As filed with the Securities and Exchange Commission on September 14, 2001. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-14 ---- REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /_X__/ ---- Pre-Effective Amendment No. __ /____/ ---- Post-Effective Amendment No. ___ /____/ (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 office) Zip Code (617) 375-1702 - -------------------------------------------------------------------------------- (Registrant's Telephone Number, including Area Code) Susan S. Newton, Esq. John Hancock Advisers, Inc. 101 Huntington Avenue Boston, MA 02199 - -------------------------------------------------------------------------------- (Name and address of agent for service) Title of Securities Being Registered: shares of beneficial interest of John Hancock Declaration Trust. Approximate Date of Proposed Public Offering: As soon as practicable after the effectiveness of the registration statement. No filing fee is required because an indefinite number of shares has previously been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended. This Registration Statement relates to shares previously registered on Form N-1A (File Nos. 33-64465 and 811-07437). It is proposed that this filing will become effective on October 15, 2001 pursuant to Rule 488 under the Securities Act of 1933. JOHN HANCOCK DECLARATION TRUST CROSS-REFERENCE SHEET Items Required by Form N-14 PART A - ------ Item No. Item Caption Prospectus Caption - -------- ------------ ------------------ 1. Beginning of Registration COVER PAGE OF REGISTRATION Statement and Outside Front STATEMENT; FRONT COVER PAGE OF Cover Page of Prospectus PROSPECTUS 2. Beginning and Outside Back TABLE OF CONTENTS Cover Page of Prospectus 3. Synopsis and Risk Factors SUMMARY; INVESTMENT RISKS 4. Information About the INTRODUCTION; SUMMARY; INVESTMENT Transaction RISKS; INFORMATION CONCERNING THE MEETING; PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION; FURTHER INFORMATION ON EACH REORGANIZATION; CAPITALIZATION 5. Information About the PROSPECTUS COVER PAGE; INTRODUCTION; Registrant SUMMARY; ADDITIONAL INFORMATION ABOUT THE FUNDS' BUSINESSES 6. Information About the PROSPECTUS COVER PAGE; INTRODUCTION; Company Being Acquired SUMMARY; ADDITIONAL INFORMATION ABOUT THE FUNDS' BUSINESSES 7. Voting Information PROSPECTUS COVER PAGE; NOTICE OF SPECIAL MEETING OF SHAREHOLDERS; SUMMARY; INFORMATION CONCERNING THE MEETING; VOTING RIGHTS AND REQUIRED VOTE 8. Interest of Certain Persons EXPERTS and Experts 9. Additional Information NOT APPLICABLE Required for Reoffering by Persons Deemed to be Underwriters PART B - ------ Caption in Statement of Item No. Item Caption Additional Information - -------- ------------ ---------------------- 10. Cover Page COVER PAGE 11. Table of Contents TABLE OF CONTENTS 12. Additional Information ADDITIONAL INFORMATION ABOUT About the Registrant V.A. STRATEGIC INCOME FUND AND V.A. FINANCIAL INDUSTRIES FUND 13. Additional Information About ADDITIONAL INFORMATION ABOUT the Company Being Acquired V.A HIGH YIELD BOND FUND AND V.A. REGIONAL BANK FUND 14. Financial Statements ADDITIONAL INFORMATION ABOUT V.A. STRATEGIC INCOME FUND; ADDITIONAL INFORMATION ABOUT V.A HIGH YIELD BOND FUND; PRO FORMA COMBINED FINANCIAL STATEMENTS ADDITIONAL INFORMATION ABOUT V.A. FINANCIAL INDUSTRIES FUND; ADDITIONAL INFORMATION ABOUT V.A. REGIONAL BANK FUND; PRO-FORMA COMBINED FINANCIAL STATEMENTS. PART C - ------ Item No. Item Caption - -------- ------------ 15. Indemnification INDEMNIFICATION 16. Exhibits EXHIBITS 17. Undertakings UNDERTAKINGS November 1, 2001 Dear Contract or Certificate Owner: I am writing to ask for your vote on important matters concerning your investment in certain funds within your John Hancock Variable Annuity. Your fund's trustees are proposing the merger of two funds in the John Hancock Declaration Trust (the "Acquired Funds") with two other funds in the same Trust (the "Acquiring Funds"), as described in the enclosed proxy materials and summarized in the questions and answers on the following pages. The Board of Trustees considered the following matters, among others, in approving the proposals: | | Each Acquiring Fund's total expenses are lower. As a result, shareholders may experience a reduction in the total amount of fees, as a percentage of average net assets, that they indirectly pay. Consolidating your fund's assets with a similar fund to increase the overall asset base is a logical path for containing the fund's expense ratios going forward. | | The Trustees believe that the Acquiring Funds are better positioned to generate strong returns because of their ability to choose from a broader range of investment opportunities. The fund merger proposals have been unanimously approved by each fund's board of trustees, who believe the mergers will benefit you. The enclosed proxy statement contains further explanation and important details of the reorganizations, which I strongly encourage you to read before voting. Your Vote Makes a Difference! No matter what size your investment may be, your vote is important. Please review the enclosed materials and to complete, sign and return the enclosed proxy ballot(s) to us immediately. Your prompt response will help avoid the need for additional mailings. For your convenience, we have provided a postage-paid envelope. If you have any questions or need additional information, please contact your Investment Professional or call a John Hancock Service Representative at 1-800-824-0335, Monday through Friday between 8:00 A.M. and 8:00 P.M. Eastern Time. I thank you for your prompt vote on this matter. Sincerely, /s/Maureen R. Ford - ------------------ Maureen R. Ford Chairman and Chief Executive Officer Declaration Variable Annuity, Patriot Variable Annuity and Revolution Variable Annuities are issued by John Hancock Life Insurance Company, or its subsidiary John Hancock Variable Life Insurance Company*, and are distributed by John Hancock Funds, Inc., 101 Huntington Avenue, Boston, MA 02199-7603, or Signator Investors Inc., 200 Clarendon Street, Boston, MA 02117. *Not licensed in New York. Q&A --- Q. What are the changes being proposed? A. Generally, these proposals focus on merging funds into similar funds, which have significantly larger assets and offer a greater opportunity for future growth. Specifically, the trustees of your fund(s) are proposing the following mergers: - ----------------- -------------------------------------------------------------- Acquired Fund Acquiring Fund - ----------------- -------------------------------------------------------------- Proposal 1 V.A. High Yield Bond Fund V.A. Strategic Income Fund - ----------------- -------------------------------------------------------------- Proposal 2 V.A. Regional Bank Fund V.A. Financial Industries Fund - ----------------- -------------------------------------------------------------- Q. Will this change affect the number of units I currently have? Will there be any tax implications? A. No. There will be no impact on the number of units you have invested in your variable annuity and there are no tax implications (no Form 1099R will be generated) Q. Will the transfer count towards the 12 free transfers allowed per contract year? A. No, the merger transfer will be free and it will not count toward your allowable 12 free transfers per year. Q. What if I do not want to have any units of the acquired fund transferred to the proposed acquiring fund? A. Prior to the merger, you may contact an Annuity Service Representative at 1-800-824-0335, Monday through Friday between 8:00 A.M. - 8:00 P.M. Eastern Time and request a transfer to another investment option or Fixed Account (if available in your state). Please consult your Investment Professional prior to reallocating your assets. Q. How do I vote? A. Follow two simple steps: STEP 1: First, read the sections of the proxy statement that apply to your fund(s). STEP 2: Finally, complete the enclosed voting card for each of your funds and return it in the enclosed postage-paid envelope. If you have more than one card, you need to complete, sign and mail each one. Q. Does my vote make a difference? A. Whether you are a large or small investor, your vote is important, and we urge you to participate in this process to ensure that John Hancock represents your wishes when it casts votes at the shareholder meeting. The Board voted unanimously to recommend these changes for your fund(s), and your approval is needed to implement the changes. JOHN HANCOCK V.A. HIGH YIELD BOND FUND JOHN HANCOCK V.A. REGIONAL BANK FUND (each a "Fund", and each a series of John Hancock Declaration Trust) 101 Huntington Avenue Boston, MA 02199 NOTICE OF MEETING OF SHAREHOLDERS SCHEDULED FOR DECEMBER 5, 2001 This is the formal agenda for each fund's shareholder meeting. It tells you, as contract owners, and the insurance companies that are the owners of the funds' shares, what matters will be voted on and the time and place of the meeting. The insurance companies will vote their fund shares as instructed by their contract or certificate owners, who are also referred to in the proxy materials as "shareholders" for this limited purpose. To the shareholders of the funds: A joint shareholder meeting for your fund(s) will be held at 101 Huntington Avenue, Boston, Massachusetts on Wednesday, December 5, 2001 at 9:00 a.m., Eastern time, to consider the following: 1. A proposal to approve an Agreement and Plan of Reorganization between John Hancock V.A. High Yield Bond Fund ("V.A. High Yield Bond Fund") and John Hancock V.A. Strategic Income Fund ("V.A. Strategic Income Fund"). Under this Agreement, V.A. High Yield Bond Fund would transfer all of its assets to V.A. Strategic Income Fund in exchange for shares of V.A. Strategic Income Fund. These shares would be distributed proportionately to the shareholders of V.A. High Yield Bond Fund. V.A. Strategic Income Fund would also assume V.A. High Yield Bond Fund's liabilities. V.A. High Yield Bond Fund's Board of Trustees recommends that shareholders vote FOR this proposal. 2. A proposal to approve an Agreement and Plan of Reorganization between John Hancock V.A. Regional Bank Fund ("V.A. Regional Bank Fund") and John Hancock V.A. Financial Industries Fund ("V.A. Financial Industries Fund"). Under this Agreement, V.A. Regional Bank Fund would transfer all of its assets to V.A. Financial Industries Fund in exchange for shares of V.A. Financial Industries Fund. These shares would be distributed proportionately to the shareholders of V.A. Regional Bank Fund. V.A. Financial Industries Fund would also assume V.A. Regional Bank Fund's liabilities. V.A. Regional Bank Fund's Board of Trustees recommends that shareholders vote FOR this proposal. 3. Any other business that may properly come before the meeting. Shareholders of record as of the close of business on September 20, 2001 are entitled to vote at the meeting and any related follow-up meetings. Whether or not you expect to attend the meeting, please complete and return the enclosed proxy card (voting instruction card). If shareholders do not return their proxies in sufficient numbers, your fund will incur the cost of extra solicitations, which is indirectly borne by shareholders. By order of the Board of Trustees, Susan S. Newton Secretary November 1, 2001 PROXY STATEMENT OF V.A. HIGH YIELD BOND FUND V.A. REGIONAL BANK FUND (each an "Acquired Fund" or "your fund", and each a series of John Hancock Declaration Trust) PROSPECTUS FOR V.A. STRATEGIC INCOME FUND V.A. FINANCIAL INDUSTRIES FUND (each an "Acquiring Fund", and each a series of John Hancock Declaration Trust) This proxy statement and prospectus contains the information shareholders should know before voting on the proposed reorganizations. Please read it carefully and retain it for future reference. How each Reorganization Will Work -------------------------------------------------------------------------- Acquired Fund Acquiring Fund -------------------------------------------------------------------------- Proposal 1 V.A. High Yield Bond Fund V.A. Strategic Income Fund -------------------------------------------------------------------------- Proposal 2 V.A. Regional Bank Fund V.A. Financial Industries Fund -------------------------------------------------------------------------- o Each Acquired Fund will transfer all of its assets to the respective Acquiring Fund. Each Acquiring Fund will assume the Acquired Fund's liabilities. o Each Acquiring Fund will issue shares to the respective Acquired Fund in an amount equal to the value of the Acquired Fund's shares. These shares will be distributed to Acquired Fund shareholders in proportion to their holdings on the reorganization date. o The reorganization will be tax-free to shareholders. o Each Acquired Fund will be liquidated and fund shareholders will become shareholders of the corresponding Acquiring Fund. Shares of the Acquiring Funds are not deposits or obligations of, or guaranteed or endorsed by, any bank or other depository institution. These shares are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency. Shares of the Acquiring Funds have not been approved or disapproved by the Securities and Exchange Commission. The Securities and Exchange Commission has not passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. 1 Why each Acquired Fund's Trustees are Recommending the Reorganization The Acquired Funds' Trustees believe that reorganizing each fund into a larger fund with similar investment policies will enable the shareholders of the funds to benefit from increased diversification, the ability to achieve better net prices on securities trades and economies of scale that may contribute to a lower expense ratio. Therefore, the Trustees recommend that Acquired Fund shareholders vote FOR the reorganization. - ------------------------------------------------------------------------------------------- Where to Get More Information - ------------------------------------------------------------------------------------------- Prospectuses of the Acquired Funds and the Incorporated by reference into this proxy Acquiring Funds dated May 1, 2001. statement and prospectus and summarized in Appendices A and B. - ------------------------------------------------------------------------------------------- The Acquired Funds' annual and semiannual On file with the Securities and Exchange reports to shareholders. Commission ("SEC") and available at no - ---------------------------------------------- charge by calling 1-800-824-0335. The Acquiring Funds' annual and semiannual Incorporated by reference into this proxy reports to shareholders. statement and prospectus. - ------------------------------------------------------------------------------------------- A statement of additional information dated November 1, 2001. It contains additional information about the Acquired Funds and the Acquiring Funds. - ------------------------------------------------------------------------------------------- To ask questions about this proxy statement Call our toll-free telephone and prospectus. number: 1-800-824-0335. - ------------------------------------------------------------------------------------------- The date of this proxy statement and prospectus is November 1, 2001. 2 TABLE OF CONTENTS Page INTRODUCTION............................................................ 4 PROPOSAL 1 - V.A. HIGH YIELD BOND FUND.................................. 5 Summary............................................................... 5 Investment Risks...................................................... 10 Proposal to Approve the Agreement and Plan of Reorganization.......... 11 PROPOSAL 2 - V.A. REGIONAL BANK FUND.................................... 13 Summary............................................................... 13 Investment Risks...................................................... 18 Proposal to Approve the Agreement and Plan of Reorganization.......... 18 FURTHER INFORMATION ON EACH REORGANIZATION.............................. 20 CAPITALIZATION.......................................................... 21 ADDITIONAL INFORMATION ABOUT THE FUNDS' BUSINESSES................................................. 22 BOARDS' EVALUATION AND RECOMMENDATION .................................. 22 VOTING RIGHTS AND REQUIRED VOTE ........................................ 22 INFORMATION CONCERNING THE MEETING...................................... 23 OWNERSHIP OF SHARES OF THE FUNDS........................................ 25 EXPERTS................................................................. 25 AVAILABLE INFORMATION................................................... 25 EXHIBIT A - Form of Agreement and Plan of Reorganization................ 26 APPENDICES A. BASIC INFORMATION ABOUT THE FUNDS (attached to this document). B. MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE: DECEMBER 31, 2000 (attached to this document). 3 INTRODUCTION This proxy statement and prospectus is being used by the Acquired Funds' Board of Trustees to solicit proxies to be voted at a special meeting of the Acquired Funds' shareholders. This meeting will be held at 101 Huntington Avenue, Boston, Massachusetts on Wednesday, December 5, 2001 at 9:00 a.m., Eastern time. The purpose of the meeting is to consider proposals to approve Agreements and Plans of Reorganization providing for the reorganization of the Acquired Funds into the Acquiring Funds. Who is Eligible to Vote? Shareholders of record on September 20, 2001 (record date) are entitled to attend and vote at the meeting or any adjourned meeting. Each share is entitled to one vote. As of the record date, the insurance companies, on behalf of the separate accounts, were shareholders of record of the Acquired Funds. The insurance companies will vote shares of the Acquired Funds held by them in accordance with voting instructions received from contract owners for whose accounts the shares are held. The enclosed voting instruction card will be used by the insurance companies to receive voting instructions from contract owners. The notice of meeting, the proxy card (voting instruction card), the proxy statement and prospectus are being mailed to the insurance companies and contract owners on or about November 1, 2001. Summary of each Proposal For each proposal, this proxy statement and prospectus includes a summary of more complete information appearing later in the proxy statement. Please read the entire proxy statement and Exhibit A, as well as Appendices A and B, because they contain details that are not in the summary. You can obtain information about rights of a holder of a variable contract from your Annuity Prospectus. 4 PROPOSAL 1 APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN V.A. HIGH YIELD BOND FUND AND V.A. STRATEGIC INCOME FUND A proposal to approve an Agreement and Plan of Reorganization between V.A. High Yield Bond Fund and V.A. Strategic Income Fund. Under this Agreement, V.A. High Yield Bond Fund would transfer all of its assets to V.A. Strategic Income Fund in exchange for shares of V.A. Strategic Income Fund. These shares would be distributed proportionately to the shareholders of V.A. High Yield Bond Fund. V.A. Strategic Income Fund would also assume V.A. High Yield Bond Fund's liabilities. V.A. High Yield Bond Fund's Board of Trustees recommends that shareholders vote FOR this proposal. SUMMARY Comparison of V.A. High Yield Bond Fund to V.A. Strategic Income Fund - ------------------------------------------------------------------------------------------------------------------- V.A. High Yield Bond Fund V.A. Strategic Income Fund - ------------------------------------------------------------------------------------------------------------------- Business: Each fund is a diversified series of John Hancock Declaration Trust. The trust is an open-end investment company organized as a Massachusetts business trust. - ------------------------------------------------------------------------------------------------------------------- Net assets as of June 30, 2001: $6.13 million. $52.81 million. - ------------------------------------------------------------------------------------------------------------------- Investment adviser and Investment Adviser: Investment Adviser: portfolio managers: John Hancock Advisers, Inc. John Hancock Advisers, Inc. Portfolio managers:* Portfolio managers:* Arthur N. Calavritinos, CFA Frederick L. Cavanaugh, Jr. -V.P. of adviser -Senior V.P. of adviser -Joined fund team in 1998 -Joined fund team in 1996 -Joined adviser in 1988 -Joined adviser in 1986 -Began business career in 1986 -Began business career in 1975 Frederick L. Cavanaugh, Jr. Arthur N. Calavritinos, CFA -Senior V.P. of adviser -V.P. of adviser -Joined fund team in 1998 -Joined fund team in 1996 -Joined adviser in 1986 -Joined adviser in 1988 -Began business career in 1975 -Began business career in 1986 Janet L. Clay, CFA Janet L. Clay, CFA -V.P. of adviser -V.P. of adviser -Joined fund team in 1998 -Joined fund team in 1998 -Joined adviser in 1995 -Joined adviser in 1995 -Began business career in 1990 -Began business career in 1990 Daniel S. Janis -Second V.P. of adviser -Joined fund team in 1999 -Joined adviser in 1999 -Began business career in 1984 --------------------------------------------------------------------------------- *Although each portfolio manager is primarily responsible for the day-to-day management of both funds' portfolios, Mr. Calavritinos is the team leader for V.A. High Yield Bond Fund and Mr. Cavanaugh is the team leader for V.A. Strategic Income Fund. - ------------------------------------------------------------------------------------------------------------------- 5 - ---------------------------------------------------------------------------------------------------------------- V.A. High Yield Bond Fund V.A. Strategic Income Fund - ---------------------------------------------------------------------------------------------------------------- Investment objective: The fund seeks to maximize current income The fund seeks a high level of current without assuming undue risk. Capital income. This objective can be changed appreciation is a secondary goal. This without shareholder approval. objective can be changed without shareholder approval. - ----------------------- -------------------------------------------- ------------------------------------------- Primary investments: The fund normally invests at least 65% of The fund invests primarily in: assets in U.S. and foreign bonds rated o Foreign government and BBB/Baa or lower and their unrated corporate debt securities from equivalents. The fund may invest up to developed and emerging markets; 30% of assets in junk bonds rated CC/Ca o U.S. Government and agency and their unrated equivalents. securities; and o U.S. junk bonds rated as low as CC/Ca and their unrated equivalents. The fund normally invests in all three categories. However, the managers may invest up to 100% of assets in any one category. - ----------------------- -------------------------------------------- ------------------------------------------- Junk bonds: The fund may invest without limit in junk The fund may invest without limit in junk bonds. The fund may invest up to 30% of bonds rated as low as CC/Ca and their assets in junk bonds rated CC/Ca and their unrated equivalents. unrated equivalents. - ----------------------- -------------------------------------------- ------------------------------------------- Foreign debt The fund may invest in foreign debt The fund may invest in foreign debt securities: securities without any percentage limit. securities without any percentage limit. The fund limits its investments in government securities of any one country to 25% of total assets. - ----------------------- -------------------------------------------- ------------------------------------------- Equity securities: The fund may invest up to 20% of net The fund may invest up to 10% of net assets in U.S. and foreign equity assets in U.S. and foreign equity securities. securities. - ----------------------- ---------------------------------------------------------------------------------------- Average maturity: There is no limit on either fund's average maturity. - ----------------------- ---------------------------------------------------------------------------------------- Illiquid securities: The fund may invest up to 15% of net assets in illiquid securities. - ----------------------- ---------------------------------------------------------------------------------------- Diversification: The fund is diversified and, with respect to 75% of total assets, cannot invest more than 5% of total assets in securities of a single issuer. - ----------------------- -------------------------------------------- ------------------------------------------- Industry The fund may invest up to 40% of assets in The fund may not invest more than 25% of Concentration: electric utilities and telecommunications assets in securities of issuers in any companies. one industry. - ----------------------- ---------------------------------------------------------------------------------------- Derivatives: The fund may use certain derivatives (investments whose value is based on indices, securities or currencies). - ----------------------- ------------------------------------------- -------------------------------------------- Temporary defensive In abnormal market conditions, the fund In abnormal market conditions, the fund positions: may temporarily invest more than 35% of may temporarily invest extensively in assets in investment-grade short-term investment-grade short-term securities. securities. In these and other cases, In these and other cases, the fund might the fund might not achieve its goal. not achieve its goal. - ----------------------- ------------------------------------------- -------------------------------------------- 6 The Funds' Expenses Both funds pay various expenses. The first two expense tables appearing below show the expenses for the twelve-month period ended June 30, 2001, adjusted to reflect any changes. Future expenses may be greater or less. The examples contained in each expense table show what you would pay if you invested $10,000 over the various time periods indicated. Each example assumes that you reinvested all dividends and that the average annual return was 5%. The examples do not reflect the fees and expenses associated with variable annuity and variable life insurance contracts for which the funds serve as investment vehicles. The examples are for comparison purposes only and are not a representation of either fund's actual expenses or returns, either past or future. 7 V.A. High Yield Bond Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.60% Other expenses 0.57% Total fund operating expenses 1.17% Expense reimbursement (1) 0.32% Actual operating expenses 0.85% Example Year 1 Year 3 Year 5 Year 10 At end of period $87 $271 $471 $1049 (1) V.A. High Yield Bond Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.25% until 5/1/02. V.A. Strategic Income Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.60% Other expenses 0.11% Total fund operating expenses 0.71% Expense reimbursement (1) 0.00% Actual operating expenses 0.71% (1) V.A. Strategic Income Fund's adviser has agreed to limit the Fund's expenses, excluding management fees, to 0.25% until 5/1/02. Example Year 1 Year 3 Year 5 Year 10 At end of period $73 $228 $397 $888 8 Pro Forma Expense Table The following expense table shows the pro forma expenses of V.A. Strategic Income Fund assuming that a reorganization with V.A. High Yield Bond Fund occurred on June 30, 2000. The expenses shown in the table are based on fees and expenses incurred during the twelve months ended June 30, 2001, adjusted to reflect any changes. V.A. Strategic Income Fund's actual expenses after the reorganization may be greater or less than those shown. The example contained in the pro forma expense table shows what you would pay on a $10,000 investment if the reorganization had occurred on June 30, 2000. The example assumes that you reinvested all dividends and that the average annual return was 5%. The example does not reflect the fees and expenses associated with variable annuity and variable life insurance contracts for which the funds serves as an investment vehicle. The pro forma example is for comparison purposes only and is not a representation of V.A. Strategic Income Fund's actual expenses or returns, either past or future. V.A. Strategic Income Fund (PRO FORMA) (Assuming reorganization with V.A. High Yield Bond Fund) Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.60% Other expenses 0.11% Total fund operating expenses 0.71% Expense reimbursement (1) 0.00% Actual operating expenses 0.71% Pro Forma Example Year 1 Year 3 Year 5 Year 10 At end of period $73 $228 $397 $888 (1) V.A. Strategic Income Fund's adviser has agreed to limit the Fund's expenses, excluding management fees, to 0.25% until 5/1/02. 9 The Reorganization o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 14, 2001, but may occur on any later date before June 30, 2002. V.A. High Yield Bond Fund will transfer all of its assets to V.A. Strategic Income Fund. V.A. Strategic Income Fund will assume V.A. High Yield Bond Fund's liabilities. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o V.A. Strategic Income Fund will issue to V.A. High Yield Bond Fund shares in an amount equal to the aggregate net asset value of V.A. High Yield Bond Fund's shares. These shares will be distributed immediately to V.A. High Yield Bond Fund's shareholders in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. High Yield Bond Fund will end up as shareholders of V.A. Strategic Income Fund. o After the reorganization is over, V.A. High Yield Bond Fund will be terminated. o The reorganization will be tax-free and will not take place unless both funds receive a satisfactory opinion concerning the tax consequences of the reorganization from Hale and Dorr LLP, counsel to the funds. The following diagram shows how the reorganization would be carried out. V. A. High Yield Bond V. A. High Yield Bond Fund V.A. Strategic Income Fund transfers assets assets and liabilities Fund receives assets and liabilities to V.A. ----------->---------- and assumes liabilities Strategic Income of V.A. High Yield Bond Fund Fund Shareholders -----------<---------- Issues Shares V.A. High Yield Bond Fund receives V.A. Strategic Income Fund shares and distributes them to its shareholders. Other Consequences of the Reorganization. Each fund pays monthly advisory fees equal to the following annual percentage of its average daily net assets: V.A. High Yield Bond Fund--0.60% and V.A. Strategic Income Fund 0.60%. V.A. Strategic Income Fund's management fee rate of 0.60% and its pro forma management fee rate of 0.60% are the same as V.A. High Yield Bond Fund's management fee rate of 0.60%. V.A. High Yield Bond Fund's gross total annual operating expenses of 1.17% are substantially higher than those of V.A. Strategic Income Fund which are 0.71%. Even after the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. High Yield Bond Fund's total annual operating expenses (0.85%) are higher than those of V.A. Strategic Income Fund (0.71%). After the reorganization, V.A. Strategic Income Fund's pro forma total annual operating expenses (0.71%) are less than those of V.A. High Yield Bond Fund's gross total annual operating expenses (1.17%) and net total annual operating expenses (0.85%). 10 INVESTMENT RISKS The funds are exposed to various risks that could cause shareholders to lose money on their investments in the funds. The following table shows that the risks affecting each fund are similar and compares the risks affecting each fund. - ---------------------------------------------------------------------------------------------------------------------- V.A. High Yield Bond Fund V.A. Strategic Income Fund - ---------------------------------------------------------------------------------------------------------------------- Interest rate risk When interest rates rise, bond prices usually fall. Generally, an increase in the fund's average maturity will make it more sensitive to interest rate risk. - ------------------------------- -------------------------------------------------------------------------------------------- Prepayment (call) and If interest rate movements cause the fund's mortgage-related and callable securities to be extension risks paid off earlier or later than expected, the fund's share price or yield could be hurt. - ------------------------------- -------------------------------------------------------------------------------------------- Credit risk Credit risk depends largely on the perceived financial health of bond issuers. The fund could lose money if the credit rating of any bond in its portfolio is downgraded or if the issuer of the bond defaults on its obligations. In general, lower-rated bonds involve more credit risk. - ------------------------------- -------------------------------------------------------------------------------------------- Other junk bond risks Junk bond prices can fall on bad news about the economy, an industry or a company. - ------------------------------- ---------------------------------------------- --------------------------------------------- Volatility risk The fund's share price, yield and total The fund's risk profile depends on its return may fluctuate more than with less sector allocation. Fluctuations in the aggressive bond funds. fund's share price, yield and total return are expected to be above average for bond funds. - ------------------------------- ---------------------------------------------- --------------------------------------------- Government securities market Not applicable because the fund does not A fall in worldwide demand for U.S. risk ordinarily focus on U.S. government government securities could lower the securities. prices of these securities. - ------------------------------- ---------------------------------------------- --------------------------------------------- Industry concentration risk If the fund concentrates in Not applicable because the fund does not telecommunications or electric utilities, usually concentrate in particular its performance would be tied more closely industries. to those industries and could be worse than that of the overall bond market. - ------------------------------- -------------------------------------------------------------------------------------------- Manager risk The manager and its strategy may fail to produce the intended results. The fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. - ------------------------------- -------------------------------------------------------------------------------------------- Foreign securities risk Foreign investments involve additional risks, including potentially inaccurate financial information and social or political instability. Unfavorable foreign currency exchange rates could reduce the value of bonds denominated in foreign currencies. The prices of foreign bonds may also be more volatile and more sensitive to adverse economic developments occuring outside the U.S. These risks are more severe in emerging markets. - ------------------------------- -------------------------------------------------------------------------------------------- Stock market risk Stock investments may go down in value due to stock market movements or negative company or industry events. - ------------------------------- -------------------------------------------------------------------------------------------- Derivatives risk Certain derivative instruments can produce disproportionate gains or losses and are riskier than direct investments. Also, in a down market derivatives could become harder to value or sell at a fair price. - ------------------------------- -------------------------------------------------------------------------------------------- Liquidity and valuation risks In a down or unstable market, the fund's investments could become harder to value accurately or to sell at a fair price. - ------------------------------- -------------------------------------------------------------------------------------------- Turnover risk In general, the greater the volume of buying and selling by a fund (and the higher its "turnover rate"), the greater the impact that transaction costs will have on the fund's performance. The fund's turnover rate may exceed 100%, which is considered relatively high. - ------------------------------- -------------------------------------------------------------------------------------------- 11 PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION Description of Reorganization Shareholders are being asked to approve an Agreement and Plan of Reorganization, a form of which is attached as Exhibit A. The Agreement provides for a reorganization on the following terms: o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 14, 2001, but may occur on any later date before June 30, 2002. V.A. High Yield Bond Fund will transfer all of its assets to V.A. Strategic Income Fund and V.A. Strategic Income Fund will assume all of V.A. High Yield Bond Fund's liabilities. This will result in the addition of V.A. High Yield Bond Fund's assets to V.A. Strategic Income Fund's portfolio. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o V.A. Strategic Income Fund will issue to V.A. High Yield Bond Fund shares in an amount equal to the aggregate net asset value of V.A. High Yield Bond Fund's shares. As part of the liquidation of V.A. High Yield Bond Fund, these shares will be distributed immediately to shareholders of record of V.A. High Yield Bond Fund in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. High Yield Bond Fund will end up as shareholders of V.A. Strategic Income Fund. o After the reorganization is over, the existence of V.A. High Yield Bond Fund will be terminated. Reasons for the Proposed Reorganization. The Board of Trustees of V.A. High Yield Bond Fund believes that the proposed reorganization will be advantageous to the shareholders of V.A. High Yield Bond Fund for several reasons. The Board of Trustees considered the following matters, among others, in approving the proposal. First, V.A. High Yield Bond Fund is no longer being offered to new variable insurance contract holders, making it increasingly difficult for the fund to attract assets. Second, shareholders may be better served by a fund offering more diversification. V.A. Strategic Income Fund has a larger asset size than V.A. High Yield Bond Fund and may invest in a broader range of securities. Furthermore, V.A. High Yield Bond Fund's small size makes it difficult to manage in a cost effective manner because of the volatility of these bonds and the resulting trading costs. Third, V.A. Strategic Income Fund shares have performed better than V.A. High Yield Bond Fund over the life of both funds. While past performance cannot predict future results, the Trustees believe that V.A. Strategic Income Fund is better positioned than V.A. High Yield Bond Fund to continue to generate strong returns because of its greater flexibility to choose from among a broader range of investment opportunities. 12 Fourth, a combined fund may offer economies of scale that can lead to better control over expenses than is possible for V.A. High Yield Bond Fund alone. Both funds incur substantial costs for accounting, legal, transfer agency services, insurance, and custodial and administrative services. Fifth, V.A. Strategic Income Fund's total expenses are lower than V.A. High Yield Bond Fund's total expenses. As a result of the reorganization, shareholders of V.A. High Yield Bond Fund may experience a reduction in the total amount of fees, as a percentage of average net assets, that they pay each month. The Trustees believe that V.A. Strategic Income Fund shareholders will also benefit from improved diversification as a result of the reorganization. Although V.A. Strategic Income Fund is a larger fund than V.A. High Yield Bond Fund, the Trustees believe that the addition of V.A. High Yield Bond Fund's assets may add to the diversification of V.A. Strategic Income Fund's overall portfolio and therefore provide an economic benefit to V.A. Strategic Income Fund and its shareholders. The Boards of Trustees of both funds also considered that the adviser will also benefit from the reorganization. For example, the adviser might realize time savings from a consolidated portfolio management effort and from the need to prepare fewer reports and regulatory filings as well as prospectus disclosure for one fund instead of two. The Trustees believe, however, that these savings will not amount to a significant economic benefit to the adviser. Comparative Fees and Expense Ratios. As discussed above in the Summary, the advisory fee rate paid by V.A. High Yield Bond Fund is the same as the rate paid by V.A. Strategic Income Fund. V.A. Strategic Income Fund's management fee rate of 0.60% and its pro forma management fee rate of 0.60% are the same as V.A. High Yield Bond Fund's management fee rate of 0.60%. V.A. High Yield Bond Fund's gross total annual operating expenses of 1.17% are substantially higher that those of V.A. Strategic Income Fund, which are 0.71%. Even after the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. High Yield Bond Fund's total annual operating expenses (0.85%) are higher than those of V.A. Strategic Income Fund (0.71%). After the reorganization, V.A. Strategic Income Fund's pro forma total annual operating expenses (0.71) are less than those of V.A. High Yield Bond Fund's gross total annual operating expenses (1.17%) and net total annual operating expenses (0.85%). V.A. High Yield Bond Fund has not increased its asset size. The Trustees do not believe, given V.A. High Yield Bond Fund's current size and historical growth rate, that V.A. High Yield Bond Fund will grow to an asset size that would allow V.A. High Yield Bond Fund to realize the benefits of economies of scale, including better control over expenses. The Trustees also do not believe that V.A. High Yield Bond Fund will reach an asset size which will allow V.A. High Yield Bond Fund to significantly broaden the diversification of its investment portfolio. Comparative Performance. The trustees also took into consideration the relative performance of V.A. High Yield Bond Fund and V.A. Strategic Income Fund. 13 PROPOSAL 2 APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN JOHN HANCOCK V.A. REGIONAL BANK FUND AND JOHN HANCOCK V.A. FINANCIAL INDUSTRIES FUND A proposal to approve an Agreement and Plan of Reorganization between John Hancock V.A. Regional Bank Fund and John Hancock V.A. Financial Industries Fund. Under this Agreement, V.A. Regional Bank Fund would transfer all of its assets to V.A. Financial Industries Fund in exchange for shares of V.A. Financial Industries Fund. These shares would be distributed proportionately to the shareholders of V.A. Regional Bank Fund. V.A. Financial Industries Fund would also assume V.A. Regional Bank Fund's liabilities. V.A. Regional Bank Fund's Board of Trustees recommends that shareholders vote FOR this proposal. SUMMARY Comparison of V.A. Regional Bank Fund to V.A. Financial Industries Fund - ------------------------------------------------------------------------------------------------------------------- V.A. Regional Bank Fund V.A. Financial Industries Fund - ------------------------------------------------------------------------------------------------------------------- Business: Each fund is a diversified series of John Hancock Declaration Trust. The trust is an open-end investment company organized as a Massachusetts business trust. - ------------------------------------------------------------------------------------------------------------------- Net assets as of June 30, $11.19 million. $82.0 million. 2001: - ------------------------------------------------------------------------------------------------------------------- Investment adviser and Investment adviser: Investment adviser: portfolio managers: John Hancock Advisers, Inc. John Hancock Advisers, Inc. Portfolio managers: Portfolio managers: James K. Schmidt, CFA James K. Schmidt, CFA -Executive V.P. of adviser -Executive V.P. of adviser -Joined fund team in 1998 -Joined fund team in 1997 -Joined adviser in 1985 -Joined adviser in 1985 -Began business career in 1979 -Began business career in 1979 Thomas M. Finucane Thomas M. Finucane -V.P. of adviser -V.P. of adviser -Joined fund team in 1998 -Joined fund team in 1997 -Joined adviser in 1990 -Joined adviser in 1990 -Began business career in 1983 -Began business career in 1983 Thomas C. Goggins Thomas C. Goggins -Senior V.P. of adviser -Senior V.P. of adviser -Joined fund team in 1998 -Joined fund team in 1998 -Joined adviser in 1995 -Joined adviser in 1995 -Began business career in 1981 -Began business career in 1981 - ------------------------------------------------------------------------------------------------------------------- 14 - ---------------------------------------------------------------------------------------------------------------- V.A. Regional Bank Fund V.A. Financial Industries Fund - ---------------------------------------------------------------------------------------------------------------- Investment objective: The fund seeks long-term capital The fund seeks capital appreciation. This appreciation. This objective can be objective can be changed without changed without shareholder approval. shareholder approval. - ---------------------- ------------------------------------------ --------------------------------------------- Primary investments: The fund invests at least 65% of assets The fund invests at least 65% of assets in in stocks of regional banks and lending stocks of U.S. and foreign financial companies, including commercial and services companies of any size. These industrial banks, savings and loan companies include banks, thrifts, finance associations and bank holding companies, brokerage and advisory firms, companies. Typically, these companies real estate-related firms, insurance provide full-service banking, have companies and financial holding companies. primarily domestic assets and are based outside money centers such as New York City and Chigaco. - ---------------------- ------------------------------------------- -------------------------------------------- Other Investments: The fund may invest in other U.S. and The fund may invest in U.S. and foreign foreign financial services companies, bonds, including up to 5% of net assets in such as lending companies and money junk bonds (those rated below BBB/Baa and center banks. The fund may invest up to their unrated equivalents). 