Accounting Officer) William H. King * Trustee - ------------------------- Dennis S. Aronowitz * Trustee - ------------------------- Richard P. Chapman, Jr. * Trustee - ------------------------- William J. Cosgrove C-5 * Trustee - ------------------------- John M. DeCiccio * Trustee - ------------------------- Richard A. Farrell * Trustee - ------------------------- Gail D. Fosler * Trustee - ------------------------- William F. Glavin * Trustee - ------------------------- John A. Moore * Trustee - ------------------------- Patti McGill Peterson * Trustee - ------------------------- John W. Pratt By: /s/Susan S. Newton February 19, 2002 ------------------ Susan S. Newton, Attorney-in-Fact, under Powers of Attorney dated May 22, 2001 and September 12, 2001 filed herewith. C-6 John Hancock Capital Series John Hancock Strategic Series John Hancock Declaration Trust John Hancock Tax-Exempt Series Fund John Hancock Income Securities Trust John Hancock World Fund John Hancock Investors Trust John Hancock Investment Trust II John Hancock Equity Trust John Hancock Investment Trust III John Hancock Sovereign Bond Fund POWER OF ATTORNEY ----------------- The undersigned Trustee/Officer of each of the above listed Trusts, each a Massachusetts business trust or Maryland corporation, does hereby severally constitute and appoint Susan S. Newton, WILLIAM h. KING, and AVERY P. MAHER, and each acting singly, to be my true, sufficient and lawful attorneys, with full power to each of them, and each acting singly, to sign for me, in my name and in the capacity indicated below, any Registration Statement on Form N-1A and any Registration Statement on Form N-14 to be filed by the Trust under the Investment Company Act of 1940, as amended (the "1940 Act"), and under the Securities Act of 1933, as amended (the "1933 Act"), and any and all amendments to said Registration Statements, with respect to the offering of shares and any and all other documents and papers relating thereto, and generally to do all such things in my name and on my behalf in the capacity indicated to enable the Trust to comply with the 1940 Act and the 1933 Act, and all requirements of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by said attorneys or each of them to any such Registration Statements and any and all amendments thereto. IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument as of the 12th day of September, 2001. /s/Maureen R. Ford /s/Gail D. Fosler - ------------------ ----------------- Maureen R. Ford, as Chairman and Chief Gail D. Fosler Exective Officer /s/John M. DeCiccio /s/William F. Glavin - ------------------- -------------------- John M. DeCiccio, as Trustee William F. Glavin /s/Dennis S..Aronowitz /s/John A. Moore - ---------------------- ---------------- Dennis S. Aronowitz John A. Moore /s/Richard P. Chapman, Jr. /s/Patti McGill Peterson - -------------------------- ------------------------ Richard P. Chapman, Jr. Patti McGill Peterson /s/William J. Cosgrove /s/John W. Pratt - ---------------------- ---------------- William J. Cosgrove John W. Pratt - ---------------------- Richard A. Farrell Panel A John Hancock Capital Series John Hancock Strategic Series John Hancock Declaration Trust John Hancock Tax-Exempt Series Fund John Hancock Income Securities Trust John Hancock World Fund John Hancock Investors Trust John Hancock Investment Trust II John Hancock Equity Trust John Hancock Investment Trust III John Hancock Sovereign Bond Fund Panel B John Hancock Bank and Thrift Opportunity Fund John Hancock Patriot Global Dividend Fund John Hancock Bond Trust John Hancock Patriot Preferred Dividend Fund John Hancock California Tax-Free Income Fund John Hancock Patriot Premium Dividend Fund I John Hancock Current Interest John Hancock Patriot Premium Dividend Fund II John Hancock Institutional Series Trust John Hancock Patriot Select Dividend Trust John Hancock Investment Trust John Hancock Series Trust John Hancock Cash Reserve, Inc. John Hancock Tax-Free Bond Trust POWER OF ATTORNEY ----------------- The undersigned Officer of each of the above listed Trusts, each a Massachusetts business trust, or Maryland Corporation, does hereby severally constitute and appoint SUSAN S. NEWTON, WILLIAM H. KING, AND AVERY P. MAHER, and each acting singly, to be my true, sufficient and lawful attorneys, with full power to each of them, and each acting singly, to sign for me, in my name and in the capacity indicated below, any Registration Statement on Form N-1A and any Registration Statement on Form N-14 to be filed by the Trust under the Investment Company Act of 1940, as amended (the "1940 Act"), and under the Securities Act of 1933, as amended (the "1933 Act"), and any and all amendments to said Registration Statements, with respect to the offering of shares and any and all other documents and papers relating thereto, and generally to do all such things in my name and on my behalf in the capacity indicated to enable the Trust to comply with the 1940 Act and the 1933 Act, and all requirements of the Securities and Exchange Commission thereunder, hereby ratifying and confirming my signature as it may be signed by said attorneys or each of them to any such Registration Statements and any and all amendments thereto. IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument as of the 23rd day of June, 2001. /s/Richard A. Brown ------------------- Richard A. Brown Chief Financial Officer Commonwealth of Massachusetts ) - ----------------------------- )ss COUNTY OF Suffolk ) ------- Then personally appeared the above-named Richard A. Brown, who acknowledged the foregoing instrument to be his free act and deed, before me, this 23rd day of June, 2001. /s/Erika L. Nager ----------------- Notary Public My Commission Expires: June 14, 2007 ------------- s:\general\prwattn\01June23.doc John Hancock Declaration Trust INDEX TO EXHIBITS 99.(a) Articles of Incorporation. Declaration of Trust dated November 15, 1995.* 99.(a).1 Establishment and Designation of shares of beneficial interest of V.A. Growth and Income Fund. V.A. High Yield Bond Fund, V.A. Special Opportunities Fund dated September 9, 1997.****** 99.(a).2 Instrument changing names of series dated May 21, 1996.****** 99.(a).3 Amendment and Designation of shares of beneficial interest of John Hancock Financial Industries Fund dated March 11, 1997 **** 99.(a).4 Instrument changing names of series of shares of the trust (V.A. Discover to V.A Growth) dated January 2, 1998***** 99.(a).5 Establishing and Designation of shares of beneficial interest of John Hancock V.A. Regional Bank Fund date March 10, 1998.****** 99.(a).6 Instrument changing names of series of shares of the Trust (V.A. Sovereign Bond to V.A. Bond Fund).****** 99.(a).7 Abolition of John Hancock V.A. World Bond Fund dated March 9, 1999.******* 99.(a).8 Instrument Changing Names of Series of the Trust dated March 9, 1999.******* 99.(a).9 Instrument Fixing the Number of Trustees and Appointing Individual to Fill Vacancy dated December 7, 1999.******** 99.(a).10 Instrument Changing name of series of shares of the trust (V.A. Large Cap Value to V.A. Relative Value) dated March 7, 2000.# 99.(a).11 Establishing and Designation of shares of beneficial interest of John Hancock V.A. Technology Fund dated March 7, 2000.# 99.(a).12 Abolition of John Hancock V.A. Bond Fund, John Hancock V.A. Core Equity Fund, John Hancock V.A. Large Cap Growth Fund, John Hancock V.A Mid Cap Growth Fund, John Hancock V.A. Small Cap Growth Fund, John Hancock V.A. 500 Index Fund, John Hancock V.A. High Yield Bond Fund, John Hancock V.A. International Fund, John Hancock V.A. Money Market Fund and John Hancock V.A. Regional Bank Fund and Amendment of Section 5.11 dated November 20, 2001.+ 99.(b) By-Laws. Amended and Restated By-Laws dated December 3, 1996.*** 99.(c) Instruments Defining Rights of Securities Holders. See exhibits 99.(a) and 99.(b). 99.(d) Investment Advisory Contracts. Investment Advisory Agreement between John Hancock V.A. International Fund, John Hancock V.A. Emerging Growth Fund, John Hancock V.A. Growth Fund, John Hancock V.A. Independence Equity Fund, John Hancock V.A. Sovereign Investors Fund, John Hancock V.A. 500 Index Fund, John Hancock V.A. Bond Fund, John Hancock V.A. Strategic Income Fund and John Hancock V.A. Money Market Fund and John Hancock Advisers, Inc.** 99.(d).1 Investment Advisory Agreement between John Hancock V.A Financial Industries Fund dated May 1, 1997.****** 99.(d).2 Investment Advisory Agreement between John Hancock V.A Special Opportunities Fund, John Hancock V.A. Growth and Income Fund and John Hancock V.A. High Yield Bond Fund and John Hancock Advisers, Inc. dated January 2, 1998.****** 99.(d).3 Investment Advisory Agreement between John Hancock V.A Regional Bank Fund and John Hancock Advisers, Inc. dated May 1, 1998.****** 99.(d).4 Sub-Investment Management Contracts among the Registrant on behalf of John Hancock V.A. International Fund, John Hancock Advisers, Inc. and John Hancock Advisers International, Ltd..** 99.(d).5 Sub-Investment Management Contracts among the Registrant on behalf of John Hancock V.A. Independence Equity Fund, John Hancock Advisers, Inc. and Independence Investment Associates, Inc.** 99.(d).6 Sub-Investment Management Contracts among the Registrant on behalf of John Hancock V.A. International Fund, John Hancock Advisers, Inc. and Indocam International Investment Services.******** 99.(d).7 John Hancock Advisers International, Limited waived a part of its fees as of January 1, 2000.# C-7 99.(d).8 Instrument Terminating Sub-Investment Management Contract among the Registrant on behalf of John Hancock V.A. International, John Hancock Advisers, Inc. and John Hancock Advisers International, Limited.# 99.(d).9 Investment Advisory Agreement between John Hancock V.A. Technology Fund and John Hancock Advisers, Inc.# 99.(d).10 Sub-Investment Management Contract among between John Hancock V.A. Technology Fund on behalf of John Hancock Advisers, Inc. and American Fund Advisers, Inc.# 99.(d).11 Interim Sub-Investment Management Contract among the Registrant on behalf of V.A. International Fund, John Hancock Advisers, Inc. and Nicholas-Applegate Capital Management dated December 14, 2000.## 99.(d).12 Second Interim Sub-Investment Management Contract among the Registrant on behalf of V.A. International Fund, John Hancock Advisers, Inc. and Nichloas-Applegate Capital Management dated January 31, 2001.## 99.(d).13 Sub-Investment Management Contract among Registrant on behalf of V.A. International Fund, John Hancock Advisers, Inc. and Nicholas-Applegate Capital Management dated May 11, 2001.+ 99.(e) Underwriting Contracts. Distribution Agreement between John Hancock Funds, Inc. and the Registrant dated July 22, 1996.*** 99.(e).1 Amendment to Distribution Agreement between V.A. Financial Industries and John Hancock Funds, Inc. dated May 1, 1997.****** 99.(e).2 Amendment to Distribution Agreement between V.A. High Yield Bond, V.A. Growth and Income and V.A. Special Opportunities Funds and John Hancock Funds, Inc. dated January 2, 1998.****** 99.(e).3 Amendment to Distribution Agreement between V.A. Regional Bank Fund and John Hancock Funds, Inc. dated May 1, 1998.****** 99.(e).4 Amendments to the Distribution Agreement between V.A. Technology Fund, the Registrant and John Hancock Funds, Inc. dated May 1, 2000.# 99.(f) Bonus or Profit Sharing Contracts. Not Applicable. 99.(g) Custodian Agreements. Custodian Agreements between John Hancock Mutual Funds and Bank of New York dated September 10, 2001.+ 99.(h) Other Material Contracts. Amended and Restated Master Transfer Agency and Service Agreement between John Hancock funds and John Hancock Signature Services, Inc. dated July 22, 1996.# 99.(h).1 Accounting Services Agreement between John Hancock Advisers, Inc. and Registrant as of January 1, 1996.****** 99.(h).2 Amendment Master Transfer Agency and Service Agreement establishing a new series of shares, V.A. Technology, and Registrant retaining the Transfer Agent.# 99.(i) Legal Opinion.+ 99.(j) Other Opinions. Auditor's Consent. Not Applicable. 99.(k) Omitted Financial Statements. Not Applicable. 99.(l) Initial Capital Agreements. Not Applicable. C-8 99.(m) Rule 12b-1 Plans. Not Applicable 99.(n) Rule 18f-3 Plan. Not Applicable 99.(p) Code of Ethics. John Hancock Funds, Inc., Independence Investments Associates, Inc., Indocam International Investment Services and American Fund Advisors, Inc.# 99.(p).1 Code of Ethics and Conduct. Nicholas-Applegate.## * Previously filed electronically with Registration Statement file nos. 811-07437 and 33-64465 on November 20, 1995, accession number 0000950146-95-000740. ** Previously filed electronically with Registration Statement and/or pre-effective amendment no.1 file nos. 811-07437 and 33-64465 on August 7, 1996, accession number 0001010521-96-000139. *** Previously filed electronically with Registration Statement and/or post-effective amendment no. 3. file nos. 811-07437 and 33-64465 on February 14, 1997, accession number 0001010521-97-000212-. **** Previously filed electronically with Registration Statement and/or post-effective amendment no.4. file nos. 811-07437 and 33-64465 on April 29, 1997, accession number 0001010521-97-000278. ***** Previously filed electronically with Registration Statement and/or post-effective amendment no.6. file nos. 811-07437 and 33-64465 on October 1, 1997, accession number 0001010521-97-000403. ****** Previously filed electronically with Registration Statement and/or post-effective amendment no. 9 file nos. 811-07437 and 33-64465 on February 23, 1999, accession number 0001010521-99-000137. ******* Previously filed electronically with Registration Statement and/or post-effective amendment no. 10 file nos. 811-07437 and 33-64465 on April 29, 1999, accession number 0001010521-99-000201. ******** Previously filed electronically with Registration Statement and/or post-effective amendment no. 11 file nos. 811-07437 and 33-64465 on February 16, 2000, accession number 0001010521-00-000186. # Previously filed electronically with Registration Statement and/or post-effective amendment no. 12 file nos. 811-07437 and 33-64465 on April 27, 2000, accession number 0001010521-00-000253. ## Previously filed electronically with Registration Statement and/or post-effective amendment no. 13 file nos. 811-07437 and 33-64465 on February 21, 2001, accession number 0001010521-01-000158. + Filed herewith.
C-9 EX-99.A 3 ex99a12.txt AMENDMENT JOHN HANCOCK DECLARATION TRUST Abolition of John Hancock V.A. Bond Fund, John Hancock V.A. Core Equity Fund, John Hancock V.A. Large Cap Growth Fund, John Hancock V.A. Mid Cap Growth Fund, John Hancock V.A. Small Cap Growth Fund, John Hancock V.A. 500 Index Fund, John Hancock V.A. High Yield Bond Fund, John Hancock V.A. International Fund, John Hancock V.A. Money Market Fund, and John Hancock V.A. Regional Bank Fund (the "Funds") and Amendment of Section 5.11 Abolition of the Funds ---------------------- The undersigned, being a majority of the Trustees of John Hancock Declaration Trust, a Massachusetts business trust (the "Trust"), acting pursuant to Section 8.3 of the Amended and Restated Declaration of Trust dated June 6, 2000, as amended from time to time (the "Declaration of Trust"), do hereby abolish the John Hancock V.A. Bond Fund, John Hancock V.A. Core Equity Fund, John Hancock V.A. Large Cap Growth Fund, John Hancock V.A. Mid Cap Growth Fund, John Hancock V.A. Small Cap Growth Fund, John Hancock V.A. 500 Index Fund, John Hancock V.A. High Yield Bond Fund, John Hancock V.A. International Fund, John Hancock V.A. Money Market Fund, and John Hancock V.A. Regional Bank Fund and in connection therewith do hereby extinguish any and all rights and preferences of such Funds as set forth in the Declaration of Trust and the Trust's Registration Statement on Form N-1A. The abolition of the Funds are effective as of December 31, 2001. Amendment of Section 5.11 ------------------------- The undersigned, being a majority of the Trustees of John Hancock Declaration Trust, a Massachusetts business trust (the "Trust"), acting pursuant to Section 8.3 of the Amended and Restated Declaration of Trust dated June 6, 2000, as amended from time to time, do hereby amend Section 5.11, effective December 31, 2001, as follows: 1. Section 5.11 (a) shall be deleted and replaced with the following: Without limiting the authority of the Trustees set forth in Section 5.1 to establish and designate any further Series or Classes, the Trustees hereby establish the following Series, each of which consists of a single Class of Shares: John Hancock V.A. Financial Industries Fund, John Hancock V.A. Relative Value Fund, John Hancock V.A. Sovereign Investors Fund, John Hancock V.A. Strategic Income Fund and John Hancock V.A. Technology Fund (the "Existing Series"). IN WITNESS WHEREOF, the undersigned have executed this instrument on the 20th day of November 2001. /s/Dennis S. Aronowitz /s/Gail D. Fosler - ---------------------- ----------------- Dennis S. Aronowitz Gail D. Fosler /s/John M. DeCiccio /s/William F. Glavin - ------------------- -------------------- John M. DeCiccio William F. Glavin /s/Richard P. Chapman, Jr. /s/John A. Moore - ------------------------- ---------------- Richard P. Chapman, Jr. John A. Moore /s/William J. Cosgrove /s/Patti McGill Peterson - ---------------------- ------------------------ William J. Cosgrove Patti McGill Peterson /s/Richard A. Farrell /s/John W. Pratt - --------------------- ---------------- Richard A. Farrell John W. Pratt /s/Maureen R. Ford - ------------------ Maureen R. Ford The Declaration of Trust, a copy of which, together with all amendments thereto, is on file in the office of the Secretary of State of The Commonwealth of Massachusetts, provides that no Trustee, officer, employee or agent of the Trust or any Series thereof shall be subject to any personal liability whatsoever to any Person, other than to the Trust or its shareholders, in connection with Trust Property or the affairs of the Trust, save only that arising from bad faith, willful misfeasance, gross negligence or reckless disregard of his/her duties with respect to such Person; and all such Persons shall look solely to the Trust Property, or to the Trust Property of one or more specific Series of the Trust if the claim arises from the conduct of such Trustee, officer, employee or agent with respect to only such Series, for satisfaction of claims of any nature arising in connection with the affairs of the Trust. s:\dectrust\amendmts\dectrust\abolish 10 va funds EX-99.D 4 ex99d13.txt CONTRACT JOHN HANCOCK DECLARATION TRUST John Hancock V.A. International Fund Sub-Investment Management Contract Dated May 11, 2001 JOHN HANCOCK ADVISERS, INC. 101 Huntington Avenue Boston, Massachusetts 02199 JOHN HANCOCK DECLARATION TRUST - John Hancock V.A. International Fund 101 Huntington Avenue Boston, Massachusetts 02199 NICHOLAS-APPLEGATE CAPITAL MANAGEMENT 600 West Broadway San Diego, California 92101 Sub-Investment Management Contract ---------------------------------- Ladies and Gentlemen: John Hancock Declaration Trust (the "Trust") has been organized as a business trust under the laws of The Commonwealth of Massachusetts to engage in the business of an investment company. The Trust's shares of beneficial interest may be classified into series, each series representing the entire undivided interest in a separate portfolio of assets. Series may be established or terminated from time to time by action of the Board of Trustees of the Trust. As of the date hereof, the Trust has fifteen series of shares, representing interests in John Hancock V.A. Bond Fund, John Hancock V.A. Large Cap Growth Fund, John Hancock V.A. Small Cap Growth Fund, John Hancock V.A. 500 Index Fund, John Hancock V.A. Financial Industries Fund, John Hancock V.A. Relative Value Fund, John Hancock V.A. High Yield Bond Fund, John Hancock V.A. Core Equity Fund, John Hancock V.A. International Fund, John Hancock V.A. Money Market Fund, John Hancock V.A. Regional Bank Fund, John Hancock V.A. Sovereign Investors Fund, John Hancock V.A. Mid Cap Growth Fund, John Hancock V.A. Technology Fund and John Hancock V.A. Strategic Income Fund. The Board of Trustees of the Trust (the "Trustees") has selected John Hancock Advisers, Inc. (the "Adviser") to provide overall investment advice and management for the John Hancock V.A. International Fund (the "Fund"), and to provide certain other services, under the terms and conditions provided in the Investment Management Contract, dated August 29, 1996, between the Trust, the Fund and the Adviser (the "Investment Management Contract"). The Adviser and the Trustees have selected Nicholas-Applegate Capital Management (the "Sub-Adviser") to provide the Adviser and the Fund with the advice and services set forth below, and the Sub-Adviser is willing to provide such advice and services, subject to the review of the Trustees and overall supervision of the Adviser, under the terms and conditions hereinafter set forth. The Sub-Adviser hereby represents and warrants that it is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. Accordingly, the Trust, on behalf of the Fund, and the Adviser agree with the Sub-Adviser as follows: 1. Delivery of Documents. The Trust has furnished the Sub-Adviser with copies, properly certified or otherwise authenticated, of each of the following: (a) Declaration of Trust of the Trust, dated November 15, 1995, as amended from time to time (the "Declaration of Trust"); (b) By-Laws of the Trust as in effect on the date hereof; (c) Resolutions of the Trustees approving the form of this Agreement by and among the Adviser, the Sub-Adviser and the Trust, on behalf of the Fund; (d) Resolutions of the Trustees selecting the Adviser as investment adviser for the Fund and approving the form of the Investment Management Contract; (e) the Investment Management Contract; (f) the Fund's portfolio compliance checklists; (g) the Fund's current Registration Statement, including the Fund's Prospectus and Statement of Additional Information; and (h) the Fund's Code of Ethics. The Trust will furnish to the Sub-Adviser from time to time copies, properly certified or otherwise authenticated, of all amendments of or supplements to the foregoing, if any. 2. Investment Services. The Sub-Adviser will use its best efforts to provide to the Fund continuing and suitable investment advice with respect to investments, consistent with the investment policies, objectives and restrictions of the Fund as set forth in the Fund's Prospectus and Statement of Additional Information. In the performance of the Sub-Adviser's duties hereunder, subject always (x) to the provisions contained in the documents delivered to the Sub-Adviser pursuant to Section 1, as each of the same may from time to time be amended or supplemented, and (y) to the limitations set forth in the Registration Statement of the Trust, on behalf of the Fund, as in effect from time to time under the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended (the "1940 Act"), the Sub-Adviser will have investment discretion with respect to the Fund and will, at its own expense: (a) furnish the Adviser and the Fund with advice and recommendations, consistent with the investment policies, objectives and restrictions of the Fund as set forth in the Fund's Prospectus and Statement of Additional Information, with respect to the purchase, holding and disposition of portfolio securities including the purchase and sale of options; 2 (b) furnish the Adviser and the Fund with advice as to the manner in which voting rights, subscription rights, rights to consent to corporate action and any other rights pertaining to the Fund's assets shall be exercised, the Fund having the responsibility to exercise such voting and other rights; (c) furnish the Adviser and the Fund with research, economic and statistical data in connection with the Fund's investments and investment policies; (d) submit such reports relating to the valuation of the Fund's securities as the Trustees may reasonably request; (e) subject to prior consultation with the Adviser, engage in negotiations relating to the Fund's investments with issuers, investment banking firms, securities brokers or dealers and other institutions or investors; (f) The Sub-Adviser shall have full authority and discretion to select brokers and dealers to execute portfolio transactions for the Fund and for the selection of the markets on or in which the transaction will be executed. In providing the Fund with investment management, it is recognized that the Sub-Adviser will give primary consideration to securing the most favorable price and efficient execution considering all circumstances. Within the framework of this policy, the Sub-Adviser may consider the financial responsibility, research and investment information and other research services and products provided by brokers or dealers who may effect or be a party to any such transaction or other transactions to which the Sub-Adviser's other clients may be a party. It is understood that it is desirable for the Fund that the Sub-Adviser have access to brokerage and research services and products and security and economic analysis provided by brokers who may execute brokerage transactions at a higher cost to the Fund than broker-dealers that do not provide such brokerage and research services. Therefore, in compliance with Section 28(e) of the Securities Exchange Act of 1934 ("1934 Act"), the Sub-Adviser is authorized to place orders for the purchase and sale of securities for the Fund with such brokers, that provide brokerage and research products and/or services that charge an amount of commission for effecting securities transaction in excess of the amount of commission another broker would have charged for effecting that transaction, provided the Sub-Adviser determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research products and/or services provided by such broker viewed in terms of either that particular transaction or the overall responsibilities of the Sub-Adviser for this or other advisory accounts, subject to review by the Adviser from time to time with respect to the extent and continuation of this practice. It is understood that the information, services and products provided by such brokers may be useful to the Sub-Adviser in connection with the Sub-Adviser's services to other clients; (g) from time to time or at any time requested by the Adviser or the Trustees, make reports to the Adviser or the Trust of the Sub-Adviser's performance of the foregoing services; (h) subject to the supervision of the Adviser, maintain all books and records with respect to the Fund's securities transactions required by the 1940 Act, and preserve such records for the periods prescribed therefor by the 1940 Act (the Sub-Adviser agrees that such records are the property of the Trust and copies will be surrendered to the Trust promptly upon request therefor); 3 (i) give instructions to the Fund's custodian as to deliveries of securities to and from such custodian and transfer of payment of cash for the account of the Fund, and advise the Adviser on the same day such instructions are given; and (j) cooperate generally with the Fund and the Adviser to provide information necessary for the preparation of registration statements and periodic reports to be filed with the Securities and Exchange Commission, including Form N-1A, periodic statements, shareholder communications and proxy materials furnished to holders of shares of the Fund, filings with state "blue sky" authorities and with United States agencies responsible for tax matters, and other reports and filings of like nature. 3. Expenses Paid by the Sub-Adviser. The Sub-Adviser will pay the cost of maintaining the staff and personnel necessary for it to perform its obligations under this Agreement, the expenses of office rent, telephone, telecommunications and other facilities it is obligated to provide in order to perform the services specified in Section 2, and any other expenses incurred by it in connection with the performance of its duties hereunder. 4. Expenses of the Fund Not Paid by the Sub-Adviser. The Sub-Adviser will not be required to pay any expenses which this Agreement does not expressly make payable by the Sub-Adviser. In particular, and without limiting the generality of the foregoing but subject to the provisions of Section 3, the Sub-Adviser will not be required to pay under this Agreement: (a) the compensation and expenses of Trustees and of independent advisers, independent contractors, consultants, managers and other agents employed by the Trust or the Fund other than through the Sub-Adviser; (b) legal, accounting and auditing fees and expenses of the Trust or the Fund; (c) the fees and disbursements of custodians and depositories of the Trust or the Fund's assets, transfer agents, disbursing agents, plan agents and registrars; (d) taxes and governmental fees assessed against the Trust or the Fund's assets and payable by the Trust or the Fund; (e) the cost of preparing and mailing dividends, distributions, reports, notices and proxy materials to shareholders of the Trust or the Fund except that the Sub-Adviser shall bear the costs of providing the information referred to in Section 2(j) to the Adviser; (f) brokers' commissions and underwriting fees; and 4 (g) the expense of periodic calculations of the net asset value of the shares of the Fund. 5. Compensation of the Sub-Adviser. For all services to be rendered, facilities furnished and expenses paid or assumed by the Sub-Adviser as herein provided for the Fund, the Adviser will pay the Sub-Adviser quarterly, in arrears, a fee at the annual rate of : (i) 0.50% of the first $500,000,000 of the average daily net asset value of the Fund; and (ii) 0.45% of the average daily net asset value of the Fund in excess of $500,000,000. The "average daily net assets" of the Fund shall be determined on the basis set forth in the Fund's Prospectus or otherwise consistent with the 1940 Act and the regulations promulgated thereunder. The Sub-Adviser will receive a pro rata portion of such fee for any periods in which the Sub-Adviser advises the Fund less than a full quarter. The Fund shall not be liable to the Sub-Adviser for the Sub-Adviser's compensation hereunder. Calculations of the Sub-Adviser's fee will be based on average net asset values as provided by the Adviser. In addition to the foregoing, the Sub-Adviser may from time to time agree not to impose all or a portion of its fee otherwise payable hereunder (in advance of the time such fee or portion thereof would otherwise accrue) and/or undertake to pay or reimburse the Fund for all or a portion of its expenses not otherwise required to be borne or reimbursed by it. Any such fee reduction or undertaking may be discontinued or modified by the Sub-Adviser at any time. 6. Other Activities of the Sub-Adviser and Its Affiliates. Nothing herein contained shall prevent the Sub-Adviser or any associate of the Sub-Adviser from engaging in any other business or from acting as investment adviser or investment manager for any other person or entity. It is understood that officers, directors and employees of the Sub-Adviser or its affiliates may continue to engage in providing portfolio management services and advice to other investment companies, whether or not registered, to other investment advisory clients of the Sub-Adviser or its affiliates and to said affiliates themselves. 7. Avoidance of Inconsistent Position. In connection with purchases or sales of portfolio securities for the account of the Fund, neither the Sub-Adviser nor any of its investment management subsidiaries nor any of such investment management subsidiaries' directors, officers or employees will act as principal or agent or receive any commission, except as may be permitted by the 1940 Act and rules and regulations promulgated thereunder. The Sub-Adviser shall not knowingly recommend that the Fund purchase, sell or retain securities of any issuer in which the Sub-Adviser has a financial interest without obtaining prior approval of the Adviser prior to the execution of any such transaction. Nothing herein contained shall limit or restrict the Sub-Adviser or any of its officers, affiliates or employees from buying, selling or trading in any securities for its or their own account or accounts. The Trust and Fund acknowledge the Sub-Adviser and its officers, affiliates, and employees, and its other clients may at any time have, acquire, increase, decrease or dispose of positions in investments which are at the same time being acquired or disposed of hereunder. The Sub-Adviser shall have no obligation to acquire with respect to the Fund, a position in any investment which the Sub-Adviser, its officers, affiliates or employees may acquire for its or their own accounts or for the account of another client, if in the sole discretion of the Sub-Adviser, it is not feasible or desirable to acquire a position in such investment on behalf of the Fund. Nothing herein contained shall prevent the Sub-Adviser from purchasing or recommending the purchase of a particular security for one or more funds or clients while other funds or clients may be selling the same security. 5 8. No Partnership or Joint Venture. The Trust, the Fund, the Adviser and the Sub-Adviser are not partners of or joint venturers with each other and nothing herein shall be construed so as to make them such partners or joint venturers or impose any liability as such on any of them. 9. Name of the Trust, the Fund and Sub-Adviser. The Trust and the Fund may use the name "John Hancock" or any name or names derived from or similar to the names "John Hancock Advisers, Inc." or "John Hancock Life Insurance Company" only for so long as this Agreement remains in effect. At such time as this Agreement shall no longer be in effect, the Trust and the Fund will (to the extent that they lawfully can) cease to use such a name or any other name indicating that the Fund is advised by or otherwise connected with the Adviser. The Fund acknowledges that it has adopted the name John Hancock V.A. International Fund through permission of John Hancock Life Insurance Company, a Massachusetts insurance company, and agrees that John Hancock Life Insurance Company reserves to itself and any successor to its business the right to grant the nonexclusive right to use the name "John Hancock" or any similar name or names to any other corporation or entity, including but not limited to any investment company of which John Hancock Life Insurance Company or any subsidiary or affiliate thereof shall be the investment adviser. In addition, the Fund and the Trust hereby consent to the reasonable use of the name of the Fund in marketing/client materials developed and distributed by or on behalf of Sub-Adviser. In addition, it is understood that the name "Nicholas-Applegate" or the name of any of its affiliates, or any derivative associated with those names, are the valuable property of the Sub-Adviser and its affiliates and that the Fund, Trust and/or the Adviser have the right to use such name(s) or derivative(s) in offering materials and sales literature so long as this Agreement is in effect. Upon termination of the Agreement, such authorization shall forthwith cease to be in effect. 10. Limitation of Liability of Sub-Adviser. The Sub-Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust or the Fund or the Adviser in connection with the matters to which this Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the Sub-Adviser's part in the performance of its duties or from reckless disregard by it of its obligations and duties under this Agreement. Any person, even though also employed by the Sub-Adviser, who may be or become an employee of and paid by the Trust or the Fund shall be deemed, when acting within the scope of his employment by the Trust or the Fund, to be acting in such employment solely for the Trust or the Fund and not as the Sub-Adviser's employee or agent. 6 11. Duration and Termination of this Agreement. This Agreement shall remain in force until June 30, 2002. This Agreement may, on 60 days' written notice, be terminated at any time without the payment of any penalty by the Trust or the Fund by vote of a majority of the outstanding voting securities of the Fund, by the Trustees, the Adviser or the Sub-Adviser. Termination of this Agreement with respect to the Fund shall not be deemed to terminate or otherwise invalidate any provisions of any contract between the Sub-Adviser and any other series of the Trust. This Agreement shall automatically terminate in the event of its assignment or upon termination of the Investment Management Contract. In interpreting the provisions of this Section 11, the definitions contained in Section 2(a) of the 1940 Act (particularly the definitions of "assignment," "interested person" or "voting security"), shall be applied. 12. Amendment of this Agreement. No provision of this Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, and no amendment, transfer, assignment, sale, hypothecation or pledge of this Agreement shall be effective until approved by (a) the Trustees, including a majority of the Trustees who are not interested persons of the Adviser, the Sub-Adviser, or (other than as Board members) of the Trust or the Fund, cast in person at a meeting called for the purpose of voting on such approval, and (b) a majority of the outstanding voting securities of the Fund, as defined in the 1940 Act. 13. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the Commonwealth of Massachusetts. 14. Severability. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be deemed invalid or unenforceable in whole or in part. 15. Miscellaneous. (a) The captions in this Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The name John Hancock Declaration Trust is the designation of the Trustees under the Declaration of Trust dated November 15, 1995, as amended from time to time. The Declaration of Trust has been filed with the Secretary of The Commonwealth of Massachusetts. The obligations of the Trust and the Fund are not personally binding upon, nor shall resort be had to the private property of, any of the Trustees, shareholders, officers, employees or agents of the Fund, but only the Fund's property shall be bound. The Trust or the Fund shall not be liable for the obligations of any other series of the Trust. (b) Any information supplied by the Sub-Adviser, which is not otherwise in the public domain, in connection with the performance of its duties hereunder is to be regarded as confidential and for use only by the Fund and/or its agents, and only in connection with the Fund and its investments. 16. Nicholas-Applegate undertakes to promptly notify Fund of any change in its general partner(s). 7 17. The Fund agrees to obtain and maintain insurance coverage satisfying any insurance requirements under the 1940 Act, to carry errors and omissions coverage in the amount of $10,000,000. Yours very truly, JOHN HANCOCK DECLARATION TRUST on behalf of John Hancock V.A. International Fund By: /s/Maureen R. Ford ------------------ President The foregoing contract is hereby agreed to as of the date hereof. JOHN HANCOCK ADVISERS, INC. By: /s/Maureen R. Ford - ---------------------- President NICHOLAS-APPLEGATE CAPITAL MANAGEMENT By: /s/E. Blake Moore, Jr. - -------------------------- Name: E, Blake Moore, Jr. Title: General Counsel s:\funds\dectrust\vaintrnl\subinvmginicholasmay01 8 EX-99.G 5 ex99g.txt CUSTODIAN AGREEMENT CUSTODY AGREEMENT AGREEMENT, dated as of September 10, 2001 between each John Hancock Fund listed on Schedule II, each either a business trust organized and existing under the laws of The Commonwealth of Massachusetts, or a Maryland corporation organized and existing under the laws of the state of Maryland, having its principal office and place of business at 101 Huntington Avenue, Boston, Massachusetts 02199 (each the "Fund", collectively the "Funds") and The Bank of New York, a New York corporation authorized to do a banking business having its principal office and place of business at One Wall Street, New York, New York 10286 ("Custodian"). W I T N E S S E T H: that for and in consideration of the mutual promises hereinafter set forth the Fund and Custodian agree as follows: ARTICLE I DEFINITIONS Whenever used in this Agreement, the following words shall have the meanings set forth below: 1. "Authorized Person" shall be any person, whether or not an officer or employee of the Fund, duly authorized by the Fund's board to execute any Certificate or to give any Oral Instruction or other Instruction on behalf of the Fund and listed in the Certificate annexed hereto as Schedule I hereto or such other Certificate as may be received by Custodian from time to time. 2. "BNY Affiliate" shall mean any office, branch or subsidiary of The Bank of New York Company, Inc. 3. "Book-Entry System" shall mean the Federal Reserve/Treasury book-entry system for receiving and delivering securities, its successors and nominees. 4. "Business Day" shall mean any day on which the Fund, Custodian and relevant Depositories are open for business. 5. "Certificate" shall mean any notice, instruction, or other instrument in writing, authorized or required by this Agreement to be given to Custodian, which is actually received by Custodian and signed on behalf of the Fund by an Authorized Person or a person reasonably believed by Custodian to be an Authorized Person. 6. "Composite Currency Unit" shall mean the Euro or any other composite currency unit consisting of the aggregate of specified amounts of specified currencies, as such unit may be constituted from time to time. 7. "Depository" shall include (a) the Book-Entry System, (b) the Depository Trust Company, (c) any other clearing agency or securities depository registered with the Securities and Exchange Commission identified to the Fund from time to time, and (d) the respective successors and nominees of the foregoing. 8. "Foreign Depository" shall mean (a) Euroclear, (b) Clearstream Banking, societe anonyme, (c) each Eligible Securities Depository as defined in Rule 17f-7 under the Investment Company Act of 1940, as amended (the "'40 Act"), identified to the Fund from time to time, and (d) the respective successors and nominees of the foregoing. 9. "Instructions" shall mean communications transmitted by electronic or telecommunications media, including S.W.I.F.T./I.S.I.T.C., computer-to-computer interface, facsimile transmissions executed by an Authorized Person, or dedicated transmission lines. 10. "Oral Instructions" shall mean verbal instructions received by Custodian from an Authorized Person or from a person reasonably believed by Custodian to be an Authorized Person. 11. "Securities" shall have the same meaning as when used in the Securities Act of 1933, including, without limitation, any common stock and other equity securities, bonds, debentures and other debt securities, notes, mortgages or other obligations, and any instruments representing rights to receive, purchase, or subscribe for the same, or representing any other rights or interests therein (whether represented by a certificate or held in a Depository or by a Subcustodian). 12. "Subcustodian" shall mean a bank (including any branch thereof) or other financial institution (other than a Foreign Depository) located outside the U.S. which is utilized by Custodian in connection with the purchase, sale or custody of Securities hereunder and identified to the Fund from time to time, and their respective successors and nominees. ARTICLE II APPOINTMENT OF CUSTODIAN; ACCOUNTS 1. (a) The Fund hereby appoints Custodian as custodian of all Securities and cash at any time delivered to Custodian during the term of this Agreement, and authorizes Custodian to hold Securities in registered form in its name or the name of its nominees. Custodian hereby accepts such appointment and agrees to establish and maintain one or more separate securities accounts and cash accounts for each Fund in which Custodian will hold Securities and cash as provided herein. Custodian shall maintain books and records segregating the assets of each Fund from the assets of any other Fund. Such accounts (each, an "Account"; collectively, the "Accounts") shall be in the name of the Fund. (b) Custodian may from time to time establish on its books and records such sub-accounts within each Account as the Fund and Custodian may agree upon (each a "Special Account"), and Custodian shall reflect therein such assets as the Fund may specify in a Certificate or Instructions. (c) Custodian may from time to time establish pursuant to a written agreement with and for the benefit of a broker, dealer, futures commission merchant or other third party identified in a Certificate or Instructions such accounts on such terms and conditions as the Fund and Custodian shall agree, and Custodian shall transfer to such account such Securities and money as the Fund may specify in a Certificate or Instructions. 