5% of net assets in stocks of companies outside of the financial services sector and up to 5% of net assets in junk bonds (those rated below BBB/Baa and their unrated equivalents). - ---------------------- ---------------------------------------------------------------------------------------- Short-term The fund may invest up to 15% of net assets in investment-grade short-term securities. securities: - ---------------------- ---------------------------------------------------------------------------------------- Foreign securities: The fund may invest in foreign securities, including foreign-denominated securities and sponsored and unsponsored depositary receipts. - ---------------------- ---------------------------------------------------------------------------------------- Diversification: The fund is diversified and, with respect to 75% of total assets, cannot invest more than 5% of total assets in securities of a single issuer. - ---------------------- ---------------------------------------------------------------------------------------- Derivatives: The fund may make limited use of certain derivatives (investments whose value is based on indices, securities or currencies). - ---------------------- -------------------------------------------- ------------------------------------------- Temporary defensive In abnormal market conditions, the fund In abnormal market conditions, the fund positions: may temporarily invest up to 80% of assets may temporarily invest up to 80% of in investment-grade short-term assets in investment-grade short-term securities. In these and other cases, the securities. In these and other cases, fund might not achieve its goal. the fund might not achieve its goal. - ---------------------- -------------------------------------------- ------------------------------------------- 15 The Funds' Expenses Both funds pay various expenses. The first two expense tables appearing below show the expenses for the twelve-month period ended June 30, 2001, adjusted to reflect any changes. Future expenses may be greater or less. The examples contained in each expense table show what you would pay if you invested $10,000 over the various time periods indicated. Each example assumes that you reinvested all dividends and that the average annual return was 5%. The examples do not reflect the fees and expenses associated with variable annuity and variable life insurance contracts for which the funds serve as investment vehicles. The examples are for comparison purposes only and are not a representation of either fund's actual expenses or returns, either past or future. V.A. Regional Bank Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.80% Other expenses 0.22% Total fund operating expenses 1.02% Expense reimbursement (1) 0.00% Actual operating expenses 1.02% Example Year 1 Year 3 Year 5 Year 10 At end of period $104 $326 $565 $1252 (1) V.A. Regional Bank Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.25% until 5/1/02. 16 V.A. Financial Industries Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.80% Other expenses 0.12% Total fund operating expenses 0.92% Expense reimbursement (1) 0.00% Actual operating expenses 0.92% (1) V.A. Financial Industries Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.25% until 5/1/02. Example Year 1 Year 3 Year 5 Year 10 At end of period $94 $293 $509 $1131 Pro Forma Expense Table The following expense table shows the pro forma expenses of V.A. Financial Industries Fund assuming that a reorganization with V.A. Regional Bank Fund occurred on June 30, 2000. The expenses shown in the table are based on fees and expenses incurred during the twelve months ended June 30, 2001, adjusted to reflect any changes. V.A. Financial Industries Fund's actual expenses after the reorganization may be greater or less than those shown. The example contained in the pro forma expense table shows what you would pay on a $10,000 investment if the reorganization had occurred on June 30, 2000. The example assumes that you reinvested all dividends and that the average annual return was 5%. The example does not reflect the fees and expenses associated with variable annuity and variable life insurance contracts for which the fund serves as an investment vehicle. The pro forma example is for comparison purposes only and is not a representation of V.A. Financial Industries Fund's actual expenses or returns, either past or future. 17 V.A. Financial Industries Fund (PRO FORMA) (Assuming reorganization with V.A. Regional Bank Fund) Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.80% Other expenses 0.12% Total fund operating expenses 0.92% Expense reimbursement (1) 0.00% Actual operating expenses 0.92% Pro Forma Example Year 1 Year 3 Year 5 Year 10 At end of period $94 $293 $509 $1131 (1) V.A. Financial Industries Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.25% until 5/1/02. The Reorganization o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 14, 2001, but may occur on any later date before June 30, 2002. V.A. Regional Bank Fund will transfer all of its assets to V.A. Financial Industries Fund. V.A. Financial Industries Fund will assume V.A. Regional Bank Fund's liabilities. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o V.A. Financial Industries Fund will issue to V.A. Regional Bank Fund shares in an amount equal to the aggregate net asset value of V.A. Regional Bank Fund's shares. These shares will be distributed immediately to V.A. Regional Bank Fund's shareholders in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. Regional Bank Fund will end up as shareholders of V.A. Financial Industries Fund. o After the reorganization is over, V.A. Regional Bank Fund will be terminated. o The reorganization will be tax-free and will not take place unless both funds receive a satisfactory opinion concerning the tax consequences of the reorganization from Hale and Dorr LLP, counsel to the funds. 18 The following diagram shows how the reorganization would be carried out. V. A. Regional Bank V. A. Regional Bank Fund V.A. Financial Industries Fund transfers assets assets and liabilities Fund receives assets and liabilities to V.A. ------------>----------- and assumes liabilities Financial Industries of V.A. Regional Bank Fund Fund Shareholders ------------<----------- Issues Shares V.A. Regional Bank Fund receives V.A. Financial Industries Fund shares and distributes them to its shareholders. Other Consequences of the Reorganization. Each fund pays monthly advisory fees equal to the following annual percentage of its average daily net assets: V.A. Regional Bank Fund--0.80% and V.A. Financial Industries Fund 0.80%. V.A. Financial Industries Fund's management fee rate of 0.80% and its pro forma management fee rate of 0.80% are the same as V.A. Regional Bank Fund's management fee rate of 0.80%. V.A. Regional Bank Fund's gross total annual operating expenses of 1.02% are substantially higher that those of V.A. Financial Industries Fund which are 0.92%. Even after the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. Regional Bank Fund's total annual operating expenses (1.02%) are higher than those of V.A. Financial Industries Fund (0.92%). After the reorganization, V.A. Financial Industries Fund's pro forma total annual operating expenses (0.92%) are less than those of V.A. Regional Bank Fund's gross total annual operating expenses (1.02%) and net total annual operating expenses (1.02%). 19 INVESTMENT RISKS The funds are exposed to various risks that could cause shareholders to lose money on their investments in the funds. The following table shows that the risks affecting each fund are similar and compares the risks affecting each fund. - -------------------------------------------------------------------------------------------------------------------- V.A. Regional Bank Fund V.A. Financial Industries Fund - -------------------------------------------------------------------------------------------------------------------- Stock market risk The value of securities in the fund may go down in response to overall stock market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. - ------------------------------- -------------------------------------------------------------------------------------------- Sector concentration risk Because the fund focuses on a single sector of the economy, its performance depends in large part on the performane 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 the borrowing and lending rates available to these banks and companies. - ------------------------------- ---------------------------------------------- --------------------------------------------- Regional bank risk A decline in a region's economy could hurt Not applicable because the fund does not the banks in that region. usually focus on regional banks. - ------------------------------- -------------------------------------------------------------------------------------------- Investment category risk Stocks of banks and 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. - ------------------------------- -------------------------------------------------------------------------------------------- Manager risk The manager and its strategy may fail to produce the intended results. The fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. - ------------------------------- -------------------------------------------------------------------------------------------- Foreign securities risk Foreign investments involve additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. - ------------------------------- -------------------------------------------------------------------------------------------- Bond risk The credit rating of any bond in the fund's portfolio could be downgraded or the issuer of a bond could default on its obligations. 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. - ------------------------------- -------------------------------------------------------------------------------------------- Derivatives risk Certain derivative instruments can produce disproportionate gains or losses and are riskier than direct investments. Also, in a down market derivatives could become harder to value or sell at a fair price. - ------------------------------- -------------------------------------------------------------------------------------------- Turnover risk In general, the greater the volume of buying and selling by a fund (and the higher its "turnover rate"), the greater the impact that transaction costs will have on the fund's performance. The fund's turnover rate may exceed 100%, which is considered relatively high. - ------------------------------- -------------------------------------------------------------------------------------------- 20 PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION Description of Reorganization Shareholders are being asked to approve an Agreement and Plan of Reorganization, a form of which is attached as Exhibit A. The Agreement provides for a reorganization on the following terms: o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 14, 2001, but may occur on any later date before June 30, 2002. V.A. Regional Bank Fund will transfer all of its assets to V.A. Financial Industries Fund and V.A. Financial Industries Fund will assume all of V.A. Regional Bank Fund's liabilities. This will result in the addition of V.A. Regional Bank Fund's assets to V.A. Financial Industries Fund's portfolio. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o V.A. Financial Industries Fund will issue to V.A. Regional Bank Fund shares in an amount equal to the aggregate net asset value of V.A. Regional Bank Fund's shares. As part of the liquidation of V.A. Regional Bank Fund, these shares will be distributed immediately to shareholders of record of V.A. Regional Bank Fund in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. Regional Bank Fund will end up as shareholders of V.A. Financial Industries Fund. o After the reorganization is over, the existence of V.A. Regional Bank Fund will be terminated. Reasons for the Proposed Reorganization The Board of Trustees of V.A. Regional Bank Fund believes that the proposed reorganization will be advantageous to the shareholders of V.A. Regional Bank Fund for several reasons. The Board of Trustees considered the following matters, among others, in approving the proposal. First, V.A. Regional Bank Fund is no longer being offered to new variable insurance contract holders, making it increasingly difficult for the fund to attract assets. Second, shareholders may be better served by a fund offering more diversification. V.A. Financial Industries Fund has a larger asset size than V.A. Regional Bank Fund and may invest in a broader range of securities. Combining the funds' assets into a single investment portfolio may broaden diversification, making investors less vulnerable to weakness in any single portion of the financial services sector. Third, V.A. Financial Industries Fund shares have performed better than V.A. Regional Bank Fund over the life of both funds. While past performance cannot predict future results, the Trustees believe that V.A. Financial Industries Fund is better positioned than V.A. Regional Bank Fund to continue to generate strong returns because it has the ability to choose from a broader range of investment opportunities. Fourth, a combined fund may offer economies of scale that can lead to better control over expenses than is possible for V.A. Regional Bank Fund alone. Both funds incur substantial costs for accounting, legal, transfer agency services, insurance, and custodial and administrative services. Fifth, V.A. Financial Industries Fund's total expenses are lower than V.A. Regional Bank Fund's total expenses. As a result of the reorganization, shareholders of V.A. Regional Bank Fund may experience a reduction in the total amount of fees, as a percentage of average net assets, that they pay each month. The Trustees believe that V.A. Financial Industries Fund shareholders will also benefit from improved diversification as a result of the reorganization. Although V.A. Financial Industries Fund is a larger fund than V.A. Regional Bank Fund, the Trustees believe that the addition of V.A. Regional Bank Fund's assets may add to the diversification of V.A. Financial Industries Fund's overall portfolio and therefore provide an economic benefit to V.A. Financial Industries Fund and its shareholders. 21 The Boards of Trustees of both funds also considered that the adviser will also benefit from the reorganization. For example, the adviser might realize time savings from a consolidated portfolio management effort and from the need to prepare fewer reports and regulatory filings as well as prospectus disclosure for one fund instead of two. The Trustees believe, however, that these savings will not amount to a significant economic benefit to the adviser. Comparative Fees and Expense Ratios. As discussed above in the Summary, the advisory fee rate paid by V.A. Regional Bank Fund is the same as the rate paid by V.A. Financial Industries Fund. V.A. Financial Industries Fund's management fee rate of 0.80% and its pro forma management fee rate of 0.80% are the same as V.A. Regional Bank Fund's management fee rate of 0.80%. V.A. Regional Bank Fund's gross total annual operating expenses of 1.02% are substantially higher that those of V.A. Financial Industries Fund, which are 0.92%. Even after the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. Regional Bank Fund's total annual operating expenses (1.02%) are higher than those of V.A. Financial Industries Fund (0.92%). After the reorganization, V.A. Financial Industries Fund's pro forma total annual operating expenses (0.92%) are less than those of V.A. Regional Bank Fund's gross total annual operating expenses (1.02%) and net total annual operating expenses (1.02%). V.A. Regional Bank Fund has not increased its asset size. The Trustees do not believe, given V.A. Regional Bank Fund's current size and historical growth rate, that V.A. Regional Bank Fund will grow to an asset size that would allow V.A. Regional Bank Fund to realize the benefits of economies of scale, including better control over expenses. The Trustees also do not believe that V.A. Regional Bank Fund will reach an asset size which will allow V.A. Regional Bank Fund to significantly broaden the diversification of its investment portfolio. Comparative Performance. The trustees also took into consideration the relative performance of V.A. Regional Bank Fund and V.A. Financial Industries Fund. FURTHER INFORMATION ON EACH REORGANIZATION Tax Status of Each Reorganization Each reorganization will be tax-free for federal income tax purposes and will not take place unless both funds in each respective reorganization receive a satisfactory opinion from Hale and Dorr LLP, counsel to the Funds, substantially to the effect that: o The reorganization described above will be a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986 (the "Code"), and each fund will be "a party to a reorganization" within the meaning of Section 368 of the Code; o No gain or loss will be recognized by each Acquired Fund upon (1) the transfer of all of its assets to the respective Acquiring Fund as described above or (2) the distribution by each Acquired Fund of Acquiring Fund shares to Acquired Fund shareholders; o No gain or loss will be recognized by each Acquiring Fund upon the receipt of each respective Acquired Fund's assets solely in exchange for the issuance of Acquiring Fund shares and the assumption of all of Acquired Fund liabilities by each respective Acquiring Fund; o The basis of the assets of each Acquired Fund acquired by each respective Acquiring Fund will be the same as the basis of those assets in the hands of each respective Acquired Fund immediately before the transfer; o The tax holding period of the assets of each Acquired Fund in the hands of each respective Acquiring Fund will include the Acquired Fund's tax holding period for those assets; o The shareholders of each Acquired Fund will not recognize gain or loss upon the exchange of all their shares of the Acquired Funds solely for Acquiring Fund shares as part of the reorganization; 22 o The basis of Acquiring Fund shares received by Acquired Fund shareholders in the reorganization will be the same as the basis of the shares of each Acquired Fund surrendered in exchange; and o The tax holding period of the Acquiring Fund shares that Acquired Fund shareholders receive will include the tax holding period of the shares of the Acquired Fund surrendered in the exchange, provided that the shares of the Acquired Fund were held as capital assets on the reorganization date. Additional Terms of each Agreement and Plan of Reorganization Conditions to Closing each Reorganization. The obligation of each Acquired Fund to consummate the reorganization is subject to the satisfaction of certain conditions, including the performance by the respective Acquiring Fund of all its obligations under the Agreement and the receipt of all consents, orders and permits necessary to consummate the reorganization (see Agreement, paragraph 6). The obligation of each Acquiring Fund to consummate the reorganization is subject to the satisfaction of certain conditions, including each respective Acquired Fund's performance of all of its obligations under the Agreement, the receipt of certain documents and financial statements from each respective Acquired Fund and the receipt of all consents, orders and permits necessary to consummate the reorganization (see Agreement, paragraph 7). The obligations of each respective Acquired Fund and Acquiring Fund are subject to approval of the Agreement by the necessary vote of the outstanding shares of the Acquired Fund, in accordance with the provisions of the Acquired Funds' declaration of trust and by-laws. The funds' obligations are also subject to the receipt of a favorable opinion of Hale and Dorr LLP as to the federal income tax consequences of the reorganization. (see Agreement, paragraph 8). Termination of Agreement. The Board of Trustees of each respective Acquired Fund or Acquiring Fund may terminate the Agreement (even if the shareholders of an Acquired Fund have already approved it) at any time before the reorganization date, if that board believes that proceeding with the reorganization would no longer be advisable. Expenses of the Reorganization. John Hancock Advisers, Inc. will pay all the expenses incurred in connection with entering into and carrying out the provisions of the Agreement, whether or not the reorganization occurs. The expenses for each fund are estimated to be approximately $23,250 for V.A. Regional Bank Fund, $15,750 for V.A. Financial Industries Fund, $17,250 for V.A. High Yield Bond Fund, and $13,750 for V.A. Strategic Income Fund. CAPITALIZATION The following table sets forth the capitalization of each fund as of June 30, 2001, and the pro forma combined capitalization of both funds as if each reorganization had occurred on that date. If the reorganization is consummated, the actual exchange ratios on the reorganization date may vary from the exchange ratios indicated. This is due to changes in the market value of the portfolio securities of both funds between June 30, 2001 and the reorganization date, changes in the amount of undistributed net investment income and net realized capital gains of both funds during that period resulting from income and distributions, and changes in the accrued liabilities of both funds during the same period. It is impossible to predict how many shares of each Acquiring Fund will actually be received and distributed by each corresponding Acquired Fund on the reorganization date. The table should not be relied upon to determine the amount of Acquiring Fund shares that will actually be received and distributed. If the reorganization of your fund had taken place on June 30, 2001 23 - -------------------------------------------------------------------------------------------------------- V.A. High Yield V.A. Strategic Pro Forma Bond Fund Income Fund Bond - -------------------------------------------------------------------------------------------------------- Net Assets $6.28 million $52.84 million $59.12 million - -------------------------------------------------------------------------------------------------------- Net Asset Value Per Share $6.45 $8.73 $8.73 - -------------------------------------------------------------------------------------------------------- Shares Outstanding 0.97 million 6.05 million 6.77 million - -------------------------------------------------------------------------------------------------------- The table reflects pro forma exchange ratios of approximately 0.738 V.A. Strategic Income Fund shares being issued for each share of V.A. High Yield Bond Fund. - -------------------------------------------------------------------------------------------------------- V.A. Regional Bank V.A. Financial Pro Forma Fund Industries Fund - -------------------------------------------------------------------------------------------------------- Net Assets $11.89 million $81.99 million $93.88 million - -------------------------------------------------------------------------------------------------------- Net Asset Value Per Share $10.61 $16.59 $16.59 - -------------------------------------------------------------------------------------------------------- Shares Outstanding 1.12 million 4.94 million 5.66 million - -------------------------------------------------------------------------------------------------------- The table reflects pro forma exchange ratios of approximately 0.640 V.A. Financial Industries Fund shares being issued for each share of V.A. Regional Bank Fund. ADDITIONAL INFORMATION ABOUT THE FUNDS' BUSINESSES The following table shows where in each fund's prospectus you can find additional information about the business of each fund. - ------------------------------------------------------------------------------------------ Type of Information Headings in Prospectus for each Acquired Fund and each Acquiring Fund - ------------------------------------------------------------------------------------------ Investment objective and policies Goal and Strategy - ------------------------------------------------------------------------------------------ Portfolio Management Portfolio Management - ------------------------------------------------------------------------------------------ Expenses Financial Highlights - ------------------------------------------------------------------------------------------ Custodian Business Structure - ------------------------------------------------------------------------------------------ Dividends, distributions and taxes Dividends and Taxes - ------------------------------------------------------------------------------------------ BOARDS' EVALUATION AND RECOMMENDATION With respect to each reorganization, for the reasons described above, the Board of Trustees of each Acquired Fund, including the Trustees who are not "interested persons" of either fund or the adviser ("independent trustees"), approved the reorganization. In particular, the Trustees determined that the reorganization was in the best interests of each Acquired Fund and that the interests of each Acquired Fund's shareholders would not be diluted as a result of the reorganization. Similarly, the Board of Trustees of each Acquiring Fund, including the independent trustees, approved the reorganization. They also determined that the reorganization was in the best interests of each Acquiring Fund and that the interests of the Acquiring Funds' shareholders would not be diluted as a result of the reorganization. 24 - -------------------------------------------------------------------------------- The trustees of each Acquired Fund recommend that the shareholders vote for each proposal to approve the agreement and plan of reorganization. - -------------------------------------------------------------------------------- VOTING RIGHTS AND REQUIRED VOTE Each Acquired Fund share is entitled to one vote. Approval of the above proposal requires the affirmative vote of a majority of the shares of each Acquired Fund outstanding and entitled to vote. For this purpose, a majority of the outstanding shares of an Acquired Fund means the vote of the lesser of (1) 67% or more of the shares present at the meeting, if the holders of more than 50% of the shares of the fund are present or represented by proxy, or (2) more than 50% of the outstanding shares of the fund. Shares of each Acquired Fund represented in person or by proxy, including shares that abstain or do not vote with respect to the proposal, will be counted for purposes of determining whether there is a quorum at the meeting. Accordingly, an abstention from voting has the same effect as a vote against the proposal. If the required approval of shareholders is not obtained, an Acquired Fund will continue to engage in business as a separate mutual fund and the Board of Trustees will consider what further action may be appropriate. This action could include, among other things, terminating a fund's expense limitation or closing the fund. INFORMATION CONCERNING THE MEETING Voting at the Meeting Contract owners use the voting instruction card as a ballot to give the insurance company voting instructions for those shares attributable to the variable contract as of the record date. When the contract owner completes the voting instruction card and sends it to the insurance company, the insurance company votes its proxy in accordance with the contract owner's instructions. If the contract owner completes and signs the voting instruction card, the shares attributable to the variable contract will be voted as instructed. If the contract owner merely signs and returns the card, the life insurance company will vote those shares in favor of the proposal. If the contract owner does not return the card, the life insurance company will vote those shares in the same proportion as shares for which instructions were received from other contract owners. Shares of each Acquired Fund which are not attributable to variable contracts will be represented and voted by one of the insurance companies in the same proportion as the voting instructions received from contract owners. These shares include shares purchased with contributions made as seed capital to the fund by the adviser. Solicitation of Proxies In addition to the mailing of these proxy materials, proxies may be solicited by telephone, by fax or in person by the trustees, officers and employees of the Acquired Funds and by personnel of the Acquired Funds' investment adviser, John Hancock Advisers, Inc. and its transfer agent, John Hancock Annuity Servicing Office. The Annuity Servicing Office, has agreed to provide proxy solicitation services to each Acquired. 25 Revoking Proxies Each Acquired Fund shareholder signing and returning a proxy has the power to revoke it at any time before it is exercised: o By filing a written notice of revocation with the Acquired Funds' transfer agent, John Hancock Annuity Servicing Office, 529 Main Street, Charlestown, Massachusetts 02129, or o By returning a duly executed proxy with a later date before the time of the meeting, or o If a shareholder has executed a proxy but is present at the meeting and wishes to vote in person, by notifying the secretary of the respective Acquired Fund (without complying with any formalities) at any time before it is voted. Being present at the meeting alone does not revoke a previously executed and returned proxy. Contract owners may revoke their voting instructions at any time before the proxy is voted by the life insurance company by following the procedure outlined above for revoking proxies. Outstanding Shares and Quorum As of September 20, 2001 (record date), the number of shares of beneficial interest of each Acquired Fund outstanding were as follows: ---------------------------------------------------------------- FUND SHARES OUTSTANDING ---------------------------------------------------------------- V.A. High Yield Bond ---------------------------------------------------------------- V.A. Regional Bank ---------------------------------------------------------------- Only shareholders of record on September 20, 2001 (the "record date") are entitled to notice of and to vote at the meeting. A majority of the outstanding shares of each Acquired Fund that are entitled to vote will be considered a quorum for the transaction of business. Other Business The Acquired Funds' Board of Trustees knows of no business to be presented for consideration at the meeting other than the proposal. If other business is properly brought before the meeting, proxies will be voted according to the best judgment of the persons named as proxies. Adjournments If a quorum is not present in person or by proxy at the time any session of the meeting is called to order, the persons named as proxies may vote those proxies that have been received to adjourn the meeting to a later date. If a quorum is present but there are not sufficient votes in favor of the proposal, the persons named as proxies may propose one or more adjournments of the meeting to permit further solicitation of proxies concerning the proposal. Any adjournment will require the affirmative vote of a majority of an Acquired Fund's shares at the session of the meeting to be adjourned. If an adjournment of the meeting is proposed because there are not sufficient votes in favor of the proposal, the persons named as proxies will vote those proxies favoring the proposal in favor of adjournment, and will vote those proxies against the reorganization against adjournment. 26 OWNERSHIP OF SHARES OF THE FUNDS As of September 20, 2001, the following companies owned of record or on behalf of certain separate accounts, more than 5% of the funds' outstanding shares, as noted on the table below: John Hancock Life Insurance Company ("JHLICO"), 200 Clarendon Street, Boston, Massachusetts 02117; John Hancock Variable Life Insurance Company ("JHVLICO"), 197 Clarendon Street, Boston, Massachusetts, 02117. - -------------------------------------------------------------------------------- Name Number of Shares Percentage of Fund - -------------------------------------------------------------------------------- V.A. High Yield Bond Fund - -------------------------------------------------------------------------------- JHLICO % - -------------------------------------------------------------------------------- JHVLICO % - -------------------------------------------------------------------------------- V.A. Strategic Income Fund - -------------------------------------------------------------------------------- JHLICO % - -------------------------------------------------------------------------------- JHVLICO % - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- V.A. Regional Bank Fund - -------------------------------------------------------------------------------- JHLICO % - -------------------------------------------------------------------------------- JHVLICO % - -------------------------------------------------------------------------------- V.A. Financial Industries Fund - -------------------------------------------------------------------------------- JHLICO % - -------------------------------------------------------------------------------- JHVLICO % - -------------------------------------------------------------------------------- However, these companies, on behalf of the separate accounts, will vote their Fund shares only in accordance with voting instructions received from the contract or certificate owners. For this reason, the companies do not exercise control over the funds by virtue of their record ownership of funds shares. EXPERTS The financial statements and the financial highlights of each fund as of December 31, 2000 and for the periods then ended and the unaudited financial statements and financial highlights of each fund as of June 30, 2001 are incorporated by reference into this proxy statement and prospectus. The financial statements and financial highlights as of December 31, 2000 have been independently audited by Ernst & Young LLP as stated in their report appearing in the statement of additional information. These financial statements and financial highlights have been included in reliance on their report given on their authority as experts in accounting and auditing. 27 AVAILABLE INFORMATION Each fund is subject to the informational requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940 and files reports, proxy statements and other information with the SEC. These reports, proxy statements and other information filed by the funds can be inspected and copied (at prescribed rates) at the public reference facilities of the SEC at 450 Fifth Street, N.W., Washington, D.C., and at the following regional offices: Chicago (500 West Madison Street, Suite 1400, Chicago, Illinois); and New York (7 World Trade Center, Suite 1300, New York, New York). For access to the Washington D.C. Reference Room, call (202) 942-8090. Copies of this material can also be obtained by mail from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549-0102 (duplicating fee required). In addition, copies of these documents may be viewed on-screen or downloaded from the SEC's Internet site at (http://www.sec.gov), SEC file number 811-07437. 28 EXHIBIT A AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made this 13th day of September, 2001, by and between ___________________________________ (the "Acquiring Fund") and ___________________________________ (the "Acquired Fund"), each a series of John Hancock Declaration Trust, a Massachusetts business trust (the "Trust"), with their principal place of business at 101 Huntington Avenue, Boston, Massachusetts 02199. The Acquiring Fund and the Acquired Fund are sometimes referred to collectively herein as the "Funds" and individually as a "Fund." This Agreement is intended to be and is adopted as a plan of "reorganization," as such term is used in Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). The reorganization will consist of the transfer of all of the assets of the Acquired Fund to the Acquiring Fund in exchange solely for the issuance of shares of beneficial interest of the Acquiring Fund (the "Acquiring Fund Shares") to the Acquired Fund and the assumption by the Acquiring Fund of all of the liabilities of the Acquired Fund, followed by the distribution by the Acquired Fund, on or promptly after the Closing Date hereinafter referred to, of the Acquiring Fund Shares to the shareholders of the Acquired Fund in liquidation and termination of the Acquired Fund as provided herein, all upon the terms and conditions set forth in this Agreement. In consideration of the premises of the covenants and agreements hereinafter set forth, the parties hereto covenant and agree as follows: 1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR ASSUMPTION OF LIABILITIES AND ISSUANCE OF ACQUIRING FUND SHARES; LIQUIDATION OF THE ACQUIRED FUND 1.1 The Acquired Fund will transfer all of its assets (consisting, without limitation, of portfolio securities and instruments, dividends and interest receivables, cash and other assets), as set forth in the statement of assets and liabilities referred to in Paragraph 5.5 hereof (the "Statement of Assets and Liabilities"), to the Acquiring Fund free and clear of all liens and encumbrances, except as otherwise provided herein, in exchange for (i) the assumption by the Acquiring Fund of the known and unknown liabilities of the Acquired Fund, including the liabilities set forth in the Statement of Assets and Liabilities (the "Acquired Fund Liabilities"), which shall be assigned and transferred to the Acquiring Fund by the Acquired Fund and assumed by the Acquiring Fund, and (ii) delivery by the Acquiring Fund to the Acquired Fund, for distribution pro rata by the Acquired Fund to its shareholders in proportion to their respective ownership shares of beneficial interest of the Acquired Fund, as of the close of business on December 14, 2001 (the "Closing Date"), of a number of the Acquiring Fund Shares having an aggregate net asset value equal to the value of the assets, less such liabilities (herein referred to as the "net value of the assets") assumed, assigned and delivered, all determined as provided in Paragraph 2.1 hereof and as of a date and time as specified therein. Such transactions shall take place at the closing provided for in Paragraph 3.1 hereof (the "Closing"). All computations with respect to both Funds shall be provided by Investors Bank & Trust Company (the "Custodian"), as custodian and pricing agent for both Funds. 1.2 The Acquired Fund has provided the Acquiring Fund with a list of the current securities holdings of the Acquired Fund as of the date of execution of this Agreement. The Acquired Fund reserves the right to sell any of these securities (except to the extent sales may be limited by representations made in connection with issuance of the tax opinion provided for in paragraph 8.6 hereof) but will not, without the prior approval of the Acquiring Fund, acquire any additional securities other than securities of the type in which the Acquiring Fund is permitted to invest. 1.3 The Acquiring Fund and the Acquired Fund shall each bear its own expenses in connection with the transactions contemplated by this Agreement whether or not these transactions are consummated. 1.4 On or as soon after the Closing Date as is conveniently practicable (the "Liquidation Date"), the Acquired Fund will liquidate and distribute pro rata to shareholders of record (the "Acquired Fund shareholders"), determined as of the close of regular trading on the New York Stock Exchange on the Closing Date, the Acquiring Fund Shares received by the Acquired Fund pursuant to Paragraph 1.1 hereof. Such liquidation and distribution will be accomplished by the transfer of the Acquiring Fund Shares then credited to the account of the Acquired Fund on the books of the Acquiring Fund, to open accounts on the share records of the Acquiring Fund in the names of the Acquired Fund shareholders and representing the respective pro rata number of Acquiring Fund Shares due such shareholders. The Acquiring Fund shall not issue certificates representing Acquiring Fund Shares in connection with such exchange. 1.5 Any transfer taxes payable upon issuance of Acquiring Fund Shares in a name other than the registered holder of the Acquired Fund Shares on the books of the Acquired Fund as of that time shall, as a condition of such issuance and transfer, be paid by the person to whom such Acquiring Fund Shares are to be issued and transferred. 1.6 The existence of the Acquired Fund shall be terminated as promptly as practicable following the Liquidation Date. 1.7 Any reporting responsibility of the Acquired Fund, including, but not limited to, the responsibility for filing of regulatory reports, tax returns, or other documents with the Securities and Exchange Commission (the "Commission"), any state securities commissions, and any federal, state or local tax authorities or any other relevant regulatory authority, is and shall remain the responsibility of the Acquired Fund. 2. VALUATION 2.1 The net asset values of the Acquiring Fund Shares and the net values of the assets and liabilities of the Acquired Fund to be transferred shall, in each case, be determined as of the close of business (4:00 p.m. Boston time) on the Closing Date. The net asset values of the Acquiring Fund Shares shall be computed by the Acquiring Fund's Custodian in the manner set forth in the Acquiring Fund's Declaration of Trust as amended and restated (the "Declaration"), or By-Laws and the Acquiring Fund's then-current prospectus and statement of additional information and shall be computed in each case to not fewer than four decimal places. The net values of the assets of the Acquired Fund to be transferred shall be 2 computed by the Acquired Fund's Custodian by calculating the value of the assets transferred by the Acquired Fund and by subtracting therefrom the amount of the liabilities assigned and transferred to and assumed by the Acquiring Fund on the Closing Date, said assets and liabilities to be valued in the manner set forth in the Acquired Fund's then current prospectus and statement of additional information and shall be computed in each case to not fewer than four decimal places. 2.2 The number of Acquiring Fund Shares to be issued (including fractional shares, if any) in exchange for the Acquired Fund's assets shall be determined by dividing the value of the Acquired Fund's assets less the liabilities assumed by the Acquiring Fund, by the Acquiring Fund's net asset value per share, all as determined in accordance with Paragraph 2.1 hereof. 2.3 All computations of value shall be made by the Custodian in accordance with its regular practice as pricing agent for the Funds. 3. CLOSING AND CLOSING DATE 3.1 The Closing Date shall be December 14, 2001 or such other date on or before June 30, 2002 as the parties may agree. The Closing shall be held as of 5:00 p.m. at the offices of the Trust, 101 Huntington Avenue, Boston, Massachusetts 02199, or at such other time and/or place as the parties may agree. 3.2 Portfolio securities that are not held in book-entry form in the name of the Custodian as record holder for the Acquired Fund shall be presented by the Acquired Fund to the Acquiring Fund's Custodian for examination no later than five business days preceding the Closing Date. Portfolio securities which are not held in book-entry form shall be delivered by the Acquired Fund to the Custodian for the account of the Acquiring Fund on the Closing Date, duly endorsed in proper form for transfer, in such condition as to constitute good delivery thereof in accordance with the custom of brokers, and shall be accompanied by all necessary federal and state stock transfer stamps or a check for the appropriate purchase price thereof. Portfolio securities held of record by the Custodian in book-entry form on behalf of the Acquired Fund shall be delivered to the Acquiring Fund by the Custodian recording the transfer of beneficial ownership on its records. The cash delivered shall be in the form of currency or by the Custodian crediting the Acquiring Fund's account maintained with the Custodian with immediately available funds. 3.3 In the event that on the Closing Date (a) the New York Stock Exchange shall be closed to trading or trading thereon shall be restricted or (b) trading or the reporting of trading on said Exchange or elsewhere shall be disrupted so that accurate appraisal of the value of the net assets of the Acquiring Fund or the Acquired Fund is impracticable, the Closing Date shall be postponed until the first business day after the day when trading shall have been fully resumed and reporting shall have been restored; provided that if trading shall not be fully resumed and reporting restored on or before June 30, 2002, this Agreement may be terminated by the Acquiring Fund or by the Acquired Fund upon the giving of notice to the other party. 