2 ARTICLE III CUSTODY AND RELATED SERVICES 1. (a) Subject to the terms hereof, the Fund hereby authorizes Custodian to hold any Securities received by it from time to time for the Fund's account. Custodian shall be entitled to utilize Depositories, Subcustodians, and, subject to subsection(c) of this Section 1, Foreign Depositories, to the extent possible in connection with its performance hereunder. Securities and cash held in a Depository or Foreign Depository will be held subject to the rules, terms and conditions of such entity. Securities and cash held through Subcustodians shall be held subject to the terms and conditions of Custodian's agreements with such Subcustodians. Subcustodians may be authorized to hold Securities in Foreign Depositories in which such Subcustodians participate. Unless otherwise required by local law or practice or a particular subcustodian agreement, Securities deposited with a Subcustodian, a Depositary or a Foreign Depository will be held in a commingled account, in the name of Custodian, holding only Securities held by Custodian as custodian for its customers. Custodian shall identify on its books and records the Securities and cash belonging to the Fund, whether held directly or indirectly through Depositories, Foreign Depositories, or Subcustodians. Custodian shall, directly or indirectly through Subcustodians, Depositories, or Foreign Depositories, endeavor, to the extent feasible, to hold Securities in the country or other jurisdiction in which the principal trading market for such Securities is located, where such Securities are to be presented for cancellation and/or payment and/or registration, or where such Securities are acquired. Custodian at any time may cease utilizing any Subcustodian and/or may replace a Subcustodian with a different Subcustodian (the "Replacement Subcustodian"). In the event Custodian selects a Replacement Subcustodian, Custodian shall not utilize such Replacement Subcustodian until after the Fund's board or foreign custody manager has determined that utilization of such Replacement Subcustodian satisfies the requirements of the `40 Act and Rule 17f-5 thereunder. (b) Unless Custodian has received a Certificate or Instructions to the contrary, Custodian shall hold Securities indirectly through a Subcustodian only if (i) the Securities are not subject to any right, charge, security interest, lien or claim of any kind in favor of such Subcustodian or its creditors or operators, including a receiver or trustee in bankruptcy or similar authority, except for a claim of payment for the safe custody or administration of Securities on behalf of the Fund by such Subcustodian, and (ii) beneficial ownership of the Securities is freely transferable without the payment of money or value other than for safe custody or administration. (c) With respect to each Foreign Depository, Custodian shall exercise reasonable care, prudence, and diligence (i) to provide the Fund with an analysis of the custody risks associated with maintaining assets with the Foreign Depository, and (ii) to monitor such custody risks on a continuing basis and promptly notify the Fund of any material change in such risks. The Fund acknowledges and agrees, that such analysis and monitoring shall be made on the basis of, and limited by, information gathered from Subcustodians, from trade associations of which Custodian is a member from time to time, or through publicly available information otherwise obtained by Custodian, and shall not include any evaluation of Country Risks. As used herein the term "Country Risks" shall mean with respect to any Foreign Depository: (a) the financial 3 infrastructure of the country in which it is organized, (b) such country's prevailing custody and settlement practices, (c) nationalization, expropriation or other governmental actions, (d) such country's regulation of the banking or securities industry, (e) currency controls, restrictions, devaluations or fluctuations, and (f) market conditions which affect the orderly execution of securities transactions or affect the value of securities. Custodian represents that each Foreign Depository in which a Subcustodian is authorized to maintain Fund assets is an "Eligible Securities Depository" as defined in Rule 17f-7 under the '40 Act. Custodian agrees to certify to the Fund's board, annually and upon reasonable request, that each Foreign Depository remains an Eligible Securities Depository. 2. Custodian shall furnish Fund on-line access to daily transactions on a real time basis and a monthly summary of all transfers to or from Fund's account on the first business day after the month end. 3. With respect to all Securities held hereunder, Custodian shall, unless otherwise instructed to the contrary: (a) Collect all income, dividends, distributions and other payments due or payable; (b) Present for payment and collect the amount paid upon all Securities which mature; (c) Forward to the Fund promptly copies of all information or documents that it may actually receive from an issuer of Securities which, in the reasonable opinion of Custodian, are intended for the beneficial owner of Securities; (d) Execute, as custodian, any certificates of ownership, affidavits, declarations or other certificates under any tax laws now or hereafter in effect in connection with the collection of bond and note coupons; (e) Hold directly or through a Depository, a Foreign Depository, or a Subcustodian all rights and similar Securities issued with respect to any Securities credited to an Account hereunder; and (f) Endorse for collection checks, drafts or other negotiable instruments. 4. (a) Custodian promptly shall notify the Fund of rights or discretionary actions with respect to Securities held hereunder, and of the date or dates by when such rights must be exercised or such action must be taken, provided that Custodian has actually received, from the issuer or the relevant Depository (with respect to Securities issued in the United States) or from the relevant Subcustodian, Foreign Depository, or a nationally or internationally recognized bond or corporate action service to which Custodian subscribes, timely notice of such rights or discretionary corporate action or of the date or dates such rights must be exercised or such action must be taken. 4 (b) Whenever Securities (including, but not limited to, warrants, options, tenders, options to tender or non-mandatory puts or calls) confer discretionary rights on the Fund or provide for discretionary action or alternative courses of action by the Fund, the Fund shall be responsible for making any decisions relating thereto and for directing Custodian to act provided that Custodian promptly has notified the Fund of such discretionary right or action. In order for Custodian to act, it must receive the Fund's Certificate or Instructions at Custodian's offices, addressed as Custodian may from time to time request, not later than noon (New York time) at least one (1) Business Day prior to the last scheduled date to act with respect to such Securities (or such earlier date or time as Custodian may specify to the Fund). Custodian shall not be liable for failure to take any action relating to or to exercise any rights conferred by such Securities, unless Custodian has failed to timely receive the Fund's Certificate or Instruction and such failure is attributable to Custodian's negligence or willful misconduct. 5. All voting rights with respect to Securities, however registered, shall be exercised by the Fund or its designee. For domestic and foreign securities Custodian will utilize a proxy service for the exercise of such voting rights. 6. Custodian shall promptly advise the Fund upon Custodian's actual receipt of notification of the partial redemption, partial payment or other action affecting less than all Securities of the relevant class. If Custodian, any Subcustodian, any Depository, or any Foreign Depository holds any Securities in which the Fund has an interest as part of a fungible mass, Custodian, such Subcustodian, Depository, or Foreign Depository may select the Securities to participate in such partial redemption, partial payment or other action in any non-discriminatory manner that it customarily uses to make such selection. 7. Custodian shall not under any circumstances accept bearer interest coupons which have been stripped from United States federal, state or local government or agency securities unless explicitly agreed to by Custodian in writing. 8. The Fund shall be liable for all taxes, assessments, duties and other governmental charges, including any interest or penalty with respect thereto ("Taxes"), with respect to any cash or Securities held on behalf of the Fund or any transaction related thereto. The Fund shall indemnify Custodian and each Subcustodian for the amount of any Tax that Custodian, any such Subcustodian or any other withholding agent is required under applicable laws (whether by assessment or otherwise) to pay on behalf of, or in respect of income earned by or payments or distributions made to or for the account of the Fund (including any payment of Tax required by reason of an earlier failure to withhold). Custodian shall, or shall instruct the applicable Subcustodian or other withholding agent to, withhold the amount of any Tax which is required to be withheld under applicable law upon collection of any dividend, interest or other distribution made with respect to any Security and any proceeds or income from the sale, loan or other transfer of any Security. In the event that Custodian or any Subcustodian is required under applicable law to pay any Tax on behalf of the Fund, Custodian is hereby authorized to withdraw cash from that Fund's cash account in the amount required to pay such Tax and to use such cash, or to remit such cash to the appropriate Subcustodian or other withholding agent, for the timely payment of such Tax in the manner required by applicable law. If the aggregate amount of cash in that Fund's cash accounts is not sufficient to pay such Tax, Custodian shall promptly notify the Fund of the 5 additional amount of cash (in the appropriate currency) required, and the Fund shall directly deposit such additional amount in the appropriate cash account promptly after receipt of such notice, for use by Custodian as specified herein. In the event that Custodian reasonably believes that Fund is eligible, pursuant to applicable law or to the provisions of any tax treaty, for a reduced rate of, or exemption from, any Tax which is otherwise required to be withheld or paid on behalf of the Fund under any applicable law, Custodian shall, or shall instruct the applicable Subcustodian or withholding agent to, either withhold or pay such Tax at such reduced rate or refrain from withholding or paying such Tax, as appropriate; provided that Custodian shall have received from the Fund all documentary evidence of residence or other qualification for such reduced rate or exemption required to be received under such applicable law or treaty. In the event that Custodian reasonably believes that a reduced rate of, or exemption from, any Tax is obtainable only by means of an application for refund, Custodian and the applicable Subcustodian shall have responsibility for providing the Fund with the correct forms and filling them out in a timely and accurate fashion, but no responsibility for the accuracy or validity of the Fund's information on any forms or documentation provided solely by the Fund to Custodian hereunder. The Fund hereby agrees to indemnify and hold harmless Custodian and each Subcustodian for any liability arising from any underwithholding or underpayment of any Tax which results from the inaccuracy or invalidity of any information provided by the Fund for such forms or other documentation prepared solely by the Fund, and such obligation to indemnify shall be a continuing obligation of the Fund, its successors and assigns notwithstanding the termination of this Agreement. 9. (a) For the purpose of settling Securities and foreign exchange transactions, the Fund shall provide Custodian with sufficient immediately available funds for all transactions by such time and date as conditions in the relevant market dictate. As used herein, "sufficient immediately available funds" shall mean either (i) sufficient cash denominated in U.S. dollars to purchase the necessary foreign currency, or (ii) sufficient applicable foreign currency, to settle the transaction. Custodian shall provide the Fund with immediately available funds each day which result from the contractual settlement of all sale transactions, based upon advices received by Custodian from Subcustodians, Depositories, and Foreign Depositories. Such funds shall be in U.S. dollars or such other currency as the Fund may specify to Custodian. (b) Any foreign exchange transaction effected by Custodian in connection with this Agreement may be entered with Custodian or a BNY Affiliate acting as principal or otherwise through customary banking channels. The Fund may issue a standing Certificate or Instructions with respect to foreign exchange transactions, but Custodian may establish rules or limitations concerning any foreign exchange facility made available to the Fund. The Fund shall bear all investment risks of investing in Securities or holding cash denominated in a foreign currency. 10. Custodian shall promptly send to the Fund (a) any reports it receives from a Depository on such Depository's system of internal accounting control, and (b) such reports on its own system of internal accounting control as the Fund may reasonably request from time to time. 6 ARTICLE IV PURCHASE AND SALE OF SECURITIES; CREDITS TO ACCOUNT 1. Promptly after each purchase or sale of Securities by the Fund, the Fund shall deliver to Custodian a Certificate or Instructions, or with respect to a purchase or sale of a Security generally required to be settled on the same day the purchase or sale is made, Oral Instructions specifying all information Custodian may reasonably request to settle such purchase or sale. Custodian shall account for all purchases and sales of Securities on the actual settlement date unless otherwise agreed by Custodian. 2. The Fund understands that when Custodian is instructed to deliver physical Securities against payment, delivery of such Securities and receipt of payment therefor may not be completed simultaneously. Notwithstanding any provision in this Agreement to the contrary, settlements, payments and deliveries of physical Securities may be effected by Custodian or any Subcustodian in accordance with the customary or established securities trading or securities processing practices and procedures in the jurisdiction in which the transaction occurs, including, without limitation, delivery to a purchaser or dealer therefor (or agent) against receipt with the expectation of receiving later payment for such Securities 3. Custodian may, as a matter of bookkeeping convenience or by separate agreement with the Fund, credit the Account with the proceeds from the sale, redemption or other disposition of Securities or interest, dividends or other distributions payable on Securities prior to its actual receipt of final payment therefor. All such credits shall be conditional until Custodian's actual receipt of final payment and may be reversed by Custodian to the extent that final payment is not received. Payment with respect to a transaction will not be "final" until Custodian shall have received immediately available funds which under applicable local law, rule and/or practice are irreversible and not subject to any security interest, levy or other encumbrance, and which are specifically applicable to such transaction. ARTICLE V OVERDRAFTS OR INDEBTEDNESS 1. If Custodian should in its sole discretion advance funds on behalf of any Fund which results in an overdraft because the money held by Custodian in an Account for such Fund shall be insufficient to pay the total amount payable upon a purchase of Securities by such Fund, as set forth in a Certificate, Instructions or Oral Instructions, or if an overdraft arises with respect to a Fund for some other reason, including, without limitation, because of a reversal of a conditional credit or the purchase of any currency, or if any Fund is for any other reason indebted to Custodian (except a borrowing for investment or for temporary or emergency purposes pursuant to a separate agreement), such overdraft or indebtedness shall be deemed to be a loan made by Custodian to such Fund payable on demand and shall bear interest from the date incurred at such rate per annum as such Fund and Custodian may agree upon from time to time. In addition, the Fund hereby agrees that Custodian shall to the maximum extent permitted by law have a continuing lien, security interest, and security 7 entitlement in and to any property, including, without limitation, any investment property or any financial asset, of such Fund at any time held by Custodian for the benefit of such Fund or in which such Fund may have an interest which is then in Custodian's possession or control or in possession or control of any third party acting in Custodian's behalf. Such Fund authorizes Custodian, in its sole discretion, at any time to charge any such overdraft or indebtedness together with interest due thereon against any balance of account standing to such Fund's credit on Custodian's books. Custodian shall promptly advise any Fund whenever such Fund has an overdraft or indebtedness bearing interest as provided in this Article, or whenever Custodian intends to realize upon its lien, security interest or security entitlement. 2. If the Fund borrows money from any bank (including Custodian if the borrowing is pursuant to a separate agreement) for investment or for temporary or emergency purposes using Securities held by Custodian hereunder as collateral for such borrowings, the Fund shall deliver to Custodian a Certificate specifying with respect to each such borrowing: (a) the Series to which such borrowing relates; (b) the name of the bank, (c) the amount of the borrowing, (d) the time and date, if known, on which the loan is to be entered into, (e) the total amount payable to the Fund on the borrowing date, (f) the Securities to be delivered as collateral for such loan, including the name of the issuer, the title and the number of shares or the principal amount of any particular Securities, and (g) a statement specifying whether such loan is for investment purposes or for temporary or emergency purposes and that such loan is in conformance with the `40 Act and the Fund's prospectus. Custodian shall deliver on the borrowing date specified in a Certificate the specified collateral against payment by the lending bank of the total amount of the loan payable, provided that the same conforms to the total amount payable as set forth in the Certificate. Custodian may, at the option of the lending bank, keep such collateral in its possession, but such collateral shall be subject to all rights therein given the lending bank by virtue of any promissory note or loan agreement. Custodian shall deliver such Securities as additional collateral as may be specified in a Certificate to collateralize further any transaction described in this Section. The Fund shall cause all Securities released from collateral status to be the name of the Series for which such money was received. ARTICLE VI SALE AND REDEMPTION OF SHARES 1. Whenever the Fund shall sell any shares issued by the Fund ("Shares") it shall deliver to Custodian a Certificate or Instructions specifying the amount of money and/or Securities to be received by Custodian for the sale of such Shares and specifically allocated to an Account for such Series. 2. Upon receipt of such money, Custodian shall credit such money to an Account in the name of the Series for which such money was received. 3. Except as provided hereinafter, whenever the Fund desires Custodian to make payment out of the money held by Custodian hereunder in connection with a redemption of any Shares, it shall furnish to Custodian a Certificate or Instructions specifying the total amount to be paid for such Shares. Custodian shall make payment of such total amount to the transfer agent specified in such Certificate or Instructions out of the money held in an Account of the appropriate Series. 8 ARTICLE VII PAYMENT OF DIVIDENDS OR DISTRIBUTIONS 1. Whenever the Fund shall determine to pay a dividend or distribution on Shares it shall furnish to Custodian Instructions or a Certificate setting forth with respect to the Series specified therein the date of the declaration of such dividend or distribution, the total amount payable, and the payment date. 2. Upon the payment date specified in such Instructions or Certificate, Custodian shall pay out of the money held for the account of such Series the total amount payable to the dividend agent of the Fund specified therein. ARTICLE VIII CONCERNING CUSTODIAN 1. (a) Except as otherwise expressly provided herein, Custodian shall not be liable for any costs, expenses, damages, liabilities or claims, including attorneys' and accountants' fees (collectively, "Losses"), incurred by or asserted against the Fund, except those Losses arising out of Custodian's own negligence or willful misconduct. Custodian shall have no liability whatsoever for the action or inaction of any Depositories or any Foreign Depositories. With respect to any Losses incurred by the Fund as a result of the acts or failures to act by a Subcustodian which is either a BNY Affiliate or listed on Appendix A hereto, Custodian shall be liable to the Fund for such Losses, but only to the extent such Losses arise out of or are caused by acts or failures to act by such Subcustodian which are contrary to the prevailing practices or standard of care in the relevant market in which such Subcustodian operates. With respect to any Losses incurred by the Fund as a result of the acts or failures to act by a Subcustodian which is not a BNY Affiliate and is not listed on Appendix A hereto, Custodian shall take appropriate action to recover such Losses from such Subcustodian, and Custodian's sole responsibility and liability to the Fund shall be limited to amounts so received from such Subcustodians (exclusive of costs and expenses incurred by Custodian). In no event shall Custodian be liable 9 to the Fund or any third party for special, indirect or consequential damages, or lost profits or loss of business, arising in connection with this Agreement, nor shall BNY or any Subcustodian be liable: (i) for acting in accordance with any Certificate or Oral Instructions actually received by Custodian; (ii) for acting in accordance with Instructions; (iii) for conclusively presuming that all Instructions other than Oral Instructions are given only by person(s) duly authorized; (iv) for any Losses due to forces beyond the control of Custodian, including without limitation strikes, work stoppages, acts of war or terrorism, insurrection, revolution, nuclear or natural catastrophes or acts of God, interruption, loss or malfunction of utilities or communication services, or, but only to the extent beyond Custodian's reasonable control, and only if Custodian is maintaining the same and appropriate back-up system(s) in accordance with industry standards and practices, interruption, loss, or malfunction of computers (hardware or software); or (v) for any Losses arising from the applicability of any law or regulation now or hereafter in effect, or from the occurrence of any event, including, without limitation, implementation or adoption of any rules or procedures of a Foreign Depository, which may affect, limit, prevent or impose costs or burdens on, the transferability, convertibility, or availability of any currency or Composite Currency Unit in any country or on the transfer of any Securities, and in no event shall Custodian be obligated to substitute another currency for a currency (including a currency that is a component of a Composite Currency Unit) whose transferability, convertibility or availability has been affected, limited, or prevented by such law, regulation or event, and to the extent that any such law, regulation or event imposes a cost or charge upon Custodian in relation to the transferability, convertibility, or availability of any cash currency or Composite Currency Unit, such cost or charge shall be for the account of the Fund, and Custodian may treat any account denominated in an affected currency as a group of separate accounts denominated in the relevant component currencies. (b) Custodian may enter into subcontracts, agreements and understandings with any BNY Affiliate, whenever and on such terms and conditions as it deems necessary or appropriate to perform its services hereunder. No such subcontract, agreement or understanding shall discharge Custodian from its obligations hereunder. (c) The Fund agrees to indemnify and hold Custodian harmless from and against any and all Losses sustained or incurred by or asserted against Custodian by reason of or as a result of any action or inaction, or arising out of Custodian performance hereunder, including reasonable fees and expenses of counsel, provided however, that the Fund shall not indemnify Custodian for those Losses arising out of Custodian's own negligence or willful misconduct, nor for any Losses which constitute indirect, special, or consequential damages, or lost profits or loss of business. Custodian agrees to indemnify and hold the Fund harmless from and against any and all Losses, including reasonable fees and expenses of counsel, sustained or incurred by or asserted against the Fund arising out of Custodian's own negligence or willful misconduct, provided, however, that Custodian shall not indemnify the Fund for any Losses which constitute indirect, special, or consequential damages, or lost profits or loss of business. This indemnity shall be a continuing obligation of Fund and Custodian, their successors and assigns, notwithstanding the termination of this Agreement. 2. Without limiting the generality of the foregoing, Custodian shall be under no obligation to inquire into, and shall not be liable for: (a) The validity of the issue of any Securities purchased, sold, or written by or for the Fund, the legality of the purchase, sale or writing thereof, or the propriety of the amount paid or received therefor; (b) The legality of the sale or redemption of any Shares, or the propriety of the amount to be received or paid therefor; (c) The legality of the declaration or payment of any dividend or distribution by the Fund; (d) The legality of any borrowing by the Fund; (e) Whether any Securities at any time delivered to, or held by Custodian or by any Subcustodian, for the account of the Fund are such as properly may be held by the Fund under the provisions of its then current prospectus and statement of additional information, or to ascertain whether any transactions by the Fund, whether or not involving Custodian, are such transactions as may properly be engaged in by the Fund. 10 3. Custodian may, with respect to questions of law specifically regarding an Account, obtain the advice of counsel at its own expense and shall be fully protected with respect to anything done or omitted by it in good faith in conformity with such advice. 4. Custodian shall have no duty or responsibility to inquire into, make recommendations, supervise, or determine the suitability of any Securities transactions effected for a Fund. 5. The Fund shall pay to Custodian the fees and charges as may be specifically agreed upon from time to time and such other fees and charges at Custodian's standard rates for such services as may be applicable. The Fund shall also reimburse Custodian for out-of-pocket expenses which are a normal incident of the services provided hereunder. 6. With instructions from an Authorized Person of the Fund, the Custodian has the right to debit any cash account for any amount payable by the Fund in connection with any and all obligations of the Fund to Custodian. Custodian will use its bet efforts to consult with Fund's investment advisor about the selection of securities used to offset that Fund's obligations to Custodian. Any such asset of, or obligation to the Fund may be transferred to Custodian and any BNY Affiliate in order to effect the above rights. 7. The Fund will make its best efforts to forward to Custodian a Certificate or Instructions confirming Oral Instructions by the close of business of the same day that such Oral Instructions are given to Custodian. Fund and Custodian agree that the fact that such confirming Certificate or Instructions are not received or that a contrary Certificate or contrary Instructions are received by Custodian shall affect the validity and enforceability of transactions authorized by such Oral Instructions and effected by Custodian. If the Fund elects to transmit Instructions through an on-line communications system offered by Custodian, the Fund's use thereof shall be subject to the Terms and Conditions attached as Appendix I hereto, and Custodian shall provide user and authorization codes, passwords and authentication keys only to an Authorized Person. 8. The books and records pertaining to the Fund which are in possession of Custodian shall be the property of the Fund. Such books and records shall be prepared and maintained as required by the `40 Act and the rules thereunder. The Fund, or its authorized representatives, shall have access to such books and records during Custodian's normal business hours. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by Custodian to the Fund or its authorized representative. Upon the reasonable request of the Fund, Custodian shall provide in hard copy or on computer disc any records included in any such delivery which are maintained by Custodian on a computer disc, or are similarly maintained. 9. It is understood that Custodian is authorized to supply any information regarding the Accounts which is required by any law, regulation or rule now or hereafter in effect. Custodian shall provide the Fund with any report obtained by Custodian on the system of internal accounting control of a Depository, and with such reports on its own system of internal accounting control as the Fund may reasonably request from time to time. 11 ARTICLE IX TERMINATION 1. Either of the parties hereto may terminate this Agreement by giving to the other party a notice in writing specifying the date of such termination, which shall be not less than sixty (60) days after the date of giving of such notice. In the event such notice is given by the Fund, it shall be accompanied by a copy of a resolution of the board of the Fund, certified by the Fund's Secretary or any Assistant Secretary, electing to terminate this Agreement and designating a successor custodian or custodians, each of which shall be a bank or trust company having not less than $2,000,000 aggregate capital, surplus and undivided profits. In the event such notice is given by Custodian, the Fund shall, on or before the termination date, deliver to Custodian a copy of a resolution of the board of the Fund, certified by the Secretary or any Assistant Secretary, designating a successor custodian or custodians. In the absence of such designation by the Fund, Custodian may designate a successor custodian which shall be a bank or trust company having not less than $2,000,000 aggregate capital, surplus and undivided profits. Upon the date set forth in such notice this Agreement shall terminate, and Custodian shall upon receipt of a notice of acceptance by the successor custodian on that date deliver directly to the successor custodian all Securities and money then owned by the Fund and held by it as Custodian, after deducting all fees, expenses and other amounts for the payment or reimbursement of which it shall then be entitled. 2. If a successor custodian is not designated by the Fund or Custodian in accordance with the preceding Section, the Fund shall upon the date specified in the notice of termination of this Agreement and upon the delivery by Custodian of all Securities (other than Securities which cannot be delivered to the Fund) and money then owned by the Fund be deemed to be its own custodian and Custodian shall thereby be relieved of all duties and responsibilities pursuant to this Agreement, other than the duty with respect to Securities which cannot be delivered to the Fund to hold such Securities hereunder in accordance with this Agreement. ARTICLE X MISCELLANEOUS 1. The Fund agrees to furnish to Custodian a new Certificate of Authorized Persons in the event of any change in the then present Authorized Persons. Until such new Certificate is received, Custodian shall be fully protected in acting upon Certificates or Oral Instructions of such present Authorized Persons. 2. Any notice or other instrument in writing, authorized or required by this Agreement to be given to Custodian, shall be sufficiently given if addressed to Custodian and received by it at its offices at 100 Church Street, New York, New York 10286, or at such other place as Custodian may from time to time designate in writing. 12 3. Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Fund shall be sufficiently given if addressed to the Fund and received by it at its offices at 101 Huntington Avenue, Boston, Massachusetts 02199, or at such other place as the Fund may from time to time designate in writing. 4. Each and every right granted to either party hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of either party to exercise, and no delay in exercising, any right will operate as a waiver thereof, nor will any single or partial exercise by either party of any right preclude any other or future exercise thereof or the exercise of any other right. 5. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any exclusive jurisdiction, the validity, legality and enforceability of the remaining provisions shall not in any way be affected thereby. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties, except that any amendment to the Schedule I hereto need be signed only by the Fund and any amendment to Appendix I hereto need be signed only by Custodian. This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by either party without the written consent of the other. 6. This Agreement shall be construed in accordance with the substantive laws of The Commonwealth of Massachusetts, without regard to conflicts of laws principles thereof. The Fund and Custodian each hereby irrevocably waives any and all rights to trial by jury in any legal proceeding arising out of or relating to this Agreement. 7. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument. 8. Fund and Custodian agree that the obligations of each Fund are not binding upon any of the Trustees/Directors, officers or shareholders of the Fund individually, but are binding only upon that Fund and its assets. Each Fund shall be severally, not jointly, liable only for its own obligations under this Agreement. 13 IN WITNESS WHEREOF, the Fund and Custodian have caused this Agreement to be executed by their respective officers, thereunto duly authorized, as of the day and year first above written. Each John Hancock Fund listed on Schedule II By: /s/Richard A. Brown ------------------- Title: SeniorVice President & CFO THE BANK OF NEW YORK By: /s/James E. Hillman ------------------- Title: Senior Vice President 14 SCHEDULE II John Hancock Funds (As of September 10, 2001) - -------------------------------------------------------------------------------- EIN Name - -------------------------------------------------------------------------------- 04-3478429 John Hancock 500 Index Fund - -------------------------------------------------------------------------------- 04-3260673 John Hancock Active Bond Fund - -------------------------------------------------------------------------------- 04-3167136 John Hancock Balanced Fund - -------------------------------------------------------------------------------- 04-3241844 John Hancock Bank & Thrift Opportunity Fund - -------------------------------------------------------------------------------- 04-3551118 John Hancock Biotechnology Fund - -------------------------------------------------------------------------------- 04-2528977 John Hancock Bond Fund - -------------------------------------------------------------------------------- 76-0296100 John Hancock California Tax-Free Income Fund - -------------------------------------------------------------------------------- 95-3464388 John Hancock Cash Reserve, Inc. - -------------------------------------------------------------------------------- 04-3551126 John Hancock Communications Fund - -------------------------------------------------------------------------------- 04-3551129 John Hancock Consumer Industries Fund - -------------------------------------------------------------------------------- 04-3122478 John Hancock Core Equity Fund - -------------------------------------------------------------------------------- 04-3260682 John Hancock Core Growth Fund - -------------------------------------------------------------------------------- 04-3260681 John Hancock Core Value Fund - -------------------------------------------------------------------------------- 04-3260671 John Hancock Dividend Performers Fund - -------------------------------------------------------------------------------- 04-3409706 John Hancock European Equity Fund - -------------------------------------------------------------------------------- 04-3305812 John Hancock Financial Industries Fund - -------------------------------------------------------------------------------- 56-1662953 John Hancock Financial Trends, Inc. - -------------------------------------------------------------------------------- 04-3535633 John Hancock Focused Relative Value Fund - -------------------------------------------------------------------------------- 04-3313164 John Hancock Focused Small Cap Growth Fund - -------------------------------------------------------------------------------- 04-6944774 John Hancock Fundamental Value Fund - -------------------------------------------------------------------------------- 04-6543623 John Hancock Global Fund - -------------------------------------------------------------------------------- 76-0230587 John Hancock Government Income Fund - -------------------------------------------------------------------------------- 04-3524763 John Hancock Growth Trends Fund (add Class I eff 11/15/01) - -------------------------------------------------------------------------------- 04-3124238 John Hancock Health Sciences Fund - -------------------------------------------------------------------------------- 04-3551132 John Hancock High Income Fund - -------------------------------------------------------------------------------- 76-0230586 John Hancock High Yield Bond Fund - -------------------------------------------------------------------------------- 76-0235997 John Hancock High Yield Tax-Free Fund - -------------------------------------------------------------------------------- 04-2507646 John Hancock Income Securities Trust - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EIN Name - -------------------------------------------------------------------------------- 04-3260684 John Hancock Independence Balanced Fund - -------------------------------------------------------------------------------- 04-3260680 John Hancock Independence Diversified Core Equity Fund II (terminate Class P 9/13/01) - -------------------------------------------------------------------------------- 04-3260683 John Hancock Independence Medium Capitalization Fund - -------------------------------------------------------------------------------- 76-0354706 John Hancock Intermediate Government Fund - -------------------------------------------------------------------------------- 04-3260679 John Hancock International Equity Fund - -------------------------------------------------------------------------------- 04-3214877 John Hancock International Fund - -------------------------------------------------------------------------------- 04-6944776 John Hancock International Small Cap Growth Fund - -------------------------------------------------------------------------------- 04-2474663 John Hancock Investors Trust - -------------------------------------------------------------------------------- 04-2443211 John Hancock Large Cap Growth Fund - -------------------------------------------------------------------------------- N/A John Hancock Large Cap Spectrum Fund (eff (9/24/01) - -------------------------------------------------------------------------------- 74-6035056 John Hancock Large Cap Value Fund - -------------------------------------------------------------------------------- 04-6564705 John Hancock Massachusetts Tax-Free Income Fund - -------------------------------------------------------------------------------- 04-3259499 John Hancock Medium Capitalization Growth Fund - -------------------------------------------------------------------------------- 04-3208756 John Hancock Mid Cap Growth Fund - -------------------------------------------------------------------------------- 76-0230583 John Hancock Money Market Fund - -------------------------------------------------------------------------------- 04-3539446 John Hancock Multi-Cap Growth Fund - -------------------------------------------------------------------------------- 04-6564703 John Hancock New York Tax-Free Income Fund - -------------------------------------------------------------------------------- 04-6567740 John Hancock Pacific Basin Equities Fund - -------------------------------------------------------------------------------- 04-3161453 John Hancock Patriot Global Dividend Fund - -------------------------------------------------------------------------------- 04-3190056 John Hancock Patriot Preferred Dividend Fund - -------------------------------------------------------------------------------- 04-3044078 John Hancock Patriot Premium Dividend Fund I - -------------------------------------------------------------------------------- 04-3097281 John Hancock Patriot Premium Dividend Fund II - -------------------------------------------------------------------------------- 04-3090916 John Hancock Patriot Select Dividend Trust - -------------------------------------------------------------------------------- 04-3435529 John Hancock Real Estate Fund - -------------------------------------------------------------------------------- 04-6526682 John Hancock Regional Bank Fund - -------------------------------------------------------------------------------- 76-0230584 John Hancock Small Cap Growth Fund - -------------------------------------------------------------------------------- 04-3214880 John Hancock Small Cap Value Fund - -------------------------------------------------------------------------------- 04-3260676 John Hancock Small Capitalization Value Fund (name change eff 9/30/01 to John Hancock Small Cap Equity Fund) - -------------------------------------------------------------------------------- 51-0094374 John Hancock Sovereign Investors Fund - -------------------------------------------------------------------------------- N/A John Hancock Strategic Growth Fund (eff 12/01/01) - -------------------------------------------------------------------------------- 04-6545497 John Hancock Strategic Income Fund - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EIN Name - -------------------------------------------------------------------------------- 76-0296098 John Hancock Tax-Free Bond Fund - -------------------------------------------------------------------------------- 13-3100162 John Hancock Technology Fund - -------------------------------------------------------------------------------- 76-0235823 John Hancock U.S. Government Cash Reserve - -------------------------------------------------------------------------------- 04-3551130 John Hancock U.S. Global Leaders Fund - -------------------------------------------------------------------------------- 04-3367188 John Hancock V.A. Financial Industries Fund - -------------------------------------------------------------------------------- 04-3402968 John Hancock V.A. High Yield Bond Fund - -------------------------------------------------------------------------------- 04-3418331 John Hancock V.A. Regional Bank Fund - -------------------------------------------------------------------------------- 04-3402969 John Hancock V.A. Relative Value Fund - -------------------------------------------------------------------------------- 04-3326565 John Hancock V.A. Sovereign Investors Fund - -------------------------------------------------------------------------------- 04-3326570 John Hancock V.A. Strategic Income Fund - -------------------------------------------------------------------------------- 04-3513386 John Hancock V.A. Technology Fund - -------------------------------------------------------------------------------- Agreement/custodian/BNYScheduleII APPENDIX I THE BANK OF NEW YORK ON-LINE COMMUNICATIONS SYSTEM (THE "SYSTEM") TERMS AND CONDITIONS 1. License; Use. Upon delivery to an Authorized Person or a person reasonably believed by Custodian to be an Authorized Person of the Fund of software enabling the Fund to obtain access to the System (the "Software"), Custodian grants to the Fund a personal, nontransferable and nonexclusive license to use the Software solely for the purpose of transmitting Written Instructions, receiving reports, making inquiries or otherwise communicating with Custodian in connection with the Account(s). The Fund shall use the Software solely for its own internal and proper business purposes and not in the operation of a service bureau. Except as set forth herein, no license or right of any kind is granted to the Fund with respect to the Software. The Fund acknowledges that Custodian and its suppliers retain and have title and exclusive proprietary rights to the Software, including any trade secrets or other ideas, concepts, know-how, methodologies, or information incorporated therein and the exclusive rights to any copyrights, trademarks and patents (including registrations and applications for registration of either), or other statutory or legal protections available in respect thereof. The Fund further acknowledges that all or a part of the Software may be copyrighted or trademarked (or a registration or claim made therefor) by Custodian or its suppliers. The Fund shall not take any action with respect to the Software inconsistent with the foregoing acknowledgments, nor shall you attempt to decompile, reverse engineer or modify the Software. The Fund may not copy, sell, lease or provide, directly or indirectly, any of the Software or any portion thereof to any other person or entity without Custodian's prior written consent. The Fund may not remove any statutory copyright notice or other notice included in the Software or on any media containing the Software. The Fund shall reproduce any such notice on any reproduction of the Software and shall add any statutory copyright notice or other notice to the Software or media upon Custodian's request. 2. Equipment. The Fund shall obtain and maintain at its own cost and expense all equipment and services, including but not limited to communications services, necessary for it to utilize the Software and obtain access to the System, and Custodian shall not be responsible for the reliability or availability of any such equipment or services. 3. Proprietary Information. The Software, any data base and any proprietary data, processes, information and documentation made available to the Fund (other than which are or become part of the public domain or are legally required to be made available to the public) (collectively, the "Information"), are the exclusive and confidential property of Custodian or its suppliers. The Fund shall keep the Information confidential by using the same care and discretion that the Fund uses with respect to its own confidential property and trade secrets, but not less than reasonable care. Upon termination of the Agreement or the Software license granted herein for any reason, the Fund shall return to Custodian any and all copies of the Information which are in its possession or under its control. 4. Modifications. Custodian reserves the right to modify the Software from time to time and the Fund shall install new releases of the Software as Custodian may direct. The Fund agrees not to modify or attempt to modify the Software without Custodian's prior written consent. The Fund acknowledges that any modifications to the Software, whether by the Fund or Custodian and whether with or without Custodian's consent, shall become the property of Custodian. 5. NO REPRESENTATIONS OR WARRANTIES. CUSTODIAN AND ITS MANUFACTURERS AND SUPPLIERS MAKE NO WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE SOFTWARE, SERVICES OR ANY DATABASE, EXPRESS OR IMPLIED, IN FACT OR IN LAW, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THE FUND ACKNOWLEDGES THAT THE SOFTWARE, SERVICES AND ANY DATABASE ARE PROVIDED "AS IS." IN NO EVENT SHALL CUSTODIAN OR ANY SUPPLIER BE LIABLE FOR ANY DAMAGES, WHETHER DIRECT, INDIRECT SPECIAL, OR CONSEQUENTIAL, WHICH THE FUND MAY INCUR IN CONNECTION WITH THE SOFTWARE, SERVICES OR ANY DATABASE, UNLESS CUSTODIAN OR SUCH SUPPLIER KNOWS OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF SUCH DAMAGES. IN NO EVENT SHALL CUSTODIAN OR ANY SUPPLIER BE LIABLE FOR ACTS OF GOD, MACHINE OR COMPUTER BREAKDOWN OR MALFUNCTION, INTERRUPTION OR MALFUNCTION OF COMMUNICATION FACILITIES, LABOR DIFFICULTIES OR ANY OTHER SIMILAR OR DISSIMILAR CAUSE BEYOND THEIR REASONABLE CONTROL. 