3 3.4 The Acquired Fund shall deliver at the Closing a list of the names, addresses, federal taxpayer identification numbers and backup withholding and nonresident alien withholding status of the Acquired Fund shareholders and the number of outstanding shares of beneficial interest of the Acquired Fund owned by each such shareholder, all as of the close of business on the Closing Date, certified by its Treasurer, Secretary or other authorized officer (the "Shareholder List"). The Acquiring Fund shall issue and deliver to the Acquired Fund a confirmation evidencing the Acquiring Fund Shares to be credited on the Closing Date, or provide evidence satisfactory to the Acquired Fund that such Acquiring Fund Shares have been credited to the Acquired Fund's account on the books of the Acquiring Fund. At the Closing, each party shall deliver to the other such bills of sale, checks, assignments, stock certificates, receipts or other documents as such other party or its counsel may reasonably request. 4. REPRESENTATIONS AND WARRANTIES 4.1 The Trust on behalf of each Fund represents, warrants and covenants as follows: (a) The Trust is a business trust, duly organized, validly existing and in good standing under the laws of The Commonwealth of Massachusetts and has the power to own all of its properties and assets and, subject to approval by the shareholders of the Acquired Fund, to carry out the transactions contemplated by this Agreement. Neither the Trust nor either Fund is required to qualify to do business in any jurisdiction in which it is not so qualified or where failure to qualify would subject it to any material liability or disability. The Trust has all necessary federal, state and local authorizations to own all of its properties and assets and to carry on its business as now being conducted; (b) The Trust is a registered investment company classified as a management company and its registration with the Commission as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), is in full force and effect. Each Fund is a diversified series of the Trust; (c) The Trust and each Fund are not, and the execution, delivery and performance of their obligations under this Agreement will not result, in violation of any provision of the Trust's Declaration of Trust, as amended and restated (the "Trust's Declaration") or By-Laws or of any agreement, indenture, instrument, contract, lease or other undertaking to which the Trust or either Fund is a party or by which it is bound; (d) Except as otherwise disclosed in writing and accepted by either Fund, no material litigation or administrative proceeding or investigation of or before any court or governmental body is currently pending or threatened against the Trust or either Fund or any of either Fund's properties or assets. The Trust knows of no facts which might form the basis for the institution of such proceedings, and neither the Trust nor either Fund is a party to or subject to the provisions of any order, decree or judgment of any court or governmental body which materially and adversely affects either Fund's business or its ability to consummate these transactions; 4 (e) Neither fund has any material contracts or other commitments (other than this Agreement or agreements for the purchase of securities entered into in the ordinary course of business and consistent with its obligations under this Agreement) which will not be terminated without liability to the respective Fund at or prior to the Closing Date; (f) The audited statement of assets and liabilities, including the schedule of investments, of the Acquired Fund as of December 31, 2000 and the related statement of operations as well as the Acquired Fund's unaudited statements dated June 30, 2001 (copies of which have been furnished to the Acquiring Fund) present fairly in all material respects the financial condition of the Acquired Fund as of December 31, 2000 and June 30, 2001 and the results of its operations for the period then ended in accordance with generally accepted accounting principles consistently applied, and there were no known actual or contingent liabilities of the Acquired Fund as of those dates not disclosed therein; (g) The audited statement of assets and liabilities, including the schedule of investments, of the Acquiring Fund as of December 30, 2000 and the related statement of operations as well as the Acquired Fund's unaudited statements dated June 30, 2001 (copies of which have been furnished to the Acquired Fund) present fairly in all material respects the financial condition of the Acquiring Fund as of December 31, 2000 and June 30, 2001 and the results of its operations for the period then ended in accordance with generally accepted accounting principles consistently applied, and there were no known actual or contingent liabilities of the Acquiring Fund as of those dates not disclosed therein; (h) Since June 30, 2001, there has not been any material adverse change in either Fund's financial condition, assets, liabilities, or business other than changes occurring in the ordinary course of business, or any incurring by either Fund of indebtedness maturing more than one year from the date such indebtedness was incurred, except as otherwise disclosed to and accepted by the other Fund; (i) At the date hereof and by the Closing Date, all federal, state and other tax returns and reports, including information returns and payee statements, of the Acquired Fund shall have been filed or furnished, and all federal, state and other taxes, interest and penalties shall have been paid so far as due, or provision shall have been made for the payment thereof, and to the best of the Acquired Fund's knowledge no such return is currently under audit and no assessment has been asserted with respect to such returns or reports; (j) Each of the Funds and its predecessors has qualified as a regulated investment company for each taxable year of its operation and will qualify as such as of the Closing Date with respect to its taxable year ending on the Closing Date; (k)The authorized capital of each Fund consists of an unlimited number of shares of beneficial interest, no par value. All issued and outstanding shares of beneficial interest of each Fund are, and at the Closing Date will be, duly and validly issued and outstanding, fully paid and nonassessable by the other Fund. All of the issued and outstanding shares of beneficial interest of the Acquired Fund will, at the time of Closing, be held by the persons and in the amounts set forth in the Shareholder List submitted to the Acquiring Fund pursuant to Paragraph 3.4 hereof. Neither Fund has outstanding any options, warrants or other rights to subscribe for or purchase any of its shares of beneficial interest, or any security convertible into any of its shares of beneficial interest; 5 (l) At the Closing Date, the Acquired Fund will have good and marketable title to the assets to be transferred to the Acquiring Fund pursuant to Paragraph 1.1 hereof, and full right, power and authority to sell, assign, transfer and deliver such assets hereunder, and upon delivery and payment for such assets, the Acquiring Fund will acquire good and marketable title thereto subject to no restrictions on the full transfer thereof, including such restrictions as might arise under the Securities Act of 1933, as amended (the "1933 Act"); (m)The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of the Trust on behalf of each Fund, and this Agreement constitutes a valid and binding obligation of the Trust and each Fund enforceable in accordance with its terms, subject to the approval of the Acquired Fund's shareholders; (n) The information to be furnished by each Fund for use in all necessary documents will be accurate, complete and comply in all material respects with all applicable laws and regulations; (o) The proxy statement of the Acquired Fund (the "Proxy Statement") to be included in the Registration Statement referred to in Paragraph 5.7 hereof, on the effective date of the Registration Statement, on the date of the meeting of the Acquired Fund shareholders and on the Closing Date, will not contain any untrue or misleading statement of a material fact, or omit a required or necessary material fact. (p) The prospectus (the "Acquiring Fund Prospectus") and statement of additional information for the Acquiring Fund, each dated May 1, 2001, and any amendments or supplements thereto on or prior to the Closing Date, and the Registration Statement on Form N-14 to be filed in connection with this Agreement (the "Registration Statement") will conform in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the rules and regulations of the Commission thereunder. The Registration Statement will not include any untrue or misleading statement of material fact, or omit a required or necessary material fact. (q) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by either Fund of the transactions contemplated by this Agreement, except for the registration of the Acquiring Fund shares under the 1933 Act and the 1940 Act; (r) All of the issued and outstanding shares of beneficial interest of the Acquired Fund have been offered for sale and sold in conformity with all applicable federal and state securities laws; 6 5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND 5.1 Except as expressly stated herein to the contrary, each Fund will operate its respective businesses in the ordinary course between the date hereof and the Closing Date, including customary dividends and any distributions that may be advisable. 5.2 The Trust will call a meeting of the Acquired Fund shareholders to consider and act upon this Agreement and to take all other action necessary to obtain approval of the transactions contemplated herein. 5.3 The Acquired Fund covenants that the Acquiring Fund Shares to be issued hereunder are not being acquired by the Acquired Fund for the purpose of making any distribution other than in accordance with the terms of this Agreement. 5.4 Subject to the provisions of this Agreement, the Acquiring Fund and the Acquired Fund each shall take, or cause to be taken, all action, and do or cause to be done, all things reasonably necessary, proper or advisable to consummate the transactions contemplated by this Agreement. 5.5 The Acquired Fund shall furnish to the Acquiring Fund on the Closing Date the Statement of Assets and Liabilities of the Acquired Fund as of the Closing Date, which statement shall be prepared in accordance with generally accepted accounting principles consistently applied and shall be certified by the Acquired Fund's Treasurer or Assistant Treasurer. As promptly as practicable but in any case within 60 days after the Closing Date, the Acquired Fund shall furnish to the Acquiring Fund, in such form as is reasonably satisfactory to the Trust, a statement of the earnings and profits of the Acquired Fund for federal income tax purposes and of any capital loss carryovers and other items that will be carried over to the Acquiring Fund as a result of Section 381 of the Code, and which statement will be certified by the President or Treasurer of the Acquired Fund. 5.6 The Trust on behalf of the Acquiring Fund will prepare and file with the Commission the Registration Statement in compliance with the 1933 Act and the 1940 Act in connection with the issuance of the Acquiring Fund Shares. 5.7 The Trust on behalf of the Acquired Fund will prepare a Proxy Statement, to be included in the Registration Statement in compliance with the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act and the rules and regulations thereunder (collectively, the "Acts") in connection with the special meeting of shareholders of the Acquired Fund to consider approval of this Agreement. 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF BOTH FUNDS The obligations of each Fund to complete the transactions provided for herein shall be subject to the performance by the other Fund of all the obligations to be performed by it hereunder on or before the Closing Date, and, in addition, the following conditions: 7 6.1 All representations and warranties of each Fund in this Agreement will be true and correct in all material respects as of the date of the Agreement and, unless affected by the transactions contemplated by the Agreement, on the Closing Date; and each Fund will deliver to the other Fund a certificate signed by its President or Vice President and its Treasurer or Assistant Treasurer, dated as of the Closing Date to the effect that the representations and warranties made in this Agreement are true and correct as of the Closing Date, except as affected by the transactions contemplated by this Agreement, and as to any other matters as either Fund reasonably requests. 6.2 The Acquired Fund shall have delivered to the Acquiring Fund the Statement of Assets and Liabilities of the Acquired Fund, together with a list of its portfolio securities showing the federal income tax bases and holding periods of such securities, as of the Closing Date, certified by the Treasurer or Assistant Treasurer of the Acquired Fund; 6.3 At or prior to the Closing Date, the Acquired Fund's investment adviser, or an affiliate thereof, shall have made all payments, or applied all credits, to the Acquired Fund required by any applicable contractual expense limitation. 7. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE FUNDS The obligations hereunder of each Fund are subject to the further conditions that on or before the Closing Date: 7.1 The Agreement and the transactions contemplated herein shall have been approved by the requisite vote of the holders of the outstanding shares of beneficial interest of the Acquired Fund in accordance with the provisions of the Trust's Declaration and By-Laws, and certified copies of the resolutions evidencing approval by the Acquired Fund's shareholders shall have been delivered to the Acquiring Fund; 7.2 The Registration Statement shall have become effective under the 1933 Act and the 1940 Act and no stop orders suspending the effectiveness thereof shall have been issued and, to the best knowledge of the parties hereto, no investigation or proceeding for that purpose shall have been instituted or be pending, threatened or contemplated under the 1933 Act or the 1940 Act; 7.3 The Acquired Fund shall have distributed to its shareholders, in a distribution or distributions qualifying for the deduction for dividends paid under Section 561 of the Code, all of its investment company taxable income (as defined in Section 852(b)(2) of the Code determined without regard to Section 852(b)(2)(D) of the Code) for its taxable year ending on the Closing Date, all of the excess of (i) its interest income excludable from gross income under Section 103(a) of the Code over (ii) its deductions disallowed under Sections 265 and 171(a)(2) of the Code for its taxable year ending on the Closing Date, and all of its net capital gain (as such term is used in Sections 852(b)(3)(A) and (C) of the Code), after reduction by any available capital loss carryforward, for its taxable year ending on the Closing Date; and 8 7.4 The parties shall have received an opinion of Hale and Dorr LLP, satisfactory to the Trust on behalf of each Fund, substantially to the effect that for federal income tax purposes: (a) The acquisition by the Acquiring Fund of all of the assets of the Acquired Fund solely in exchange for the issuance of Acquiring Fund Shares to the Acquired Fund and the assumption of all of the Acquired Fund Liabilities by the Acquiring Fund, followed by the distribution by the Acquired Fund, in liquidation of the Acquired Fund, of Acquiring Fund Shares to the shareholders of the Acquired Fund in exchange for their shares of beneficial interest of the Acquired Fund and the termination of the Acquired Fund, will constitute a "reorganization" within the meaning of Section 368(a) of the Code, and the Acquired Fund and the Acquiring Fund will each be "a party to a reorganization" within the meaning of Section 368(b) of the Code; (b) No gain or loss will be recognized by the Acquired Fund upon (i) the transfer of all of its assets to the Acquiring Fund solely in exchange for the issuance of Acquiring Fund Shares to the Acquired Fund and the assumption of all of the Acquired Fund Liabilities by the Acquiring Fund; and (ii) the distribution by the Acquired Fund of such Acquiring Fund Shares to the shareholders of the Acquired Fund; (c) No gain or loss will be recognized by the Acquiring Fund upon the receipt of the assets of the Acquired Fund solely in exchange for the issuance of the Acquiring Fund Shares to the Acquired Fund and the assumption of all of the Acquired Fund Liabilities by the Acquiring Fund; (d) The basis of the assets of the Acquired Fund acquired by the Acquiring Fund will be, in each instance, the same as the basis of those assets in the hands of the Acquired Fund immediately prior to the transfer; (e) The tax holding period of the assets of the Acquired Fund in the hands of the Acquiring Fund will, in each instance, include the Acquired Fund's tax holding period for those assets; (f) The shareholders of the Acquired Fund will not recognize gain or loss upon the exchange of all of their shares of beneficial interest of the Acquired Fund solely for Acquiring Fund Shares as part of the transaction; (g) The basis of the Acquiring Fund Shares received by the Acquired Fund shareholders in the transaction will be the same as the basis of the shares of beneficial interest of the Acquired Fund surrendered in exchange therefor; and (h) The tax holding period of the Acquiring Fund Shares received by the Acquired Fund shareholders will include, for each shareholder, the tax holding period for the shares of the Acquired Fund surrendered in exchange therefor, provided that the Acquired Fund shares were held as capital assets on the date of the exchange. The Trust agrees to make and provide representations with respect to the Acquiring Fund and the Acquired Fund, respectively, which are reasonably necessary to enable Hale and Dorr LLP to deliver an opinion substantially as set forth in this Paragraph 7.4. Notwithstanding anything herein to the contrary, the Trust may not waive the conditions set forth in this Paragraph 7.4. 9 8. BROKERAGE FEES AND EXPENSES 8.1 The Trust on behalf of each Fund represents and warrants that there are no brokers or finders entitled to receive any payments in connection with the transactions provided for herein. 8.2 Each Fund shall bear its own expenses in connection with carrying out the terms of this Agreement and if the Agreement is terminated no party will be liable to another party for damages. 9. TERMINATION 9.1 This Agreement may be terminated by the mutual agreement of the Acquiring Fund and the Acquired Fund. In addition, either party may terminate this Agreement at or prior to the Closing Date by resolution of the Trust's Board of Trustees if, in the good faith opinion of the Board, proceeding with the Agreement is not in the best interests of the Trust or either Fund's shareholders. 9.2 The representations, warranties and covenants in the Agreement and related documents will survive the consummation of the transactions contemplated by the Agreement. 10. AMENDMENTS This Agreement may be amended, modified or supplemented in such manner as may be mutually agreed upon by the authorized officers of each Fund. However, following the meeting of the Acquired Fund shareholders held pursuant to Paragraph 5.2 of this Agreement, no such amendment may have the effect of changing the provisions for determining the number of Acquiring Fund Shares to be issued to the Acquired Fund shareholders under this Agreement to the detriment of these shareholders without their further approval; provided, however, that nothing contained in this Article 10 shall be construed to prohibit the parties from amending this Agreement to change the Closing Date. 11. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT 11.1 The article and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 11.2 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original. 11.3 This Agreement shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. 10 11.4 This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns, but no assignment or transfer hereof or of any rights or obligations hereunder shall be made by any party without the prior written consent of the other party. Nothing herein expressed or implied is intended or shall be construed to confer upon or give any person, firm or corporation, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Agreement. 11.5 All persons dealing with the Trust must look solely to the property of the Trust for the enforcement of any claims against the Trust as the Trustees, officers, agents and shareholders of the Trust assume no personal liability for obligations entered into on behalf of the Trust. None of the other series of the Trust shall be responsible for any obligations assumed by on or behalf of the Acquired Fund or the Acquiring Fund under this Agreement. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed as of the date first set forth above by its President or Vice President and has caused its corporate seal to be affixed hereto. JOHN HANCOCK DECLARATION TRUST on behalf of --------------------------------------------- By:_________________________________________ Maureen R. Ford President and Chief Executive Officer JOHN HANCOCK DECLARATION TRUST on behalf of --------------------------------------------- By:__________________________________________ Susan S. Newton Senior Vice President and Secretary s:\agrcont\agreemnt\reorg\merger\Form of VA to VA 11 Appendix A Basic information about the funds A-1 PROPOSAL 1 V.A. High Yield Bond Fund GOAL AND STRATEGY [Clip Art] The fund seeks to maximize current income without assuming undue risk. Capital appreciation is a secondary goal. In pursuing these goals, the fund normally invests at least 65% of assets in U.S. and foreign bonds rated BBB/Baa or lower and their unrated equivalents. The fund may invest up to 30% of assets in junk bonds rated CC/Ca and their unrated equivalents. There is no limit on the fund's average maturity. In managing the fund's portfolio, the managers concentrate on industry allocation and securities selection: deciding which types of industries to emphasize at a given time, and then which individual bonds to buy. The managers use top-down analysis to determine which industries may benefit from current and future changes in the economy. In choosing individual securities, the managers use bottom-up research to find securities that appear comparatively undervalued. The managers look at the financial condition of the issuers as well as the collateralization and other features of the securities themselves. The managers also look at companies' financing cycles to determine which types of securities (for example, bonds, preferred stocks or common stocks) to favor. The fund typically invests in a broad range of industries, although it may invest up to 40% of assets in electric utilities and telecommunications companies. The fund may use certain higher-risk investments, including derivatives (investments whose value is based on indexes, securities or currencies) and restricted or illiquid securities. In addition, the fund may invest up to 20% of net assets in U.S. and foreign stocks. In abnormal market conditions, the fund may temporarily invest more than 35% of assets in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. ================================================================================ PORTFOLIO MANAGERS Arthur N. Calavritinos, CFA - -------------------------------- Vice president of adviser Joined fund team in 1998 Joined adviser in 1988 Began business career in 1986 Frederick L. Cavanaugh, Jr. - -------------------------------- Senior vice president of adviser Joined fund team in 1998 Joined adviser in 1986 Began business career in 1975 Janet L. Clay, CFA - -------------------------------- Vice president of adviser Joined fund team in 1998 Joined adviser in 1995 Began business career in 1990 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 -9.81% 13.12% -6.08% 2001 total return as of June 30: 1.30% Best quarter: Q2 `99, 4.51% Worst quarter: Q3 `98, -14.84% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year -6.08% -5.86% Life of fund - began 1/6/98 -1.41% -1.81%* Index: Lehman Brothers U.S. Corporate High Yield Bond Index, an unmanaged index of high-yield bonds. *As of December 31, 1997. A-2 MAIN RISKS [Clip Art] The major factors in the fund's performance are interest rates and credit risk. When interest rates rise, bond prices generally fall. Generally, an increase in the fund's average maturity will make it more sensitive to interest rate risk. Credit risk depends largely on the perceived financial health of bond issuers. In general, lower-rated bonds have higher credit risks. Junk bond prices can fall on bad news about the economy, an industry or a company. Share price, yield and total return may fluctuate more than with less aggressive bond funds. The fund could lose money if any bonds it owns are downgraded in credit rating or go into default. If certain industries or investments do not perform as the fund expects, it could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. o If interest rate movements cause the fund's callable securities to be paid off substantially earlier or later than expected, the fund's share price or yield could be hurt. o If the fund concentrates its investments in telecommunications or electric utilities, its performance could be tied more closely to those industries than to the market as a whole. o Stock investments may go down in value due to stock market movements or negative company or industry events. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquired Fund's financial performance since its inception on January 6, 1998. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus). - ------------------------------------------------------------------------------------------------------------------- Period ended: 12/98(1) 12/99 12/00 6/01(9) - ------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $8.22 $8.31 $6.68 Net investment income(2) 0.90 0.88 0.94 0.36 Net realized and unrealized gain (loss) on investments (1.82) 0.16 (1.40) (0.20) Total from investment operations (0.92) 1.04 (0.46) 0.16 Less distributions: Dividends from net investment income (0.84) (0.88) (0.94) (0.39) Distributions from net realized gain on investments sold -- (0.07) (0.23) -- Tax return of capital (0.02) -- -- -- Total distributions (0.86) (0.95) (1.17) (0.39) Net asset value, end of period $8.22 $8.31 $6.68 $6.45 Total investment return(3,4) (%) (9.80)(5) 13.12 (6.08) 2.46(5) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 8,120 9,287 7,219 6,284 Ratio of expenses to average net assets (%) 0.85(6) 0.85 0.85 0.85 Ratio of adjusted expenses to average net assets(7) (%) 1.15(6) 1.03 1.24 1.04 Ratio of net investment income to average net assets (%) 9.85(6) 10.56 12.12 11.18(6,8) Portfolio turnover rate (%) 102 122 56 33 (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) The total returns 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 periods shown. (8) Had the Fund not amortized premiums on debt securities, the annualized ratio of net investment income to average net assets would have been 11.40%. (9) Semiannual period from January 1, 2001 through June 30, 2001. Unaudited. A-3 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. 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 category. Within each category, the managers look for securities that are appropriate for the overall portfolio in terms of yield, credit quality, structure and industry distribution. In selecting securities, relative yields and risk/reward ratios are the primary considerations. 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 Arthur N. Calavritinos, CFA - --------------------------------- Vice president of adviser Joined fund team in 1996 Joined adviser in 1988 Began business career in 1986 Janet L. Clay, CFA - --------------------------------- Vice president of adviser Joined fund team in 1998 Joined adviser in 1995 Began business career in 1990 Daniel S. Janis - --------------------------------- 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 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 11.77% 4.92% 4.82% 1.40% 2001 total return as of June 30: 0.77% Best quarter: Q2 `97, 6.28% Worst quarter: Q3 `98, -2.79% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year 1.40% 11.85% Life of fund - began 8/29/96 6.72% 7.70% Index: Lehman Brothers Government/Credit Bond Index, an unmanaged index of U.S. government, U.S. corporate and Yankee bonds. A-4 MAIN RISKS [Clip Art] The fund's risk profile depends on its sector allocation. In general, investors should expect fluctuations in share price, yield and total return that are above average for bond funds. When interest rates rise, bond prices generally fall. Generally, an increase in the fund's average maturity will make it more sensitive to interest rate risk. A fall in worldwide demand for U.S. government securities could also lower the prices of these securities. The fund could lose money if any bonds it owns are downgraded in credit rating or go into default. In general, lower-rated bonds have higher credit risks, and their prices can fall on bad news about the economy, an industry or a company. If certain allocation strategies or certain industries or investments do not perform as the fund expects, it could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. These risks are greater in emerging markets. o If interest rate movements cause the fund's callable securities to be paid off substantially earlier or later than expected, the fund's share price or yield could be hurt. o Stock investments may go down in value due to stock market movements or negative company or industry events. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. ================================================================================ FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquired Fund's financial performance since its inception on August 29, 1996. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus). - ------------------------------------------------------------------------------------------------------------------------------------ Period ended: 12/96(1) 12/97 12/98 12/99 12/00 6/01(10) - ------------------------------------------------------------------------------------------------------------------------------------ Per share operating performance Net asset value, beginning of period $10.00 $10.30 $10.47 $10.10 $9.77 $8.97 Net investment income (2) 0.27 0.91 0.85 0.80 0.83 0.33 Net realized and unrealized gain (loss) on investments 0.36 0.26 (0.35) (0.33) (0.71) (0.17) Total from investment operations 0.63 1.17 0.50 0.47 0.12 0.16 Less distributions: Dividends from net investment income (0.27) (0.91) (0.85) (0.80) (0.83) (0.40) 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) (0.40) Net asset value, end of period $10.30 $10.47 $10.10 $9.77 $8.97 $8.73 Total investment return(3) (%) 6.45(4,5) 11.77(5) 4.92(5) 4.82(5) 1.40 1.79(4) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 2,131 5,540 15,019 22,282 34,472 52,836 Ratio of expenses to average net assets (%) 0.85(6) 0.85 0.85 0.85 0.76 0.71(6) Ratio of adjusted expenses to average net assets(7) (%) 2.28(6) 1.37 0.93 0.87 -- -- Ratio of net investment income to average net assets (%) 7.89(6) 8.77 8.19 8.06 8.91 7.60(6,8) Portfolio turnover rate (%) 73 110 92 53(9) 53 47 (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) Had the Fund not amortized premiums on debt securities the annualized ratio of net investment income to average net assets would have been 9.10%. (9) Portfolio turnover rate excludes merger activity. (10) Semiannual period from January 1, 2001 through June 30, 2001. Unaudited. A-5 PROPOSAL 2 V.A. Regional Bank Fund GOAL AND STRATEGY [Clip Art] The fund seeks long- term capital appreciation. To pursue this goal, the fund normally invests at least 65% of assets in stocks of regional banks and lending companies, including commercial and industrial banks, savings and loan associations and bank holding companies. Typically, these companies provide full-service banking, have primarily domestic assets and are based outside of money centers such as New York City and Chicago. In managing the portfolio, the managers focus primarily on stock selection. In choosing individual stocks, the managers use fundamental financial analysis to identify securities that appear comparatively undervalued. The managers look for low price/ earnings (P/E) ratios, high-quality assets and sound loan review processes. Given the industry-wide trend toward consolidation, the managers also invest in companies that appear to be positioned for a merger. The fund's portfolio may be concentrated in geographic regions where consolidation activity is high. The managers generally gather firsthand information about companies from interviews and company visits. The fund may also invest in other U.S. and foreign financial services companies, such as lending companies and money center banks. The fund may invest up to 5% of net assets in stocks of companies outside the financial services sector and up to 5% of net assets in junk bonds (those rated below BBB/Baa and their unrated equivalents). The fund may make limited use of certain derivatives (investments whose value is based on indexes, securities or currencies). In abnormal market conditions, the fund may temporarily invest up to 80% of assets in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. ================================================================================ PORTFOLIO MANAGERS James K. Schmidt, CFA - ------------------------------------ Executive vice president of adviser Joined fund team in 1998 Joined adviser in 1985 Began business career in 1979 Thomas M. Finucane - ------------------------------------ Vice president of adviser Joined fund team in 1998 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 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. - -------------------------------------------------------------------------------- Total return -- calendar year - -------------------------------------------------------------------------------- 1999 2000 -4.86% 17.91% 2001 total return as of June 30: 9.85% Best quarter: Q4 `98, 16.10% Worst quarter: Q3 `98, -15.94% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year 17.91% -9.10% Life of fund - began 5/1/98 1.83% 7.70% Index: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. A-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. For instance, when interest rates fall or economic conditions deteriorate, regional bank stocks could suffer losses. Also, rising interest rates can reduce profits by narrowing the difference between these companies' borrowing and lending rates. A decline in a region's economy could hurt the banks in that region. Regional bank stocks as a group could fall out of favor with the market, causing the fund to underperform funds that focus on other types of stocks. In addition, if the managers' security selection strategies do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. o Any bonds held by the fund could be downgraded in credit rating or go into default. Bond prices generally fall when interest rates rise. This risk is greater for longer maturity bonds. Junk bond prices can fall on bad news about the economy, an industry or a company. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquired Fund's financial performance since its inception on May 1, 1998. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus). - ---------------------------------------------------------------------------------------------------------------------- Period ended: 12/98(1) 12/99 12/00 6/01(9) - ---------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $9.28 $8.56 $9.89 Net investment income (2) 0.09 0.12 0.16 0.07 Net realized and unrealized gain (loss) on investments (0.74) (0.57) 1.34 0.72 Total from investment operations (0.65) (0.45) 1.50 0.79 Less distributions: Dividends from net investment income (0.07) (0.12) (0.17) (0.07) Distributions from net realized gain on investments sold --(3) (0.15) -- -- Total distributions (0.07) (0.27) (0.17) (0.07) Net asset value, end of period $9.28 $8.56 $9.89 $10.61 Total investment return(4) (%) (6.43)(5,6) (4.86) 17.91 8.10(5) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 20,256 20,295 13,733 11,888 Ratio of expenses to average net assets (%) 1.05(7) 1.00 1.01 1.03(7) Ratio of adjusted expenses to average net assets(8) (%) 1.14(7) -- -- -- Ratio of net investment income to average net assets (%) 1.39(7) 1.30 1.92 1.44(7) Portfolio turnover rate (%) 28 49 32 9 (1) Began operations on May 1, 1998. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment. (5) 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) Semiannual period from January 1, 2001 through June 30, 2001. Unaudited. A-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 65% of assets in stocks of U.S. and foreign financial services companies of any size. These companies include banks, thrifts, finance companies, brokerage and advisory firms, real estate-related firms, insurance companies and financial holding companies. 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 market conditions, the fund may temporarily invest up to 80% of assets in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ PORTFOLIO MANAGERS James K. Schmidt, CFA - ------------------------------------ Executive vice president of adviser Joined 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 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 8.57% 1.23% 27.16% 2001 total return as of June 30: 4.73% Best quarter: Q4 `98, 16.08% Worst quarter: Q3 `98, -16.76% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year 27.16% -9.10% Life of fund - began 4/30/97 18.90% 16.17% Index: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. A-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, those risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. o Any bonds held by the fund could be downgraded in credit rating or go into default. Bond prices generally fall when interest rates rise. This risk is greater for longer maturity bonds. Junk bond prices can fall on bad news about the economy, an industry or a company. ================================================================================ FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquired Fund's financial performance since its inception on April 30, 1997. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus). - --------------------------------------------------------------------------------------------------------------------------------- Period ended: 12/97(1) 12/98 12/99 12/00 6/01(9) - --------------------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $13.44 $14.45 $14.46 $18.34 Net investment income (2) 0.11 0.18 0.11 0.06 0.05 Net realized and unrealized gain (loss) on investments 3.39 0.97 0.06 3.87 (1.80) Total from investment operations 3.50 1.15 0.17 3.93 (1.75) 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 $16.59 Total investment return(4) (%) 35.05(5,6) 8.55 1.23 27.16 (9.54)(5) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 18,465 54,569 49,312 71,367 81,990 Ratio of expenses to average net assets (%) 1.05(7) 0.92 0.90 0.90 0.90(7) Ratio of adjusted expenses to average net assets(8) (%) 1.39(7) -- -- -- -- Ratio of net investment income to average net assets (%) 1.32(7) 1.25 0.77 0.36 0.65(7) Portfolio turnover rate (%) 11 38 72 41 53 (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) Semiannual period from January 1, 2001 through June 30, 2001. Unaudited. A-9 A-10 Appendix B Management's discussion of fund performance: December 31, 2000 B-1 PROPOSAL 1 John Hancock V.A. High Yield Bond Fund BY ARTHUR N. CALAVRITINOS, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND JANET L. CLAY, CFA, FREDERICK L. CAVANAUGH, JR. AND DANIEL S. JANIS, PORTFOLIO MANAGERS It was a difficult year for high-yield bonds. The impact of rising interest rates in the first half of 2000 finally began to take hold in the shape of a slowing economy. A growing number of companies began to miss their earnings targets, sending shock waves through the financial markets, especially the technology-heavy NASDAQ Composite Index. The number of defaults among high-yield companies, defined as those rated below investment grade, also rose. Telecommunications companies, whose prices had risen to stratospheric levels, were particularly hard hit. As these companies fell short in their business plans and faced diminished prospects for getting their next round of funding in the equity market, their prices tumbled. Since this sector makes up the largest component of the high-yield market, its downfall was a significant drag on the group. High-yield companies also were hurt by a growing lack of liquidity, or ease of trading, that was caused by the mergers of several investment-banking firms. The struggles of these higher-risk bonds stood in marked contrast to U.S. government bonds, which benefited from stabilizing rates, reduced supply, the prospects of a slowing economy and their status as a safe haven in the face of growing stock-market and presidential election uncertainties. By the end of the year, the difference in yield between high-yield bonds and Treasury bonds had widened significantly. High-yield bond yields averaged 14.12%, as measured by the Merrill Lynch High Yield Master II Index, compared with the 5.11% yield of the 10-year Treasury bond. FUND PERFORMANCE For the year ended December 31, 2000, John Hancock V.A. High Yield Bond Fund posted a total return of -6.08% at net asset value. By comparison, the average variable annuity high current yield fund returned -7.03%, according to Lipper, Inc. Historical performance information can be found on the next page. TELECOMMUNICATIONS CUT Although telecommunications is the Fund's largest sector concentration, we continue to maintain an underweighting compared to our peers since so many high-yield telecom companies are only several years old and have yet to deliver results. During the year, we became increasingly convinced that the telecom market was reaching a point of too much capacity and not enough demand -- for everything from equipment to services. As a result, we pared our stake from 23% a year ago to 14% at the end of December. We sold Internet Web-hosting companies PSI Net and Exodus Communications and sold the common stock of Viatel, a competitive local exchange carrier (CLEC) in Europe. Although we sold these and other names before their prices fell even more, we still had some disappointments. KMC Telecom Holdings was a prime example of the problems facing many telecom start-ups. A CLEC serving the Southeast, it provides telephone, cable and Internet access to companies in direct competition with the Baby Bells. While it has a good set of assets, it also has a large amount of debt, needs more money to grow, and is being pinched in its ability to access capital to continue executing its business plan. CREDIT SPECIFIC ISSUES HURT Our biggest disappointments came from several company-specific problems, such as Asia Pulp & Paper (APP) which sparked market concerns and lost credibility when it announced that it needed to extend its debt maturities. Cargo operator Fine Air Services filed for bankruptcy protection after failing to execute its business plan because of operational difficulties. ENERGY GROWS With fuel prices spiking, we increased our weighting in oil and gas and related service companies. We are particularly interested in the natural gas market, since that is where we see the biggest potential for further exploration and development, as well as price gains, given the low supply and growing demand. We added to our stakes in oil drilling company Grey Wolf and Gothic Production, a natural gas exploration and production company that was recently acquired by Chesapeake. Key Energy Services, the major player in the well-servicing business, has performed admirably. We sold our Key Energy stock, but still hold a significant stake in its bonds. We also added a stake in CHC Helicopter, a Canadian company that provides helicopter service to offshore rigs and coastal rescue operations. B-2 OUTLOOK We remain cautious about the near-term prospects for high-yield bonds. It's likely that we could see more failures in the telecommunications group in 2001. We are also waiting for liquidity to return to the high-yield market, which should eventually happen. But we also see a silver lining. As investors recover from the "irrational exuberance" that gripped high-yield telecommunications bonds as well as stocks, we believe they will reassess the risks and rewards of investing in various asset classes. While this takes time, a return to a more rational mode of investing will inevitably serve us well, especially if the stock market remains dicey. With high-yield bond prices low and their yields at very high levels compared to Treasuries, investors are soon bound to recognize the value that exists in the high-yield sector. See the prospectus for the risks of investing in high-yield bonds. International investing involves special risks such as political, economic and currency risks and differences in accounting standards and financial reporting. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (1/6/98) ---------- ---------- Cumulative Total Returns (6.08%) (4.16%) Average Annual Total Returns(1) (6.08%) (1.41%) YIELD For the period ended December 31, 2000 SEC 30-DAY YIELD ---------- John Hancock V.A. High Yield Bond Fund(1) 14.03% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return for the one-year period and since inception would have been (6.47%) and (1.70%), respectively, and the yield would have been 13.64%. [Pie chart at bottom left-hand column with heading "Portfolio Diversification." The chart is divided into six sections (from top to left): Common Stock 9%, Short-Term Investments & Other 25%, Convertible Bonds 3%, Preferred Stock 3%, Foreign Corporate Bonds 16% and U.S. Corporate Bonds 44%. A note below the chart reads "As a percentage of net assets on December 31, 2000."] WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. High Yield Bond Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Lehman Brothers High Yield Bond Index - -- an unmanaged index of fixed-income securities that are similar, but not identical, to the bonds in the Fund's portfolio. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. High Yield Bond Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Lehman Brothers High Yield Bond Index and is equal to $9,819 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. High Yield Bond Fund on January 6, 1998 and is equal to $9,591 as of December 31, 2000. B-3 John Hancock V.A. Strategic Income Fund BY FREDERICK CAVANAUGH, MANAGEMENT TEAM LEADER, AND ARTHUR N. CALAVRITINOS, CFA, JANET L. CLAY, CFA, AND DANIEL S. JANIS, PORTFOLIO MANAGERS The past year was a good one for U.S. Treasury securities, which were boosted initially by the government's debt buyback program and later by expanding signs that the U.S. economy was slowing. Despite the Federal Reserve's effort to stave off inflation by raising interest rates through May 2000, Treasury prices rose as the government scaled back the frequency and size of its auctions of new debt and bought back billions of dollars of outstanding debt. Continued debt reduction efforts, coupled with mounting evidence that economic growth had slacked off and inflation was non-existent, added steam to the Treasury market in the second half. By year's end, the market increasingly anticipated that the Fed would stop raising interest rates in recognition of receding inflationary pressures, and perhaps even cut them in the near future. Meanwhile, concern about the outlook for the economy and corporate profits eroded investor confidence in the high-yield sector. That was particularly true among high-yield bonds in the telecommunications sector. For the most part, foreign government bond markets remained relatively uninteresting from our standpoint. Western Europe and Asia didn't offer a lot of value, since their bond yields typically were lower than those offered in the United States. One foreign bright spot was Canada, which benefited from relatively low and stable inflation. There also was some good news out of some Latin American countries, which enjoyed improving credit fundamentals thanks to the rise in oil prices. FUND PERFORMANCE For the 12 months ended December 31, 2000, John Hancock V.A. Strategic Income Fund posted a total return of 1.40% at net asset value, compared with the 4.64% return of the average variable annuity general bond fund income fund, according to Lipper Inc. Historical performance information can be found on the next page. DEFENSIVE STANCE Given the ongoing difficulties suffered by the high-yield market and our view that more problems may be in store over the near-term, we continually expanded our defensive posture throughout 2000. By year-end, we had reduced our exposure to high-yield bonds to about 23% of net assets, and increasingly gravitated toward more stable, high-quality investments. Our position in cash and other short-term securities rose to 10% by the end of the period, up from 1% at the beginning of the year. We also increased our Treasury holdings to 49% at the end of the year, up from 35% at the end of June 2000. We emphasized a combination of short- and long-term holdings, which was a plus for performance. Short-term securities rallied on expectations that the Fed would lower short-term interest rates, while long-term Treasuries turned in strong performance thanks to the government's buyback program and expectations for lower interest rates. HIGH-YIELD LEADERS AND LAGGARDS The high-yield market's slump was difficult to escape, although some of our holdings held up much better than the others. Packaging company Kappa Beheer, for example, surprised Wall Street with much better than expected financial results. Natural gas service company Universal Compression was lifted by the rising price of that fuel. Finally, French billboard company Go Outdoors Systems Holding and British newspaper company Regional Independent Media Group each benefited from reasonably strong advertising and economic growth. On the flip side, many of our biggest disappointments were telecommunications holdings. As we mentioned earlier, this sector stumbled because investors were worried about telecom companies' ability to raise money to continue the build-out of their networks. Within that group, the bond prices of Viatel, Primus Telecommunications Group and Esprit Telecom Group all suffered substantial losses during 2000. CHANGES IN FOREIGN HOLDINGS Our increase in foreign securities basically was a function of our purchases of Canadian and Venezuelan government bonds. Canadian bonds, which were the best performers among foreign bond markets, offered interest rates competitive with those of U.S. Treasuries and afforded us the opportunity to increase our holdings in a high-quality market characterized by low and stable inflation. Our Venezuelan holdings, which we view as a short-term play, were boosted by the country's improving creditworthiness as oil prices rose. B-4 A LOOK AHEAD We expect to maintain our defensive stance for the time being. High-yield bonds offer some very attractive values, including some bonds carrying yields of nearly nine full percentage points more than U.S. Treasuries. But we don't believe investors will rush back into the market. We believe they'll take a "wait and see" attitude about how much the economy will eventually slow and how much the Federal Reserve will cut interest rates, which it began to do January 3 with a one-half percentage point cut. But since no one can pinpoint the exact timing of the next high-yield bond market rally, we'll continue to hold onto some high-yield bonds that we think have good fundamental prospects and can perform better once market sentiment turns more favorable. We are prepared to move even more into lower-quality investments when we think the time is right. Finally, we'll continue to look for attractive yields in foreign markets, although we believe Canada still offers the best value. International investing involves special risks such as political, economic and currency risks and differences in accounting standards and financial reporting. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (8/29/96) ---------- ---------- Cumulative Total Returns 1.40% 32.63% Average Annual Total Returns(1) 1.40% 6.72% YIELD For the period ended December 31, 2000 SEC 30-DAY YIELD ---------- John Hancock V.A. Strategic Income Fund(1) 7.94% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return since inception would have been 6.30%. The expense limitation did not impact the one-year performance. [Table at bottom left-hand column entitled "Top Five Sectors." The first listing is U.S. Government 49%, the second is Telecommunications 14%, the third Foreign Governments 10%, the fourth Utilities 3% and the fifth Media 2%. A note below the table reads "As a percentage of net assets on December 31, 2000."] WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Strategic Income Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Lehman Brothers Government/Corporate Bond Index -- an unmanaged index that measures the performance of U.S. government bonds, U.S. corporate bonds and Yankee bonds. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Strategic Income Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Lehman Brothers Government/Corporate Bond Index and is equal to $13,760 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Strategic Income Fund on August 29, 1996 and is equal to $13,271 as of December 31, 2000. B-5 PROPOSAL 2 John Hancock V.A. Regional Bank Fund BY JAMES K. SCHMIDT, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND THOMAS M. FINUCANE AND THOMAS C. GOGGINS, PORTFOLIO MANAGERS Bank stocks did an about-face in 2000 and far surpassed the broader market's results, finally re-gaining investors' attention as interest rates stopped going up and technology stocks tanked. In the first three months of the year, investors only had eyes for technology. But starting in March, with the first hint of cracks in the robust economy, investors saw the light and moved out of the technology and telecommunications sectors, where stock prices had reached the stratosphere. Financial stocks of all stripes were the beneficiaries of this important market shift, as investors sought out more attractively valued companies. This interest-rate sensitive group was also boosted by a growing sense that the Federal Reserve was done raising rates to cool the economy. Even with their rally, bank stocks had a few setbacks along the way as earnings shortfalls and increases in non-performing loans were announced at some prominent banks. But regional banks and thrifts came on strong in November and December, when continued signs that the economy had rapidly slowed convinced investors that the Fed's next move would be a rate cut to prevent the economy from stalling. Three days after the year ended, the Fed did just that in a surprising and aggressive move, and also signaled more cuts could be coming. With the favorable turn in financial stocks' fortunes this year, the Standard & Poor's Financial Index rose 26.1% for the year ended December 31, 2000, while the broader market, as measured by the Standard & Poor's 500 Index, lost 9.1%. FUND PERFORMANCE For the year ended December 31, 2000, John Hancock V.A. Regional Bank Fund posted a strong return of 17.91% at net asset value, due largely to its second-half rally when it rose 30%. In comparison, the average open-end financial services fund returned 26.56% and the average sector/miscellaneous fund returned 0.63% for the year, according to Lipper, Inc. See the next page for historical performance information. While significantly outperforming the broad market, the Fund lagged the Lipper group of financial services funds, many of which invested in the securities brokers, asset managers and larger diversified financial firms, which were the better performers until the last two months of the year. Furthermore, although most of our holdings posted earnings results in line with our expectations, we did experience earnings shortfalls among some of our larger holdings. The problems either stemmed from an increase in non-performing loans -- at such banks as UnionBanCal Corp., Bank of America, Marshal & Ilsley, Bank of the Ozarks and Lamar Capital - -- and/or from merger integration issues. FOCUS ON ASSET QUALITY As we mentioned in our last report, after a lengthy period of an expanding economy and a favorable lending environment, it is no surprise that as the economy slowed this year there was a pickup in the level of non-performing assets. But even with the increase, the level of problem loans still remains low at 0.70% of total assets, according to FDIC statistics. The area experiencing much of the deteriorating credit quality is syndicated loans -- large loans shared among a consortium of banks. While the non-performing loan rate could rise some more, we expect that it should remain at a low level (below 1% of total assets) and that the banking industry is establishing adequate loan loss reserves. On an ongoing basis, our team continues to carefully scrutinize the credit risks and prospects of our banks. FUNDAMENTALS INTACT; MERGERS STILL A TREND Even with an increase in non-performing assets, a slowdown in loan growth and flat net interest margins, we still anticipate average 2001 bank earnings growth to be about 8% higher than this year's. This year, our biggest contributor to the Fund's performance was Texas bank Southwest Bancorp. The largest bank left headquartered in Texas, it gained significant market share and benefited from the state's energy-induced boom. Texas bank Cullen Frost also rode this wave, and we sold it to lock in profits during the year. Although bank merger activity slowed in 2000, the consolidation trend remains solidly in place. More recently there was a resurgence of activity, with FleetBoston Financial's announced purchase of Summit Bank, and Firstar's acquisition of U.S. Bancorp. Both of these transactions were priced at more realistic levels, thus boosting the chances of success. We could see more consolidation as banks, struggling to increase revenues, use mergers as a means of improving profits through gained operating efficiencies. B-6 A LOOK AHEAD We are encouraged by the recent turn of events for bank stocks. Even though further asset- quality announcements could roil the group, there are several factors working in our favor. Interest rates have started to come down, which tends to boost investors' confidence in bank stocks, and prospects for further merger activity are good. While it's still not clear that the Fed has achieved the sought-after soft landing, we believe the potential for this not-too-fast, not-too-slow outcome for the economy remains quite real, as the Fed has made clear -- with its interest-rate cut days after the year's end -- that it is intent on preventing an economic meltdown. Finally, even though the stocks have outperformed the market by a wide margin lately, their valuations remain reasonable, which means there's more room for them to advance. Sector investing is subject to greater risks than the market as a whole. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (5/1/98) ---------- ---------- Cumulative Total Returns 17.91% 4.96% Average Annual Total Returns(1) 17.91% 1.83% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return since inception would have been 1.80%. The expense limitation did not impact the one-year performance. [Table at bottom left hand column entitled "Top Five Stock Holdings." The first listing is Mid-State Bancshares 3.9%, the second is Valley National Bancorp 3.8%, the third Fifth Third Bancorp 3.7%, the fourth Commerce Bancshares 3.7% and the fifth Independent Bank Corp. 3.4%. A note below the table reads "As a percentage of net assets on December 31, 2000."] WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Regional Bank Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Regional Bank Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Standard & Poor's 500 Index and is equal to $12,291 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Regional Bank Fund on May 1, 1998 and is equal to $10,496 as of December 31, 2000. B-7 John Hancock V.A. Financial Industries Fund BY JAMES K. SCHMIDT, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND THOMAS M. FINUCANE AND THOMAS C. GOGGINS, PORTFOLIO MANAGERS After struggling in 1999, financial stocks produced some of the market's best results in 2000, as market leadership changed dramatically and high-flying technology stocks fell sharply beginning in March. With growing signs that the economy was slowing from its torrid pace, investors became increasingly concerned that the business fundamentals of many technology and telecommunications companies didn't justify their sky-high valuations. Financial stocks were the beneficiaries of this important market change, as investors sought out more attractively valued companies. This interest-rate sensitive group also benefited from the growing perception that the Federal Reserve was nearing the end of its cycle of raising interest rates. A summer wave of merger activity in the wake of financial reform legislation also lifted the group. For the first 10 months of the year, the best performers in the financial group were the asset managers and brokerage houses, while some banks reported earnings disappointments. But as the year progressed and less expensive value stocks became even more desirable as market turmoil grew, the more growth-oriented broker and asset managers gave back some of their gains and banks moved into the lead. With the favorable turn in financial stocks' fortunes this year, the Standard & Poor's Financial Index rose 26.1% for the year ended December 31, 2000, while the broader market, as measured by the Standard & Poor's 500 Index, lost 9.1%. FUND PERFORMANCE AND STRATEGY UPDATE John Hancock V.A. Financial Industries Fund benefited fully from the upswing in financial stocks, producing a total return of 27.16% at net asset value for the year ended December 31, 2000. That compared with the 26.56% return of the average open-end financial services fund and the 0.63% return of the average variable annuity sector/miscellaneous fund, according to Lipper, Inc. See the next page for historical performance information. The Fund continues to seek capital appreciation by investing in a broad range of U.S. and foreign financial services companies of any size. During the year, shareholders voted to eliminate a restriction that had required the Fund to invest more than 25% of its assets in the banking industry. This change provides the Fund with added flexibility. BROKERS, ASSET MANAGERS STRONG Some of our biggest contributors to performance were our brokerage and asset manager stocks. They rode a wave of high-priced takeovers that emerged in the wake of the Gramm-Leach-Bliley Act -- legislation that dropped the barriers preventing banks, brokers and insurers from affiliating. Over the summer, Chase Manhattan bank bought J.P. Morgan, UBS announced plans to buy investment banker PaineWebber and Credit Suisse Group bought Donaldson, Lufkin and Jenrette. We also benefited from having shifted away from the regional brokers last year to the wire house brokerage names like Morgan Stanley Dean Witter and Merrill Lynch, which were top performers for the year despite their pullback in the last two months. Although it was our belief that underwriting, trading and merger activity would slow in the next several quarters, we are still positive on the group because the level of investment banking activity is still very good and the underwriting calendar should pick up again once the market firms up. The top contributor to the Fund's performance was Amvescap, an asset manager that increased its stature this year through the success of asset gathering at its AIM and Invesco subsidiaries. The stalwart insurance broker Marsh & McLennan also served us well, partly because of the upturn in the property and casualty insurance business, and also because of its strong mutual fund arm. PROPERTY AND CASUALTY MAKES A COMEBACK For much of the year, our life insurance companies, including AXA Financial and AFLAC were better performers than the property and casualty insurers, which have struggled for the last five years in a very competitive pricing environment. But in the latter part of the year, the global pricing cycle for property and casualty companies finally began to turn upward, so we started to shift some of our insurance assets back to this group. B-8 BANK SELECTIONS MOSTLY HELP For the most part, we focused on the trust banks like State Street Corp., Bank of New York and Northern Trust Corp. which did well because of their recurring revenue streams from their main advisory and custody businesses. Our regional banks were mixed. Wells Fargo and FleetBoston Financial did well, as they successfully navigated their way through acquisitions. On the other hand, First Tennessee and Marshal & Ilsley were tarnished by earnings disappointments. During the year we upped our stake in several attractively priced regionals, such as Fifth Third Bancorp and Wells Fargo, and that served us well toward the end of the year. A LOOK AHEAD The prospects for financial stocks remain bright. With the economy slowing dramatically in the fourth quarter, the Fed moved just days into the new year to cut interest rates in an aggressive signal that it intended to prevent an economic stall. Investors tend to favor financial stocks more in an environment of lower rates and slower, steadier economic growth. It remains to be seen if the Fed will succeed in pulling off another soft landing for the economy, but we believe it's the most likely outcome. What's more, we have only just begun to see the powerful results of the merger trend spawned by financial reform legislation and we expect more consolidation to follow. Sector investing is subject to greater risks than the market as a whole. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (4/30/97) ---------- ---------- Cumulative Total Returns 27.16% 88.73% Average Annual Total Returns(1) 27.16% 18.90% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return since inception would have been 18.84%. The expense limitation did not impact the one-year performance. [Table at bottom left-hand column entitled "Top Five Stock Holdings." The first listing is Fifth Third Bancorp 4.1%, the second is AFLAC 3.7%, the third Ambac Financial Group 3.7%, the fourth Wells Fargo 3.6% and the fifth American International Group 3.5%. A note below the table reads "As a percentage of net assets on December 31, 2000."] WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Financial Industries Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Financial Industries Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Financial Industries Fund on April 30, 1997 and is equal to $18,873 as of December 31, 2000. The second line represents the Standard & Poor's 500 Index and is equal to $17,339 as of December 31, 2000. B-9 John Hancock Declaration Funds Prospectus May 1, 2001 - -------------------------------------------------------------------------------- Equity V.A. Core Equity Fund V.A. 500 Index Fund V.A. Large Cap Growth Fund V.A. Mid Cap Growth Fund V.A. Relative Value Fund V.A. Small Cap Growth Fund V.A. Sovereign Investors Fund International V.A. International Fund Sector V.A. Financial Industries Fund V.A. Regional Bank Fund Income V.A. Bond Fund V.A. High Yield Bond Fund V.A. Money Market Fund V.A. Strategic Income Fund As with all mutual funds, the Securities and Exchange Commission has not approved or disapproved these funds or determined whether the information in this prospectus is adequate and accurate. Anyone who indicates otherwise is committing a federal crime. [LOGO](R) ------------------ JOHN HANCOCK FUNDS Contents - -------------------------------------------------------------------------------- General information about Overview 3 the Declaration funds. A fund-by-fund summary Equity of goals, strategies, risks, performance and financial V.A. Core Equity Fund 4 highlights. V.A. 500 Index Fund 6 V.A. Large Cap Growth Fund 8 V.A. Mid Cap Growth Fund 10 V.A. Relative Value Fund 12 V.A. Small Cap Growth Fund 14 V.A. Sovereign Investors Fund 16 International V.A. International Fund 18 Sector V.A. Financial Industries Fund 20 V.A. Regional Bank Fund 22 Income V.A. Bond Fund 24 V.A. High Yield Bond Fund 26 V.A. Money Market Fund 28 V.A. Strategic Income Fund 30 Transaction policies and Account information other information affecting your fund investment. Buying and selling fund shares 32 Valuing fund shares 32 Fund expenses 32 Dividends and taxes 32 Further information on the Fund details Declaration funds. Business structure 33 For more information back cover Overview - -------------------------------------------------------------------------------- JOHN HANCOCK DECLARATION FUNDS These funds offer investment choices for the variable annuity and variable life insurance contracts of certain insurance companies. You should read this prospectus together with the attached prospectus of the insurance product you are considering. RISKS OF MUTUAL FUNDS Mutual funds are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Because you could lose money by investing in these funds, be sure to read all risk disclosure carefully before investing. THE MANAGEMENT FIRM All John Hancock Declaration funds are managed by John Hancock Advisers, Inc. Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock Financial Services, Inc. and manages more than $30 billion in assets. FUND INFORMATION KEY Concise fund-by-fund descriptions begin on the next page. Each description provides the following information: [Clip Art] Goal and strategy The fund's particular investment goals and the strategies it intends to use in pursuing those goals. [Clip Art] Main risks The major risk factors associated with the fund. [Clip Art] Past performance The fund's total return, measured year-by-year and over time. [Clip Art] Financial highlights A table showing the fund's financial performance for up to five years. 3 V.A. Core Equity Fund GOAL AND STRATEGY [Clip Art] The fund seeks above-average total return (capital appreciation plus income). To pursue this goal, the fund normally invests at least 65% of assets in a diversified portfolio of equities which are primarily large-capitalization stocks. The portfolio's risk profile is similar to that of the Standard & Poor's 500 Index. The managers select from a menu of stocks of approximately 550 companies that evolves over time. Approximately 70% to 80% of these companies also are included in the Standard & Poor's 500 Index. The subadviser's investment research team is organized by industry and tracks these companies to develop earnings estimates and five-year projections for growth. A series of proprietary computer models use this in-house research to rank the stocks according to their combination of: o value, meaning they appear to be underpriced o improving fundamentals, meaning they show potential for strong growth This process, together with a risk/ return analysis against the Standard & Poor's 500 Index, results in a portfolio of approximately 100 to 130 of the stocks from the top 60% of the menu. The fund generally sells stocks that fall into the bottom 20% of the menu. In normal market conditions, the fund is almost entirely invested in stocks. The fund may invest in dollar-denominated foreign securities and make limited use of certain derivatives (investments whose value is based on indexes or securities). In abnormal market conditions, the fund may temporarily invest more than 35% of assets in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ SUBADVISER Independence Investment LLC - --------------------------- Team responsible for day-to-day investment management A subsidiary of John Hancock Financial Services, Inc. Founded in 1982 Supervised by the adviser PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 30.68% 28.42% 13.89% -7.11% 2001 total return as of March 31: -10.46% Best quarter: Q4 '98, 23.16% Worst quarter: Q3 '98, -13.01% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year -7.11% -9.10% Life of fund - began 8/29/96 17.11% 19.18% 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 market movements. Large-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform funds that focus on smallor medium-capitalization stocks. The fund's management strategy has a significant influence on fund performance. If the investment research team's earnings estimates or projections turn out to be inaccurate, or if the proprietary computer models do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially inadequate or inaccurate financial information and social or political instability. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by Ernst & Young LLP. - ------------------------------------------------------------------------------------------------------------------------------- Period ended: 12/96(1) 12/97 12/98 12/99 12/00 - ------------------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $11.11 $14.11 $17.74 $19.70 Net investment income (loss)(2) 0.06 0.16 0.10 0.09 0.08 Net realized and unrealized gain (loss) on investments 1.12 3.23 3.90 2.36 (1.48) Total from investment operations 1.18 3.39 4.00 2.45 (1.40) Less distributions: Dividends from net investment income (0.06) (0.14) (0.10) (0.09) (0.09) Distributions in excess of net investment income -- -- -- --(3) -- Distributions from net realized gain on investments sold (0.01) (0.25) (0.27) (0.40) (0.31) Distributions in excess of net realized gain on investments sold -- -- -- -- (0.38) Total distributions (0.07) (0.39) (0.37) (0.49) (0.78) Net asset value, end of period $11.11 $14.11 $17.74 $19.70 $17.52 Total investment return (4) (%) 11.78(5,6) 30.68(6) 28.42 13.89 (7.11) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 1,149 8,719 26,691 44,991 40,673 Ratio of expenses to average net assets (%) 0.95(7) 0.95 0.95 0.83 0.85 Ratio of adjusted expenses to average net assets(8) (%) 4.23(7) 1.59 -- -- -- Ratio of net investment income (loss) to average net assets (%) .. 1.60(7) 1.24 0.65 0.47 0.45 Portfolio turnover rate (%) 24 53 55 77 97 (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 V.A. 500 Index Fund GOAL AND STRATEGY [Clip Art] The fund seeks to provide investment results that correspond to the total return performance of the Standard & Poor's 500 Stock Price Index. To pursue this goal, the fund normally invests at least 80% of assets in common stocks of S&P 500(R) companies, in approximately the same proportions as they are represented in the index. This fund is passively managed, meaning that the manager does not use any broad economic or fundamental financial analysis to select investments. The manager monitors the portfolio daily and rebalances periodically to maintain the proportions of the index. The fund also invests in futures contracts, exchange traded funds and options based on S&P 500 stocks. Under normal circumstances, the fund is fully invested -- directly or through futures and options contracts -- in all 500 stocks represented in the index. It may, however, invest in fewer stocks or in stocks of non-S&P 500 companies. The fund normally maintains less than 1% of assets in cash or cash equivalents. ================================================================================ PORTFOLIO MANAGER James D. Schantz, CFA - -------------------------------------- Vice president of adviser Joined fund team in 2000 Joined adviser in 1998 Executive vice president and director of quantitative research at Hagler, Mastrovita & Hewitt (1994-1998) Began business career in 1970 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 29.51% 28.44% 20.81% -9.28% 2001 total return as of March 31: -11.95% Best quarter: Q4 '98, 21.39% Worst quarter: Q3 '98, -10.01% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year -9.28% -9.10% Life of fund - began 8/29/96 17.75% 19.18% Index: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. 6 MAIN RISKS [Clip Art] The value of your investment will fluctuate with the index. The fund does not attempt to temper volatility or avoid losses associated with a decline in the index. The large-capitalization stocks that make up the index could fall out of favor with the market, causing the fund to underperform funds that focus on smallor medium-capitalization stocks. Certain investment practices may cause the fund to track the index less closely: o Transaction expenses can reduce fund performance. o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o The performance of S&P futures, exchange traded funds or options could correlate less strongly with the index than investments in the underlying securities. o The relative proportions of stocks in the fund's portfolio could drift over time, which could increase tracking error. Other factors may affect performance, such as the liquidity of S&P 500 stocks and the timing of the fund's cash flows. You could lose money by investing in the fund. Note: "Standard & Poor's(R)" and "S&P 500(R)" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the adviser. Standard & Poor's does not sell or promote the fund or advise whether you should invest in the fund. A description of this license is provided in the statement of additional information. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by Ernst & Young LLP. - ----------------------------------------------------------------------------------------------------------------------- Period ended: 12/96(1) 12/97 12/98 12/99 12/00 - ----------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $10.44 $12.62 $15.23 $18.09 Net investment income (loss)(2) 0.17 0.30 0.20 0.17 0.14 Net realized and unrealized gain (loss) on investments 0.98 2.72 3.37 2.98 (1.81) Total from investment operations 1.15 3.02 3.57 3.15 (1.67) Less distributions: Dividends from net investment income (0.16) (0.30) (0.20) (0.17) (0.15) Distributions from net realized gain on investments sold (0.55) (0.54) (0.76) (0.11) (0.06) Distributions in excess of net realized gain on investments sold -- -- -- (0.01) -- Total distributions (0.71) (0.84) (0.96) (0.29) (0.21) Net asset value, end of period $10.44 $12.62 $15.23 $18.09 $16.21 Total investment return(3,4) (%) 11.49(5) 29.51 28.44 20.81 (9.28) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 4,049 20,008 26,457 37,953 25,094 Ratio of expenses to average net assets (%) 0.60(6) 0.36 0.35 0.35 0.35 Ratio of adjusted expenses to average net assets(7) (%) 1.31(6) 0.83 0.92 0.75 0.93 Ratio of net investment income (loss) to average net assets (%) 4.57(6) 2.45 1.44 1.06 0.86 Portfolio turnover rate (%) -- 9 47 5 7 (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) The total returns would have been lower had certain expenses not been reduced during the periods shown. (5) Not annualized. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. 7 V.A. Large Cap Growth Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term capital appreciation. To pursue this goal, the fund normally invests at least 65% of assets in stocks of large-capitalization companies (companies in the capitalization range of the Russell Top 200 Growth Index, which was $0.88 billion to $415.8 billion as of March 31, 2001). In choosing individual stocks, the managers use fundamental financial analysis to identify companies with: o strong cash flows o secure market franchises o sales growth that outpaces their industries The fund generally invests in a diversified portfolio of U.S. companies. The fund has tended to emphasize, or overweight, certain sectors such as health care, technology or consumer goods. These weightings may change in the future. The management team uses various means to assess the depth and stability of companies' senior management, including interviews and company visits. The fund favors companies for which the managers project an above-average growth rate. The fund may invest in preferred stocks and other types of equities, and may invest up to 15% of assets in foreign securities. The fund may also make limited use of certain derivatives (investments whose value is based on 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. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ PORTFOLIO MANAGERS William L. Braman - ----------------------------------- Executive vice president and chief investment officer of adviser Joined fund team in 2000 Joined adviser in 2000 Chief investment officer at Baring Asset Management (London 1998-2000) Head of U.S. equity team at Baring Asset Management (Boston 1989-1998) Began business career in 1977 Robert J. Uek, CFA - ----------------------------------- Vice president of adviser Joined fund team in 2000 Joined adviser in 1997 Corporate finance manager at Ernst & Young (1994-1997) Began business career in 1990 Paul J. Berlinguet - ----------------------------------- Vice president of adviser Joined fund team in 2001 Joined adviser in 2001 U.S. equity investment manager at Baring America Asset Management (1989-2001) Began business career in 1986 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with 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 14.27% 24.60% 20.71% -31.30% 2001 total return as of March 31: -31.74% Best quarter: Q3 '97, 22.53% Worst quarter: Q1 '97, -15.55% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 Index 2 1 year -31.30% -9.10% -24.53% Life of fund - began 8/29/96 2.41% 19.18% 19.57% Index 1: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. Index 2: Russell Top 200 Growth Index, an unmanaged index containing growth-oriented stocks from the Russell Top 200 Index. In the future, the adviser will compare the fund's performance only to the Russell Top 200 Growth Index since it more closely represents the fund's investment strategy. 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. Large-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform investments that focus on smallor medium- capitalization stocks. Similarly, growth stocks could underperform value stocks. To the extent the fund invests in a given industry, its performance will be hurt if that industry performs poorly. In addition, if the managers' security selection strategies do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by Ernst & Young LLP. - -------------------------------------------------------------------------------------------------------------------------------- Period ended: 12/96(1) 12/97 12/98 12/99 12/00 - -------------------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $9.39 $10.73 $13.37 $15.77 Net investment income (loss)(2) (0.01) (0.04) (0.00)(3) (0.04) (0.08) Net realized and unrealized gain (loss) on investments (0.60) 1.38 2.64 2.80 (4.85) Total from investment operations (0.61) 1.34 2.64 2.76 (4.93) Less distributions: Distributions from net realized gain on investments sold -- -- -- (0.36) (0.57) Net asset value, end of period $9.39 $10.73 $13.37 $15.77 $10.27 Total investment return(4) (%) (6.10)(5,6) 14.27(6) 24.60(6) 20.71(6) (31.30) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 994 3,733 10,372 21,872 12,304 Ratio of expenses to average net assets (%) 1.00(7) 1.00 1.00 1.00 0.96 Ratio of adjusted expenses to average net assets(8) (%) 4.76(7) 2.37 1.33 1.02 -- Ratio of net investment income (loss) to average net assets (%) (0.23)(7) (0.39) (0.00) (0.25) (0.59) Portfolio turnover rate (%) 68 136 176 172 170 (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. 9 V.A. Mid Cap Growth Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term capital appreciation. To pursue this goal, the fund normally invests at least 80% of assets in stocks of medium- capitalization companies (companies in the capitalization range of the Russell Midcap Growth Index, which was $0.02 billion to $19.37 billion as of March 31, 2001). The manager conducts fundamental financial analysis to identify companies with above-average earnings growth. In choosing individual securities, the manager looks for companies with growth stemming from a combination of gains in market share and increasing operating efficiency. Before investing, the manager identifies a specific catalyst for growth, such as a new product, business reorganization or merger. The management team generally maintains personal contact with the senior management of the companies the fund invests in. The manager considers broad economic trends, demographic factors, technological changes, consolidation trends and legislative initiatives. The fund generally invests in more than 100 companies. The fund may not invest more than 5% of assets in any one security. The fund may invest up to 10% of assets in foreign securities. The fund may also make limited use of certain derivatives (investments whose value is based on indexes or currencies). In abnormal conditions, the fund may temporarily invest in U.S. government securities with maturities of up to three years and more than 10% of assets in cash or cash equivalents. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ PORTFOLIO MANAGERS Barbara C. Friedman, CFA - --------------------------------- Senior vice president of adviser Joined fund team in 1998 Joined adviser in 1998 Head of mid-cap equity group at Fleet Investment Advisors (1996-1997) Began business career in 1973 Timothy N. Manning - --------------------------------- Joined fund team in 2000 Joined adviser in 2000 Analyst at State Street Research (1999-2000) Equity research associate at State Street Research (1996-1999) Began business career in 1993 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with 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 10.35% 56.18% -11.73% 2001 total return as of March 31: -30.42% Best quarter: Q4 '99, 41.78% Worst quarter: Q3 '98, -19.74% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 Index 2 1 year -11.73% -9.10% -11.75% Life of fund - began 1/7/98 15.12% 12.58% 17.28% Index 1: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. Index 2: Russell Midcap Growth Index, an unmanaged index containing those stocks from the Russell Midcap Index with a greater-than-average growth orientation. 10 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. Medium-capitalization stocks tend to be more volatile than stocks of larger companies, and as a group could fall out of favor with the market, causing the fund to underperform investments that focus either on smallor large-capitalization stocks. Similarly, growth stocks could underperform value stocks. To the extent the fund invests in a given industry, its performance will be hurt if that industry performs poorly. In addition, if the managers' security selection strategies do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by Ernst & Young LLP. - ------------------------------------------------------------------------------------------------- Period ended: 12/98(1) 12/99 12/00 - ------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $11.03 $17.21 Net investment income (loss)(2) 0.01 (0.03) (0.08) Net realized and unrealized gain (loss) on investments 1.03 6.23 (1.94) Total from investment operations 1.04 6.20 (2.02) Less distributions: Dividends from net investment income (0.01) -- -- Distributions from net realized gain on investments sold -- (0.02) (0.10) Tax return of capital --(3) -- -- Total distributions (0.01) (0.02) (0.10) Net asset value, end of period $11.03 $17.21 $15.09 Total investment return(4,5) (%) 10.35(6) 56.18 (11.73) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 1,779 6,363 11,482 Ratio of expenses to average net assets (%) 1.00(7) 1.00 1.00 Ratio of adjusted expenses to average net assets(8) (%) 4.23(7) 2.36 1.10 Ratio of net investment income (loss) to average net assets (%) 0.06(7) (0.23) (0.42) Portfolio turnover rate (%) 103 136 155 (1) Began operations on January 7, 1998. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment. (5) The total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Not annualized. (7) Annualized. (8) Does not take into consideration expense reductions during the periods shown. 11 V.A. Relative Value Fund GOAL AND STRATEGY [Clip Art] The fund seeks the highest total return (capital appreciation plus current income) that is consistent with reasonable safety of capital. To pursue this goal, the fund invests in a diversified portfolio of stocks, bonds and money market securities. Although the fund may concentrate in any of these asset classes, under normal circumstances it invests primarily in stocks. In managing the portfolio, the managers emphasize a value- oriented approach to individual stock selection. With the aid of proprietary financial models, the management team looks for companies that are selling at what appear to be substantial discounts to their long-term intrinsic and "franchise" values. These companies often have identifiable catalysts for growth, such as new products, business reorganizations or mergers. The fund manages risk by typically holding between 50 and 150 large companies that are diversified across industry sectors. The management team also uses fundamental financial analysis to identify individual companies with substantial cash flows, reliable revenue streams, superior competitive positions and strong management. The fund may attempt to take advantage of short-term market volatility by investing in corporate restructurings or pending acquisitions. In selecting bonds of any maturity, the manager looks for the most favorable risk/return ratios. The fund may invest up to 15% of net assets in junk bonds rated as low as CC/Ca and their unrated equivalents. The fund may invest up to 25% of assets in foreign securities (35% during adverse U.S. market conditions). The fund may also make limited use of certain derivatives (investments whose value is based on 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 Timothy E. Quinlisk, CFA - --------------------------------- Senior vice president of adviser Joined fund team in 1998 Joined adviser in 1998 Analyst at Hagler, Mastrouita & Hewitt (1997-1998) Analyst at State Street Global Advisors (1995-1997) Began business career in 1985 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 R. Scott Mayo, CFA - --------------------------------- Second vice president of adviser Joined fund team in 2000 Joined adviser in 1998 Analyst at Morgan Stanley (1998) Analyst at Grantham, Mayo & Van Otterloo (1993-1996) Began business career in 1993 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1998 1999 2000 21.39% 56.65% -4.80% 2001 total return as of March 31: -9.92% Best quarter: Q4 `99, 43.25% Worst quarter: Q3 `98, -16.61% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year -4.80% -9.10% Life of fund - began 1/6/98 22.01% 12.47% Index: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. 12 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 smallor medium-capitalization stocks. Similarly, value stocks could underperform growth stocks. In addition, if the managers' securities selection strategies do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. o Any bonds held by the fund could be downgraded in credit rating or go into default. Bond prices generally fall when interest rates rise and longer maturity will increase volatility. Junk bond prices can fall on bad news about the economy, an industry or a company. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by Ernst & Young LLP. - ------------------------------------------------------------------------------------------------------ Period ended: 12/98(1) 12/99 12/00 - ------------------------------------------------------------------------------------------------------ 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. 