6. Security; Reliance; Unauthorized Use. The Fund will cause all persons utilizing the Software and System to treat all applicable user and authorization codes, passwords and authentication keys with extreme care, and it will establish internal control and safekeeping procedures to restrict the availability of the same to persons duly authorized to give Instructions. Custodian is hereby irrevocably authorized to act in accordance with and rely on Instructions received by it through the System. The Fund acknowledges that it is its sole responsibility to assure that only persons duly authorized use the System and that Custodian shall not be responsible nor liable for any unauthorized use thereof. 7. System Acknowledgments. Custodian shall acknowledge through the System its receipt of each transmission communicated through the System. In the absence of such acknowledgment Custodian shall not be liable for any failure to act in accordance with such transmission however, Custodian will be liable for all transmissions where the Fund shows that such transmission was received by Custodian. 8. EXPORT RESTRICTIONS. EXPORT OF THE SOFTWARE IS PROHIBITED BY UNITED STATES LAW. THE FUND MAY NOT UNDER ANY CIRCUMSTANCES RESELL, DIVERT, TRANSFER, TRANSSHIP OR OTHERWISE DISPOSE OF THE SOFTWARE (IN ANY FORM) IN OR TO ANY OTHER COUNTRY. IF CUSTODIAN DELIVERED THE SOFTWARE TO THE FUND OUTSIDE OF THE UNITED STATES, THE SOFTWARE WAS EXPORTED FROM THE UNITED STATES IN ACCORDANCE WITH THE EXPORTER ADMINISTRATION REGULATIONS. DIVERSION CONTRARY TO U.S. LAW IS PROHIBITED. The Fund hereby authorizes Custodian to report its name and address to government agencies to which Custodian is required to provide such information by law. 9. ENCRYPTION. The Fund acknowledges and agrees that encryption may not be available for every communication through the System, or for all data. The Fund agrees that Custodian may deactivate any encryption features at any time, with notice to the Fund, for the purpose of maintaining, repairing or troubleshooting the System or the Software. The Fund and the bank agree that the obligations of each Fund are not binding upon any of the Trustees/Directors. Officers or shareholders of the Fund individually, but are binding only upon that Fund and its assets. Each Fund shall be severally, not jointly, liable for its own obligations under this Agreement. S:\Corporate Secretary\AGRCONT\AGREEMNT\CUSTODIA\BNYcustody01.DOC SCHEDULE II John Hancock Funds (As of September 10, 2001) - -------------------------------------------------------------------------------- EIN Name - -------------------------------------------------------------------------------- 04-3478429 John Hancock 500 Index Fund - -------------------------------------------------------------------------------- 04-3260673 John Hancock Active Bond Fund - -------------------------------------------------------------------------------- 04-3167136 John Hancock Balanced Fund - -------------------------------------------------------------------------------- 04-3241844 John Hancock Bank & Thrift Opportunity Fund - -------------------------------------------------------------------------------- 04-3551118 John Hancock Biotechnology Fund - -------------------------------------------------------------------------------- 04-2528977 John Hancock Bond Fund - -------------------------------------------------------------------------------- 76-0296100 John Hancock California Tax-Free Income Fund - -------------------------------------------------------------------------------- 95-3464388 John Hancock Cash Reserve, Inc. - -------------------------------------------------------------------------------- 04-3551126 John Hancock Communications Fund - -------------------------------------------------------------------------------- 04-3551129 John Hancock Consumer Industries Fund - -------------------------------------------------------------------------------- 04-3122478 John Hancock Core Equity Fund - -------------------------------------------------------------------------------- 04-3260682 John Hancock Core Growth Fund - -------------------------------------------------------------------------------- 04-3260681 John Hancock Core Value Fund - -------------------------------------------------------------------------------- 04-3260671 John Hancock Dividend Performers Fund - -------------------------------------------------------------------------------- 04-3409706 John Hancock European Equity Fund - -------------------------------------------------------------------------------- 04-3305812 John Hancock Financial Industries Fund - -------------------------------------------------------------------------------- 56-1662953 John Hancock Financial Trends, Inc. - -------------------------------------------------------------------------------- 04-3535633 John Hancock Focused Relative Value Fund - -------------------------------------------------------------------------------- 04-3313164 John Hancock Focused Small Cap Growth Fund - -------------------------------------------------------------------------------- 04-6944774 John Hancock Fundamental Value Fund - -------------------------------------------------------------------------------- 04-6543623 John Hancock Global Fund - -------------------------------------------------------------------------------- 76-0230587 John Hancock Government Income Fund - -------------------------------------------------------------------------------- 04-3524763 John Hancock Growth Trends Fund (add Class I eff 11/15/01) - -------------------------------------------------------------------------------- 04-3124238 John Hancock Health Sciences Fund - -------------------------------------------------------------------------------- 04-3551132 John Hancock High Income Fund - -------------------------------------------------------------------------------- 76-0230586 John Hancock High Yield Bond Fund - -------------------------------------------------------------------------------- 76-0235997 John Hancock High Yield Tax-Free Fund - -------------------------------------------------------------------------------- 04-2507646 John Hancock Income Securities Trust - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EIN Name - -------------------------------------------------------------------------------- 04-3260684 John Hancock Independence Balanced Fund - -------------------------------------------------------------------------------- 04-3260680 John Hancock Independence Diversified Core Equity Fund II (terminate Class P 9/13/01) - -------------------------------------------------------------------------------- 04-3260683 John Hancock Independence Medium Capitalization Fund - -------------------------------------------------------------------------------- 76-0354706 John Hancock Intermediate Government Fund - -------------------------------------------------------------------------------- 04-3260679 John Hancock International Equity Fund - -------------------------------------------------------------------------------- 04-3214877 John Hancock International Fund - -------------------------------------------------------------------------------- 04-6944776 John Hancock International Small Cap Growth Fund - -------------------------------------------------------------------------------- 04-2474663 John Hancock Investors Trust - -------------------------------------------------------------------------------- 04-2443211 John Hancock Large Cap Growth Fund - -------------------------------------------------------------------------------- N/A John Hancock Large Cap Spectrum Fund (eff (9/24/01) - -------------------------------------------------------------------------------- 74-6035056 John Hancock Large Cap Value Fund - -------------------------------------------------------------------------------- 04-6564705 John Hancock Massachusetts Tax-Free Income Fund - -------------------------------------------------------------------------------- 04-3259499 John Hancock Medium Capitalization Growth Fund - -------------------------------------------------------------------------------- 04-3208756 John Hancock Mid Cap Growth Fund - -------------------------------------------------------------------------------- 76-0230583 John Hancock Money Market Fund - -------------------------------------------------------------------------------- 04-3539446 John Hancock Multi-Cap Growth Fund - -------------------------------------------------------------------------------- 04-6564703 John Hancock New York Tax-Free Income Fund - -------------------------------------------------------------------------------- 04-6567740 John Hancock Pacific Basin Equities Fund - -------------------------------------------------------------------------------- 04-3161453 John Hancock Patriot Global Dividend Fund - -------------------------------------------------------------------------------- 04-3190056 John Hancock Patriot Preferred Dividend Fund - -------------------------------------------------------------------------------- 04-3044078 John Hancock Patriot Premium Dividend Fund I - -------------------------------------------------------------------------------- 04-3097281 John Hancock Patriot Premium Dividend Fund II - -------------------------------------------------------------------------------- 04-3090916 John Hancock Patriot Select Dividend Trust - -------------------------------------------------------------------------------- 04-3435529 John Hancock Real Estate Fund - -------------------------------------------------------------------------------- 04-6526682 John Hancock Regional Bank Fund - -------------------------------------------------------------------------------- 76-0230584 John Hancock Small Cap Growth Fund - -------------------------------------------------------------------------------- 04-3214880 John Hancock Small Cap Value Fund - -------------------------------------------------------------------------------- 04-3260676 John Hancock Small Capitalization Value Fund (name change eff 9/30/01 to John Hancock Small Cap Equity Fund) - -------------------------------------------------------------------------------- 51-0094374 John Hancock Sovereign Investors Fund - -------------------------------------------------------------------------------- N/A John Hancock Strategic Growth Fund (eff 12/01/01) - -------------------------------------------------------------------------------- 04-6545497 John Hancock Strategic Income Fund - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EIN Name - -------------------------------------------------------------------------------- 76-0296098 John Hancock Tax-Free Bond Fund - -------------------------------------------------------------------------------- 13-3100162 John Hancock Technology Fund - -------------------------------------------------------------------------------- 76-0235823 John Hancock U.S. Government Cash Reserve - -------------------------------------------------------------------------------- 04-3551130 John Hancock U.S. Global Leaders Fund - -------------------------------------------------------------------------------- 04-3367188 John Hancock V.A. Financial Industries Fund - -------------------------------------------------------------------------------- 04-3402968 John Hancock V.A. High Yield Bond Fund - -------------------------------------------------------------------------------- 04-3418331 John Hancock V.A. Regional Bank Fund - -------------------------------------------------------------------------------- 04-3402969 John Hancock V.A. Relative Value Fund - -------------------------------------------------------------------------------- 04-3326565 John Hancock V.A. Sovereign Investors Fund - -------------------------------------------------------------------------------- 04-3326570 John Hancock V.A. Strategic Income Fund - -------------------------------------------------------------------------------- 04-3513386 John Hancock V.A. Technology Fund - -------------------------------------------------------------------------------- Agreement/custodian/BNYScheduleII FUND ACCOUNTING AGREEMENT ------------------------- AGREEMENT made as of this 10th day of September, 2001 by and between each John Hancock Fund listed on Schedule II, each either a business trust organized and existing under the laws of The Commonwealth of Massachusetts or a Maryland corporation organized and existing under the laws of the state of Maryland, having its principal place of business at 101 Huntington Avenue, Boston, Massachusetts 02199 (each a "Fund") and The Bank of New York, a New York corporation authorized to do a banking business, having its principal place of business at One Wall Street, New York, New York 10286 (hereinafter called the "Bank"). W I T N E S S E T H: - - - - - - - - - - In consideration of the mutual agreements herein contained, the Fund and the Bank hereby agree as follows: 1. The Fund hereby appoints the Bank to perform the duties hereinafter set forth. 2. The Bank hereby accepts appointment and agrees to perform the duties hereinafter set forth. 3. Subject to the provisions of paragraphs 4 and 5 below, the Bank shall compute the net asset value per share of each Fund listed on Schedule II and shall value the securities held by the Fund (the "Securities") at such times and dates and in the manner specified in the then currently effective Prospectus of the Fund. 4. To the extent valuation of Securities or computation of a Fund's net asset value as specified in the Fund's then currently effective Prospectus is at any time inconsistent with any applicable laws or regulations, the Fund shall immediately so notify the Bank in writing and thereafter shall either furnish the Bank at all appropriate times with the values of such Securities and each Fund's net asset value, or subject to the prior approval of the Bank, instruct the Bank in writing to value Securities and compute each Fund's net asset value in a manner which the Fund then represents in writing to be consistent with all applicable laws and regulations. The Fund may also from time to time, subject to the prior approval of the Bank, instruct the Bank in writing to compute the value of the Securities or a Fund's net asset value in a manner other than as specified in paragraph 3 of this Agreement. By giving such instruction, the Fund shall be deemed to have represented that such instruction is consistent with all applicable laws and regulations and the then currently effective Prospectus of the Fund. The Fund shall have sole responsibility for determining the method of valuation of Securities and the method of computing each Fund's net asset value. 5. The Fund shall furnish the Bank with any and all instructions, explanations, information, specifications and documentation deemed necessary by the Bank in the performance of its duties hereunder, including, without limitation, the amounts or written formula for calculating the amounts and times of accrual of Fund liabilities and expenses. The Bank shall not be required to include as Fund liabilities and expenses, nor as a reduction of net asset value, any accrual for any federal, state, or foreign income taxes unless the Fund shall have specified to the Bank the precise amount of the same to be included in liabilities and expenses or used to reduce net asset value. The Fund shall also furnish the Bank with bid, offer, or market values of Securities if the Bank notifies the Fund that same are not available to the Bank from a security pricing or similar service utilized, or subscribed to, by the Bank which the Bank in its judgment deems reliable at the time such information is required for calculations hereunder. At any time and from time to time, the Fund also may furnish the Bank with bid, offer, or market values of Securities and instruct the Bank to use such information in its calculations hereunder. 6. The Bank as Fund Accounting agent shall advise the Fund and the Fund's transfer agent of the Fund's net asset value upon completion of the computations required to be made by the Bank pursuant to this Agreement. 2 7. The Bank shall, as agent for the Fund, maintain and keep current the books, accounts and other documents, if any, listed in Appendix A hereto and made a part hereof, as such Appendix A may be amended from time to time, and preserve any such books, accounts and other documents in accordance with the applicable provisions of Rule 31a-2 of the General Rules and Regulations under the Investment Company Act of 1940, as amended (the "Rules"). Such books, accounts and other documents shall be made available upon reasonable request for inspection by officers, employees and auditors of the Fund. 8. All records maintained and preserved by the Bank pursuant to this Agreement which the Fund is required to maintain and preserve in accordance with the above-mentioned Rules shall be and remain the property of the Fund and shall be surrendered to the Fund promptly upon request in the that the Fund requests. Upon reasonable request of the Fund, the Bank shall provide in hard copy, on micro-film or electronically, whichever the Fund shall elect, any records included in any such delivery. 9. The Bank, in performing the services required of it under the terms of this Agreement, shall be entitled to rely fully on the accuracy and validity of any and all instructions, explanations, information, specifications and documentation furnished to it by the Fund and shall have no duty or obligation to review the accuracy, validity or propriety of such instructions, explanations, information, specifications or documentation, including, without limitation, evaluations of Securities; the amounts or formula for calculating the amounts and times of accrual of Fund's liabilities and expenses; the amounts receivable and the amounts payable on the sale or purchase of Securities; and amounts receivable or amounts payable for the sale or redemption of Fund shares effected by or on behalf of the Fund. In the event the Bank's computations hereunder rely, in whole or in part, upon information, including, without limitation, bid, offer or market values of Securities or other assets, or accruals of interest or earnings thereon, from a pricing or similar service utilized, or subscribed to, by the Bank which the Bank in its judgment deems reliable, the Bank shall not be responsible for, deemed to make any assurances with respect to, nor under any duty to inquire into, the accuracy and completeness of such information, except that if any such information contains manifest error, the Bank shall in accordance with its then standard practices attempt to have such manifest error corrected, and shall notify the Fund if such attempt is unsuccessful. 3 10. The Bank shall not be required to inquire into any valuation of Securities or other assets by the Fund or any third party described in preceding paragraph 9 hereof, even though the Bank in performing services similar to the services provided pursuant to this Agreement for others may receive different valuations of the same or different securities of the same issuers. 11. The Bank, in performing the services required of it under the terms of this Agreement, shall not be responsible for determining whether any interest accruable to the Fund is or will be actually paid, but will accrue such interest until otherwise instructed by the Fund. 12. The Bank shall not be responsible for delays or errors which occur by reason of circumstances beyond its control in the performance of its duties under this Agreement, including, without limitation, mechanical breakdowns, flood or catastrophe, acts of God, failures of transportation, communication or power supply, or other similar circumstances. Nor shall the Bank be responsible for delays or failures to supply the information or services specified in this Agreement where such delays or failures are caused by the failure of any person(s) other than the Bank to supply any instructions, explanations, information, specifications or documentation deemed necessary by the Bank in the performance of its duties under this Agreement. 13. No provision of this Agreement shall prevent the Bank from offering services similar or identical to those covered by this Agreement to any other corporations, associations or entities of any kind. Any and all operational procedures, techniques and devices developed by the Bank in connection with the performance of its duties and obligations under this Agreement, including those developed in conjunction with the Fund, shall be and remain the property of the Bank, and the Bank shall be free to employ such procedures, techniques and devices in connection with the performance of any other contract with any other person whether or not such contract is similar or identical to this Agreement. 4 14. The Bank may, with respect to questions of law, apply to and obtain the advice and opinion of counsel to the Fund or its own counsel and shall be entitled to rely on the advice or opinion of such counsel. 15. The Bank shall be entitled to rely upon any oral instructions received by the Bank and reasonably believed by the Bank to be given by or on behalf of the Fund, unless the Bank subsequently receives written instructions contradicting such oral instructions. 16. Notwithstanding any other provision contained in this Agreement, the Bank shall have no duty or obligation with respect to, including, without limitation, any duty or obligation to determine, or advise or notify the Fund of: (a) the taxable nature of any distribution or amount received or deemed received by, or payable to, the Fund; (b) the taxable nature or effect on the Fund or its shareholders of any corporate actions, class actions, tax reclaims, tax refunds, or similar events; (c) the taxable nature or taxable amount of any distribution or dividend paid, payable or deemed paid, by the Fund to its shareholders; or (d) the effect under any federal, state, or foreign income tax laws of the Fund making or not making any distribution or dividend payment, or any election with respect thereto. 17. The Bank shall not be liable for any loss, damage or expense resulting from, arising out of, or in connection with its performance hereunder, including its actions or omissions, the incompleteness or inaccuracy of any specifications or other information furnished by the Fund, or for delays caused by circumstances beyond the Bank's control, unless such loss, damage or expense arises out of the negligence or willful misconduct of the Bank. In no event shall the Bank be liable for special, indirect, or consequential damages, or for lost profits or loss of business, arising under or in connection with this Agreement, even if previously informed of the possibility of such damages and regardless of the form of action. For purposes of this provision, if as a result of the negligence or willful misconduct of the Bank there is a material error in the net asset value per share of the Fund, the material losses of the Fund on the sale and issuance, or the redemption, of its shares attributable to such material error shall be direct money damages. 5 18. Without limiting the generality of the foregoing, (i) the Bank shall indemnify the Fund against any loss, damage or expense, including reasonable counsel fees and other costs and expenses of a defense against any claim or liability, arising out of the negligence or willful misconduct of the Bank, except that in no event shall the Bank be liable for special, indirect, or consequential damages, or for lost profits or loss of business, and (ii) the Fund shall indemnify the Bank against any loss, damage or expense, including reasonable counsel fees and other costs and expenses of a defense against any claim or liability, arising from any one or more of the following, except that in no event shall the Fund be liable for special, indirect, or consequential damages, or for lost profits or loss of business: (a) Errors in records or instructions, explanations, information, specifications or documentation of any kind, as the case may be, supplied to the Bank by the Fund, or, subject to the provisions of paragraph 9, by a pricing or similar service which the Bank in its judgment deems reliable; (b) Action or inaction taken or omitted to be taken by the Bank pursuant to written or oral instructions of the Fund without negligence or willful misconduct; (c) Any action taken or omitted to be taken by the Bank in good faith and with notice to the Fund, in accordance with the advice or opinion of counsel for the Fund or Bank counsel; (d) Any improper use by the Fund or its agents, distributor or investment advisor of any valuations or computations supplied by the Bank pursuant to this Agreement; 6 (e) The method of valuation of the Securities and the method of computing each Fund's net asset value; or (f) Any valuations of Securities or net asset value provided by the Fund. 19. In consideration for all of the services to be performed by the Bank as set forth herein the Bank shall be entitled to receive reimbursement for all out-of-pocket expenses and such compensation as may be agreed upon in writing from time to time between the Bank and the Fund. 20. Attached hereto as Appendix B is a list of persons duly authorized by the Fund's Declaration of Trust and By-Laws to execute this Agreement and give any written, electronic or oral instructions, or written, electronic or oral specifications, by or on behalf of the Fund. From time to time the Fund may deliver a new Appendix B to add or delete any person and the Bank shall be entitled to rely on the last Appendix B actually received by the Bank. 21. The Fund represents and warrants to the Bank that it has all requisite power to execute and deliver this Agreement, to give any written, electronic or oral instructions contemplated hereby, and to perform the actions or obligations contemplated to be performed by it hereunder, and has taken all necessary action to authorize such execution, delivery, and performance. 22. This Agreement shall not be assignable by the Fund without the prior written consent of the Bank, or by the Bank without the prior written consent of the Fund, which consents shall not be unreasonably withheld. 23. Either of the parties hereto may terminate this Agreement by giving the other party a notice in writing specifying the date of such termination, which shall not be less than sixty (60) days after the date of giving of such notice. Upon the date set forth in such notice, the Bank shall deliver to the Fund all its records. 7 24. This Agreement may not be amended or modified in any manner except by written agreement executed by both parties hereto. 25. This Agreement shall be construed in accordance with the substantive laws of The Commonwealth of Massachusetts without regard to conflicts of laws principals. The Fund and the Bank each hereby irrevocably waives any and all rights to trial by jury in any legal proceeding arising out of or relating to this Agreement. 26. The performance and provisions of this Agreement are intended to benefit only the Bank and the Fund, and no rights shall be granted to any other person by virtue of this Agreement. 27. The Fund and the Bank agree that the obligations of each Fund are not binding upon any of the Trustees/Directors, officers or shareholders of the Fund individually, but are binding only upon that Fund and its assets. Each Fund shall be severally, not jointly, liable for its own obligations under this Agreement. 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. Each John Hancock Fund listed on Schedule II By: /s/Richard A. Brown, SVP & CFO ------------------------------ Attest: /s/Rita A. Grimes - ----------------- THE BANK OF NEW YORK By: /s/James E. Hillman, SVP ------------------------ Attest: /s/Rita A. Grimes - ----------------- 9 APPENDIX A TO FUND ACCOUNTING AGREEMENT BETWEEN THE BANK OF NEW YORK AND The John Hancock Funds listed on Schedule II I._______The Bank of New York (the "Bank"), as agent for each John Hancock Fund listed on Schedule II (each a "Fund"), shall maintain the following records on a daily basis for each Fund. 1. Report of priced portfolio securities 2. Statement of net asset value per share II. The Bank shall maintain the following records on a monthly basis for each Fund: 1. General Ledger 2. General Journal 3. Cash Receipts Journal 4. Cash Disbursements Journal 5. Subscriptions Journal 6. Redemptions Journal 7. Accounts Receivable Reports 8. Accounts Payable Reports 9. Open Subscriptions/Redemption Reports 10. Transaction (Securities) Journal 11. Broker Net Trades Reports III. The Bank shall prepare a Holdings Ledger on a quarterly basis, and a Buy-Sell Ledger (Broker's Ledger) on a semiannual basis for each Fund. Schedule D shall be produced on an annual basis for each Fund. The above reports may be printed according to any other required frequency to meet the requirements of the Internal Revenue Service, the Securities and Exchange Commission and the Fund's Auditors. IV. For internal control purposes, the Bank uses the Account Journals produced by The Bank of New York Custody System to record daily settlements of the following for each Fund: 1. Securities bought 2. Securities sold 3. Interest received 4. Dividends received 5. Capital stock sold 6. Capital stock redeemed 7. Other income and expenses All portfolio purchases for the Fund are recorded to reflect expected maturity value and total cost including any prepaid interest. 2 SCHEDULE II John Hancock Funds (As of September 10, 2001) - -------------------------------------------------------------------------------- EIN Name - -------------------------------------------------------------------------------- 04-3478429 John Hancock 500 Index Fund - -------------------------------------------------------------------------------- 04-3260673 John Hancock Active Bond Fund - -------------------------------------------------------------------------------- 04-3167136 John Hancock Balanced Fund - -------------------------------------------------------------------------------- 04-3241844 John Hancock Bank & Thrift Opportunity Fund - -------------------------------------------------------------------------------- 04-3551118 John Hancock Biotechnology Fund - -------------------------------------------------------------------------------- 04-2528977 John Hancock Bond Fund - -------------------------------------------------------------------------------- 76-0296100 John Hancock California Tax-Free Income Fund - -------------------------------------------------------------------------------- 95-3464388 John Hancock Cash Reserve, Inc. - -------------------------------------------------------------------------------- 04-3551126 John Hancock Communications Fund - -------------------------------------------------------------------------------- 04-3551129 John Hancock Consumer Industries Fund - -------------------------------------------------------------------------------- 04-3122478 John Hancock Core Equity Fund - -------------------------------------------------------------------------------- 04-3260682 John Hancock Core Growth Fund - -------------------------------------------------------------------------------- 04-3260681 John Hancock Core Value Fund - -------------------------------------------------------------------------------- 04-3260671 John Hancock Dividend Performers Fund - -------------------------------------------------------------------------------- 04-3409706 John Hancock European Equity Fund - -------------------------------------------------------------------------------- 04-3305812 John Hancock Financial Industries Fund - -------------------------------------------------------------------------------- 56-1662953 John Hancock Financial Trends, Inc. - -------------------------------------------------------------------------------- 04-3535633 John Hancock Focused Relative Value Fund - -------------------------------------------------------------------------------- 04-3313164 John Hancock Focused Small Cap Growth Fund - -------------------------------------------------------------------------------- 04-6944774 John Hancock Fundamental Value Fund - -------------------------------------------------------------------------------- 04-6543623 John Hancock Global Fund - -------------------------------------------------------------------------------- 76-0230587 John Hancock Government Income Fund - -------------------------------------------------------------------------------- 04-3524763 John Hancock Growth Trends Fund (add Class I eff 11/15/01) - -------------------------------------------------------------------------------- 04-3124238 John Hancock Health Sciences Fund - -------------------------------------------------------------------------------- 04-3551132 John Hancock High Income Fund - -------------------------------------------------------------------------------- 76-0230586 John Hancock High Yield Bond Fund - -------------------------------------------------------------------------------- 76-0235997 John Hancock High Yield Tax-Free Fund - -------------------------------------------------------------------------------- 04-2507646 John Hancock Income Securities Trust - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EIN Name - -------------------------------------------------------------------------------- 04-3260684 John Hancock Independence Balanced Fund - -------------------------------------------------------------------------------- 04-3260680 John Hancock Independence Diversified Core Equity Fund II (terminate Class P 9/13/01) - -------------------------------------------------------------------------------- 04-3260683 John Hancock Independence Medium Capitalization Fund - -------------------------------------------------------------------------------- 76-0354706 John Hancock Intermediate Government Fund - -------------------------------------------------------------------------------- 04-3260679 John Hancock International Equity Fund - -------------------------------------------------------------------------------- 04-3214877 John Hancock International Fund - -------------------------------------------------------------------------------- 04-6944776 John Hancock International Small Cap Growth Fund - -------------------------------------------------------------------------------- 04-2474663 John Hancock Investors Trust - -------------------------------------------------------------------------------- 04-2443211 John Hancock Large Cap Growth Fund - -------------------------------------------------------------------------------- N/A John Hancock Large Cap Spectrum Fund (eff (9/24/01) - -------------------------------------------------------------------------------- 74-6035056 John Hancock Large Cap Value Fund - -------------------------------------------------------------------------------- 04-6564705 John Hancock Massachusetts Tax-Free Income Fund - -------------------------------------------------------------------------------- 04-3259499 John Hancock Medium Capitalization Growth Fund - -------------------------------------------------------------------------------- 04-3208756 John Hancock Mid Cap Growth Fund - -------------------------------------------------------------------------------- 76-0230583 John Hancock Money Market Fund - -------------------------------------------------------------------------------- 04-3539446 John Hancock Multi-Cap Growth Fund - -------------------------------------------------------------------------------- 04-6564703 John Hancock New York Tax-Free Income Fund - -------------------------------------------------------------------------------- 04-6567740 John Hancock Pacific Basin Equities Fund - -------------------------------------------------------------------------------- 04-3161453 John Hancock Patriot Global Dividend Fund - -------------------------------------------------------------------------------- 04-3190056 John Hancock Patriot Preferred Dividend Fund - -------------------------------------------------------------------------------- 04-3044078 John Hancock Patriot Premium Dividend Fund I - -------------------------------------------------------------------------------- 04-3097281 John Hancock Patriot Premium Dividend Fund II - -------------------------------------------------------------------------------- 04-3090916 John Hancock Patriot Select Dividend Trust - -------------------------------------------------------------------------------- 04-3435529 John Hancock Real Estate Fund - -------------------------------------------------------------------------------- 04-6526682 John Hancock Regional Bank Fund - -------------------------------------------------------------------------------- 76-0230584 John Hancock Small Cap Growth Fund - -------------------------------------------------------------------------------- 04-3214880 John Hancock Small Cap Value Fund - -------------------------------------------------------------------------------- 04-3260676 John Hancock Small Capitalization Value Fund (name change eff 9/30/01 to John Hancock Small Cap Equity Fund) - -------------------------------------------------------------------------------- 51-0094374 John Hancock Sovereign Investors Fund - -------------------------------------------------------------------------------- N/A John Hancock Strategic Growth Fund (eff 12/01/01) - -------------------------------------------------------------------------------- 04-6545497 John Hancock Strategic Income Fund - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EIN Name - -------------------------------------------------------------------------------- 76-0296098 John Hancock Tax-Free Bond Fund - -------------------------------------------------------------------------------- 13-3100162 John Hancock Technology Fund - -------------------------------------------------------------------------------- 76-0235823 John Hancock U.S. Government Cash Reserve - -------------------------------------------------------------------------------- 04-3551130 John Hancock U.S. Global Leaders Fund - -------------------------------------------------------------------------------- 04-3367188 John Hancock V.A. Financial Industries Fund - -------------------------------------------------------------------------------- 04-3402968 John Hancock V.A. High Yield Bond Fund - -------------------------------------------------------------------------------- 04-3418331 John Hancock V.A. Regional Bank Fund - -------------------------------------------------------------------------------- 04-3402969 John Hancock V.A. Relative Value Fund - -------------------------------------------------------------------------------- 04-3326565 John Hancock V.A. Sovereign Investors Fund - -------------------------------------------------------------------------------- 04-3326570 John Hancock V.A. Strategic Income Fund - -------------------------------------------------------------------------------- 04-3513386 John Hancock V.A. Technology Fund - -------------------------------------------------------------------------------- Agreement/custodian/BNYScheduleII APPENDIX B I, William H. King, Treasurer, of each John Hancock Fund listed on Schedule II, (each a "Fund"), do hereby certify that: The following individuals serve in the following positions with the Fund, and each has been duly elected or appointed by the Board of Trustees of the Fund to each such position and qualified therefor in conformity with the Fund's Declaration of Trust and By-Laws, and the signatures set forth opposite their respective names are their true and correct signatures. Each such person is authorized to give written or oral instructions or written or oral specifications by or on behalf of the Fund to the Bank. William H. King Treasurer /s/William H. King - --------------- --------- ------------------ Name Position Signature Robert E. Gramer Associate Treasurer /s/Robert E. Gramer - ---------------- ------------------- ------------------- Name Position Signature William J. Hayes Associate Treasurer /s/William J. Hayes - ---------------- ------------------- ------------------- Name Position Signature Cheryl J. Fahy Assistant Treasurer /s/Cheryl J. Fahy - ------------------ ------------------- ----------------- Name Position Signature Joan E. McCormick Assistant Treasurer /s/Joan E. McCormick - ----------------- ------------------- -------------------- Name Position Signature Joseph G. Thompson Assistant Treasurer /s/Joseph G. Thompson - ------------------ ------------------- --------------------- Name Position Signature S:\general\funds\authorizedsignersfundmoney FOREIGN CUSTODY MANAGER AGREEMENT AGREEMENT made as of September 10, 2001 between each John Hancock Fund listed on Schedule II (each a "Fund") and The Bank of New York ("BNY"). W I T N E S S E T H: WHEREAS, the Fund desires to appoint BNY as a Foreign Custody Manager on the terms and conditions contained herein; WHEREAS, BNY desires to serve as a Foreign Custody Manager and perform the duties set forth herein on the terms and conditions contained herein; NOW THEREFORE, in consideration of the mutual promises hereinafter contained in this Agreement, the Fund and BNY hereby agree as follows: ARTICLE I. DEFINITIONS Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings: 1. "Board" shall mean the board of directors or board of trustees, as the case may be, of the Fund. 2. "Eligible Foreign Custodian" shall have the meaning provided in the Rule. 3. "Monitoring System" shall mean a system established by BNY to fulfill the Responsibilities specified in clauses (d) and (e) of Section 1 of Article III of this Agreement. 4. "Responsibilities" shall mean the responsibilities delegated to BNY under the Rule as a Foreign Custody Manager with respect to each Specified Country and each Eligible Foreign Custodian selected by BNY, as such responsibilities are more fully described in Article III of this Agreement. 5. "Rule" shall mean Rule 17f-5 under the Investment Company Act of 1940, as amended (the "1940 Act"). Specific references to Sections of the Rule (or of Rule 17f-7) in this Agreement shall mean those Sections as in effect as of the date of this Agreement. 6. "Risk Analysis" shall mean the analysis required under Rule 17f-7(a)(1)(A) under the 1940 Act. 7. "Securities Depository" shall mean a system for the central handling of securities as defined in Rule 17f-4 under the 1940 Act. 8. "Specified Country" shall mean each country listed on Schedule I attached hereto and each country, other than the United States, constituting the primary market for a security with respect to which the Fund has given settlement instructions to The Bank of New York as custodian (the "Custodian") under its Custody Agreement with the Fund. BNY agrees to notify immediately the Fund and the Fund's investment adviser if, at any time, BNY believes that it cannot perform, in accordance with the foregoing standard of care, its duties hereunder with respect to any Eligible Foreign Custodian. ARTICLE II. BNY AS A FOREIGN CUSTODY MANAGER 1. The Fund on behalf of its Board hereby delegates to BNY with respect to each Specified Country the Responsibilities. 2. BNY accepts the Board's delegation of Responsibilities with respect to each Specified Country and agrees in performing the Responsibilities as a Foreign Custody Manager to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of the Fund's assets would exercise. 3. BNY shall provide to the Board at least annually and at such other times as the Board deems reasonable and appropriate based on the circumstances of the Fund's foreign custody arrangements written reports, which shall include the following: (a) Information relating to Eligible Foreign Custodians. Such written reports shall include a list of all Eligible Foreign Custodians with which assets of the Fund are maintained, and notification of any material changes in the arrangements with such Eligible Foreign Custodians (including without limitation, adding a new Eligible Foreign Custodian, replacing an Eligible Foreign Custodian, changes in the capital structure of an existing Eligible Foreign Custodian and changes in the contract governing an arrangement with an Eligible Foreign Custodian). (b) Information relating to Securities Depositories. Such written report shall include a Risk Analysis with respect to each Securities Depository in each Specified Country. If a new Securities Depository commences operations in a Specified Country (or in the case of a new Specified Country), BNY shall promptly notify the Board and the Fund's investment adviser of such commencement and shall provide a Risk Analysis for such Securities Depository (or in the case of a new Specified Country, all Securities Depositories in such country) as soon as reasonably practicable after such Securities Depository becomes operational (or in the case of a new Specified Country, after such country becomes a Specified Country) but in any event prior to maintaining a Fund's assets with such Securities Depository. BNY shall also include in such written report a representation that each Securities Depository in which the Fund maintains assets is an "Eligible Foreign Custodian" as defined in Rule 17f-7 under the 1940 Act. (c) Information relating to Country Risk. Notwithstanding anything to the contrary in this Agreement or in the Custody Agreement between the Fund and BNY, with respect to each Specified Country, BNY shall promptly provide to the Board and to the Fund's investment adviser such information with respect to Country Risk (as defined in Section 2 of Article III hereof) as may be sent to, and received by, BNY from any Eligible Foreign Custodian. ARTICLE III. RESPONSIBILITIES 1. Subject to the provisions of this Agreement, BNY shall with respect to each Specified Country select an Eligible Foreign Custodian. In connection therewith, BNY shall: (a) determine that assets of the Fund held by such Eligible Foreign Custodian will be subject to reasonable care, based on the standards applicable to custodians in the relevant market in which such Eligible Foreign Custodian operates, after considering all factors relevant to the safekeeping of such assets, including, without limitation, those contained in paragraph (c)(1) of the Rule; (b) determine that the Fund's foreign custody arrangements with each Eligible Foreign Custodian are governed by a written contract with the Custodian which will provide reasonable care for the Fund's assets based on the standards specified in paragraph (c)(1) of the Rule; (c) determine that each contract with an Eligible Foreign Custodian shall include the provisions specified in paragraph (c)(2)(i)(A) through (F) of the Rule or, alternatively, in lieu of any or all of such (c)(2)(i)(A) through (F) provisions, such other provisions as BNY determines will provide, in their entirety, the same or a greater level of care and protection for the assets of the Fund as such specified provisions; (d) monitor pursuant to the Monitoring System the appropriateness of maintaining the assets of the Fund with a particular Eligible Foreign Custodian pursuant to paragraph (c)(1) of the Rule and the performance of the contract governing such arrangement; and (e) advise the Fund whenever BNY determines under the Monitoring System that an arrangement (including, any material change in the contract governing such arrangement) described in preceding clause (d) no longer meets the requirements of the Rule. 2. For purposes of clause (d) of preceding Section 1 of this Article, BNY's determination of appropriateness shall not include, nor be deemed to include, any evaluation of Country Risks associated with investment in a particular country. For purposes hereof, "Country Risks" shall mean systemic risks of holding assets in a particular country including but not limited to (a) an Eligible Foreign Custodian's use of any depositories that act as or operate a system or a transnational system for the central handling of securities or any equivalent book-entries; (b) such country's financial infrastructure; (c) such country's prevailing custody and settlement practices; (d) nationalization, expropriation or other governmental actions; (e) regulation of the banking or securities industry; (f) currency controls, restrictions, devaluations or fluctuations; and (g) market conditions which affect the orderly execution of securities transactions or affect the value of securities. ARTICLE IV. REPRESENTATIONS 1. The Fund hereby represents that this Agreement has been duly authorized, executed and delivered by the Fund, constitutes a valid and legally binding obligation of the Fund enforceable in accordance with its terms, and no statute, regulation, rule, order, judgment or contract binding on the Fund prohibits the Fund's execution or performance of this Agreement; and this Agreement has been approved by the Board at a meeting duly called and at which a quorum was at all times present. 