13 V.A. Small Cap Growth Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term capital appreciation. To pursue this goal, the fund normally invests at least 80% of assets in stocks of small-capitalization companies (companies in the capitalization range of the Russell 2000 Growth Index, which was $10 million to $4.20 billion as of March 31, 2001). The managers look for companies in the emerging growth phase of development that are not yet widely recognized. The fund also may invest in established companies that, because of new management, products or opportunities, offer the possibility of accelerating earnings. To manage risk, the fund typically invests in 150 to 220 companies across many industries, and does not invest more than 5% of assets in any one security. In choosing individual securities, the managers use fundamental financial analysis to identify rapidly growing companies. The managers favor companies that dominate their market niches or are poised to become market leaders. They look for strong senior management teams and coherent business strategies. They generally maintain personal contact with the senior management of the companies the fund invests in. The fund may invest in preferred stocks and other types of equities, and may invest up to 10% of assets in foreign securities. The fund may also make limited use of certain derivatives (investments whose value is based on indexes or currencies). In abnormal conditions, the fund may temporarily invest in U.S. government securities with maturities of up to three years and more than 10% of assets in cash and cash equivalents. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ PORTFOLIO MANAGERS Bernice S. Behar, CFA - --------------------------------- Senior vice president of adviser Joined fund team in 1996 Joined adviser in 1991 Began business career in 1986 Anurag Pandit, CFA - --------------------------------- Vice president of adviser Joined fund team in 1996 Joined adviser in 1996 Equity analyst at Loomis Sayles (1992-1996) Began business career in 1984 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with broad-based market 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 11.06% 15.94% 68.52% -22.33% 2001 total return as of March 31: -21.81% Best quarter: Q4 `99, 44.55% Worst quarter: Q3 `98, -21.42% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 Index 2 1 year -22.33% -3.02% -22.43% Life of fund - began 8/29/96 11.02% 10.29% 6.88% Index 1: Russell 2000 Index, an unmanaged index of 2,000 U.S. small-capitalization stocks. Index 2: Russell 2000 Growth Index, an unmanaged index containing those stocks from the Russell 2000 Index with a greater-than-average growth orientation. 14 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. Small-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform investments that focus on mediumor large-capitalization stocks. Similarly, growth stocks could underperform value stocks. To the extent the fund invests in a given industry, its performance will be hurt if that industry performs poorly. In addition, if the managers' security selection strategies do not perform as expected, the fund could underperform its peers or lose money. Stocks of smaller companies are more volatile than stocks of larger companies. Many smaller companies have short track records, narrow product lines or niche markets, making them highly vulnerable to isolated business setbacks. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price; this risk could also affect small-capitalization stocks, especially those with low trading volumes. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by Ernst & Young LLP. - --------------------------------------------------------------------------------------------------------------------------- Period ended: 12/96(1) 12/97 12/98 12/99 12/00 - --------------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $9.32 $10.35 $12.00 $19.76 Net investment income (loss)(2) 0.02 (0.02) (0.06) (0.10) (0.13) Net realized and unrealized gain (loss) on investments (0.68) 1.05 1.71 8.29 (4.33) Total from investment operations (0.66) 1.03 1.65 8.19 (4.46) Less distributions: Dividends from net investment income (0.02) --(3) -- -- -- Distributions from net realized gain on investments sold -- -- -- (0.43) (0.90) Total distributions (0.02) -- -- (0.43) (0.90) Net asset value, end of period $9.32 $10.35 $12.00 $19.76 $14.40 Total investment return(4,5) (%) (6.62)(6) 11.06 15.94 68.52 (22.33) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 975 3,841 8,232 20,867 19,772 Ratio of expenses to average net assets (%) 1.00(7) 1.00 1.00 1.00 1.00 Ratio of adjusted expenses to average net assets(8) (%) 5.19(7) 2.72 1.63 1.38 1.10 Ratio of net investment income (loss) to average net assets (%) 0.62(7) (0.16) (0.59) (0.76) (0.68) Portfolio turnover rate (%) 31 79 93 120 104 (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) The total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Not annualized. (7) Annualized. (8) Does not take into consideration expense reductions during the periods shown. 15 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, 2001, that range was $0.67 billion to $415.8 billion. At least 65% of the fund's stock investments are "dividend performers" -- companies whose dividend payments have increased steadily for ten years. The managers use fundamental financial analysis to identify individual companies with high-quality income statements, substantial cash reserves and identifiable catalysts for growth, which may be new products or benefits from industry-wide growth. The managers generally visit companies to evaluate the strength and consistency of their management strategy. Finally, the managers look for stocks that are reasonably priced relative to their earnings and industry. Historically, companies that meet these criteria have tended to have large or medium market capitalizations. The fund may not invest more than 5% of assets in any one security. The fund may invest in bonds of any maturity, with up to 5% of assets in junk bonds rated as low as C and their unrated equivalents. The fund typically invests in U.S. companies but may invest in dollar-denominated foreign securities. It may also make limited use of certain derivatives (investments whose value is based on 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 28.43% 16.87% 3.84% -0.33% 2001 total return as of March 31: -9.03% Best quarter: Q4 `98, 15.75% Worst quarter: Q3 `99, -7.43% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year -0.33% -9.10% Life of fund - began 8/29/96 12.73% 19.18% Index: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. 16 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock and bond market movements. The fund's management strategy will influence performance significantly. Large or medium-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform funds that focus on small-capitalization stocks. 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, those risks could increase volatility or reduce performance: o Any bonds held by the fund could be downgraded in credit rating or go into default. Bond prices generally fall when interest rates rise and longer maturity will increase volatility. Junk bond prices can fall on bad news about the economy, an industry or a company. o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including inadequate or inaccurate financial information and social or political instability. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by Ernst & Young LLP. - --------------------------------------------------------------------------------------------------------------------------- Period ended: 12/96(1) 12/97 12/98 12/99 12/00 - --------------------------------------------------------------------------------------------------------------------------- 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. 17 V.A. International Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the fund normally invests at least 80% of assets in stocks of foreign companies. The fund may invest up to 30% of assets in emerging markets as classified by Morgan Stanley Capital International (MSCI). The fund does not maintain a fixed allocation of assets, either with respect to securities type or geography. In managing the portfolio, the managers focus on a "bottom-up" analysis on the financial conditions and competitiveness of individual foreign companies. In analyzing specific companies for possible investment, the managers ordinarily look for several of the following characteristics that will enable the companies to compete successfully in their respective markets: o above-average per share earnings growth o high return on invested capital o a healthy balance sheet o sound financial and accounting policies and overall financial strength o strong competitive advantages o effective research, product development and marketing. The managers consider whether to sell a particular security when any of those factors materially changes. The managers allocate the fund's assets among securities of countries that are expected to provide the best opportunities for meeting the fund's investment objective. To manage risk, the fund does not invest more than 5% of assets in any one security. The fund may use certain derivatives (investments whose value is based on indexes, securities or currencies). In abnormal conditions, the fund may temporarily invest more than 20% of assets in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. ================================================================================ SUBADVISER Nicholas-Applegate Capital Management - ---------------------------------- U.S.-based team responsible for day-to-day investment manage- ment since December 2000 Founded in 1984 Supervised by the adviser PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 -0.54% 16.76% 31.55% -25.17% 2001 total return as of March 31: -19.07% Best quarter: Q4 `99, 25.38% Worst quarter: Q3 `98, -17.11% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year -25.17% -16.34% Life of fund - began 8/29/96 6.02% 5.25% Index: MSCI All Country World Ex-U.S. Free Index, an unmanaged index of freely traded stocks of foreign companies. 18 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock market movements. Foreign investments are more risky than domestic investments. Investments in foreign securities may be affected by fluctuations in currency exchange rates, incomplete or inaccurate financial information on companies, social instability and political actions ranging from tax code changes to governmental collapse. These risks are more significant in emerging markets. The fund's management strategy has a significant influence on fund performance. If the fund invests in countries or regions that experience economic downturns, performance could suffer. In addition, if certain investments or industries do not perform as expected, or if the managers' security selection strategies do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o In a down market, emerging market securities, other higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by Ernst & Young LLP. - --------------------------------------------------------------------------------------------------------------------------- Period ended: 12/96(1) 12/97 12/98 12/99 12/00 - --------------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $11.23 $10.50 $12.18 $15.45 Net investment income (loss)(2) 0.07 0.05 0.07 0.07 0.03 Net realized and unrealized gain (loss) on investments 1.20 (0.13) 1.69 3.75 (3.93) Total from investment operations 1.27 (0.08) 1.76 3.82 (3.90) Less distributions: Dividends from net investment income (0.04) (0.01) (0.07) (0.08) (0.17) Dividends in excess of net investment income -- -- (0.01) (0.02) -- Distributions from net realized gain on investments sold -- (0.64) -- (0.45) (0.37) Total distributions (0.04) (0.65) (0.08) (0.55) (0.54) Net asset value, end of period $11.23 $10.50 $12.18 $15.45 $11.01 Total investment return(3,4) (%) 12.75(5) (0.54) 16.75 31.55 (25.17) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 2,267 3,792 7,201 9,375 7,330 Ratio of expenses to average net assets (%) 1.15(6) 1.15 1.15 1.15 1.15 Ratio of adjusted expenses to average net assets(7) (%) 3.13(6) 2.04 3.13 2.51 3.24 Ratio of net investment income (loss) to average net assets (%) 2.03(6) 0.43 0.59 0.52 0.19 Portfolio turnover rate (%) 14 273 89 116 177 (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) The total returns would have been lower had certain expenses not been reduced during the periods shown. (5) Not annualized. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. 19 V.A. Financial Industries Fund GOAL AND STRATEGY [Clip Art] The fund seeks capital appreciation. To pursue this goal, the fund normally invests at least 65% of assets in stocks of U.S. and foreign financial services companies of any size. These companies include banks, thrifts, finance companies, brokerage and advisory firms, real estate-related firms, insurance companies and financial holding companies. 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 market conditions, the fund may temporarily invest up to 80% of assets in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ PORTFOLIO MANAGERS James K. Schmidt, CFA - ------------------------------------ Executive vice president of adviser Joined 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 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 8.57% 1.23% 27.16% 2001 total return as of March 31: -13.63% Best quarter: Q4 `98, 16.08% Worst quarter: Q3 `98, -16.76% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year 27.16% -9.10% Life of fund - began 4/30/97 18.90% 16.17% Index: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. 20 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, those risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. o Any bonds held by the fund could be downgraded in credit rating or go into default. Bond prices generally fall when interest rates rise. This risk is greater for longer maturity bonds. Junk bond prices can fall on bad news about the economy, an industry or a company. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by Ernst & Young LLP. - --------------------------------------------------------------------------------------------------------------- Period ended: 12/97(1) 12/98 12/99 12/00 - --------------------------------------------------------------------------------------------------------------- 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. 21 V.A. Regional Bank Fund GOAL AND STRATEGY [Clip Art] The fund seeks long- term capital appreciation. To pursue this goal, the fund normally invests at least 65% of assets in stocks of regional banks and lending companies, including commercial and industrial banks, savings and loan associations and bank holding companies. Typically, these companies provide full-service banking, have primarily domestic assets and are based outside of money centers such as New York City and Chicago. In managing the portfolio, the managers focus primarily on stock selection. In choosing individual stocks, the managers use fundamental financial analysis to identify securities that appear comparatively undervalued. The managers look for low price/ earnings (P/E) ratios, high-quality assets and sound loan review processes. Given the industry-wide trend toward consolidation, the managers also invest in companies that appear to be positioned for a merger. The fund's portfolio may be concentrated in geographic regions where consolidation activity is high. The managers generally gather firsthand information about companies from interviews and company visits. The fund may also invest in other U.S. and foreign financial services companies, such as lending companies and money center banks. The fund may invest up to 5% of net assets in stocks of companies outside the financial services sector and up to 5% of net assets in junk bonds (those rated below BBB/Baa and their unrated equivalents). The fund may make limited use of certain derivatives (investments whose value is based on indexes, securities or currencies). In abnormal market conditions, the fund may temporarily invest up to 80% of assets in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. ================================================================================ PORTFOLIO MANAGERS James K. Schmidt, CFA - ------------------------------------ Executive vice president of adviser Joined fund team in 1998 Joined adviser in 1985 Began business career in 1979 Thomas M. Finucane - ------------------------------------ Vice president of adviser Joined fund team in 1998 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 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. - -------------------------------------------------------------------------------- Total return -- calendar year - -------------------------------------------------------------------------------- 1999 2000 -4.86% 17.91% 2001 total return as of March 31: -1.59% Best quarter: Q4 `98, 16.10% Worst quarter: Q3 `98, -15.94% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year 17.91% -9.10% Life of fund - began 5/1/98 1.83% 7.70% Index: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. 22 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. For instance, when interest rates fall or economic conditions deteriorate, regional bank stocks could suffer losses. Also, rising interest rates can reduce profits by narrowing the difference between these companies' borrowing and lending rates. A decline in a region's economy could hurt the banks in that region. Regional bank stocks as a group could fall out of favor with the market, causing the fund to underperform funds that focus on other types of stocks. In addition, if the managers' security selection strategies do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. o Any bonds held by the fund could be downgraded in credit rating or go into default. Bond prices generally fall when interest rates rise. This risk is greater for longer maturity bonds. Junk bond prices can fall on bad news about the economy, an industry or a company. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased during the year. Figures audited by Ernst & Young LLP. - ----------------------------------------------------------------------------------------------------- Period ended: 12/98(1) 12/99 12/00 - ----------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $9.28 $8.56 Net investment income (loss)(2) 0.09 0.12 0.16 Net realized and unrealized gain (loss) on investments (0.74) (0.57) 1.34 Total from investment operations (0.65) (0.45) 1.50 Less distributions: Dividends from net investment income (0.07) (0.12) (0.17) Distributions from net realized gain on investments sold --(3) (0.15) -- Total distributions (0.07) (0.27) (0.17) Net asset value, end of period $9.28 $8.56 $9.89 Total investment return(4) (%) (6.43)(5,6) (4.86) 17.91 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 20,256 20,295 13,733 Ratio of expenses to average net assets (%) 1.05(7) 1.00 1.01 Ratio of adjusted expenses to average net assets(8) (%) 1.14(7) -- -- Ratio of net investment income (loss) to average net assets (%) 1.39(7) 1.30 1.92 Portfolio turnover rate (%) 28 49 32 (1) Began operations on May 1, 1998. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment. (5) 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. 23 V.A. Bond Fund GOAL AND STRATEGY [Clip Art] The fund seeks to generate a high level of current income consistent with prudent investment risk. In pursuing this goal, the fund normally invests at least 65% of assets in a diversified portfolio of debt securities. These include corporate bonds and debentures as well as U.S. government and agency securities. Most of these securities are investment grade, although the fund may invest up to 25% of assets in junk bonds rated as low as CC/Ca and their unrated equivalents. There is no limit on the fund's average maturity. In managing the fund's portfolio, the managers concentrate on sector allocation, industry allocation and securities selection: deciding which types of bonds and industries to emphasize at a given time, and then which individual bonds to buy. When making sector and industry allocations, the managers try to anticipate shifts in the business cycle, using top-down analysis to determine which sectors and industries may benefit over the next 12 months. In choosing individual securities, the managers use bottom-up research to find securities that appear comparatively undervalued. The managers look at bonds of all different quality levels and maturities from many different issuers, potentially including foreign governments and corporations. The fund intends to keep its exposure to interest rate movements generally in line with those of its peers. The fund may invest in mortgage-related securities and certain other derivatives (investments whose value is based on indexes, securities or currencies). Under normal conditions, the fund may not invest more than 10% of assets in cash or cash equivalents. In abnormal market conditions, the fund may temporarily invest more than 35% of assets in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. ================================================================================ PORTFOLIO MANAGERS James K. Ho, CFA - ------------------------------------ Executive vice president of adviser Joined fund team in 1996 Joined adviser in 1985 Began business career in 1977 Benjamin A. Matthews - ------------------------------------ Vice president of adviser Joined fund team in 1998 Joined adviser in 1995 Began business career in 1970 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 9.31% 9.41% -0.51% 11.89% 2001 total return as of March 31: 2.85% Best quarter: Q3 `98, 4.76% Worst quarter: Q1 `97, -0.96% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year 11.89% 9.39% Life of fund - began 8/29/96 7.88% 7.28% Index: Lehman Brothers Credit Bond Index, an unmanaged index of corporate bonds and Yankee bonds. 24 MAIN RISKS [Clip Art] The major factors in this fund's performance are interest rates and credit risk. When interest rates rise, bond prices generally fall. Generally, an increase in the fund's average maturity will make it more sensitive to interest rate risk. The fund could lose money if any bonds it owns are downgraded in credit rating or go into default. In general, lower-rated bonds have higher credit risks. If certain sectors or investments do not perform as the fund expects, it could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o Junk bonds and foreign securities may make the fund more sensitive to market or economic shifts in the U.S. and abroad. o If interest rate movements cause the fund's mortgage-related and callable securities to be paid off substantially earlier or later than expected, the fund's share price or yield could be hurt. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. Any U.S. government guarantees on portfolio securities do not apply to these securities' market value or current yield, or to fund shares. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by Ernst & Young LLP. - -------------------------------------------------------------------------------------------------------------------------- Period ended: 12/96(1) 12/97 12/98 12/99 12/00 - -------------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $10.19 $10.36 $10.51 $9.81 Net investment income (loss)(2) 0.23 0.68 0.63 0.64 0.64 Net realized and unrealized gain (loss) on investments 0.21 0.24 0.32 (0.70) 0.50 Total from investment operations 0.44 0.92 0.95 (0.06) 1.12 Less distributions: Dividends from net investment income (0.23) (0.68) (0.63) (0.64) (0.64) Distributions from net realized gain on investments sold (0.02) (0.07) (0.17) -- -- Total distributions (0.25) (0.75) (0.80) (0.64) (0.64) Net asset value, end of period $10.19 $10.36 $10.51 $9.81 $10.29 Total investment return(3,4) (%) 4.42(5) 9.30 9.41 (0.51) 11.89 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 1,056 3,682 10,669 12,531 25,173 Ratio of expenses to average net assets (%) 0.75(6) 0.75 0.75 0.75 0.75 Ratio of adjusted expenses to average net assets(7) (%) 4.15(6) 2.53 1.34 1.01 0.92 Ratio of net investment income (loss) to average net assets (%) 6.69(6) 6.57 5.93 6.39 6.47 Portfolio turnover rate (%) 45 193 367 307 298 (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) The total returns would have been lower had certain expenses not been reduced during the periods shown. (5) Not annualized. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. 25 V.A. High Yield Bond Fund GOAL AND STRATEGY [Clip Art] The fund seeks to maximize current income without assuming undue risk. Capital appreciation is a secondary goal. In pursuing these goals, the fund normally invests at least 65% of assets in U.S. and foreign bonds rated BBB/Baa or lower and their unrated equivalents. The fund may invest up to 30% of assets in junk bonds rated CC/Ca and their unrated equivalents. There is no limit on the fund's average maturity. In managing the fund's portfolio, the managers concentrate on industry allocation and securities selection: deciding which types of industries to emphasize at a given time, and then which individual bonds to buy. The managers use top-down analysis to determine which industries may benefit from current and future changes in the economy. In choosing individual securities, the managers use bottom-up research to find securities that appear comparatively undervalued. The managers look at the financial condition of the issuers as well as the collateralization and other features of the securities themselves. The managers also look at companies' financing cycles to determine which types of securities (for example, bonds, preferred stocks or common stocks) to favor. The fund typically invests in a broad range of industries, although it may invest up to 40% of assets in electric utilities and telecommunications companies. The fund may use certain higher-risk investments, including derivatives (investments whose value is based on indexes, securities or currencies) and restricted or illiquid securities. In addition, the fund may invest up to 20% of net assets in U.S. and foreign stocks. In abnormal market conditions, the fund may temporarily invest more than 35% of assets in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. ================================================================================ PORTFOLIO MANAGERS Arthur N. Calavritinos, CFA - -------------------------------- Vice president of adviser Joined fund team in 1998 Joined adviser in 1988 Began business career in 1986 Frederick L. Cavanaugh, Jr. - -------------------------------- Senior vice president of adviser Joined fund team in 1998 Joined adviser in 1986 Began business career in 1975 Janet L. Clay, CFA - -------------------------------- Vice president of adviser Joined fund team in 1998 Joined adviser in 1995 Began business career in 1990 Daniel S. Janis - -------------------------------- 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 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 -9.81% 13.12% -6.08% 2001 total return as of March 31: 1.15% Best quarter: Q2 `99, 4.51% Worst quarter: Q3 `98, -14.84% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year -6.08% -5.86% Life of fund - began 1/6/98 -1.41% -1.81%* Index: Lehman Brothers U.S. Corporate High Yield Bond Index, an unmanaged index of high-yield bonds. *As of December 31, 1997. 26 MAIN RISKS [Clip Art] The major factors in the fund's performance are interest rates and credit risk. When interest rates rise, bond prices generally fall. Generally, an increase in the fund's average maturity will make it more sensitive to interest rate risk. Credit risk depends largely on the perceived financial health of bond issuers. In general, lower-rated bonds have higher credit risks. Junk bond prices can fall on bad news about the economy, an industry or a company. Share price, yield and total return may fluctuate more than with less aggressive bond funds. The fund could lose money if any bonds it owns are downgraded in credit rating or go into default. If certain industries or investments do not perform as the fund expects, it could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. o If interest rate movements cause the fund's callable securities to be paid off substantially earlier or later than expected, the fund's share price or yield could be hurt. o If the fund concentrates its investments in telecommunications or electric utilities, its performance could be tied more closely to those industries than to the market as a whole. o Stock investments may go down in value due to stock market movements or negative company or industry events. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased during the year. Figures audited by Ernst & Young LLP. - ------------------------------------------------------------------------------------------------- Period ended: 12/98(1) 12/99 12/00 - ------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $8.22 $8.31 Net investment income (loss)(2) 0.90 0.88 0.94 Net realized and unrealized gain (loss) on investments (1.82) 0.16 (1.40) Total from investment operations (0.92) 1.04 (0.46) Less distributions: Dividends from net investment income (0.84) (0.88) (0.94) Distributions from net realized gain on investments sold -- (0.07) (0.23) Tax return of capital (0.02) -- -- Total distributions (0.86) (0.95) (1.17) Net asset value, end of period $8.22 $8.31 $6.68 Total investment return(3,4) (%) (9.80)(5) 13.12 (6.08) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 8,120 9,287 7,219 Ratio of expenses to average net assets (%) 0.85(6) 0.85 0.85 Ratio of adjusted expenses to average net assets(7) (%) 1.15(6) 1.03 1.24 Ratio of net investment income (loss) to average net assets (%) 9.85(6) 10.56 12.12 Portfolio turnover rate (%) 102 122 56 (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) The total returns 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 periods shown. 27 V.A. Money Market Fund GOAL AND STRATEGY [Clip Art] The fund seeks the maximum current income that is consistent with maintaining liquidity and preserving capital. The fund intends to maintain a stable $1 share price. The fund invests only in dollar-denominated securities rated within the two highest short-term credit categories and their unrated equivalents. These securities may be issued by: o U.S. and foreign companies o U.S. and foreign banks o U.S. and foreign governments o U.S. agencies, states and municipalities o International organizations such as the World Bank and the International Monetary Fund The fund may also invest in repurchase agreements based on these securities. The fund maintains an average dollar-weighted maturity of 90 days or less, and does not invest in securities with remaining maturities of more than 13 months. In managing the portfolio, the management team searches aggressively for the best values on securities that meet the fund's credit and maturity requirements. The team tends to favor corporate securities and looks for relative yield advantages between, for example, a company's secured and unsecured short-term debt obligations. ================================================================================ PORTFOLIO MANAGERS Team of money market research analysts and portfolio managers YIELD INFORMATION For the fund's 7-day effective yield, call 1-800-824-0335 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time. This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 4.90% 4.90% 4.60% 5.90% 2001 total return as of March 31: 1.30% Best quarter: Q1 `98, 1.25% Worst quarter: Q1 `99, 1.06% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund 1 year 5.90% Life of fund - began 8/29/96 5.00% 28 MAIN RISKS [Clip Art] The value of your investment will be most affected by short-term interest rates. If interest rates rise sharply, the fund could underperform its peers or lose money. An issuer of securities held by the fund could default or have its credit rating downgraded. Foreign investments carry additional risks, including inadequate or inaccurate financial information and social or political instability. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by Ernst & Young LLP. - --------------------------------------------------------------------------------------------------------------------------- Period ended: 12/96(1) 12/97 12/98 12/99 12/00 - --------------------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 Net investment income (loss)(2) 0.02 0.05 0.05 0.05 0.06 Less distributions: Dividends from net investment income (0.02) (0.05) (0.05) (0.05) (0.06) Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 Total investment return(3) (%) 1.61(4,5) 4.88(5) 4.87 4.58 5.90 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 207 8,377 16,519 32,952 73,917 Ratio of expenses to average net assets (%) 0.75(6) 0.75 0.74 0.66 0.60 Ratio of adjusted expenses to average net assets(7) (%) 27.48(6) 1.27 -- -- -- Ratio of net investment income (loss) to average net assets (%) 4.68(6) 4.86 4.70 4.55 5.86 (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. 29 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. 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 category. Within each category, the managers look for securities that are appropriate for the overall portfolio in terms of yield, credit quality, structure and industry distribution. In selecting securities, relative yields and risk/reward ratios are the primary considerations. 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 Arthur N. Calavritinos, CFA - --------------------------------- Vice president of adviser Joined fund team in 1996 Joined adviser in 1988 Began business career in 1986 Janet L. Clay, CFA - --------------------------------- Vice president of adviser Joined fund team in 1998 Joined adviser in 1995 Began business career in 1990 Daniel S. Janis - --------------------------------- 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 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 11.77% 4.92% 4.82% 1.40% 2001 total return as of March 31: 1.06% Best quarter: Q2 `97, 6.28% Worst quarter: Q3 `98, -2.79% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year 1.40% 11.85% Life of fund - began 8/29/96 6.72% 7.70% Index: Lehman Brothers Government/Credit Bond Index, an unmanaged index of U.S. government, U.S. corporate and Yankee bonds. 30 MAIN RISKS [Clip Art] The fund's risk profile depends on its sector allocation. In general, investors should expect fluctuations in share price, yield and total return that are above average for bond funds. When interest rates rise, bond prices generally fall. Generally, an increase in the fund's average maturity will make it more sensitive to interest rate risk. A fall in worldwide demand for U.S. government securities could also lower the prices of these securities. The fund could lose money if any bonds it owns are downgraded in credit rating or go into default. In general, lower-rated bonds have higher credit risks, and their prices can fall on bad news about the economy, an industry or a company. If certain allocation strategies or certain industries or investments do not perform as the fund expects, it could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. These risks are greater in emerging markets. o If interest rate movements cause the fund's callable securities to be paid off substantially earlier or later than expected, the fund's share price or yield could be hurt. o Stock investments may go down in value due to stock market movements or negative company or industry events. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. ================================================================================ FINANCIAL HIGHLIGHTS [Clip Art] This table details the performance of the fund's shares, including total return information showing how much an investment in the fund has increased or decreased each year. Figures audited by Ernst & Young LLP. - ------------------------------------------------------------------------------------------------------------------------------------ Period ended: 12/96(1) 12/97 12/98 12/99 12/00 - ------------------------------------------------------------------------------------------------------------------------------------ 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. 31 Account information - -------------------------------------------------------------------------------- BUYING AND SELLING FUND SHARES When you invest in a Declaration fund through a variable contract, your premium payments are used to buy units of an insurance company separate account that then buys shares of the fund. The shares are purchased at net asset value (NAV) and are generally credited to the separate account immediately after the fund accepts payment from the insurance company. In unusual circumstances or to protect shareholders, a fund may refuse a purchase order, especially when the adviser believes the order might be large enough to disrupt the fund's management. A fund may also temporarily suspend the offering of its shares. Shares are sold at the next NAV to be determined after the fund accepts the sell request. The sales proceeds are normally forwarded by bank wire to the insurance company on the next business day. In unusual circumstances, the fund may temporarily suspend the processing of sell requests. It may also postpone the payment of sales proceeds for up to seven days or longer, as allowed by federal securities laws. - -------------------------------------------------------------------------------- VALUING FUND SHARES The NAV for each fund is determined each business day at the close of business on the New York Stock Exchange (typically 4:00 P.M. Eastern Time). The Exchange is typically open Monday through Friday. Except for V.A. Money Market Fund, which values its securities at amortized cost, securities in a fund's portfolio are generally valued on the basis of market quotations and valuations provided by independent pricing services. The funds may also value securities at fair value, especially if market quotations are not readily available or if the securities' value has been materially affected by events following the close of a foreign market. Fair value is determined according to procedures approved by the funds' board of trustees. If a fund uses this method, the securities' prices may be higher or lower than the same securities held by another fund using market quotations. - -------------------------------------------------------------------------------- FUND EXPENSES Management fees The management fees paid to the investment adviser by the John Hancock Declaration funds last year are as follows: - -------------------------------------------------------------------------------- Equity Funds % of net assets - -------------------------------------------------------------------------------- V.A. Core Equity Fund 0.70% V.A. 500 Index Fund 0.10% V.A. Large Cap Growth Fund 0.75% V.A. Mid Cap Growth Fund 0.75% V.A. Relative Value Fund 0.60% V.A. Small Cap Growth Fund 0.75% V.A. Sovereign Investors Fund 0.60% - -------------------------------------------------------------------------------- International Funds - -------------------------------------------------------------------------------- V.A. International Fund 0.90% - -------------------------------------------------------------------------------- Sector Funds - -------------------------------------------------------------------------------- V.A. Financial Industries Fund 0.80% V.A. Regional Bank Fund 0.80% - -------------------------------------------------------------------------------- Income Funds - -------------------------------------------------------------------------------- V.A. Bond Fund 0.50% V.A. High Yield Bond Fund 0.60% V.A. Money Market Fund 0.50% V.A. Strategic Income Fund 0.60% The adviser pays subadvisory fees out of its own assets, and no fund is responsible for paying a fee to its 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, 2002. If annual expenses fall below this limitation at the end of any fund's fiscal year, the adviser can impose the full fee and recover any other payments up to the amount of the limitation. - -------------------------------------------------------------------------------- DIVIDENDS AND TAXES All income and capital gain distributions are automatically reinvested in additional shares of the fund at net asset value and are includable in the separate accounts holding these shares. For a discussion of the tax status of your variable contract, including the tax consequences of withdrawals or other payments, refer to the prospectus of your insurance company's separate account. 