2. BNY hereby represents that: (a) BNY is duly organized and existing under the laws of the State of New York, with full power to carry on its businesses as now conducted, and to enter into this Agreement and to perform its obligations hereunder; (b) this Agreement has been duly authorized, executed and delivered by BNY, constitutes a valid and legally binding obligation of BNY enforceable in accordance with its terms, and no statute, regulation, rule, order, judgment or contract binding on BNY prohibits BNY's execution or performance of this Agreement; and (c) BNY has established the Monitoring System. ARTICLE V. CONCERNING BNY 1. BNY shall not be liable for any costs, expenses, damages, liabilities or claims, including attorneys' and accountants' fees, sustained or incurred by, or asserted against, the Fund except to the extent the same arises out of the failure of BNY to exercise the care, prudence and diligence required by Section 2 of Article II hereof. In no event shall BNY be liable to the Fund, the Board, or any third party for special, indirect or consequential damages, or for lost profits or loss of business, arising in connection with this Agreement. 2. The Fund shall indemnify BNY and hold it harmless from and against any and all costs, expenses, damages, liabilities or claims, including attorneys' and accountants' fees, sustained or incurred by, or asserted against, BNY by reason or as a result of any action or inaction, or arising out of BNY's performance hereunder, provided that the Fund shall not indemnify BNY to the extent any such costs, expenses, damages, liabilities or claims arises out of BNY's failure to exercise the reasonable care, prudence and diligence required by Section 2 of Article II hereof. In no event shall the Fund be liable to BNY for any special, indirect or consequential damages, or for lost profits or loss of business, arising in connection with this Agreement. BNY shall indemnify the Fund and hold it harmless from and against any and all costs, expenses, damages, liabilities or claims, including attorneys' and accountants' fees, sustained or incurred by, or asserted against, the Fund by reason or as a result of BNY's failure to exercise the reasonable care, prudence and diligence required by Section 2 of Article II hereof; provided, however, that BNY shall not be liable to the Fund for any special, indirect or consequential damages, or for lost profits or loss of business, arising in connection with this Agreement. 3. For its services hereunder, the Fund agrees to pay to BNY such compensation and out-of-pocket expenses as shall be mutually agreed. 4. BNY shall have only such duties as are expressly set forth herein. In no event shall BNY be liable for any Country Risks associated with investments in a particular country, except that BNY shall timely forward such information with respect to Country Risk, if any, as may have been sent to, and received by, BNY from any Eligible Foreign Custodian. ARTICLE VI. MISCELLANEOUS 1. This Agreement sets forth BNY's duties with respect to, among other things, the selection of Foreign Custodians, the administration of contracts with Foreign Custodians, the addition and deletion of Foreign Custodians, the issuance of reports in connection with such duties, the monitoring of such duties, and the supplying of information with respect to Country Risk. The terms of the Custody Agreement between the Fund and BNY, as amended from time to time, shall apply generally as to matters not expressly covered in this Agreement, including dealings with the Foreign Custodians in the course of discharge of BNY's obligations under the Custody Agreement. The terms of this Agreement shall control to the extent of any conflicts between this Agreement and the Custody Agreement. Except as set forth in this Article, nothing in this Agreement shall affect the obligations of the parties hereto under any other agreement. 2. Any notice or other instrument in writing, authorized or required by this Agreement to be given to BNY, shall be sufficiently given if received by it at its offices at 100 Church Street, 10th Floor, New York, New York 10286, or at such other place as BNY may from time to time designate in writing. 3. Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Fund shall be sufficiently given if received by it at its offices at 101 Huntington Avenue, Boston, Massachusetts 02199, or at such other place as the Fund may from time to time designate in writing. 4. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions shall not in any way be affected thereby. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties. This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided however, that this Agreement shall not be assignable by either party without the written consent of the other, which consent shall not be unreasonably withheld. 5. If at any time BNY shall be a party to an agreement to serve as a Foreign Custody Manager to an investment company that provides for either (i) a standard of care with respect to the selection of Foreign Custodians in any jurisdiction higher than that set forth in Article I of this Agreement or (ii) a standard of care with respect to BNY exercising its duties as Foreign Custody Manager in any jurisdiction or with regard to its responsibilities under Rule 17f-7 higher than those set forth in Article II, Section 2 of this Agreement, BNY agrees to notify the Fund of this fact and to raise the applicable standard of care hereunder in the applicable jurisdiction to the standard specified in such other agreement. 6. The Fund and BNY agree that the obligations of each Fund are not binding upon the Trustees/Directors, officers or shareholders of the Fund individually, but are binding only upon that Fund and its assets. Each Fund shall be severally, not jointly, liable for its own obligations under this agreement. This Agreement shall be construed in accordance with the substantive laws of The Commonwealth of Massachusetts, without regard to conflicts of laws principles thereof. The Fund and BNY each hereby irrevocably waives any and all rights to trial by jury in any legal proceeding arising out of or relating to this Agreement. The parties hereto agree that in performing hereunder, BNY is acting solely on behalf of the Fund and no contractual or service relationship shall be deemed to be established hereby between BNY and any other person by reason of this Agreement. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument. This Agreement shall terminate simultaneously with the termination of the Custody Agreement between the Fund and the Custodian, and may otherwise be terminated by either party giving to the other party a notice in writing specifying the date of such termination, which shall be not less than thirty (30) days after the date of such notice. IN WITNESS WHEREOF, the Fund and BNY have caused this Agreement to be executed by their respective officers, thereunto duly authorized, as of the date first above written. Each John Hancock Fund listed on Schedule II By:/s/Richard A. Brown ------------------- Title: Senior Vice President & CFO THE BANK OF NEW YORK By:/s/James E. Hillman ------------------- Title: Senior Vice President SCHEDULE I Date: July 23, 2001 To: International Markets Committee From: Bob Pieroni Re: Approved Country Listing - Funds - -------------------------------------------------------------------------------- SIPC and the International Market Committee have approved the following countries for investments by John Hancock funds: Argentina Greece Australia Hong Kong Peru Austria Hungary Philippines Bangladesh Iceland Poland Belgium India Portugal Bermuda Indonesia Romania Brazil Ireland Russia* Botswana Israel Singapore Bulgaria ** Italy Slovak Republic Canada Japan South Africa Chile Kenya Spain China Korea Sweden Columbia Latvia Switzerland Costa Rica Lithuania Taiwan Croatia Luxembourg Thailand Czech Republic Malaysia Turkey Denmark Mauritius United Kingdom Egypt ** Mexico United States Estonia Netherlands Venezuela Finland New Zealand Zimbabwe France Norway Germany Panama Ghana Pakistan * Please note that Russia is restricted to Sovereign Russian and municipal fixed income securities only and these investments are further restricted to only certain fixed income accounts. Please consult Operations or Legal for detailed listing. Investments in other countries (including ADR & GDR vehicles) are not permitted - ------------------------------------------------------------------------------- without prior approval from the International Markets Committee. - ---------------------------------------------------------------- ** Addition since 1/1/01 Cc: Merrill Lynch Asset Management Nicholas Applegate American Fund Advisers SCHEDULE II John Hancock Funds (As of September 10, 2001) - -------------------------------------------------------------------------------- EIN Name - -------------------------------------------------------------------------------- 04-3478429 John Hancock 500 Index Fund - -------------------------------------------------------------------------------- 04-3260673 John Hancock Active Bond Fund - -------------------------------------------------------------------------------- 04-3167136 John Hancock Balanced Fund - -------------------------------------------------------------------------------- 04-3241844 John Hancock Bank & Thrift Opportunity Fund - -------------------------------------------------------------------------------- 04-3551118 John Hancock Biotechnology Fund - -------------------------------------------------------------------------------- 04-2528977 John Hancock Bond Fund - -------------------------------------------------------------------------------- 76-0296100 John Hancock California Tax-Free Income Fund - -------------------------------------------------------------------------------- 95-3464388 John Hancock Cash Reserve, Inc. - -------------------------------------------------------------------------------- 04-3551126 John Hancock Communications Fund - -------------------------------------------------------------------------------- 04-3551129 John Hancock Consumer Industries Fund - -------------------------------------------------------------------------------- 04-3122478 John Hancock Core Equity Fund - -------------------------------------------------------------------------------- 04-3260682 John Hancock Core Growth Fund - -------------------------------------------------------------------------------- 04-3260681 John Hancock Core Value Fund - -------------------------------------------------------------------------------- 04-3260671 John Hancock Dividend Performers Fund - -------------------------------------------------------------------------------- 04-3409706 John Hancock European Equity Fund - -------------------------------------------------------------------------------- 04-3305812 John Hancock Financial Industries Fund - -------------------------------------------------------------------------------- 56-1662953 John Hancock Financial Trends, Inc. - -------------------------------------------------------------------------------- 04-3535633 John Hancock Focused Relative Value Fund - -------------------------------------------------------------------------------- 04-3313164 John Hancock Focused Small Cap Growth Fund - -------------------------------------------------------------------------------- 04-6944774 John Hancock Fundamental Value Fund - -------------------------------------------------------------------------------- 04-6543623 John Hancock Global Fund - -------------------------------------------------------------------------------- 76-0230587 John Hancock Government Income Fund - -------------------------------------------------------------------------------- 04-3524763 John Hancock Growth Trends Fund (add Class I eff 11/15/01) - -------------------------------------------------------------------------------- 04-3124238 John Hancock Health Sciences Fund - -------------------------------------------------------------------------------- 04-3551132 John Hancock High Income Fund - -------------------------------------------------------------------------------- 76-0230586 John Hancock High Yield Bond Fund - -------------------------------------------------------------------------------- 76-0235997 John Hancock High Yield Tax-Free Fund - -------------------------------------------------------------------------------- 04-2507646 John Hancock Income Securities Trust - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EIN Name - -------------------------------------------------------------------------------- 04-3260684 John Hancock Independence Balanced Fund - -------------------------------------------------------------------------------- 04-3260680 John Hancock Independence Diversified Core Equity Fund II (terminate Class P 9/13/01) - -------------------------------------------------------------------------------- 04-3260683 John Hancock Independence Medium Capitalization Fund - -------------------------------------------------------------------------------- 76-0354706 John Hancock Intermediate Government Fund - -------------------------------------------------------------------------------- 04-3260679 John Hancock International Equity Fund - -------------------------------------------------------------------------------- 04-3214877 John Hancock International Fund - -------------------------------------------------------------------------------- 04-6944776 John Hancock International Small Cap Growth Fund - -------------------------------------------------------------------------------- 04-2474663 John Hancock Investors Trust - -------------------------------------------------------------------------------- 04-2443211 John Hancock Large Cap Growth Fund - -------------------------------------------------------------------------------- N/A John Hancock Large Cap Spectrum Fund (eff (9/24/01) - -------------------------------------------------------------------------------- 74-6035056 John Hancock Large Cap Value Fund - -------------------------------------------------------------------------------- 04-6564705 John Hancock Massachusetts Tax-Free Income Fund - -------------------------------------------------------------------------------- 04-3259499 John Hancock Medium Capitalization Growth Fund - -------------------------------------------------------------------------------- 04-3208756 John Hancock Mid Cap Growth Fund - -------------------------------------------------------------------------------- 76-0230583 John Hancock Money Market Fund - -------------------------------------------------------------------------------- 04-3539446 John Hancock Multi-Cap Growth Fund - -------------------------------------------------------------------------------- 04-6564703 John Hancock New York Tax-Free Income Fund - -------------------------------------------------------------------------------- 04-6567740 John Hancock Pacific Basin Equities Fund - -------------------------------------------------------------------------------- 04-3161453 John Hancock Patriot Global Dividend Fund - -------------------------------------------------------------------------------- 04-3190056 John Hancock Patriot Preferred Dividend Fund - -------------------------------------------------------------------------------- 04-3044078 John Hancock Patriot Premium Dividend Fund I - -------------------------------------------------------------------------------- 04-3097281 John Hancock Patriot Premium Dividend Fund II - -------------------------------------------------------------------------------- 04-3090916 John Hancock Patriot Select Dividend Trust - -------------------------------------------------------------------------------- 04-3435529 John Hancock Real Estate Fund - -------------------------------------------------------------------------------- 04-6526682 John Hancock Regional Bank Fund - -------------------------------------------------------------------------------- 76-0230584 John Hancock Small Cap Growth Fund - -------------------------------------------------------------------------------- 04-3214880 John Hancock Small Cap Value Fund - -------------------------------------------------------------------------------- 04-3260676 John Hancock Small Capitalization Value Fund (name change eff 9/30/01 to John Hancock Small Cap Equity Fund) - -------------------------------------------------------------------------------- 51-0094374 John Hancock Sovereign Investors Fund - -------------------------------------------------------------------------------- N/A John Hancock Strategic Growth Fund (eff 12/01/01) - -------------------------------------------------------------------------------- 04-6545497 John Hancock Strategic Income Fund - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EIN Name - -------------------------------------------------------------------------------- 76-0296098 John Hancock Tax-Free Bond Fund - -------------------------------------------------------------------------------- 13-3100162 John Hancock Technology Fund - -------------------------------------------------------------------------------- 76-0235823 John Hancock U.S. Government Cash Reserve - -------------------------------------------------------------------------------- 04-3551130 John Hancock U.S. Global Leaders Fund - -------------------------------------------------------------------------------- 04-3367188 John Hancock V.A. Financial Industries Fund - -------------------------------------------------------------------------------- 04-3402968 John Hancock V.A. High Yield Bond Fund - -------------------------------------------------------------------------------- 04-3418331 John Hancock V.A. Regional Bank Fund - -------------------------------------------------------------------------------- 04-3402969 John Hancock V.A. Relative Value Fund - -------------------------------------------------------------------------------- 04-3326565 John Hancock V.A. Sovereign Investors Fund - -------------------------------------------------------------------------------- 04-3326570 John Hancock V.A. Strategic Income Fund - -------------------------------------------------------------------------------- 04-3513386 John Hancock V.A. Technology Fund - -------------------------------------------------------------------------------- Agreement/custodian/BNYScheduleII APPENDIX A SUB-CUSTODIAN INDEMNIFICATION POLICY
- ----------------------------- -------------- ----------------- ----------------------------------------------------- Market A B Sub-Custodian - ----------------------------- -------------- ----------------- ----------------------------------------------------- Argentina X Banco Rio de la Plata - ----------------------------- -------------- ----------------- ----------------------------------------------------- Australia X National Australia Bank Ltd. X Commonwealth Bank of Australia - ----------------------------- -------------- ----------------- ----------------------------------------------------- Austria X Bank Austria AG - ----------------------------- -------------- ----------------- ----------------------------------------------------- Bahrain X HSBC Bank Middle East - ----------------------------- -------------- ----------------- ----------------------------------------------------- Bangladesh X Standard Chartered Bank - ----------------------------- -------------- ----------------- ----------------------------------------------------- Belgium X Banque Bruxelles Lambert - ----------------------------- -------------- ----------------- ----------------------------------------------------- Benin X Societe Generale de Banques en Cote d'Ivoire - ----------------------------- -------------- ----------------- ----------------------------------------------------- Bermuda X Bank of Bermuda Ltd. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Bolivia X Citibank - ----------------------------- -------------- ----------------- ----------------------------------------------------- Botswana X Barclays Bank of Botswana Ltd. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Brazil X Bank Boston - ----------------------------- -------------- ----------------- ----------------------------------------------------- Bulgaria X ING Bank - ----------------------------- -------------- ----------------- ----------------------------------------------------- Burkina Faso X Societe Generale de Banques en Cote d'Ivoire - ----------------------------- -------------- ----------------- ----------------------------------------------------- Canada X Royal Bank of Canada - ----------------------------- -------------- ----------------- ----------------------------------------------------- Chile X Bank Boston N.A. - ----------------------------- -------------- ----------------- ----------------------------------------------------- China X Standard Chartered Bank - ----------------------------- -------------- ----------------- ----------------------------------------------------- Colombia X Cititrust Colombia, S.A. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Costa Rica X Banco BCT - ----------------------------- -------------- ----------------- ----------------------------------------------------- Croatia X Privredna Banka Zqgreb d.d. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Cyprus X Bank of Cyprus - ----------------------------- -------------- ----------------- ----------------------------------------------------- Czech Republic X Ceskoslovenska Obchodni Banka, A.S. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Denmark X Den Danske Bank - ----------------------------- -------------- ----------------- ----------------------------------------------------- EASDAQ X Banque Bruxelles Lambert - ----------------------------- -------------- ----------------- ----------------------------------------------------- Ecuador X Citibank, N.A. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Egypt X Citibank, N.A. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Estonia X Hansabank Ltd. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Euromarket - Cedel X Clearstream Euroclear X Euroclear - ----------------------------- -------------- ----------------- ----------------------------------------------------- Finland X Merita Bank plc - ----------------------------- -------------- ----------------- ----------------------------------------------------- France X Paribas - ----------------------------- -------------- ----------------- ----------------------------------------------------- Germany X Dresdner Bank AG - ----------------------------- -------------- ----------------- ----------------------------------------------------- Ghana X Barclays Bank of Ghana Ltd. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Greece X Paribas - ----------------------------- -------------- ----------------- ----------------------------------------------------- Guinea Bissau X Societe Generale de Banques en Cote d'Ivoire - ----------------------------- -------------- ----------------- ----------------------------------------------------- Hong Kong X HSBC - ----------------------------- -------------- ----------------- ----------------------------------------------------- Hungary X Citibank Budapest Rt. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Iceland X Landsbanki Islands - ----------------------------- -------------- ----------------- ----------------------------------------------------- India X HSBC X Deutsche Bank AG - ----------------------------- -------------- ----------------- ----------------------------------------------------- Indonesia X HSBC - ----------------------------- -------------- ----------------- ----------------------------------------------------- Ireland X Allied Irish Banks, plc - ----------------------------- -------------- ----------------- ----------------------------------------------------- A= BNY will accept responsibility for negligence and wilful misconduct by the subcustodian. B= BNY does not guarantee or indemnify but will provide "Pass-Through" for any situations. APPENDIX A SUB-CUSTODIAN INDEMNIFICATION POLICY - ----------------------------- -------------- ----------------- ----------------------------------------------------- Market A B Sub-Custodian - ----------------------------- -------------- ----------------- ----------------------------------------------------- Israel X Bank Leumi LE - Israel B.M. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Italy X Banca Commerciale Italiana X Paribas - ----------------------------- -------------- ----------------- ----------------------------------------------------- Ivory Coast X Societe Generale - Abidjan - ----------------------------- -------------- ----------------- ----------------------------------------------------- Jamaica X CIBC Trust & Merchant Bank Jamaica Ltd. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Japan X The Fuji Bank Ltd. X The Bank of Tokyo-Mitsubishi Ltd. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Jordan X HSBC Bank Middle East - ----------------------------- -------------- ----------------- ----------------------------------------------------- Kazakhstan X ABN/AMRO - ----------------------------- -------------- ----------------- ----------------------------------------------------- Kenya X Barclays Bank of Kenya Ltd. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Latvia X Hansabanka Ltd. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Lebanon X HSBC Bank Middle East - ----------------------------- -------------- ----------------- ----------------------------------------------------- Lithuania X Vilniaus Bankas - ----------------------------- -------------- ----------------- ----------------------------------------------------- Luxembourg X Banque et Caisse d'Espargne de l'Etat - ----------------------------- -------------- ----------------- ----------------------------------------------------- Malaysia X HongKong Bank Malaysia Berhad - ----------------------------- -------------- ----------------- ----------------------------------------------------- Mali X Societe Generale de Banques en Cote d'Ivoire - ----------------------------- -------------- ----------------- ----------------------------------------------------- Malta X HSBC Bank Malta plc - ----------------------------- -------------- ----------------- ----------------------------------------------------- Mauritius X HSBC - ----------------------------- -------------- ----------------- ----------------------------------------------------- Mexico X Banco Nacional de Mexico - ----------------------------- -------------- ----------------- ----------------------------------------------------- Morocco X Banque Commerciale du Maroc - ----------------------------- -------------- ----------------- ----------------------------------------------------- Namibia X Stanbic Bank Namibia Ltd. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Netherlands X Mees Pierson - ----------------------------- -------------- ----------------- ----------------------------------------------------- New Zealand X Australia & New Zealand Banking Group - ----------------------------- -------------- ----------------- ----------------------------------------------------- Niger X Societe Generale de Banques en Cote d'Ivoire - ----------------------------- -------------- ----------------- ----------------------------------------------------- Nigeria X Stanbic Merchant Bank Nigeria Ltd. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Norway X Den Norske Bank ASA - ----------------------------- -------------- ----------------- ----------------------------------------------------- Oman X HSBC Bank Middle East Pakistan X Standard Chartered Bank - ----------------------------- -------------- ----------------- ----------------------------------------------------- Panama X BankBoston, N.A. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Peru X Citibank, N.A. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Philippines X HSBC - ----------------------------- -------------- ----------------- ----------------------------------------------------- Poland X Bank Handlowy W Warszawie S.A. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Portugal X Banco Comercial Portugues - ----------------------------- -------------- ----------------- ----------------------------------------------------- Romania X ING Bank - ----------------------------- -------------- ----------------- ----------------------------------------------------- Russia X Vneshtorgbank X Credit Suisse First Boston AO - ----------------------------- -------------- ----------------- ----------------------------------------------------- Senegal X Societe Generale de Banques en Cote d'Ivoire - ----------------------------- -------------- ----------------- ----------------------------------------------------- Singapore X United Overseas Bank Ltd. X The Development. Bank of Singapore Ltd. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Slovakia X Ceskoslovenska Obchodni Banka, AS - ----------------------------- -------------- ----------------- ----------------------------------------------------- Slovenia X Bank Austria Creditanstalt d.d. Ljublijan - ----------------------------- -------------- ----------------- ----------------------------------------------------- South Africa X Societe Generale Johannesburg X The Standard Bank of South Africa Ltd. - ----------------------------- -------------- ----------------- ----------------------------------------------------- A= BNY will accept responsibility for negligence and wilful misconduct by the subcustodian. B= BNY does not guarantee or indemnify but will provide "Pass-Through" for any situations. APPENDIX A SUB-CUSTODIAN INDEMNIFICATION POLICY - ----------------------------- -------------- ----------------- ----------------------------------------------------- Market A B Sub-Custodian - ----------------------------- -------------- ----------------- ----------------------------------------------------- South Korea X Standard Chartered Bank - ----------------------------- -------------- ----------------- ----------------------------------------------------- Spain X Banco Bilboa Vizcaya Argentaria S.A. (BBVA) - ----------------------------- -------------- ----------------- ----------------------------------------------------- Sri Lanka X Standard Chartered Bank - ----------------------------- -------------- ----------------- ----------------------------------------------------- Swaziland X Stanbic Bank Swaziland Ltd. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Sweden X Skandinaviska Enskilda Banken - ----------------------------- -------------- ----------------- ----------------------------------------------------- Switzerland X Credit Suisse First Boston - ----------------------------- -------------- ----------------- ----------------------------------------------------- Taiwan X HSBC - ----------------------------- -------------- ----------------- ----------------------------------------------------- Thailand X Standard Chartered Bank X Bangkok Bank Public Company Ltd. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Togo X Societe Generale de Banques en Cote d'Ivoire - ----------------------------- -------------- ----------------- ----------------------------------------------------- Trinidad & Tobago X Republic Bank Ltd. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Tunisia X Banque Internationale Arabe de Tunisie - ----------------------------- -------------- ----------------- ----------------------------------------------------- Turkey X Osmanli Bankasi A.S. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Ukraine X ING Bank - ----------------------------- -------------- ----------------- ----------------------------------------------------- United Kingdom NA NA The Bank of New York X The Depository & Clearing Centre (DCC) - ----------------------------- -------------- ----------------- ----------------------------------------------------- United States NA NA The Bank of New York - ----------------------------- -------------- ----------------- ----------------------------------------------------- Uruguay X Bank Boston, N.A. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Venezuela X Citibank, N.A. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Zambia X Barclays Bank of Zambia Ltd. - ----------------------------- -------------- ----------------- ----------------------------------------------------- Zimbabwe X Barclays Bank of Zimbabwe Ltd. - ----------------------------- -------------- ----------------- ----------------------------------------------------- A= BNY will accept responsibility for negligence and wilful misconduct by the subcustodian. B= BNY does not guarantee or indemnify but will provide "Pass-Through" for any situations.
Fee Schedule for JOHN HANCOCK FUNDS Listed on Schedule II ---------------------------------------- DOMESTIC CUSTODY FEE SCHEDULE 1. Securities Settled and Safekept Within the United States. The Bank of New York's fee for custody services for each account is as follows: Maintenance Charges Asset Holding Annual Basis Points - -------------------------------------------------------------------------------- 0 - $10 billion .25 Excess .15 Transaction Charges Category Per Transaction - -------------------------------------------------------------------------------- Receive/Delivery - Book Entry $ 5.00 Receive/Delivery - PTC 5.00 Receive/Delivery - Physical 15.00 P & I Payments 5.00 Wires In/Out and official check requests to pay 3.50 Fund related expenses A transaction is defined as a receipt or delivery versus payment or a free receipt or deliver. II. General - Account Maintenance: Monthly fee of $50.00 per account. (Waived) - On-Line Services: $200.00 monthly access fee. (Waived) - Dedicated Line Services: Charged as pass through costs. 1 GLOBAL SECURITIES FEE SCHEDULE ADMINISTRATION/ INSTRUCTION FEE SAFEKEEPING FEE (PER INSTRUCTION) COUNTRY (IN BASIS POINTS)* (U.S. DOLLARS) - -------------------------------------------------------------------------------- Argentina (Equities)..................... 22.0 ............. 60 Argentina (Bonds)........................ 18.0 ............. 60 Australia................................ 3.0 ............. 45 Austria (ATS Securities)................. 4.5 ............. 55 Bahrain.................................. 50.0 ............. 140 Bangladesh............................... 50.0 ............. 165 Belgium (Equities)....................... 3.5 ............. 50 Belgium (Bonds).......................... 2.5 ............. 50 Belgium (T/Bills)........................ 2.0 ............. 50 Bermuda.................................. 22.0 ............. 80 Bolivia.................................. 60.0 ............. 150 Botswana................................. 45.0 ............. 150 Brazil................................... 22.0 ............. 30 Bulgaria................................. 45.0 ............. 95 Canada................................... 2.0 ............. 18 Chile.................................... 22.0 ............. 85 China.................................... 22.0 ............. 80 Colombia................................. 50.0 ............. 115 Costa Rica............................... 22.0 ............. 75 Croatia.................................. 35.0 ............. 85 Cyprus................................... 22.0 ............. 65 Czech Republic (Equities/Bonds).......... 22.0 ............. 75 Czech Republic (T/Bills)................. 18.0 ............. 75 Denmark.................................. 3.5 ............. 55 EASDAQ................................... 5.5 ............. 60 Ecuador.................................. 40.0 ............. 85 Egypt.................................... 45.0 ............. 115 Estonia.................................. 12.0 ............. 45 Euromarkets (Euroclear - Eurobonds only**)....................... 1.8 ............. 18 Finland.................................. 6.0 ............. 55 France................................... 3.25 ............. 50 Germany.................................. 2.5 ............. 35 Ghana.................................... 45.0 ............. 150 Greece (Equities)........................ 22.0 ............. 105 Greece (Bonds)........................... 16.0 ............. 105 Hong Kong (Equities/Bonds)............... 6.0 ............. 70 Hong Kong (CMU Bonds).................... 4.0 ............. 50 Hungary (KELER - Equities)............... 30.0 ............. 85 Hungary (KELER - Bonds).................. 30.0 ............. 65 Iceland ................................. 28.0 ............. 80 2 ADMINISTRATION/ INSTRUCTION FEE SAFEKEEPING FEE (PER INSTRUCTION) COUNTRY (IN BASIS POINTS)* (U.S. DOLLARS) - -------------------------------------------------------------------------------- India (Dematerialized Securities)....... 20.0 ............. 160 India (Physical Securities)............. 70.0 ............. 335 Indonesia............................... 13.0 ............. 105 Ireland................................. 3.75 ............. 40 Israel.................................. 22.0 ............. 50 Italy................................... 3.25 ............. 55 Ivory Coast............................. 50.0 ............. 155 Jamaica................................. 45.0 ............. 75 Japan................................... 2.5 ............. 25 Jordan (Equities/Bonds)................. 45.0 ............. 140 Jordan (Gov't Bonds).................... 26.0 ............. 100 Kazakhstan (Equities)................... 60.0 ............. 150 Kazakhstan (Bonds)...................... 40.0 ............. 160 Kenya................................... 45.0 ............. 150 Latvia.................................. 55.0 ............. 70 Lebanon (Equities/Bonds)................ 50.0 ............. 140 Lebanon (Gov't Bonds)................... 26.0 ............. 100 Lithuania............................... 22.0 ............. 55 Luxembourg.............................. 5.5 ............. 55 Malaysia................................ 6.0 ............. 65 Malta................................... 22.0 ............. 75 Mauritius............................... 35.0 ............. 135 Mexico.................................. 9.0 ............. 40 Morocco................................. 40.0 ............. 115 Namibia................................. 32.0 ............. 75 Netherlands............................. 4.0 ............. 40 New Zealand............................. 3.5 ............. 50 Nigeria................................. 32.0 ............. 75 Norway.................................. 4.0 ............. 55 Oman.................................... 50.0 ............. 140 Pakistan................................ 35.0 ........... 135 Panama.................................. 65.0 ........... 85 Peru.................................... 40.0 ........... 90 Philippines............................. 10.0 ........... 90 Poland (Equities/Bonds)................. 25.0 ........... 75 Poland (T/Bills) ....................... 12.0 ........... 75 Portugal................................ 10.0 ........... 75 Romania................................. 45.0 ........... 85 Russia (Equities)....................... 65.0 ........... 160 Russia (MinFins)........................ 16.0 ........... 85 Singapore............................... 5.0 ............. 60 Slovak Republic (Equities/Bonds)........ 30.0 ............. 140 Slovak Republic (Promissory Notes)...... 30.0 ............. 260 Slovenia................................ 45.0 ............. 70 South Africa............................ 4.0 ............. 40 South Korea............................. 11.0 ............. 60 Spain (Equities/Bonds).................. 4.5 ............. 60 Spain (Gov't Bonds)..................... 2.5 ............. 60 Sri Lanka............................... 18.0 ............. 90 Swaziland............................... 32.0 ............. 75 3 ADMINISTRATION/ INSTRUCTION FEE SAFEKEEPING FEE (PER INSTRUCTION) COUNTRY (IN BASIS POINTS)* (U.S. DOLLARS) - -------------------------------------------------------------------------------- Sweden.............................. 4.0 ............. 50 Switzerland......................... 4.0 ............. 60 Taiwan.............................. 16.0 ............. 90 Thailand............................ 7.0 ............. 75 Trinidad & Tobago................... 30.0 ............. 65 Tunisia (Equities).................. 50.0 ............. 65 Tunisia (Bonds)..................... 35.0 ............. 65 Tunisia (T/Bills)................... 12.0 ............. 65 Turkey (Equities)................... 18.0 ............. 55 Turkey (Bonds)...................... 15.0 ............. 55 UK.................................. 1.5 ............. 30 Ukraine (Equities).................. 70.0 ............. 260 Ukraine (Bonds)..................... 25.0 ............. 85 Uruguay (Equities).................. 60.0 ............. 90 Uruguay (Bonds)..................... 45.0 ............. 90 Venezuela........................... 45.0 ............. 140 Zambia.............................. 45.0 ............. 150 Zimbabwe............................ 45.0 ............. 150 * Fee is expressed in basis points per annum and is calculated based upon month-end market value. ** For non-Eurobond holdings in Euroclear, surcharges apply The above instruction fees are based on an assumption that BNY will receive instructions via SWIFT, BNY proprietary systems or other electronic medium as agreed by BNY. Instructions received through other medium (e.g. Facsimile) may be subject to a surcharge. Out of Pocket Expenses : Charges incurred by The Bank of New York for local taxes, stamp duties or other local duties and assessments, stock exchange fees, postage and insurance for shipping, facsimile reporting, extraordinary telecommunications fees or other unusual expenses which are unique to the country of investment, will be passed along as incurred. A Foreign Exchange transaction undertaken through a third party will be charged $35.00 per transaction. 4 FUND ACCOUNTING FEE SCHEDULE Accounting Fee (Based on market value of all funds at each calendar month-end) - -------------- 2.0 basis points, per annum, on the first $5 billion of net assets 1.5 basis points, per annum, on the next $5 billion of net assets 1.0 basis points, per annum, on the next $5 billion of net assets .75 basis points, per annum, on the excess of net assets Minimum Fees (Per fund) - ------------ (a)$30,000 minimum fee, per annum, per domestic portfolio (a)$30,000 minimum fee, per annum, per international portfolio Out-of-Pocket Expenses - ---------------------- Out-of-pocket expenses include, but are limited to, the cost of obtaining prices for security evaluations, the cost associated with attendance at Board presentations, legal fees, filing fees, miscellaneous printing, courier and express mail charges, etc. Billing Cycle - ------------- The above fees will be billed on a monthly basis. (a) Waived for the first 12 months on any new funds up to a maximum of four funds in any calendar year. This fee is waived for any fund undergoing an incubation exercise. - -------------------------------------------------------------------------------- Other ----- The Bank of New York agrees to rebate the following amount against fees due for accounting and custody services as follows: First 12 months @ $29,166.67 per month Next 12 months @ $20,833.33 per month Next 12 months @ $12,500.00 per month These fees are guaranteed for a period of three years from the date of the Contract. Agreed to and accepted by: John Hancock Funds listed on Schedule II The Bank of New York ---------------------------------------- -------------------- Name : Name: Title: Title: Date: Date: 5 EX-99.(I) 6 file002.txt LEGAL OPINION February 19, 2002 John Hancock Declaration Trust 101 Huntington Avenue Boston, MA 02199 RE: John Hancock DeclarationTrust (the "Trust") File Nos. 33-64465; 811-07437 (0001003457) ----------------------------- Ladies and Gentlemen: In connection with the filing of Post Effective Amendment No. 15 under the Securities Act of 1933, as amended, and Amendment No. 15 under the Investment Company Act of 1940, as amended, for John Hancock Declaration Trust it is the opinion of the undersigned that the Trust's shares when sold will be legally issued, fully paid and nonassessable. In connection with this opinion it should be noted that the Fund is an entity of the type generally known as a "Massachusetts business trust." The Trust has been duly organized and is validly existing under the laws of the Commonwealth of Massachusetts. Under Massachusetts law, shareholders of a Massachusetts business trust may be held personally liable for the obligations of the Trust. However, the Trust's Declaration of Trust disclaims shareholder liability for obligations of the Trust and indemnifies the shareholders of a Fund, with this indemnification to be paid solely out of the assets of that Fund. Therefore, the shareholder's risk is limited to circumstances in which the assets of a Fund are insufficient to meet the obligations asserted against that Fund's assets. Sincerely, /s/Brian Langenfeld ------------------- Attorney and Assistant Secretary -----END PRIVACY-ENHANCED MESSAGE-----