32 ACCOUNT INFORMATION Fund details - -------------------------------------------------------------------------------- BUSINESS STRUCTURE The diagram below shows the basic business structure used by the Declaration funds. The funds' board of trustees oversees the funds' business activities and retains the services of the various firms that carry out the funds' operations. The trustees of the Declaration funds have the power to change the funds' investment goals without shareholder or contract holder approval. ------------------------ Variable contract holders ------------------------ ------------------------ Insurance company separate accounts ------------------------ ------------------------ Declaration funds ------------------------ --------------------------------------------------- Subadvisers Independence Investment LLC 53 State Street Boston, MA 02109 Nicholas-Applegate Capital Management 600 West Broadway San Diego, California 92101 Provide portfolio management to certain funds. --------------------------------------------------- --------------------------------------------------- Investment adviser John Hancock Advisers, Inc. 101 Huntington Avenue Boston, MA 02199-7603 Manages the funds' business and investment activities. --------------------------------------------------- --------------------------------------------------- Custodians Investors Bank & Trust Co. State Street Bank and Trust Company Hold the funds' assets, settle all portfolio trades and collect most of the valuation data required for calculating each fund's NAV. --------------------------------------------------- --------------------------------------------------- Trustees Oversee the funds' activities. --------------------------------------------------- FUND DETAILS 33 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) John Hancock Funds, Inc. MEMBER NASD 101 Huntington Avenue Boston, MA 02199-7603 Mutual Funds Institutional Services Private Managed Accounts Retirement Plans Insurance Services (C)2001 JOHN HANCOCK FUNDS, INC. VA00P 5/01 The latest report from your Fund's management team ANNUAL REPORT Declaration Trust Equity V.A. Core Equity Fund V.A. 500 Index Fund V.A. Large Cap Growth Fund V.A. Mid Cap Growth Fund V.A. Relative Value Fund (formerly V.A. Large Cap Value Fund) V.A. Small Cap Growth Fund V.A. Sovereign Investors Fund - ------------------------------------------------------ International V.A. International Fund - ------------------------------------------------------ Sector V.A. Financial Industries Fund V.A. Regional Bank Fund V.A. Technology Fund - ------------------------------------------------------ Income V.A. Bond Fund V.A. High Yield Bond Fund V.A. Money Market Fund V.A. Strategic Income Fund DECEMBER 31, 2000 [A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower, center middle of page. A tag line below reads "JOHN HANCOCK FUNDS".] Table of Contents Page 1) CEO Corner 3 2) Portfolio Manager Commentary This commentary reflects the views of the portfolio managers or portfolio management teams through the end of the period discussed in this report. Of course, the managers' or team's views are subject to change as market and other conditions warrant. Equity V.A. Core Equity Fund 4 V.A. 500 Index Fund 7 V.A. Large Cap Growth Fund 10 V.A. Mid Cap Growth Fund 13 V.A. Relative Value Fund 16 V.A. Small Cap Growth Fund 19 V.A. Sovereign Investors Fund 22 International V.A. International Fund 25 Sector V.A. Financial Industries Fund 28 V.A. Regional Bank Fund 31 V.A. Technology Fund 34 Income V.A. Bond Fund 37 V.A. High Yield Bond Fund 40 V.A. Money Market Fund 43 V.A. Strategic Income Fund 45 3) Financial Statements 48 4) Notes to Financial Statements 121 TRUSTEES Dennis S. Aronowitz* Stephen L. Brown Richard P. Chapman, Jr. William J. Cosgrove* Leland O. Erdahl Richard A. Farrell Maureen R. Ford Gail D. Fosler William F. Glavin Dr. John A. Moore Patti McGill Peterson John W. Pratt* * Members of the Audit Committee OFFICERS Stephen L. Brown Chairman Maureen R. Ford Vice Chairman, President and Chief Executive Officer William L. Braman Executive Vice President and Chief Investment Officer Susan S. Newton Vice President and Secretary James J. Stokowski Vice President and Treasurer Thomas H. Connors Vice President and Compliance Officer CUSTODIANS Investors Bank & Trust Company 200 Clarendon Street Boston, Massachusetts 02116 V.A. Bond Fund V.A. Core Equity Fund V.A. Financial Industries Fund V.A. High Yield Bond Fund V.A. Large Cap Growth Fund V.A. Mid Cap Growth Fund V.A. Regional Bank Fund V.A. Relative Value Fund V.A. Small Cap Growth Fund V.A. Sovereign Investors Fund V.A. Strategic Income Fund V.A. Technology Fund State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110 V.A. 500 Index Fund V.A. International Fund V.A. Money Market Fund TRANSFER AGENT John Hancock Annuity Servicing Office 529 Main Street (X-4) Charlestown, Massachusetts 02129 INVESTMENT ADVISER John Hancock Advisers, Inc. 101 Huntington Avenue Boston, Massachusetts 02199-7603 SUB-INVESTMENT ADVISERS American Fund Advisors, Inc. 1415 Kellum Place Garden City, New York 11530 V.A. Technology Fund Nicholas-Applegate Capital Management LP 600 West Broadway San Diego, California 92101 V.A. International Fund Independence Investment Associates, Inc. 53 State Street Boston, Massachusetts 02109 V.A. Core Equity Fund ISSUER John Hancock Life Insurance Company John Hancock Variable Life Insurance Company* 200 Clarendon Street Boston, Massachusetts 02117 *Not Licensed in New York PRINCIPAL DISTRIBUTOR John Hancock Funds, Inc. 101 Huntington Avenue Boston, Massachusetts 02199-7603 LEGAL COUNSEL Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109-1803 INDEPENDENT AUDITORS Ernst & Young LLP 200 Clarendon Street Boston, Massachusetts 02116-5072 CEO CORNER [A 1" x 1" photo of Maureen R. Ford, Vice Chairman and Chief Executive Officer, flush right next to second paragraph.] DEAR SHAREHOLDERS: After providing investors with positive returns since 1991, and double-digit returns since 1995, the stock market brought investors down to earth in 2000. High-priced technology stocks plunged from their record highs, and rising interest rates produced a slowing economy by year end. The tech-heavy NASDAQ Composite Index ended the year losing 39.29%, while the Standard & Poor's 500 Index fell 9.10%. If nothing else, the year 2000 served as a reminder for investors to set more realistic expectations, especially given how unusual the string of strong returns was between 1995 and 1999. It also highlighted the importance of having a diversified portfolio and maintaining a long-term perspective, particularly during tempestuous market times, to avoid making emotional, perhaps costly, investment decisions. We begin 2001 with a new U.S. president, new possibilities and lingering uncertainties. Questions remain about how successful the Federal Reserve will be in achieving the sought-after "soft landing" for the economy. As this story unfolds, the impact of a slower-growing economy on corporate profits will emerge. Even though the Fed remains a key driver of the market's direction, we are also watching Washington, D.C. as President George W. Bush takes control and attempts to enact tax cuts. Market moves aside, this is a time of year when many investors' thoughts often turn to more taxing matters. As part of your tax-planning strategy, we encourage you to work with your investment professional to consider the various options for minimizing and deferring tax payments - -- in an effort to maximize results. These include focusing on tax-exempt funds, contributing the maximum to retirement plans, establishing or adding to IRAs and funding a variable annuity. These concrete steps, coupled with a rededication to the tenets of long-term investing, are good ways to get the new year off to the right start. Sincerely, /S/ MAUREEN R. FORD MAUREEN R. FORD, VICE CHAIRMAN CHIEF EXECUTIVE OFFICER BY PAUL MCMANUS FOR THE PORTFOLIO MANAGEMENT TEAM John Hancock V.A. Core Equity Fund Slowing economy, dimming earnings prospects sink stocks The year 2000 was marked by unprecedented volatility, as the markets fell sharply in the spring, rallied over the summer and plunged again during the final four months of the year. The Federal Reserve Board, which had already hiked interest rates three times in 1999, added three more increases in the first half of 2000, including a 0.50% increase in May. With share prices in technology, telecommunications and biotechnology stocks reflecting unrealistically optimistic expectations, the Fed's actions were enough to puncture the speculative bubble and bring the popular market averages lower. The tech-heavy NASDAQ Composite Index was particularly vulnerable, shedding a whopping 39.29% in 2000. "On a relative basis, we were helped by our holdings in health care..." At the time of the Fed's final increase on May 16, there was scant evidence of decelerating growth in corporate earnings or the overall economy. Accordingly, the markets rallied during the summer, buoyed by investors' belief that interest rates were stabilizing and their hope that higher rates would cool the economy without doing significant damage to earnings. [Table at bottom left-hand column entitled "Top Five Stock Holdings." The first listing is General Electric 4.6%, the second is Citigroup 4.4%, the third Pfizer 3.6%, the fourth Merck 3.2% and the fifth ExxonMobil 3.0%. A note below the table reads "As a percentage of net assets on December 31, 2000."] That hope was shattered in the fall. Prominent companies in a broad variety of sectors issued warnings that fourth-quarter profits would be substantially lower than previously expected. At the same time, data on industrial production, retail sales, employment and consumer confidence all gave evidence of a slowing economy. As a result, sellers took control and the markets plummeted. Defensive sectors like health care, consumer nondurables and financial services managed to buck the trend, as did energy, but growth stocks in most sectors had an extremely difficult year in 2000. Performance summary The Fund continued to implement its strategy of buying undervalued stocks of companies with improving fundamentals. In sectors such as technology, however, it was more a question of identifying the companies that appeared to suffer the least deterioration in fundamentals. The Fund had a losing year but finished ahead of the S&P 500 Index, primarily due to favorable stock selection. For the 12 months ended December 31, 2000, John Hancock V.A. Core Equity Fund had a return of - -7.11% at net asset value. In comparison, the S&P 500 returned -9.10%, including reinvested dividends. However, the Fund trailed the 1.15% return of the average variable annuity growth and income fund, according to Lipper, Inc. Many funds in the Lipper average have a heavier emphasis on value-oriented investments, which were the place to be, especially during the second half of the period. Longer-term performance information can be found on page six. Health care, financials help returns On a relative basis, we were helped by our holdings in health care, a sector we steadily increased throughout the year. Compared with companies in other sectors, health-care firms, especially pharmaceutical companies, had generally superior earnings growth prospects. One of the best performers, Warner-Lambert, rose sharply as a result of being the target of a bidding war between Pfizer and American Home Products (Pfizer ultimately won). Merck, Pharmacia, Bristol-Myers Squibb and Schering-Plough were other drug stocks that made meaningful contributions to performance. [Bar chart at the top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended December 31, 2000." The chart is scaled in increments of 2% with -10% at the bottom and 2% at the top. The first bar represents the -7.11% total return for John Hancock V.A. Core Equity Fund. The second bar represents the 1.15% total return for Average variable annuity growth and income fund. A note below the chart reads "The total return for John Hancock V.A. Core Equity Fund is at net asset value with all distributions reinvested. The average variable annuity growth and income fund is tracked by Lipper, Inc. See the following page for historical performance information."] Financial stocks were another area of strength, helped by the growing consensus that a weakening economy would bring lower interest rates. Both stock selection and a marginal overweighting aided performance relative to our benchmark. One of our top performers, Fannie Mae, also benefited when Congress lost interest in an initiative that would have removed the competitive advantages Fannie Mae enjoys because of its status as a quasi-government organization. Another holding in the sector meriting mention is Citigroup, which continued to post consistently good earnings growth through its favorable mix of banking, brokerage and insurance businesses. Technology and telecommunications hit the skids Leading the list of negative contributors were many names that made positive contributions a year ago. Microsoft was hurt earlier in the year by the Justice Department's antitrust lawsuit, then by slowing demand for personal computers. We reduced the position to below market weight in the first half of the period, but the stock still hurt performance substantially. Lucent Technologies was a different story. We liked the stock for the first half of the year, but it subsequently became apparent to us that the company was slipping behind competitors in some key technological areas. Consequently, we sold the entire position in the fourth quarter. Long-distance provider WorldCom reflected the intense competition for telephone services of all kinds, as did Sprint and AT&T, two other lackluster performers. Despite the carnage, we maintained roughly a market weighting in technology. The Fund stresses diversification and attempts to keep its risk profile similar to that of the S&P 500 Index. "...we would not be surprised to see a series of interest-rate reductions." Looking ahead Amid considerable pessimism about stocks, the Fed surprised investors by cutting interest rates on January 3, just after the period ended. It appears that the primary challenge facing investors over the short term will be balancing the positive effects of lower rates with the negative ramifications of slower earnings growth. Through its actions, the Fed has served notice that it intends to be aggressive about addressing the current slowdown, so we would not be surprised to see a series of interest-rate reductions. Furthermore, history has shown that the stock market responds well to multiple rate cuts by the Fed. We will consider these and many other factors as we continue our search for undervalued stocks of companies with improving fundamentals. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (8/29/96) ---------- ---------- Cumulative Total Returns (7.11%) 98.43% Average Annual Total Returns(1) (7.11%) 17.11% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return since inception would have been 16.69%. The expense limitation did not impact the one-year performance. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Core Equity Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Core Equity Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Standard & Poor's 500 Index and is equal to $22,043 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Core Equity Fund on August 29, 1996 and is equal to $19,844 as of December 31, 2000. BY ROGER HAMILTON, CFA, PORTFOLIO MANAGER [A 1 1/2" x 3" photo at bottom right side of page of John Hancock V.A. 500 Index Fund. Caption below reads "Roger Hamilton."] John Hancock V.A. 500 Index Fund Tech stock sell-off causes S&P 500 Index to post weak performance During 2000, the Standard & Poor's 500 Index posted one of its largest losses in more than a decade, declining 9.10% for the year. But the Index's losses seem worse than they really were. While technology and telecommunications stocks -- two of the most influential groups within the Index -- suffered painful declines during the year, more than 249 out of 444 stocks that were in the Index at the start of 2000 actually posted gains for the year. Among the year's bright spots were groups like drugs, electric utilities, energy, insurance, food and thrifts. Possibly the most notable trend in 2000 was the shift away from high-growth tech and telecommunications companies into more defensive, value-oriented stocks. After bidding up their prices in 1998, 1999 and the first quarter of 2000, investors suddenly and dramatically soured on both tech and telecom as they became increasingly concerned that the business fundamentals of most of these companies didn't justify their sky-high valuations. That's not to say that tech and telecom stocks were the year's only disappointments. Retailers, automotive companies and basic-material producers also posted losses as concerns about a slowing economy weighed heavily on these groups. "...the biggest story of 2000 was the reversal of fortune of tech and telecommuni- cations stocks." [Table at bottom left-hand column entitled "Top Five Stock Holdings." The first listing is General Electric 4.1%, the second is ExxonMobil 2.5%, the third Pfizer 2.4%, the fourth Cisco Systems 2.2% and the fifth Citigroup 2.1%. A note below the table reads "As a percentage of net assets on December 31, 2000."] Fund performance John Hancock V.A. 500 Index Fund had a total return of -9.28% at net asset value. By comparison, the average variable annuity S&P 500 Index objective fund had a total return of -9.32%, according to Lipper, Inc. Historical performance information can be found on page nine. In managing the Fund, our goal is to have our holdings closely track those of the S&P 500 Index, while minimizing the costs associated with buying and selling shares of stocks. Although there are frequent changes in the composition of the Index, we re-balance the Fund's holdings less frequently to minimize transaction costs. When we get additional money into the Fund that cannot immediately be deployed into Index components, we buy S&P 500 Index futures, which allow us to participate in the Index's performance without incurring the higher transaction costs of buying stocks. Incidentally, 2000 was one of those years when there were many changes in the composition of the Index. As a result of a variety of factors, including mergers and acquisitions, financial failures or others, more than 56 new companies were added to the Index during the year. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended December 31, 2000." The chart is scaled in increments of 5% with -10% at the bottom and 0% at the top. The first bar represents the -9.28% total return for John Hancock V.A. 500 Index Fund. The second bar represents the - -9.10% total return for S&P 500 Index. The third bar represents the -9.32% total return for Average variable annuity S&P 500 Index objective fund. A note below the chart reads "The total return for John Hancock V.A. 500 Index Fund is at net asset value with all distributions reinvested. The average variable annuity S&P 500 Index objective fund is tracked by Lipper, Inc. See the following page for historical performance information."] "Given the slowing economy, we could see more disappointing earnings results." Leaders and laggards Undoubtedly, the biggest story of 2000 was the reversal of fortune of tech and telecommunications stocks. After posting eye-popping gains in 1999 and the first quarter of 2000, the tech stock mania stalled. From Internet-related companies to software makers to hardware manufacturers, investors increasingly sold tech stocks as evidence mounted that the slowing economy was eating away at profits. Losses suffered by Internet access providers Yahoo! and AOL took a big toll on the Index's performance on a capitalization weighted basis, losing more than 85% and 54%, respectively, for the year. Lucent Technologies posted a loss of nearly 81%. Shares of the beleaguered e-tailer Amazon.com slid almost 80% as investors worried that holiday sales would weaken. WorldCom and AT&T both suffered losses in excess of 65% in the wake of falling long-distance prices. Dell Computer and Intel lost 65% and 27%, respectively, due to slower-than-expected demand for personal computers. Microsoft tumbled more than 62% on worries about the antitrust suit against the company, coupled with weaker demand for its software. But outside the tech and telecommunications sectors, nowhere was the S&P 500 Index's health more evident than in the financial and drug sectors. Finance company Washington Mutual and insurance giant American International Group posted gains of 105% and 36% in response to expectations that falling interest rates in 2001 would boost their financial results. Likewise, Fannie Mae got a lift from the prospect of falling rates, and posted a gain of more than 38%. Citigroup, up 22%, was also boosted by the prospect of lower interest rates. Within the drug sector, Pfizer and Merck each rose about 40% on investors' growing desire for defensive stocks and on expectations that the demand for established drugs will remain steady. Higher oil prices lifted energy stocks, particularly Enron, which rose more than 87% during the year. Rounding out the Index's top 10 biggest contributors for 2000 were two consumer products companies nearly left for dead in 1999. Philip Morris surged more than 91% and PepsiCo gained roughly 40%. Outlook The first half of 2001 could continue to be a difficult period for the stock market. Given the slowing economy, we could see more disappointing earnings results. But after the Fed's surprise move to cut rates just days after the year ended, and with the prospect of more rate cuts in the offing, we are hopeful that it could provide the impetus for better stock-market performance in the second half of the year. No matter what the direction of the market, our goal will be to closely track the performance of the S&P 500 Index, and our performance will be dictated by the Index. The past year has served as a useful reminder that S&P 500 Index funds are susceptible to market downturns, and, as a result, the Fund's share price will rise and fall in response to gains or losses posted by the underlying stocks in the Index. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (8/29/96) ---------- ---------- Cumulative Total Returns (9.28%) 103.25% Average Annual Total Returns(1) (9.28%) 17.75% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) and the management fee to 0.l0% of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return for the one-year period and since inception would have been (9.86%) and 17.20%, respectively. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. 500 Index Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. 500 Index Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Standard & Poor's 500 Index and is equal to $22,043 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. 500 Index Fund on August 29, 1996 and is equal to $20,326 as of December 31, 2000. BY WILLIAM L. BRAMAN AND ROBERT UEK FOR THE PORTFOLIO MANAGEMENT TEAM John Hancock V.A. Large Cap Growth Fund Tough going for Fund and stock market in 2000 [A 1 1/2" x 3" photo at bottom right side of page of John Hancock V.A. Large Cap Growth Fund. Caption below reads "Will Braman."] The bears were out in full force during the past 12 months, particularly in the technology arena. Volatility began early on and continued in prolonged bouts as the period progressed. Speculation about the economy's direction and the sustainability of corporate profits dominated investors' concerns. By year's end, all the major stock indexes were down considerably, as was John Hancock V.A. Large Cap Growth Fund. "...all the major stock indexes were down..." Fund performance For the 12 months ended December 31, 2000, the Fund produced a total return of -31.30% at net asset value. By comparison, the Fund's benchmark index, the Russell Top 200 Growth Index, returned -24.53%, the tech-heavy NASDAQ Composite Index returned -39.29% and the broader market, as measured by the Standard & Poor's 500 Index, returned - -9.10%. In the same period, the average variable annuity growth fund returned -9.22%, according to Lipper, Inc. Historical performance information can be found on page 12. The Fund's performance lagged its peers primarily because of our heavy stake in technology, particularly the more aggressive companies, which we maintained throughout much of the year. As the earnings of many technology companies decelerated, their stock prices came back down to earth. [Table at bottom left-hand column entitled "Top Five Stock Holdings." The first listing is Pfizer 5.3%, the second is General Electric 4.7%, the third Cisco Systems 4.1%, the fourth Oracle Systems 3.6% and the fifth Tyco International 3.6%. A note below the table reads "As a percentage of net assets on December 31, 2000."] Technology struggles For a long time, we have been espousing the dynamic long-term growth prospects of many technology stocks and, indeed, the sector itself. We firmly believe technology companies will continue to drive not only the United States' economy but the world's as well, thereby providing investors with considerable long-term growth potential. The strength of the technology stock sector in recent years is certainly a testament to this belief. However, with each interest rate increase by the Federal Reserve Board this past spring -- and then with each new economic report suggesting a slowdown -- investors began to question the ability of companies, particularly technology firms, to continue meeting the very high earnings expectations of the past few years. Consequently, it grew increasingly difficult for many investors to justify the high stock prices in exchange for the potential payback. When a company posted disappointing earnings -- as many did -- the stock price was pummeled. As the stock prices in the tech and biotech sec tors dropped, fears arose about the possible price declines of other richly valued stocks. Investors harvested whatever profits they could and ran for cover in the United States Treasury market. [Bar chart at the top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended December 31, 2000." The chart is scaled in increments of 5% with -35% at the bottom and 0% at the top. The first bar represents the -31.30% total return for John Hancock V.A. Large Cap Growth Fund. The second bar represents the -9.22% total return for Average variable annuity growth fund. A note below the chart reads "The total return for John Hancock V.A. Large Cap Growth Fund is at net asset value with all distributions reinvested. The average variable annuity growth fund is tracked by Lipper, Inc. See the following page for historical performance information."] Tech holdings reduced Throughout the period, a large amount of the Fund's net assets remained in the technology sector, with the weighting peaking in September at around 60% of net assets. By period's end, however, the stake was reduced to 43%. While the sector's downturn had a hand in bringing that figure down, we also eliminated many holdings from the Fund. Our reasons had more to do with the possibility of further stock price volatility than with any concerns we had about the business fundamentals or long-term growth prospects of many of the companies we sold. In trimming the Fund's weighting, we targeted many names relating to personal computer hardware. Issues we sold included IBM, Microsoft, Gateway, Dell and Hewlett Packard. We also eliminated positions in commodity semiconductors and semiconductor equipment by selling Intel, Texas Instruments, Applied Materials and Micron. Other high-priced stocks that demonstrated an increased risk of price declines were sold as well. In the biotechnology sector, we moved out of Immunex and Amgen. We held on to, and even purchased, some stocks in the computer networking and communications sub sectors as stock prices became increasingly attractive. We bought such issues as Juniper Networks, CIENA, JDS Uniphase and Nortel Networks. Health care, finance increased As the period progressed, we added to the Fund's weighting in health-care and financial stocks. In health care, it was the pharmaceuticals we sought. This past year, investors prized the earnings predictability of large drug companies. These steady growers are also defensive in nature, as they are relatively insulated from economic changes. We increased the size of our stakes in Pfizer, Pharmacia and Johnson & Johnson and initiated a new position in Merck. As technology stock prices dropped, drug stocks soared. "...we are mindful that plenty of volatility may well lie ahead." Our financial focus has been fairly broad-based, though we emphasized insurance names slightly. In addition to the relatively attractive stock prices, the business cycle and pricing environment among property casualty and insurance companies has been improving. We also thought it prudent for the Fund to have exposure to the mortgage-lending and consumer-lending sub sectors. The stocks that caught our attention include AFLAC, American General, Wells Fargo, Fannie Mae, MBNA, Citigroup and State Street Corp. Outlook Shortly after the close of the period, the Fed cut the fed funds rate by one-half a percent. As encouraged as we are by the Fed's recent actions, we are mindful that plenty of volatility may well lie ahead. In our opinion, investors will need quite a bit more convincing before returning to growth stocks. First-quarter earnings reports will be somewhat of a guidepost. The good news is that tech stock prices are now more attractive than they have been in years. While the stock prices of many companies have been taken down by 60% to 70%, many are still growing their earnings by anywhere from 30% to 50%. With that in mind, we are now inclined to selectively increase the Fund's technology exposure and position for what we believe will be an eventual rebound. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (8/29/96) ---------- ---------- Cumulative Total Returns (31.30%) 10.87% Average Annual Total Returns(1) (31.30%) 2.41% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return since inception would have been 1.72%. The expense limitation did not impact the one-year performance. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Large Cap Growth Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Russell Top 200 Growth Index -- an unmanaged index which measures the performance of the Russell Top 200 companies with higher price-to-book ratios and higher forecasted growth values. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Large Cap Growth Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Russell Top 200 Growth Index and is equal to $22,269 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Large Cap Growth Fund on August 29, 1996 and is equal to $11,087 as of December 31, 2000. BY BARBARA C. FRIEDMAN, CFA, PORTFOLIO MANAGEMENT TEAM LEADER [A 1 1/2" x 3" photo at bottom right side of page of John Hancock V.A. Mid Cap Growth Fund. Caption below reads "Barbara Friedman."] John Hancock V.A. Mid Cap Growth Fund Mid caps sink along with market Mid-cap growth stocks held up well in the volatile first half of 2000, but eventually faltered amid a sharp slowdown in economic growth. Early in the year, mid-cap stocks, with their strong earnings and more reasonable valuations, remained in favor. In March, however, investors abandoned technology stocks, concerned that they had reached unsustainably high prices in light of rising interest rates and a potential deceleration in the economy. Growth stocks of all sizes suffered, while safer haven sectors like finance, health care, energy and utilities took off. By the fourth quarter, there was evidence of much slower economic growth. Weaker consumer and corporate spending hurt sales in many sectors. Stock prices fell, with the Russell Midcap Growth Index returning -11.75% for 2000. [Table at bottom left hand column entitled "Top Five Stock Holdings." The first listing is Waters Corp. 2.3%, the second is Millennium Pharmaceuticals 1.9%, the third Aeroflex 1.8%, the fourth AFLAC, Inc. 1.8% and the fifth McLeodUSA 1.8%. A note below the table reads "As a percentage of net assets on December 31, 2000."] Strategy and performance review In this difficult environment, John Hancock V.A. Mid Cap Growth Fund maintained its long-term focus on mid-size companies with strong earnings growth prospects and market capitalizations in the range of the Russell Midcap Growth Index. The Fund's above-average stake in both technology and telecommunications stocks, along with weak performance among radio stocks, resulted in a -11.73% return at net asset value for the year ended December 31, 2000. By comparison, the average variable annuity mid-cap fund, which includes funds that invest in both mid-cap growth and value stocks, returned 5.21%, according to Lipper, Inc. Historical performance information appears on page 15. "We lightened up on technology over the summer, but kept a market weighting..." Telecom and radio disappointments The Fund maintained a high stake in competitive local exchange carriers (CLECs) such as Global Crossing, McLeodUSA, XO Communi cations (formerly NEXTLINK) and Allegiance Telecom. Concerns that some CLECs would be unable to obtain funding to build out their systems hurt the entire sector, sending stock prices down 50% or more for the year. We held on to CLECs that were fully funded through 2001 and, in many cases, beyond. In addition, most of our companies ended the year in better shape fundamentally than a year earlier, having added new customers and access lines faster than anticipated. Radio stocks also declined significantly last year, as investors anticipated a huge slowdown in advertising spending in 2001. We sold smaller, specialized names like Radio One last summer. But during the fall, we added shares of leading broadcasters like Clear Channel Com munications and His panic Broadcasting, believing that inves tors had overreacted to what should be a less precipitous drop in ad spending. [Bar chart at the top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended December 31, 2000." The chart is scaled in increments of 5% with -15% at the bottom and 10% at the top. The first bar represents the -11.73% total return for John Hancock V.A. Mid Cap Growth Fund. The second bar represents the 5.21% total return for Average variable annuity mid-cap fund. A note below the chart reads "The total return for John Hancock V.A. Mid Cap Growth Fund is at net asset value with all distributions reinvested. The average variable annuity mid-cap fund is tracked by Lipper, Inc. See the following page for historical performance information."] "...we have distributed the Fund's assets across a wider array of sectors..." Technology bright spots We lightened up on technology over the summer, but kept a market weighting because we expect technology spending to continue to outpace the growth rate of the overall economy. We focused on stocks in the fast-growing areas of data storage and fiber optics. Companies like Brocade Communications Systems, which provides switches for storage systems, benefited as the Internet explosion increased data storage demands. Many top performers for the year were fiber-optics-related businesses, including Corning, a leading fiber supplier, which we sold mid-year; E-Tek Dynamics, an equipment manufacturer, which was bought out; and Applied Micro Circuits, which sells integrated circuits. Comverse Technology also did quite well as demand grew for the profitable, value-added services (like voice mail) that it provides to telephone companies. Unfortunately, we had our share of technology disappointments, including Lexmark International, which makes printers. As PC demand failed to pick up this fall, the stock got hammered, causing us to sell. Strength in finance and health care We used the proceeds from our technology sales to add to our finance and health-care investments. Finance stocks climbed largely in anticipation of declining interest rates. Concord EFS, a company that specializes in electronic transaction processing for credit cards, also soared as demand for its services increased. USA Education (formerly Sallie Mae), which makes student loans, benefited from a favorable competitive environment and a recent acquisition. Other strong performers included Ambac Financial Group, a municipal bond insurer that is expanding internationally, and Golden West Financial, a California savings and loan with a sizable mortgage business. In the health-care area, Waters Corp. and Applera Corp.--Applied Biosystems Group posted strong gains as demand increased for the analytical equipment they supply to biotech companies. We added health-care service names like Community Health Systems, a well-managed chain of rural hospitals that took off after going public this summer. Allergan, a drug company that specializes in eye diseases, also boosted performance as investors looked for safer-haven investments. Outlook for 2001 As we start 2001, we believe the environment will be one of uncertainty, continued volatility and more modest gains. We expect more companies to announce earnings disappointments related to the rapid deceleration in economic growth. But economic growth, though low, should remain positive, as business in many sectors remains strong. Inflation should also remain under control. The fact that the Federal Reserve acted quickly after year end to cut interest rates bodes well for the economy - -- and for the market. Going forward, we expect a variety of sectors to participate in any market upturn, although there will also be more distinct winners and losers within each sector. For this reason, we have distributed the Fund's assets across a wider array of sectors with a focus on the strongest mid-cap stocks in each sector -- names that should be among the first to rebound in an economic recovery. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (1/7/98) ---------- ---------- Cumulative Total Returns (11.73%) 52.13% Average Annual Total Returns(1) (11.73%) 15.12% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return for the one-year period and since inception would have been (11.83%) and 13.55%, respectively. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Mid Cap Growth Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in both the Standard & Poor's 500 Index and the Russell Midcap Growth Index. The Standard & Poor's 500 Index is an unmanaged index that includes 500 widely traded common stocks and is a commonly used measure of stock market performance. The Russell Midcap Growth Index is an unmanaged index that contains those securities from the Russell Midcap Index with a greater-than-average growth orientation. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Mid Cap Growth Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are three lines. The first line represents the Russell Midcap Growth Index and is equal to $15,737 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Mid Cap Growth Fund on January 7, 1998 and is equal to $15,213 as of December 31, 2000. The third line represents the Standard & Poor's 500 Index and is equal to $14,148 as of December 31, 2000. BY TIMOTHY E. QUINLISK, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND R. SCOTT MAYO, CFA, PORTFOLIO MANAGER [A 1 1/2" x 3" photo at bottom right side of page of John Hancock V.A. Relative Value Fund. Caption below reads "Timothy Quinlisk."] John Hancock V.A. Relative Value Fund Stock market declines as economic growth slows The past year was a difficult one for stock investors. Early on, technology and telecommunications stocks -- the leading growth sectors - -- reached what seemed to be unsustainable prices, while investors ignored value sectors like finance and utilities. This situation began to reverse in March, when signs of slower economic growth raised concerns about whether the high-fliers would be able to meet earnings expectations. Investors bolted out of technology in search of safer havens, boosting finance, energy, health-care and utilities stocks. Throughout the summer and into the fall, value stocks continued to lead. The market remained volatile and took a sharp downturn in the fourth quarter amid increasing signs that the economy might be headed for a hard landing. As consumer and corporate spending slowed, the Standard & Poor's 500 Index tumbled, returning -9.10% in 2000. "We're especially interested in companies where there is a catalyst ...that can unlock the stock's intrinsic value." Fund stays the course A weak stock market gives us more opportunities to buy great businesses that have the ability to grow and create value over a long period at a time when their stocks are selling at bargain prices. We're especially interested in companies where there is a catalyst -- such as a restructuring, new management or new product -- that can unlock the stock's intrinsic value. For the year ended December 31, 2000, John Hancock V.A. Relative Value Fund stayed ahead of the market, returning - -4.80% at net asset value. However, the Fund's above-average investment in beaten-down technology stocks caused us to lag the average variable annuity growth and income fund, which returned 1.15%, according to Lipper, Inc. For historical performance information, please see page 18. [Table at bottom left-hand column entitled "Top Five Stock Holdings." The first listing is Parametric Technology Corp. 5.3%, the second is AT&T-Liberty Media Group 5.1%, the third Hughes Electronics 5.0%, the fourth Tyco International 4.9% and the fifth Sprint Corp. 4.4%. A note below the table reads "As a percentage of net assets on December 31, 2000."] Technology nosedives The Fund's largest stake was in the technology sector, where nearly all stocks -- strong and weak alike -- posted significant declines. Our biggest disappointments included Lucent Technologies, which failed to meet investors' expectations regarding a new product launch; Conexant Systems, which experienced weakening demand from personal computer manufacturers that buy its semiconductors; and Computer Associates International, which saw demand soften as mainframe software customers waited for IBM's newest mainframe product to come out. We held on because we believe these stocks will be among the first to benefit once corporations step up spending again. In a related area, Hughes Electronics, a direct television operator, also saw its stock price sink as subscriber growth weakened. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended December 31, 2000." The chart is scaled in increments of 5% with -5% at the bottom and 5% at the top. The first bar represents the -4.80% total return for John Hancock V.A. Relative Value Fund. The second bar represents the 1.15% total return for Average variable annuity growth and income fund. A note below the chart reads "The total return for John Hancock V.A. Relative Value Fund is at net asset value with all distributions reinvested. The average variable annuity growth and income fund is tracked by Lipper, Inc. See the following page for historical performance information."] Finance and capital goods deliver Fortunately, our sizable investments in finance and capital goods helped buoy the Fund. In the finance area, we focused on names with strong earnings growth, including Ace, Ltd. and XL Capital, Ltd., property and casualty insurers that benefited as investors anticipated improved pricing. Ambac Financial Group, a municipal bond insurer, also did well, thanks to new market opportunities abroad and growing demand. In the capital goods sector, many of our investments profited from strong demand, including PerkinElmer, a company that supplies health-care testing equipment; Millipore, which provides filtration products for the pharmaceutical, biotechnology, and semiconductor markets; Corning, the leading provider of fiber for fiber-optic networks; and Amphenol, an electronics company that makes connectors for the aerospace, cable and wireless industries. As these stocks reached full valuations, we took profits. Diverse operations gain Our investments in multi-industry companies like Tyco International and Honeywell International also bolstered performance. Tyco, a company with a diverse mix of businesses and strong execution, spun off some assets in the second half of the year, which helped unlock the stock's value. Honeywell, whose management was under tremendous pressure to better integrate its Allied-Signal acquisition, benefited when General Electric announced it was buying the company late in the year. ACNielsen, which provides market research to retailers, and Etec Systems, a semiconductor equipment provider, also were strong performers, thanks to buyouts during the period. Finally, local telephone providers CenturyTel and Verizon Communications did well as investors began to focus on the value of their core local telephone businesses. "We are positioning the Fund for a recovery, but think it will be different from the past." Volatility yields opportunity As we head into 2001, the economic slowdown most likely means more companies will miss earnings expectations, causing increased market volatility. Fortunately, shortly after the new year began, the Federal Reserve began lowering interest rates. Any further rate cuts, along with tax decreases under the new administration, could help re-ignite economic growth. We are positioning the Fund for a recovery, but think it will be different from the past. Typically, the first stocks to benefit are early cyclicals -- retailers, home builders and auto parts stocks, for example, that do well once consumers start spending again. This time, because there is little pent-up consumer demand, we expect more corporate-oriented businesses to be among the first to move. With that in mind, we've begun taking money out of finance and shifting it into beaten-down media, telecom and technology stocks. We've added to our stakes in names like Parametric Technology, a mechanical design maker, and AT&T Corp. -- Liberty Media Group, the largest cable television provider in the United States. We've also made some new purchases including Viacom, the leading media company worldwide, and Sprint, a telephone company with strong local assets as well as long distance and wireless services. We believe our focus on great businesses that are selling at bargain prices will continue to benefit the Fund. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (1/6/98) ---------- ---------- Cumulative Total Returns (4.80%) 81.03% Average Annual Total Returns(1) (4.80%) 22.01% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets.Without the limitation of expenses, the average annual total return since inception would have been 21.92%. The expense limitation did not impact the one-year performance. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Relative Value Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Relative Value Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Relative Value Fund on January 6, 1998 and is equal to $18,103 as of December 31, 2000. The second line represents the Standard & Poor's 500 Index and is equal to $14,148 as of December 31, 2000. BY BERNICE S. BEHAR, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND ANURAG PANDIT, CFA, PORTFOLIO MANAGER [A 1 1/2" x 3" photo at bottom right side of page of John Hancock V.A. Small Cap Growth Fund. Caption below reads "Bernice Behar."] John Hancock V.A. Small Cap Growth Fund Growth stocks fall from favor as technology stumbles in 2000 After a very strong 1999, small-cap growth stocks sank under the weight of falling technology and telecommunications stocks in 2000. Rising interest rates and growing earnings concerns in the face of a slowing economy caused investors to flee these high-priced sectors that had held their undivided attention until mid March. This reversal sent the tech-heavy NASDAQ Composite Index down 39.29% for the year, as investors became more focused on less expensive and more defensive segments of the market like health care, financial and energy stocks. Value stocks replaced growth stocks as the place to be. The result was a huge gap in performance between two of the major indexes that track small-cap stocks, with the Russell 2000 Value Index gaining 22.83% and the Russell 2000 Growth Index losing 22.43% for the year ended December 31, 2000. [Table at bottom left-hand column entitled "Top Five Stock Holdings." The first listing is Newfield Exploration 1.5%, the second is Corporate Executive Board 1.5%, the third Bindley Western Industries 1.4%, the fourth AmeriSource Health Corp. 1.4% and the fifth LifePoint Hospitals 1.3%. A note below the table reads "As a percentage of net assets on December 31, 2000."] Fund performance John Hancock V.A. Small Cap Growth Fund performed in line with its benchmark Russell 2000 Growth Index, posting a total return of -22.33% at net asset value for the year ended December 31, 2000. That compared with the 0.24% return of the average variable annuity small-cap fund, according to Lipper, Inc. Our relative underperformance stems from the fact that this Lipper group includes funds that were able to invest in more value-oriented stocks. Furthermore, while we were underweight in technology versus our benchmark index, we remained overweighted versus the peer group. We also suspect that some of our peers held on to more of the stocks that recently graduated from small-cap to mid-cap status on their strong performance, since mid-cap companies produced some of the best relative earnings growth. In contrast, we typically sell companies once they grow too big for our small-cap focus. "...we built our weighting across a number of health-care industries..." Individual tech standouts Despite the tech and telecom group's difficult run this year, good individual stock picking provided us with some standouts, including Internet software company Interwoven and telecommunications equipment companies Virata and Powerwave. While these helped us to outperform the index in the technology category, the group's results were still negative and held us back, especially in the Internet area. Some big detractors were Mediaplex and Broadbase Software, both of which help companies develop their Web sites and target their advertising; they were hurt as the Internet advertising model started to come into question. At appropriate times we sold some of these stocks. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended December 31, 2000." The chart is scaled in increments of 5% with -25% at the bottom and 5% at the top. The first bar represents the -22.33% total return for John Hancock V.A. Small Cap Growth Fund. The second bar represents the 0.24% total return for Average variable annuity small-cap fund. A note below the chart reads "The total return for John Hancock V.A. Small Cap Growth Fund is at net asset value with all distributions reinvested. The average variable annuity small-cap fund is tracked by Lipper, Inc. See the following page for historical performance information."] "Even with a slowing economy, we remain confi- dent in our ability to find good small companies..." Going defensive: health care, financials, energy As questions arose over the year about the strength of user demand across all technology and telecom subsectors, we pared our stakes and put the proceeds into more defensive areas where we felt the relative earnings growth potential appeared more certain for the foreseeable future. These included health care, financials and energy. A large piece of our health-care stake was in biotechnology companies, where a string of good news -- from the completion of the Human Genome Project, to a flood of new products, increased spending and a favorable capital markets environment -- bodes well for the group. Although biotech stocks have a tendency to be volatile, many of our biotech companies served us well on balance for the year, including CV Therapeutics, COR Therapeutics, NPS Pharmaceuticals and Alkermes. In fact, by the end of the year, we took some profits in our biotech stake not only to lock in gains, but also to position the Fund more defensively and reduce our risk level. In addition to biotech, we built our weighting across a number of health-care industries, including medical device companies such as Wilson Greatbatch Technologies and distributors such as AmeriSource Health and Bindley Western Industries, which received a takeover proposal from one of the largest health-care distributors. We also upped our stake in rural hospital companies LifePoint Hospitals and Province Healthcare. Their results have improved, and their stock prices too, through a combination of aggressive management of the hospitals they run and positive pricing trends. We brought our weighting in financial stocks up to our benchmark's level by buying several regional banks with strong growth rates, such as Texas banks Southwest Bancorp and Sterling Bancshares. We also added several specialty property and casualty companies like HCC Insurance and title insurance company Fidelity National, all of which we believe will benefit from a lower interest-rate environment. With rising oil prices and a pickup in exploration, we added to energy companies like Lone Star Technologies, Pride International and Newfield Exploration. Companies serving the natural gas industry, like Universal Compression, did especially well. A look ahead In the short term, we expect small-cap stocks to remain volatile while the economy continues to slow and companies adjust their earnings downward. We're more optimistic about later in the year, however, as small-cap growth stock valuation levels are more attractive now and companies will have a better chance of beating lowered expectations. This is especially true in the wake of the Fed's surprise cut in short-term interest rates just days after the year ended to prevent the economy from stalling. Even with a slowing economy, we remain confident in our ability to find good small companies with accelerating and sustainable earnings growth, dominant positions and strong management. We believe we will be rewarded for holding such companies over the long term. - ---------------------------------------------------------------- See the prospectus for a discussion of the risks of investing in small-cap stocks. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (8/29/96) ---------- ---------- Cumulative Total Returns (22.33%) 57.38% Average Annual Total Returns(1) (22.33%) 11.02% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return for the one-year period and since inception would have been (22.43)% and 10.03%, respectively. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Small Cap Growth Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Russell 2000 Index and the Russell 2000 Growth Index. The Russell 2000 Index is an unmanaged small-cap index that is comprised of 2,000 U.S. stocks. The Russell 2000 Growth Index is an unmanaged index that contains Russell 2000 Index stocks with a greater-than-average growth orientation. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Small Cap Growth Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are three lines. The first line represents the Russell 2000 Index and is equal to $16,219 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Small Cap Growth Fund on August 29, 1996 and is equal to $15,738 as of December 31, 2000. The third line represents the Russell 2000 Growth Index and is equal to $14,370 as of December 31, 2000. BY JOHN F. SNYDER, III, PORTFOLIO MANAGEMENT TEAM LEADER, AND BARRY H. EVANS, CFA, AND PETER M. SCHOFIELD, PORTFOLIO MANAGERS [A 1 1/2" x 3" photo at bottom right side of page of John Hancock V.A. Sovereign Investors Fund. Caption below reads "John Snyder."] John Hancock V.A. Sovereign Investors Fund A significant shift in the market bolsters the Fund's approach The stock market experienced a significant shift at the end of the first quarter of 2000. In the first quarter, market averages skyrocketed, bolstered by a very narrow group of technology and telecommunications stocks that many investors believed were immune to the vicissitudes of the economy. Lulled into complacency, many investors ignored the kind of fundamental research that is the foundation of our approach -- looking for growth at a reasonable price. Instead, they looked for growth at any price, choosing to pay extremely high prices for a clique of tech and telecom stocks based only on the speculation that these companies would continue to promise or offer vibrant growth. "As of July 1, 2000, the Fund has been able to invest up to 35% of its stocks in non-dividend performers." [Table at bottom left-hand column entitled "Top Five Stock Holdings." The first listing is Citigroup 2.7%, the second is Chevron 2.6%, the third Interpublic Group 2.6%, the fourth Chase Manhattan 2.5% and the fifth Minnesota Mining & Manufacturing 2.4%. A note below the table reads "As a percentage of net assets on December 31, 2000."] All of that changed during the second quarter and as we progressed through the year. The economy softened, the speculative bubble burst, issues of credit quality plagued the financial markets and corporate spending fell sharply. Corporate announcements of earnings shortfalls became more widespread. In response, there was a dramatic selloff in the overvalued technology and telecommunications sectors, and the market began to broaden as investor attitudes changed. No longer cavalier about risk, investors turned toward attractively valued companies with steady growth that are perceived to be havens safe from an economic downturn -- precisely the kinds of stocks that populated the Fund. When all was said and done, the Standard & Poor's 500 Index, a common proxy for stock market performance, suffered a loss in value of 9.10% for the year ended December 31, 2000. Understanding performance John Hancock V.A. Sovereign Investors Fund produced better results than the broad market, remaining essentially flat, with a total return of - -0.33% at net asset value for the year ended December 31, 2000. By comparison, the average variable annuity equity income fund returned 6.74% for the same period, according to Lipper, Inc. Historical performance information can be found on page 24. The Fund lagged its competitors because of its lack of technology holdings during the first quarter in a tech-driven market. However, the market shift that started in the second quarter of 2000, combined with the Fund's newly implemented flexibility, helped it begin to outpace its peer group. As more reasonably valued stocks rebounded, so did many of the stocks in the Fund, including consumer staple stocks like PepsiCo and Anheuser-Busch, health-care firms like Baxter International and Abbott Laboratories, and financials like Fannie Mae, Freddie Mac and supplemental insurance company AFLAC. On the other hand, even though we reduced the Fund's retail exposure, we did suffer some losses from our holdings in Target, Home Depot and Lowe's. With consumer spending down, advertising revenues fell off, hurting our investments in Gannett and Interpublic Group. An underweighted position in the solid-performing electric utilities sector also ate into the Fund's performance relative to its peers. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended December 31, 2000." The chart is scaled in increments of 2% with -2% at the bottom and 8% at the top. The first bar represents the -0.33% total return for John Hancock V.A. Sovereign Investors Fund. The second bar represents the 6.74% total return for Average variable annuity equity income fund. A note below the chart reads "The total return for John Hancock V.A. Sovereign Investors Fund is at net asset value with all distributions reinvested. The average variable annuity equity income fund is tracked by Lipper, Inc. See the following page for historical performance information."] Enhancing the Fund's investment flexibility Earlier in the year, the Fund's Board of Trustees approved an amendment that we believe will enhance the Fund's investment flexibility. As shareholders know, since inception the Fund has invested 100% of its stock investments in what we call "dividend performers" -- companies that have increased their dividends for at least ten consecutive years. As of July 1, 2000, the Fund has been able to invest up to 35% of its stocks in non-dividend performers. The reason for this modification is simple. Historically, companies have been measured largely on their ability to consistently produce and increase dividends. Today, however, many companies have different views on the importance of dividends as a measure of corporate health. In fact, the number of companies that raise their dividends year after year is shrinking. Instead of paying for dividend increases, many companies are using cash flow to reinvest in their businesses through stock buybacks, acquisitions or restructurings. The rising-dividend requirement that has served shareholders so well is still valid. However, as the market has evolved, blind adherence to it would threaten our ability to deliver returns. We want to stress that this modification will not change the Fund's fundamental objective. However, it will give us the flexibility to keep the stocks we like even if their rising-dividend pattern is interrupted. In addition, we will now have the opportunity to consider a broader universe of attractive companies that fit our fundamental criteria -- strong management, financial soundness, stable earnings and profitability, brand-name recognition and reasonable valuations -- even if they do not meet our ten-year rising dividend test. "We expect continued weakening in the U.S. economy during the first part of 2001..." Outlook 2001 We expect continued weakening in the U.S. economy during the first part of 2001 due in part to reduced capital spending, a softening global economy, weakening offshore demand for U.S. products and lower consumer spending. In fact, the combination of these factors in an environment of very low inflation led the Federal Reserve Board to cut short-term interest rates just days into 2001. Since economic growth slowed so quickly in late 2000, we anticipate that the Fed will continue to be aggressive, looking to once again achieve the maestro touch of successfully engineering another soft landing. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (8/29/96) ---------- ---------- Cumulative Total Returns (0.33%) 68.23% Average Annual Total Returns(1) (0.33%) 12.73% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual return since inception would have been 12.42%. The expense limitation did not impact the one-year performance. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Sovereign Investors Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Sovereign Investors Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Standard & Poor's 500 Index and is equal to $22,043 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Sovereign Investors Fund on August 29, 1996 and is equal to $16,824 as of December 31, 2000. John Hancock V.A. International Fund Overseas markets stumble in 2000 On December 14, 2000, Nicholas-Applegate Capital Management assumed management responsibility for the Fund under a new subadvisory agreement that shareholders will be asked to formally approve in an upcoming proxy solicitation. Founded in 1984, Nicholas-Applegate is a recognized leader in U.S. equity, global and international equity management and currently manages more that $35 billion for institutional and individual investors. The discussion below provides a summary of the Fund's performance for the year, followed by commentary from the new managers on their investment style and strategies going forward. The year 2000 was a difficult one for foreign stock markets as a group, led by a significant downturn in Japan, where economic problems prevailed, its currency fell and its main market index -- the Nikkei -- suffered from a reshuffling that upped the technology weighting. The year began on the same high that closed out 1999, as the "TMT" sectors - -- technology, media and telecommunications -- were soaring. But the tide turned in March, when TMT stocks worldwide began a dramatic plunge as fears grew that many of these stocks were far too expensive in the face of a potential slowdown in the global economy and earnings growth. In a major reversal of fortunes, the more cyclical, attractively valued old-economy stocks began to make a comeback. [Pie chart at bottom left-hand column with heading "Portfolio Diversification." The chart is divided into seven sections (from top to left): Pacific Rim ex-Japan 8%, Short-Term Investments & Other 28%, Latin America 1%, U.K. & Ireland 11%, Continental Europe 26%, Canada 5% and Japan 21%. A note below the chart reads "As a percentage of net assets on December 31, 2000."] "Our bottom-up process guided us to begin cutting the Fund's stake in Japan..." A number of factors continued to keep overseas markets volatile -- and their results contained -- through the year's end. These included rising oil prices, rising interest rates -- first in the United States and then in Europe and elsewhere -- a slowdown in the U.S. economy later in the year and the growing downturn in the U.S. stock market. What's more, declines in many of emerging Asia's currencies and the continuing drop in the value of the euro hurt U.S.-based investors. Overall, overseas markets, as measured by the Fund's benchmark, the MSCI All Country World Free Ex-U.S. Index, lost ground, returning -16.34% for the year ended December 31, 2000. Fund performance For the year ended December 31, 2000, John Hancock V.A. International Fund posted a total return of -25.17% at net asset value, compared with the -14.72% return of the average variable annuity international fund, according to Lipper, Inc. Historical performance information can be found on page 27. The Fund's relative underperformance came mainly from its timing in the volatile TMT sectors. Although overweight versus the MSCI index, the Fund had a lighter weighting than its peers when the tech group skyrocketed early in the year. After boosting the TMT stake, the Fund was hit by having an overweighted position -- particularly in Japan and Europe -- as the stocks came back down to earth in the tumultuous months of March and April. Some of the Fund's biggest detractors came from the tech and telecom sectors, including Japanese companies Sony, Hikari Tsushin and NTT DoCoMo Communications. The Fund was also hurt by its large stake in European telecom giant Vodafone, which was pounded after its announced plan to acquire Mannesman, although Mannesman's stock rose on the news and was one of the Fund's best performers. Nortel Networks and British Telecom were two telecom companies that plunged following profit warnings. [Bar chart at the top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended December 31, 2000." The chart is scaled in increments of 5% with -30% at the bottom and 0% at the top. The first bar represents the -25.17% total return for John Hancock V.A. International Fund. The second bar represents the -14.72% total return for Average variable annuity international fund. A note below the chart reads "The total return for John Hancock V.A. International Fund is at net asset value with all distributions reinvested. The average international fund is tracked by Lipper, Inc. See the following page for historical performance information."] "Many of the uncertainties haunting the world's markets in 2000 may linger in 2001." New management: strategies and changes By Randall Kahn, CFA, and Loretta Morris, for the Portfolio Management Team On December 14, 2000, Nicholas-Applegate Capital Management assumed management of the Fund. The cornerstone of our investment philosophy rests on identifying investment opportunities that have three core attributes. We look for companies that are poised to benefit from positive change -- such as innovation, new leadership or higher-than-expected earnings; that are in a position to sustain this positive change over time; and that are beginning to be recognized by the market through rising stock prices. When all three criteria are met, we seek to invest in a timely fashion to maximize gains. We are first and foremost bottom-up stock pickers, focusing on selecting individual stocks with superior earnings potential. But we also have a strict process in place to regularly assess political, economic, monetary and technology factors in each country. This active approach to country allocation guides our decisions on whether to overweight or underweight specific countries in the portfolio. Upon assuming management of the Fund on December 14, 2000, we began to gradually transition the portfolio to be consistent with our investment approach. We moved to pare the number of holdings in order to maintain larger positions in fewer names and to make the Fund less country and sector neutral. We also further reduced the Fund's exposure to the volatile technology sector. Our bottom-up process guided us to begin cutting the Fund's stake in Japan -- particularly in the construction and banking sectors -- as we foresee little growth in that country in the coming months. The shift out of Japan will continue in the new year. In its place, we have identified more attractive opportunities in the United Kingdom and have begun to shift some assets there. Due to year-end liquidity issues, these moves are being made with deliberate slowness. A look ahead Many of the uncertainties haunting the world's markets in 2000 may linger in 2001. Technology stocks may remain under pressure in the coming quarters, as valuations for many technology leaders remain high. In addition, although global central banks seem to be done hiking interest rates, the lagged effects of their tightenings will continue to slow world activity well into 2001, according to International Strategy and Investment. Going forward, we are focusing on companies that are posting strong earnings, and we will take a more defensive stance by investing in the food, pharmaceutical, utilities, financials and energy/oil service sectors. - ----------------------------------------------------------------------- International investing involves special risks such as political, economic and currency risks and differences in accounting standards and financial reporting. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (8/29/96) ---------- ---------- Cumulative Total Returns (25.17%) 28.90% Average Annual Total Returns(1) (25.17%) 6.02% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return for the one-year period and since inception would have been (27.26%) and 4.40%, respectively. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. International Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Morgan Stanley Capital International (MSCI) All Country World Free Ex-U.S. Index, which measures the performance of a broad range of developed and emerging stock markets. The index represents securities that are freely traded on a variety of equity exchanges around the world. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. International Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the MSCI All Country World Free Ex-U.S. Index and is equal to $13,601 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. International Fund on August 29, 1996 and is equal to $12,889 as of December 31, 2000. BY JAMES K. SCHMIDT, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND THOMAS M. FINUCANE AND THOMAS C. GOGGINS, PORTFOLIO MANAGERS [A 1 1/2" x 3" photo at bottom right side of page of John Hancock V.A. Financial Industries Fund. Caption below reads "Jim Schmidt."] John Hancock V.A. Financial Industries Fund Financial stocks rebound as rates stabilize and mergers pick up After struggling in 1999, financial stocks produced some of the market's best results in 2000, as market leadership changed dramatically and high-flying technology stocks fell sharply beginning in March. With growing signs that the economy was slowing from its torrid pace, investors became increasingly concerned that the business fundamentals of many technology and telecommunications companies didn't justify their sky-high valuations. Financial stocks were the beneficiaries of this important market change, as investors sought out more attractively valued companies. This interest-rate sensitive group also benefited from the growing perception that the Federal Reserve was nearing the end of its cycle of raising interest rates. A summer wave of merger activity in the wake of financial reform legislation also lifted the group. "Some of our biggest con- tributors to performance were our brokerage and asset manager stocks." For the first 10 months of the year, the best performers in the financial group were the asset managers and brokerage houses, while some banks reported earnings disappointments. But as the year progressed and less expensive value stocks became even more desirable as market turmoil grew, the more growth-oriented broker and asset managers gave back some of their gains and banks moved into the lead. With the favorable turn in financial stocks' fortunes this year, the Standard & Poor's Financial Index rose 26.1% for the year ended December 31, 2000, while the broader market, as measured by the Standard & Poor's 500 Index, lost 9.1%. [Table at bottom left-hand column entitled "Top Five Stock Holdings." The first listing is Fifth Third Bancorp 4.1%, the second is AFLAC 3.7%, the third Ambac Financial Group 3.7%, the fourth Wells Fargo 3.6% and the fifth American International Group 3.5%. A note below the table reads "As a percentage of net assets on December 31, 2000."] Fund performance and strategy update John Hancock V.A. Financial Industries Fund benefited fully from the upswing in financial stocks, producing a total return of 27.16% at net asset value for the year ended December 31, 2000. That compared with the 26.56% return of the average open-end financial services fund and the 0.63% return of the average variable annuity sector/miscellaneous fund, according to Lipper, Inc. See page 30 for historical performance information. The Fund continues to seek capital appreciation by investing in a broad range of U.S. and foreign financial services companies of any size. During the year, shareholders voted to eliminate a restriction that had required the Fund to invest more than 25% of its assets in the banking industry. This change provides the Fund with added flexibility. Brokers, asset managers strong Some of our biggest contributors to performance were our brokerage and asset manager stocks. They rode a wave of high-priced takeovers that emerged in the wake of the Gramm-Leach-Bliley Act -- legislation that dropped the barriers preventing banks, brokers and insurers from affiliating. Over the summer, Chase Manhattan bank bought J.P. Morgan, UBS announced plans to buy investment banker PaineWebber and Credit Suisse Group bought Donaldson, Lufkin and Jenrette. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended December 31, 2000." The chart is scaled in increments of 5% with 0% at the bottom and 0% at the top. The first bar represents the 27.16% total return for John Hancock V.A. Financial Industries Fund. The second bar represents the 26.56% total return for Average open-end financial services fund. The third bar represents the 0.63% total return for Average variable annuity sector/miscellaneous fund. A note below the chart reads "The total return for John Hancock V.A. Financial Industries Fund is at net asset value with all distributions reinvested. The average open-end financial services fund and variable annuity sector/miscellaneous fund are tracked by Lipper, Inc. See the following page for historical performance information."] We also benefited from having shifted away from the regional brokers last year to the wire house brokerage names like Morgan Stanley Dean Witter and Merrill Lynch, which were top performers for the year despite their pullback in the last two months. Although it was our belief that underwriting, trading and merger activity would slow in the next several quarters, we are still positive on the group because the level of investment banking activity is still very good and the underwriting calendar should pick up again once the market firms up. The top contributor to the Fund's performance was Amvescap, an asset manager that increased its stature this year through the success of asset gathering at its AIM and Invesco subsidiaries. The stalwart insurance broker Marsh & McLennan also served us well, partly because of the upturn in the property and casualty insurance business, and also because of its strong mutual fund arm. Property and casualty makes a comeback For much of the year, our life insurance companies, including AXA Financial and AFLAC were better performers than the property and casualty insurers, which have struggled for the last five years in a very competitive pricing environment. But in the latter part of the year, the global pricing cycle for property and casualty companies finally began to turn upward, so we started to shift some of our insurance assets back to this group. Bank selections mostly help For the most part, we focused on the trust banks like State Street Corp., Bank of New York and Northern Trust Corp. which did well because of their recurring revenue streams from their main advisory and custody businesses. Our regional banks were mixed. Wells Fargo and FleetBoston Financial did well, as they successfully navigated their way through acquisitions. On the other hand, First Tennessee and Marshal & Ilsley were tarnished by earnings disappointments. During the year we upped our stake in several attractively priced regionals, such as Fifth Third Bancorp and Wells Fargo, and that served us well toward the end of the year. "The prospects for financial stocks remain bright." A look ahead The prospects for financial stocks remain bright. With the economy slowing dramatically in the fourth quarter, the Fed moved just days into the new year to cut interest rates in an aggressive signal that it intended to prevent an economic stall. Investors tend to favor financial stocks more in an environment of lower rates and slower, steadier economic growth. It remains to be seen if the Fed will succeed in pulling off another soft landing for the economy, but we believe it's the most likely outcome. What's more, we have only just begun to see the powerful results of the merger trend spawned by financial reform legislation and we expect more consolidation to follow. - ------------------------------------------------------------------------ Sector investing is subject to greater risks than the market as a whole. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (4/30/97) ---------- ---------- Cumulative Total Returns 27.16% 88.73% Average Annual Total Returns(1) 27.16% 18.90% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return since inception would have been 18.84%. The expense limitation did not impact the one-year performance. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Financial Industries Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Financial Industries Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Financial Industries Fund on April 30, 1997 and is equal to $18,873 as of December 31, 2000. The second line represents the Standard & Poor's 500 Index and is equal to $17,339 as of December 31, 2000. BY JAMES K. SCHMIDT, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND THOMAS M. FINUCANE AND THOMAS C. GOGGINS, PORTFOLIO MANAGERS [A 1 1/2" x 3" photo at bottom right side of page of John Hancock V.A. Regional Bank Fund. Caption below reads "Jim Schmidt."] John Hancock V.A. Regional Bank Fund Bank stocks stage a rebound in second half of 2000 Bank stocks did an about-face in 2000 and far surpassed the broader market's results, finally re-gaining investors' attention as interest rates stopped going up and technology stocks tanked. In the first three months of the year, investors only had eyes for technology. But starting in March, with the first hint of cracks in the robust economy, investors saw the light and moved out of the technology and telecommunications sectors, where stock prices had reached the stratosphere. Financial stocks of all stripes were the beneficiaries of this important market shift, as investors sought out more attractively valued companies. This interest-rate sensitive group was also boosted by a growing sense that the Federal Reserve was done raising rates to cool the economy. Even with their rally, bank stocks had a few setbacks along the way as earnings shortfalls and increases in non-performing loans were announced at some prominent banks. But regional banks and thrifts came on strong in November and December, when continued signs that the economy had rapidly slowed convinced investors that the Fed's next move would be a rate cut to prevent the economy from stalling. Three days after the year ended, the Fed did just that in a surprising and aggressive move, and also signaled more cuts could be coming. With the favorable turn in financial stocks' fortunes this year, the Standard & Poor's Financial Index rose 26.1% for the year ended December 31, 2000, while the broader market, as measured by the Standard & Poor's 500 Index, lost 9.1%. [Table at bottom left hand column entitled "Top Five Stock Holdings." The first listing is Mid-State Bancshares 3.9%, the second is Valley National Bancorp 3.8%, the third Fifth Third Bancorp 3.7%, the fourth Commerce Bancshares 3.7% and the fifth Independent Bank Corp. 3.4%. A note below the table reads "As a percentage of net assets on December 31, 2000."] "...we still anticipate average 2001 bank earnings growth to be about 8% higher than this year's." Fund performance For the year ended December 31, 2000, John Hancock V.A. Regional Bank Fund posted a strong return of 17.91% at net asset value, due largely to its second-half rally when it rose 30%. In comparison, the average open-end financial services fund returned 26.56% and the average sector/miscellaneous fund returned 0.63% for the year, according to Lipper, Inc. See page 33 for historical performance information. While significantly outperforming the broad market, the Fund lagged the Lipper group of financial services funds, many of which invested in the securities brokers, asset managers and larger diversified financial firms, which were the better performers until the last two months of the year. Furthermore, although most of our holdings posted earnings results in line with our expectations, we did experience earnings shortfalls among some of our larger holdings. The problems either stemmed from an increase in non-performing loans -- at such banks as UnionBanCal Corp., Bank of America, Marshal & Ilsley, Bank of the Ozarks and Lamar Capital - -- and/or from merger integration issues. [Bar chart at the top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended December 31, 2000." The chart is scaled in increments of 5% with 0% at the bottom and 30% at the top. The first bar represents the 17.91% total return for John Hancock V.A. Regional Bank Fund. The second bar represents the 26.56% total return for Average open-end financial services fund. The third bar represents the 0.63% total return for Average variable annuity sector/miscellaneous fund. A note below the chart reads "The total return for John Hancock V.A. Regional Bank Fund is at net asset value with all distributions reinvested. The average open-end financial services fund and variable annuity sector/miscellaneous fund are tracked by Lipper, Inc. See the following page for historical performance information."] "Interest rates have started to come down, which tends to boost investors' confidence in bank stocks...." Focus on asset quality As we mentioned in our last report, after a lengthy period of an expanding economy and a favorable lending environment, it is no surprise that as the economy slowed this year there was a pickup in the level of non-performing assets. But even with the increase, the level of problem loans still remains low at 0.70% of total assets, according to FDIC statistics. The area experiencing much of the deteriorating credit quality is syndicated loans -- large loans shared among a consortium of banks. While the non-performing loan rate could rise some more, we expect that it should remain at a low level (below 1% of total assets) and that the banking industry is establishing adequate loan loss reserves. On an ongoing basis, our team continues to carefully scrutinize the credit risks and prospects of our banks. Fundamentals intact; mergers still a trend Even with an increase in non-performing assets, a slowdown in loan growth and flat net interest margins, we still anticipate average 2001 bank earnings growth to be about 8% higher than this year's. This year, our biggest contributor to the Fund's performance was Texas bank Southwest Bancorp. The largest bank left headquartered in Texas, it gained significant market share and benefited from the state's energy-induced boom. Texas bank Cullen Frost also rode this wave, and we sold it to lock in profits during the year. Although bank merger activity slowed in 2000, the consolidation trend remains solidly in place. More recently there was a resurgence of activity, with FleetBoston Financial's announced purchase of Summit Bank, and Firstar's acquisition of U.S. Bancorp. Both of these transactions were priced at more realistic levels, thus boosting the chances of success. We could see more consolidation as banks, struggling to increase revenues, use mergers as a means of improving profits through gained operating efficiencies. A look ahead We are encouraged by the recent turn of events for bank stocks. Even though further asset- quality announcements could roil the group, there are several factors working in our favor. Interest rates have started to come down, which tends to boost investors' confidence in bank stocks, and prospects for further merger activity are good. While it's still not clear that the Fed has achieved the sought-after soft landing, we believe the potential for this not-too-fast, not-too-slow outcome for the economy remains quite real, as the Fed has made clear -- with its interest-rate cut days after the year's end -- that it is intent on preventing an economic meltdown. Finally, even though the stocks have outperformed the market by a wide margin lately, their valuations remain reasonable, which means there's more room for them to advance. - ------------------------------------------------------------------------ Sector investing is subject to greater risks than the market as a whole. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (5/1/98) ---------- ---------- Cumulative Total Returns 17.91% 4.96% Average Annual Total Returns(1) 17.91% 1.83% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return since inception would have been 1.80%. The expense limitation did not impact the one-year performance. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Regional Bank Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Regional Bank Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Standard & Poor's 500 Index and is equal to $12,291 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Regional Bank Fund on May 1, 1998 and is equal to $10,496 as of December 31, 2000. BY BARRY GORDON, MARC H. KLEE, CFA, AND ALAN LOEWENSTEIN, CFA, PORTFOLIO MANAGERS [A 3" x 2" photo at bottom right side of page of John Hancock V.A. Technology Fund. Caption below reads "Technology Fund management team members (l-r): Barry Gordon, Marc Klee and Alan Loewenstein."] John Hancock V.A. Technology Fund Tech stocks stumble in 2000 following eye-popping gains in 1999 "Even some of the technology sector's first-half stalwarts gave way in the final months..." After skyrocketing throughout 1998, 1999 and the first calendar quarter of 2000, technology stocks came plunging back to earth from March through December 2000. In 1998, the technology-laden NASDAQ Composite Index posted an impressive 40% gain, followed by an 86% rise in 1999 and another 24% gain from January 1 through March 10, 2000. But after peaking in mid-March, tech stocks suffered a tumble that would last until the end of the year. The downtrend was prompted by a number of difficulties, including the prospects for a slowing economy brought on by higher interest rates, weaker corporate profitability and investors' growing dislike of Internet-related stocks. Those stocks led the tech selloff, although they were later joined in the fourth quarter by many other technology segments. Once it became clear that consumers were buying fewer personal computers and corporations were cutting spending on technology and telecommunications products from servers to switches to software, the selling accelerated. From the Fund's inception on May 1 through the end of 2000, the NASDAQ Composite Index fell 26%. [Table at bottom left-hand column entitled "Top Five Stock Holdings." The first listing is Mercury Interactive 4.0%, the second is BEA Systems 3.1%, the third Solectron Corp. 3.1%, the fourth EMC Corp. 3.1% and the fifth Cisco Systems 2.9%. A note below the table reads "As a percentage of net assets on December 31, 2000."] Fund performance John Hancock V.A. Technology Fund posted a total return of -26.56% at net asset value from its May 1 inception through December 31, 2000. In the same period, the average open-end science and technology fund returned -36.72% and the average variable annuity sector/miscellaneous fund returned -4.64%, according to Lipper, Inc. Few places to hide Semiconductor and related companies, which suffered a major retrenchment in the second half of 2000 in response to slowing demand for computers, were among our hardest hit during the period. In the early stages of the Fund's operations, our view was that the demand for chips -- driven primarily by the strength in the personal computer and telecommunications sectors -- would remain robust. That proved to be the case early on, when chip manufacturers posted strong profit gains and were among our best performers. Beginning in late summer, however, chip demand contracted in response to worries over slower economic growth. Chip makers such as Micron Technology, Integrated Device Technology and Cypress Semiconductor Corp. were hit fairly hard. The stocks of companies that make the machines and tools needed to make a chip, including KLA-Tencor and PRI Automation, also were disappointments. [Bar chart at the top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "From inception May 1, 2000 through December 31, 2000." The chart is scaled in increments of 5% with -40% at the bottom and 0% at the top. The first bar represents the -26.56% total return for John Hancock V.A. Technology Fund. The second bar represents the - -36.72% total return for Average open-end science and technology fund. The third bar represents the -4.64% total return for Average variable annuity sector/miscellaneous fund. A note below the chart reads "The total return for John Hancock V.A. Technology Fund is at net asset value with all distributions reinvested. The average open-end science and technology fund and variable annuity sector/miscellaneous fund are tracked by Lipper, Inc. See the following page for historical performance information."] Even some of the technology sector's first-half stalwarts gave way in the final months of 2000 to concerns about weakening demand for computers and related products. After exiting the summer months in reasonably good shape, PC makers including Dell Computer and Gateway Inc., network company Cisco Systems and on-line company America Online all had succumbed to the market's worries by year end. Bright spots emerge Despite the gloom and doom, a few of our holdings posted significant gains during the period. The stock of BEA Systems rose more than 45%. The company is a leader in an industry known as application services, a provider of a middle layer of software that companies use to develop Web-based programs that work with many types of hardware and software. We also saw strong gains from our holdings in fiber-optical networking company CIENA Corp. It was buoyed by rapidly expanding demand for long-haul, high-speed bandwidth. Also strong were the stocks of Web performance management program maker Mercury Interactive and software maker i2 Technologies. Another plus for performance was our decision to hold onto any new money that came into the Fund in the final months of the year. While we did make some new investments as we saw compelling values, we sidelined some cash to wait for a time when we think that most of the pain is behind us. That's why our cash position stood at an unusually high 30% of assets at year end. "...tech stocks are priced much more attractively." Outlook We're optimistic about tech stocks' prospects in the year 2001. Although the initial impact of a slowing economy on tech stocks was overwhelmingly negative, we believe its ultimate effect will be positive. History suggests that during periods of slow, but positive, economic growth, tech stocks fare well because investors look to them for better-than-average earnings growth. We are also encouraged by the Federal Reserve's intent to cut interest rates. Just after the period ended, the Fed surprised most market observers by cutting interest rates one-half of a percentage point on January 3, 2001. We think that further interest-rate cuts are in store and that they will stimulate economic growth. Looking at 1995, the technology sector was the third-best-performing sector in the market after the Fed had successfully engineered a "soft landing" through a series of interest-rate cuts the previous year. Now that a lot of the excessive valuation that existed in the tech sector in late 1999 and early 2000 has been wrung out, tech stocks are priced much more attractively. Not that lower valuations, per se, are a reason to own tech stocks. But coupled with potential strong earnings gains, they give us plenty of reason for optimism. Also, because many tech companies provide productivity enhancements, we think they are poised to benefit from the need by corporate America to be leaner in a slower economy. - ------------------------------------------------------------------------ Sector investing is subject to greater risks than the market as a whole. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE INCEPTION (5/1/00) ---------- Cumulative Total Return (26.56%) Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the total return since inception would have been (27.55%). WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Technology Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Technology Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Standard & Poor's 500 Index and is equal to $9,162 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Technology Fund on May 1, 2000 and is equal to $7,344 as of December 31, 2000. BY JAMES K. HO, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND BENJAMIN A.MATTHEWS, PORTFOLIO MANAGER [A 1 1/2" x 3" photo at bottom right side of page of John Hancock V.A. Bond Fund. Caption below reads "James Ho."] John Hancock V.A. Bond Fund Fund closes year on strength as interest rates fall and Treasury bonds soar The broad fixed-income market had a better time of it this year than last, although corporate bonds experienced a fair amount of volatility and uncertainty. John Hancock V.A. Bond Fund's heavy weighting in U.S. government and agency issues was the primary driver of Fund performance, as this fixed-income segment produced the best results. Selectivity and in-depth research proved essential in the corporate area as well, particularly given the turbulence caused by the slowing economy. Overall, it was flexibility in asset allocation that enabled the Fund to post solid gains. Fund performance For the year ended December 31, 2000, John Hancock V.A. Bond Fund produced a total return of 11.89% at net asset value. This compares favorably with the 9.79% return of the average variable annuity corporate debt A-rated fund, according to Lipper, Inc. For historical performance information, please turn to page 39. [Table at bottom left-hand column entitled "Top Five Sectors." The first listing is U.S. Government 37%, the second is U.S. Agencies 24%, the third Mortgage Banking 6%, the fourth Utilities 6% and the fifth Finance 4%. A note below the table reads "As a percentage of net assets on December 31, 2000."] Defensive approach defines portfolio composition Early in the year, we began to build in some more defensive characteristics into the Fund's portfolio and further enhanced that approach as the period progressed. Calendar 2000 was the year in which the Treasury market was king. The run on Treasury securities, particularly longer-term issues, began in February and continued unabated through period's end. The U.S. government's budget surplus prompted the Treasury to propose a buyback of millions of dollars worth of bonds in coming years, jumpstarting a dramatic rally in its long-term bonds. The Federal Reserve Board continued to raise interest rates through mid-May, further strengthening the rally as investors looked past the rate hikes to their intended effect -- a slowdown in the economy. Stock market volatility simply stoked the fire as investors rushed to the relatively safe haven of U.S. government securities. "We focused more on industries that tend to be relatively stable and insulated from an economic slowdown." Our strategy in the Treasury arena was at first to cluster assets at both the long-end and short-end of the Treasury yield curve, reflecting our belief that the yield curve would flatten. (The yield curve is a plotting of yields across the maturity spectrum.) By early summer, with the curve having flattened, we not only increased the Fund's exposure to Treasury securities but moved some assets into intermediate-term issues so that by period's end we had a laddered approach in place. We also bolstered the Fund's weighting in mortgage-backed and agency securities. All performed extremely well. [Bar chart at the top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended December 31, 2000." The chart is scaled in increments of 5% with 0% at the bottom and 15% at the top. The first bar represents the 11.89% total return for John Hancock V.A. Bond Fund. The second bar represents the 9.79% total return for Average variable annuity corporate debt A- rated fund. A note below the chart reads "The total return for John Hancock V.A. Bond Fund is at net asset value with all distributions reinvested. The average variable annuity corporate debt A-rated fund is tracked by Lipper, Inc. See the following page for historical performance information."] "While nothing is guaranteed, the outlook for corporate bonds appears much improved." Upgraded credit quality Credit quality concerns played a big role in investor sentiment this past year. As the economy showed concrete signs of not only slowing, but perhaps slowing too much, investors became increasingly skittish about the creditworthiness of corporate issuers. This fear, combined with the strength of the Treasury market, caused credit yield spreads to widen dramatically. As you may know, credit spreads represent the difference in yield between bonds of different credit quality. The more credit sensitive an issue was, the greater the downward pressure. Over the period, we focused our attention on higher-quality issues within both the investment-grade and high-yield arenas. One such holding is General Electric Capital Corp. For the most part, we held smaller positions in the longer-maturity securities represented in the Fund, though at times we swapped into the shorter-term debt of corporate issuers that we already owned. Decreased high-yield exposure The high-yield sector suffered the most. Any corporate issuer that had even a hint of difficulty in meeting earnings projections witnessed the floor dropping out from under its bond prices. Defaults increased substantially. We trimmed the portfolio's exposure to high-yield debt by selling among other bonds those issued by telecommunication companies. These included Global Crossing, NEXTLINK Communications and Focal Communications. Troubled names sold early Thorough research and daily monitoring of securities proved vital to performance as the economy weakened. We were able to move out of several troubled names before the brunt of negative sentiment and price declines were realized. Holdings we sold included Dillard's Inc., Conseco, FINOVA Capital Group and two beaten down California utility companies -- Pacific Gas & Electric and Southern California Edison. Utilities, defense, healthcare, energy emphasized We focused more on industries that tend to be relatively stable and insulated from an economic slowdown. These include utility, defense, healthcare, and energy-related issues, such as Verizon, Keyspan, CalEnergy, NRG, Lockheed Martin, Raytheon, Tenet Healthcare, Hospital Corporation of America, Amerada Hess and Apache. We also maintained sizable positions in high-demand media names such as Continental Cablevision. Outlook Shortly after the close of 2000, the Fed cut short-term interest rates by one-half a percentage point. Bond prices rose and corporate spreads narrowed. While nothing is guaranteed, the outlook for corporate bonds appears much improved. Investors seem to be now anticipating the possibility of economic strengthening and greater corporate profitability down the road. Though we are encouraged, we will watch the economy closely to determine whether or not too much weakness has already set in. We shall move ahead with cautious optimism and consider opportunities to add selectively to high-yield and cyclical issues. Our duration, or interest rate sensitivity, remains relatively neutral, though we have begun to shorten it slightly, believing that yields in the government sector don't have much room to fall further. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (8/29/96) ---------- ---------- Cumulative Total Returns 11.89% 38.98% Average Annual Total Returns(1) 11.89% 7.88% YIELD For the period ended December 31, 2000 SEC 30-DAY YIELD ---------- John Hancock V.A. Bond Fund(1) 5.84% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return for the one-year period and since inception would have been 11.72% and 6.95%, respectively, and the yield would have been 5.63%. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Bond Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Lehman Brothers Corporate Bond Index -- an unmanaged index that mirrors the investment objectives and characteristics of the Fund. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Bond Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Bond Fund on August 29, 1996 and is equal to $13,897 as of December 31, 2000. The second line represents the Lehman Brothers Corporate Bond Index and is equal to $13,466 as of December 31, 2000. BY ARTHUR N. CALAVRITINOS, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND JANET L. CLAY, CFA, FREDERICK L. CAVANAUGH, JR. AND DANIEL S. JANIS, PORTFOLIO MANAGERS [A 1 1/2" x 3" photo at bottom right side of page of John Hancock V.A. High Yield Bond Fund. Caption below reads "Arthur Calavritinos."] John Hancock V.A. High Yield Bond Fund Slowing economy, liquidity woes hurt high-yield bonds It was a difficult year for high-yield bonds. The impact of rising interest rates in the first half of 2000 finally began to take hold in the shape of a slowing economy. A growing number of companies began to miss their earnings targets, sending shock waves through the financial markets, especially the technology-heavy NASDAQ Composite Index. The number of defaults among high-yield companies, defined as those rated below investment grade, also rose. Telecommunications companies, whose prices had risen to stratospheric levels, were particularly hard hit. As these companies fell short in their business plans and faced diminished prospects for getting their next round of funding in the equity market, their prices tumbled. Since this sector makes up the largest component of the high-yield market, its downfall was a significant drag on the group. High-yield companies also were hurt by a growing lack of liquidity, or ease of trading, that was caused by the mergers of several investment-banking firms. "With fuel prices spiking, we increased our weighting in oil and gas and related service companies." [Pie chart at bottom left-hand column with heading "Portfolio Diversification." The chart is divided into six sections (from top to left): Common Stock 9%, Short-Term Investments & Other 25%, Convertible Bonds 3%, Preferred Stock 3%, Foreign Corporate Bonds 16% and U.S. Corporate Bonds 44%. A note below the chart reads "As a percentage of net assets on December 31, 2000."] The struggles of these higher-risk bonds stood in marked contrast to U.S. government bonds, which benefited from stabilizing rates, reduced supply, the prospects of a slowing economy and their status as a safe haven in the face of growing stock-market and presidential election uncertainties. By the end of the year, the difference in yield between high-yield bonds and Treasury bonds had widened significantly. High-yield bond yields averaged 14.12%, as measured by the Merrill Lynch High Yield Master II Index, compared with the 5.11% yield of the 10-year Treasury bond. Fund performance For the year ended December 31, 2000, John Hancock V.A. High Yield Bond Fund posted a total return of -6.08% at net asset value. By comparison, the average variable annuity high current yield fund returned -7.03%, according to Lipper, Inc. Historical performance information can be found on page 42. Telecommunications cut Although telecommunications is the Fund's largest sector concentration, we continue to maintain an underweighting compared to our peers since so many high-yield telecom companies are only several years old and have yet to deliver results. During the year, we became increasingly convinced that the telecom market was reaching a point of too much capacity and not enough demand -- for everything from equipment to services. As a result, we pared our stake from 23% a year ago to 14% at the end of December. We sold Internet Web-hosting companies PSI Net and Exodus Communications and sold the common stock of Viatel, a competitive local exchange carrier (CLEC) in Europe. Although we sold these and other names before their prices fell even more, we still had some disappointments. KMC Telecom Holdings was a prime example of the problems facing many telecom start-ups. A CLEC serving the Southeast, it provides telephone, cable and Internet access to companies in direct competition with the Baby Bells. While it has a good set of assets, it also has a large amount of debt, needs more money to grow, and is being pinched in its ability to access capital to continue executing its business plan. [Bar chart at the top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended December 31, 2000." The chart is scaled in increments of 5% with -10% at the bottom and 0% at the top. The first bar represents the -6.08% total return for John Hancock V.A. High Yield Bond Fund. The second bar represents the -7.03% total return for Average variable annuity high current yield fund. A note below the chart reads "The total return for John Hancock V.A. High Yield Bond Fund is at net asset value with all distributions reinvested. The average variable annuity high current yield fund is tracked by Lipper, Inc. See the following page for historical performance information."] Credit specific issues hurt Our biggest disappointments came from several company-specific problems, such as Asia Pulp & Paper (APP) which sparked market concerns and lost credibility when it announced that it needed to extend its debt maturities. Cargo operator Fine Air Services filed for bankruptcy protection after failing to execute its business plan because of operational difficulties. Energy grows With fuel prices spiking, we increased our weighting in oil and gas and related service companies. We are particularly interested in the natural gas market, since that is where we see the biggest potential for further exploration and development, as well as price gains, given the low supply and growing demand. We added to our stakes in oil drilling company Grey Wolf and Gothic Production, a natural gas exploration and production company that was recently acquired by Chesapeake. Key Energy Services, the major player in the well-servicing business, has performed admirably. We sold our Key Energy stock, but still hold a significant stake in its bonds. We also added a stake in CHC Helicopter, a Canadian company that provides helicopter service to offshore rigs and coastal rescue operations. "...investors are soon bound to recognize the value that exists in the high-yield sector." Outlook We remain cautious about the near-term prospects for high-yield bonds. It's likely that we could see more failures in the telecommunications group in 2001. We are also waiting for liquidity to return to the high-yield market, which should eventually happen. But we also see a silver lining. As investors recover from the "irrational exuberance" that gripped high-yield telecommunications bonds as well as stocks, we believe they will reassess the risks and rewards of investing in various asset classes. While this takes time, a return to a more rational mode of investing will inevitably serve us well, especially if the stock market remains dicey. With high-yield bond prices low and their yields at very high levels compared to Treasuries, investors are soon bound to recognize the value that exists in the high-yield sector. - ------------------------------------------------------------------------ See the prospectus for the risks of investing in high-yield bonds. International investing involves special risks such as political, economic and currency risks and differences in accounting standards and financial reporting. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (1/6/98) ---------- ---------- Cumulative Total Returns (6.08%) (4.16%) Average Annual Total Returns(1) (6.08%) (1.41%) YIELD For the period ended December 31, 2000 SEC 30-DAY YIELD ---------- John Hancock V.A. High Yield Bond Fund(1) 14.03% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return for the one-year period and since inception would have been (6.47%) and (1.70%), respectively, and the yield would have been 13.64%. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. High Yield Bond Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Lehman Brothers High Yield Bond Index - -- an unmanaged index of fixed-income securities that are similar, but not identical, to the bonds in the Fund's portfolio. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. High Yield Bond Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Lehman Brothers High Yield Bond Index and is equal to $9,819 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. High Yield Bond Fund on January 6, 1998 and is equal to $9,591 as of December 31, 2000. BY DAWN BAILLIE FOR THE PORTFOLIO MANAGEMENT TEAM [A 1 1/2" x 3" photo at bottom middle of page of John Hancock V.A. Money Market Fund. Caption below reads "Dawn Baillie."] John Hancock V.A. Money Market Fund Short-term interest rates rise through May, then stabilize as the economy starts to slow It was a good year for money-market fund investors, who saw their yields rise and their returns beat those of most stock-fund investors. In the first half of the year, money-market yields rose along with interest rates. This occurred after all signs pointed to a very robust U.S. economy in January, with soaring consumer confidence and a booming stock market sparking concerns of an uptick in inflation. As a result, the Federal Reserve switched to its inflation-fighting mode again, raising the federal funds rate that banks charge each other for overnight loans by one-quarter percentage point in February and again in March in an effort to cool the economy and block inflation. When that didn't deter the economy, or the stock market, the Fed took the unusual step of raising rates by one-half a percentage point in May. Shortly after, the economy began to show signs of slowing, while inflation remained relatively benign. This trend continued through the year's end, so the Fed stayed on the sidelines and the federal funds rate ended the year at 6.50%, up from 5.50% a year earlier. After rising in the first half of the year, money-market yields remained fairly level, since the federal funds rate is a key pricing benchmark for money-market securities. In the second half of the year, the effects of the slowing economy began to show up in earnest in the form of earnings disappointments -- which sent the stock market reeling -- and slowdowns in manufacturing, housing and consumer spending. So by the end of the year, the Fed actually returned to its neutral stance and investors even began to anticipate rate cuts in 2001. 7-day effective yield On December 31, 2000, John Hancock V.A. Money Market Fund had a 7-day effective yield of 6.17%. By comparison, the average taxable money-market fund had a 7-day effective yield of 5.91%, according to Lipper, Inc. "It was a good year for money-market fund investors..." Staying short For the first nine months of 2000, we kept the Fund's maturity slightly shorter than average, believing that rates were on the rise, as the Fed remained intent on slowing the economy and preventing inflation through a series of rate hikes. This conservative stance meant that our money was not tied up for as long, so we were able to move more quickly into higher-yielding securities as rates rose. Our thinking changed by the end of September, as we began to see a marked and consistent slowdown in housing, manufacturing and the consumer and producer price indexes. Believing that a slowing economy would keep the Fed on hold, or even cause it to reverse course and lower rates, we extended our maturity in October to be on the average. We stayed that way through year end, mostly to take advantage of the year-end bargains and higher yields that we can generally find as traders clear out their inventory of money-market securities. [Bar chart at the top of left-hand column with heading "7-Day Effective Yield." Under the heading is a note that reads "As of December 31, 2000." The chart is scaled in increments of 2% with 0% at the bottom and 8% at the top. The first bar represents the 6.17% total return for John Hancock V.A. Money Market Fund. The second bar represents the 5.91% total return for Average taxable money-market fund. A note below the chart reads "The average taxable money-market fund is tracked by Lipper, Inc. Past performance is no guarantee of future results."] "With the prospect for additional rate cuts real, we plan to extend our maturity..." A look ahead With the economy slowing down so rapidly, we had anticipated that the Fed would begin lowering rates at its next meeting in late January. In fact, just three days after the Fund's year ended, the Fed took the surprise step of lowering rates by one-half a percentage point in an aggressive effort to avoid a serious economic downturn. In doing so, the Fed cited weaker sales, production, consumer confidence and financial markets, while core inflation remained tame. Even before this move, we had confidence that the Fed would continue to nimbly manage the economy's growth and prevent a recession, and this recent action further bolsters that view. With the prospects for additional rate cuts real, we plan to extend our maturity to slightly longer than average in an effort to lock in higher rates. As always, we will continue to focus not only on providing the Fund with a competitive yield, but also on preserving stability of principal. - ------------------------------------------------------------------------ The Fund is neither insured nor guaranteed by the U.S. government. Although the Fund seeks to maintain a net asset value of $1.00 per share, it is possible to lose money by investing in the Fund. BY FREDERICK CAVANAUGH, MANAGEMENT TEAM LEADER, AND ARTHUR N. CALAVRITINOS, CFA, JANET L. CLAY, CFA, AND DANIEL S. JANIS, PORTFOLIO MANAGERS [A 1 1/2" x 3" photo at bottom right side of page of John Hancock V.A. Strategic Income Fund. Caption below reads "Fred Cavanaugh."] John Hancock V.A. Strategic Income Fund Treasury securities advance, while high-yield bonds stumble The past year was a good one for U.S. Treasury securities, which were boosted initially by the government's debt buyback program and later by expanding signs that the U.S. economy was slowing. Despite the Federal Reserve's effort to stave off inflation by raising interest rates through May 2000, Treasury prices rose as the government scaled back the frequency and size of its auctions of new debt and bought back billions of dollars of outstanding debt. Continued debt reduction efforts, coupled with mounting evidence that economic growth had slacked off and inflation was non-existent, added steam to the Treasury market in the second half. By year's end, the market increasingly anticipated that the Fed would stop raising interest rates in recognition of receding inflationary pressures, and perhaps even cut them in the near future. Meanwhile, concern about the outlook for the economy and corporate profits eroded investor confidence in the high-yield sector. That was particularly true among high-yield bonds in the telecommunications sector. [Table at bottom left-hand column entitled "Top Five Sectors." The first listing is U.S. Government 49%, the second is Telecommunications 14%, the third Foreign Governments 10%, the fourth Utilities 3% and the fifth Media 2%. A note below the table reads "As a percentage of net assets on December 31, 2000."] For the most part, foreign government bond markets remained relatively uninteresting from our standpoint. Western Europe and Asia didn't offer a lot of value, since their bond yields typically were lower than those offered in the United States. One foreign bright spot was Canada, which benefited from relatively low and stable inflation. There also was some good news out of some Latin American countries, which enjoyed improving credit fundamentals thanks to the rise in oil prices. "The high-yield market's slump was difficult to escape..." Fund performance For the 12 months ended December 31, 2000, John Hancock V.A. Strategic Income Fund posted a total return of 1.40% at net asset value, compared with the 4.64% return of the average variable annuity general bond fund income fund, according to Lipper Inc. Historical performance information can be found on page 47. Defensive stance Given the ongoing difficulties suffered by the high-yield market and our view that more problems may be in store over the near-term, we continually expanded our defensive posture throughout 2000. By year-end, we had reduced our exposure to high-yield bonds to about 23% of net assets, and increasingly gravitated toward more stable, high-quality investments. Our position in cash and other short-term securities rose to 10% by the end of the period, up from 1% at the beginning of the year. [Bar chart at the top of left-hand column with heading "Fund Performance." Under the heading is a note that reads "For the year ended December 31, 2000." The chart is scaled in increments of 1% with 0% at the bottom and 5% at the top. The first bar represents the 1.40% total return for John Hancock V.A. Strategic Income Fund. The second bar represents the 4.64% total return for Average variable annuity general bond fund. A note below the chart reads "The total return for John Hancock V.A. Strategic Income Fund is at net asset value with all distributions reinvested. The average variable annuity general bond fund is tracked by Lipper, Inc. See the following page for historical performance information."] We also increased our Treasury holdings to 49% at the end of the year, up from 35% at the end of June 2000. We emphasized a combination of short- and long-term holdings, which was a plus for performance. Short-term securities rallied on expectations that the Fed would lower short-term interest rates, while long-term Treasuries turned in strong performance thanks to the government's buyback program and expectations for lower interest rates. "We expect to maintain our defensive stance for the time being." High-yield leaders and laggards The high-yield market's slump was difficult to escape, although some of our holdings held up much better than the others. Packaging company Kappa Beheer, for example, surprised Wall Street with much better than expected financial results. Natural gas service company Universal Compression was lifted by the rising price of that fuel. Finally, French billboard company Go Outdoors Systems Holding and British newspaper company Regional Independent Media Group each benefited from reasonably strong advertising and economic growth. On the flip side, many of our biggest disappointments were telecommunications holdings. As we mentioned earlier, this sector stumbled because investors were worried about telecom companies' ability to raise money to continue the build-out of their networks. Within that group, the bond prices of Viatel, Primus Telecommunications Group and Esprit Telecom Group all suffered substantial losses during 2000. Changes in foreign holdings Our increase in foreign securities basically was a function of our purchases of Canadian and Venezuelan government bonds. Canadian bonds, which were the best performers among foreign bond markets, offered interest rates competitive with those of U.S. Treasuries and afforded us the opportunity to increase our holdings in a high-quality market characterized by low and stable inflation. Our Venezuelan holdings, which we view as a short-term play, were boosted by the country's improving creditworthiness as oil prices rose. A look ahead We expect to maintain our defensive stance for the time being. High-yield bonds offer some very attractive values, including some bonds carrying yields of nearly nine full percentage points more than U.S. Treasuries. But we don't believe investors will rush back into the market. We believe they'll take a "wait and see" attitude about how much the economy will eventually slow and how much the Federal Reserve will cut interest rates, which it began to do January 3 with a one-half percentage point cut. But since no one can pinpoint the exact timing of the next high-yield bond market rally, we'll continue to hold onto some high-yield bonds that we think have good fundamental prospects and can perform better once market sentiment turns more favorable. We are prepared to move even more into lower-quality investments when we think the time is right. Finally, we'll continue to look for attractive yields in foreign markets, although we believe Canada still offers the best value. - ----------------------------------------------------------------------- International investing involves special risks such as political, economic and currency risks and differences in accounting standards and financial reporting. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (8/29/96) ---------- ---------- Cumulative Total Returns 1.40% 32.63% Average Annual Total Returns(1) 1.40% 6.72% YIELD For the period ended December 31, 2000 SEC 30-DAY YIELD ---------- John Hancock V.A. Strategic Income Fund(1) 7.94% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return since inception would have been 6.30%. The expense limitation did not impact the one-year performance. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Strategic Income Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Lehman Brothers Government/Corporate Bond Index -- an unmanaged index that measures the performance of U.S. government bonds, U.S. corporate bonds and Yankee bonds. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Strategic Income Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Lehman Brothers Government/Corporate Bond Index and is equal to $13,760 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Strategic Income Fund on August 29, 1996 and is equal to $13,271 as of December 31, 2000. FINANCIAL STATEMENTS John Hancock Funds - Declaration Trust Statements of Assets and Liabilities December 31, 2000 - ------------------------------------------------------------------------------------------------------------------------------- V.A. V.A. V.A. V.A. V.A. V.A. V.A. CORE EQUITY 500 INDEX LARGE CAP MID CAP RELATIVE SMALL CAP SOVEREIGN FUND FUND GROWTH FUND GROWTH FUND VALUE FUND GROWTH FUND INVESTORS FUND ----------- ----------- ----------- ----------- ----------- ----------- -------------- Assets: Investments at value - Note D: Common stocks (cost - $36,110,454, $16,676,006, $12,655,003, $10,826,748, $43,121,074, $17,936,487 and $42,749,147, respectively) $39,953,798 $23,960,835 $12,262,793 $11,416,600 $37,753,769 $19,721,586 $49,516,774 Bonds and U.S. government Obligations (cost - none, none, none, none, $401,957, none, and $401,813, respectively) -- -- -- -- 82,500 -- 404,188 Joint repurchase agreements (cost - $730,000, $1,121,000, $95,000, none, none, $144,000 and $5,365,000, respectively) 730,000 1,121,000 95,000 -- -- 144,000 5,365,000 Corporate savings account 735 -- 402 -- -- 527 6 ----------- ----------- ----------- ----------- ----------- ----------- ----------- 40,684,533 25,081,835 12,358,195 11,416,600 37,836,269 19,866,113 55,285,968 Cash -- 75,533 -- -- -- -- -- Receivable for investments sold 125,803 -- -- 235,949 2,452,116 34,008 -- Receivable for shares sold -- -- -- -- 11,847 -- 26,525 Dividends and interest receivable 45,189 21,814 5,625 1,938 17,815 2,324 74,903 Deferred organization expenses - Note B 1,413 1,413 1,413 -- -- 1,413 1,413 Receivable from John Hancock Advisers, Inc. and affiliates - Note C -- 11,986 -- -- -- -- -- Other Assets 596 705 293 49 352 1,039 721 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Assets 40,857,534 25,193,286 12,365,526 11,654,536 40,318,399 19,904,897 55,389,530 - ----------------------------------------------------------------------------------------------------------------------------- Liabilities: Due to custodian -- -- -- 79,105 428,258 -- -- Payable for investments purchased -- -- -- 45,139 805,157 43,552 -- Payable for shares repurchased 139,651 29,010 43,803 26,804 5,484 56,605 14,480 Payable for futures variation margin -- 18,200 -- -- -- -- -- Payable to John Hancock Advisers, Inc. and affiliates - Note C 25,142 -- 8,534 5,938 20,643 6,715 29,736 Accounts payable and accrued expenses 20,191 52,053 8,983 15,700 16,245 26,363 17,210 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Liabilities 184,984 99,263 61,320 172,686 1,275,787 133,235 61,426 - ----------------------------------------------------------------------------------------------------------------------------- Net Assets: Capital paid-in 37,693,541 17,418,746 14,462,393 11,596,579 42,471,127 20,227,806 50,814,015 Accumulated net realized gain (loss) on investments, financial futures contracts and foreign currency transactions (864,138) 367,594 (1,765,886) (704,573) 2,251,057 (2,241,167) (2,255,666) Net unrealized appreciation (depreciation) of investments, financial futures contracts and foreign currency transactions 3,843,344 7,302,676 (392,210) 589,852 (5,686,762) 1,785,099 6,770,002 Undistributed net investment Income (distributions in excess of net investment income) (197) 5,007 (91) (8) 7,190 (76) (253) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net Assets $40,672,550 $25,094,023 $12,304,206 $11,481,850 $39,042,612 $19,771,662 $55,328,098 ============================================================================================================================= Net Asset Value Per Share: (Based on 2,321,942, 1,547,681, 1,197,751, 761,075 3,669,836, 1,372,971, 3,525,673 shares, respectively, of beneficial interest outstanding - unlimited number of shares authorized with no par value) $17.52 $16.21 $10.27 $15.09 $10.64 $14.40 $15.69 ============================================================================================================================= The Statement of Assets and Liabilities is each Fund's balance sheet and shows the value of what the Fund owns, is due and owes on December 31, 2000. You'll also find the net asset value per share as of that date. See notes to financial statements. Statements of Assets and Liabilities (continued) December 31, 2000 - -------------------------------------------------------------- V.A. INTERNATIONAL FUND ----------------- Assets: Investments at value - Note D: Common stocks (cost - $5,094,561) $5,299,410 Short-term investments (cost - $1,022,457) 1,022,457 ----------------- 6,321,867 Cash 624 Foreign currency, at value (cost - $68,187) 66,421 Receivable for investments sold 1,929,937 Dividends and interest receivable 11,621 Deferred organization expenses - Note B 1,413 Receivable from John Hancock Advisers, Inc. and affiliates - Note C 8,832 Other assets 190 ----------------- Total Assets 8,340,905 - -------------------------------------------------------------- Liabilities: Payable for shares repurchased 31,392 Payable for securities on loan 933,457 Accounts payable and accrued expenses 46,417 ----------------- Total Liabilities 1,011,266 - -------------------------------------------------------------- Net Assets: Capital paid-in 7,723,198 Accumulated net realized loss on investments and foreign currency transactions (519,368) Net unrealized appreciation (depreciation) of investments and foreign currency transactions 202,894 Distributions in excess of net investment income (77,085) ----------------- Net Assets $7,329,639 ============================================================== Net Asset Value Per Share: (Based on 665,848 shares of beneficial interest outstanding -- unlimited number of shares authorized with no par value) $11.01 ============================================================== See notes to financial statements. Statements of Assets and Liabilities (continued) December 31, 2000 - ---------------------------------------------------------------------------------------------------------- V.A. V.A. V.A. FINANCIAL REGIONAL BANK TECHNOLOGY INDUSTRIES FUND FUND FUND ----------------- ----------------- ----------------- Assets: Investments at value - Note D: Common stocks (cost - $48,938,306, $10,935,579 and $14,432,054, respectively) $67,939,052 $13,050,336 $10,542,962 Short-term investments (cost - none, none and $1,499,369, respectively) -- -- 1,499,369 Joint repurchase agreements (cost - $3,504,000, $679,000 and $2,747,789, respectively) 3,504,000 679,000 2,747,789 Corporate savings account 879 382 792 ----------------- ----------------- ----------------- 71,443,931 13,729,718 14,790,912 Receivable for investments sold -- 36,611 -- Receivable for shares sold 608,712 -- 245,636 Dividends and interest receivable 55,035 26,914 2,290 Other assets 5,891 296 1 ----------------- ----------------- ----------------- Total Assets 72,113,569 13,793,539 15,038,839 - ---------------------------------------------------------------------------------------------------------- Liabilities: Payable for investments purchased 684,125 -- 969,180 Payable for shares repurchased -- 36,656 -- Payable to John Hancock Advisers, Inc. and affiliates - Note C 46,510 9,115 6,564 Accounts payable and accrued expenses 16,338 14,338 21,051 ----------------- ----------------- ----------------- Total Liabilities 746,973 60,109 996,795 - ---------------------------------------------------------------------------------------------------------- Net Assets: Capital paid-in 55,845,481 14,564,298 18,123,471 Accumulated net realized loss on investments, options and foreign currency transactions (3,482,390) (2,945,521) (193,630) Net unrealized appreciation (depreciation) of investments and foreign currency transactions 19,000,607 2,114,757 (3,889,092) Undistributed net investment income (distributions in excess of net investment income) 2,898 (104) 1,295 ----------------- ----------------- ----------------- Net Assets $71,366,596 $13,733,430 $14,042,044 ========================================================================================================== Net Asset Value Per Share: (Based on 3,892,145, 1,389,168 and 1,916,254, respectively, of beneficial interest outstanding -- unlimited number of shares authorized with no par value) $18.34 $9.89 $7.33 ========================================================================================================== See notes to financial statements. Statements of Assets and Liabilities (continued) December 31, 2000 - -------------------------------------------------------------------------------------------------------------------------------- V.A. V.A. V.A. V.A. BOND HIGH YIELD MONEY MARKET STRATEGIC FUND BOND FUND FUND INCOME FUND ----------------- ----------------- ----------------- ----------------- Assets: Investments at value - Note D: Common stocks (cost - none, $892,077, none and $122,883, respectively) -- $680,118 -- $177,413 Preferred stocks and warrants (cost - $51, $820,929, none and $178,105, respectively) $475 626,607 -- 104,496 Bonds (cost - $22,605,396, $6,946,112, none and $31,955,894, respectively) 23,225,973 4,572,675 -- 29,816,857 Short-term investments (cost - none, none, 61,612,023 and none, respectively) -- -- $61,612,023 -- Joint repurchase agreements (cost - $1,606,000, $1,162,000, $6,307,000 and $3,437,000, respectively) 1,606,000 1,162,000 6,307,000 3,437,000 Corporate savings account 749 951 -- 346 ----------------- ----------------- ----------------- ----------------- 24,833,197 7,042,351 67,919,023 33,536,112 Cash -- -- 281 -- Foreign currency, at value (cost - none, $3,732, none and none, respectively) -- 3,938 -- -- Receivable for shares sold 215,269 -- 6,046,686 145,909 Receivable for forward foreign currency exchange contracts purchased - Note B -- 2,091 -- 13,525 Dividends and interest receivable 377,403 228,649 17,948 846,545 Deferred organization expenses -- Note B 1,413 -- 1,413 1,413 Other assets 234 129 3,037 1,548 ----------------- ----------------- ----------------- ----------------- Total Assets 25,427,516 7,277,158 73,988,388 34,545,052 - -------------------------------------------------------------------------------------------------------------------------------- Liabilities: Payable for investments purchased 224,459 -- -- -- Payable for shares repurchased -- 10,068 -- 1,258 Distributions payable -- -- 33,176 -- Payable for forward foreign currency exchange contracts sold - Note B -- 34,228 -- 40,954 Payable to John Hancock Advisers, Inc. and affiliates - Note C 14,274 2,986 30,177 17,336 Accounts payable and accrued expenses 16,066 11,242 7,703 13,705 ----------------- ----------------- ----------------- ----------------- Total Liabilities 254,799 58,524 71,056 73,253 - -------------------------------------------------------------------------------------------------------------------------------- Net Assets: Capital paid-in 24,922,117 10,257,167 73,917,139 37,817,216 Accumulated net realized loss on investments, options and foreign currency transactions (391,881) (221,273) -- (1,029,019) Net unrealized appreciation (depreciation) of investments and foreign currency transactions 621,001 (2,812,458) -- (2,190,200) Undistributed net investment income (distributions in excess of net investment income) 21,480 (4,802) 193 (126,198) ----------------- ----------------- ----------------- ----------------- Net Assets $25,172,717 $7,218,634 $73,917,332 $34,471,799 ================================================================================================================================ Net Asset Value Per Share: (Based on 2,445,857, 1,080,247, 73,917,332 and 3,841,771 shares, respectively, of beneficial interest outstanding -- unlimited number of shares authorized with no par value) $10.29 $6.68 $1.00 $8.97 ================================================================================================================================ See notes to financial statements. Statements of Operations Year ended December 31, 2000 - ------------------------------------------------------------------------------------------------------------------------------- V.A. V.A. V.A. V.A. V.A. V.A. V.A. CORE EQUITY 500 INDEX LARGE CAP MID CAP RELATIVE SMALL CAP SOVEREIGN FUND FUND GROWTH FUND GROWTH FUND VALUE FUND GROWTH FUND INVESTORS FUND ----------- ----------- ----------- ----------- ----------- ----------- -------------- Investment Income: Dividends (net of foreign Withholding tax of $1,892, $1,761, $438, $104, $169, none and $1,865, respectively) $492,956 $372,756 $55,135 $16,961 $172,226 $11,016 $745,879 Interest 73,783 27,843 18,183 59,766 193,222 46,062 282,891 Securities lending income 831 -- 621 510 27,459 33,144 -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 567,570 400,599 73,939 77,237 392,907 90,222 1,028,770 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Expenses: Investment management fee - Note C 306,248 116,127 148,433 99,566 257,116 213,759 295,467 Custodian fee 25,408 147,126 16,780 26,598 21,881 69,760 16,924 Auditing fee 19,431 15,164 13,432 12,000 18,164 15,000 18,000 Accounting and legal services fee -Note C 8,230 6,221 3,705 2,504 8,056 5,347 9,273 Printing 4,589 2,048 1,250 4,356 2,174 4,189 1,873 Trustees' fee 2,693 2,236 1,293 439 2,345 1,275 3,214 Miscellaneous 2,163 16,092 1,059 607 2,021 1,377 5,669 Organization expense - Note B 2,141 2,141 2,141 -- -- 2,141 2,141 Legal fees 399 280 169 124 368 230 401 Registration and filing fees 27 27 13 27 127 27 27 Interest Expense -- -- 2,054 79 26,328 1,736 -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Expenses 371,329 307,462 190,329 146,300 338,580 314,841 352,989 - ----------------------------------------------------------------------------------------------------------------------------- Less Expense Reductions - Note C -- (191,146) -- (13,517) -- (29,736) -- - ----------------------------------------------------------------------------------------------------------------------------- Net Expenses 371,329 116,316 190,329 132,783 338,580 285,105 352,989 - ----------------------------------------------------------------------------------------------------------------------------- Net Investment Income (Loss) 196,241 284,283 (116,390) (55,546) 54,327 (194,883) 675,781 - ----------------------------------------------------------------------------------------------------------------------------- Realized and Unrealized Gain (Loss) on Investments, Financial Futures Contracts and Foreign Currency Transactions: Net realized gain (loss) on investments sold 153,575 571,901 (1,715,484) (691,193) 13,435,050 (2,221,923) (1,886,401) Net realized loss on financial futures contracts -- (61,831) -- -- -- -- -- Net realized loss on foreign currency transactions -- -- -- -- (919) -- -- Change in net unrealized Appreciation (depreciation) of investments (3,702,349) (3,824,817) (4,414,002) (1,246,996) (15,297,492) (5,140,485) 1,083,527 Change in net unrealized Appreciation (depreciation) of financial futures contracts -- 8,691 -- -- -- -- -- Change in net unrealized Appreciation (depreciation) of foreign currency transactions -- -- -- -- 906 -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net Realized and Unrealized Loss on Investments, Financial Futures Contracts and Foreign Currency Transactions (3,548,774) (3,306,056) (6,129,486) (1,938,189) (1,862,455) (7,362,408) (802,874) - ----------------------------------------------------------------------------------------------------------------------------- Net Decrease in Net Assets Resulting from Operations ($3,352,533) ($3,021,773) ($6,245,876) $1,993,735) ($1,808,128) ($7,557,291) ($127,093) - ----------------------------------------------------------------------------------------------------------------------------- The Statement of Operations summarizes for each of the Funds the investment income earned and expenses incurred in operating the Fund. It also shows net gains (losses) for the period stated. See notes to financial statements. Statements of Operations (continued) Year ended December 31, 2000 - -------------------------------------------------------------- V.A. INTERNATIONAL FUND ----------------- Investment Income: Dividends (net of foreign withholding tax of $15,166) $94,960 Interest 21,961 Securities lending income 4,860 ----------------- 121,781 ----------------- Expenses: Investment management fee - Note C 81,503 Custodian fee 188,289 Auditing fee 13,090 Printing 5,381 Organization expense - Note B 2,141 Accounting and legal services fee - Note C 1,697 Registration and filing fees 573 Trustees' fee 544 Miscellaneous 461 Legal fees 117 ----------------- Total Expenses 293,796 - -------------------------------------------------------------- Less Expense Reductions - Note C (189,610) - -------------------------------------------------------------- Net Expenses 104,186 - -------------------------------------------------------------- Net Investment Income 17,595 - -------------------------------------------------------------- Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Transactions: Net realized loss on investments sold (435,585) Net realized loss on foreign currency transactions (15,739) Change in net unrealized appreciation (depreciation) of investments (2,178,286) Change in net unrealized appreciation (depreciation) of foreign currency transactions (952) ----------------- Net Realized and Unrealized Loss on Investments and Foreign Currency Transactions (2,630,562) - -------------------------------------------------------------- Net Decrease in Net Assets Resulting from Operations ($2,612,967) ============================================================== See notes to financial statements. Statements of Operations (continued) Year ended December 31, 2000 - ---------------------------------------------------------------------------------------------------------- V.A. V.A. V.A. FINANCIAL REGIONAL BANK TECHNOLOGY INDUSTRIES FUND FUND FUND ----------------- ----------------- ----------------- Investment Income: Dividends (net of foreign withholding tax of $12,422, none and $3, respectively) $616,349 $375,640 $503 Interest 64,208 38,145 68,818 Securities lending income 5,313 1,734 87 ----------------- ----------------- ----------------- 685,870 415,519 69,408 ----------------- ----------------- ----------------- Expenses: Investment management fee - Note C 434,813 113,415 33,261 Custodian fee 18,441 11,464 33,980 Auditing fee 17,500 13,000 12,000 Accounting and legal services fee - Note C 10,269 2,660 810 Printing 3,971 1,036 2,276 Trustees' fee 3,058 1,096 61 Miscellaneous 2,209 296 200 Interest Expense 944 738 -- Legal fees 364 -- 61 Registration and filing fees 13 26 14 ----------------- ----------------- ----------------- Total Expenses 491,582 143,731 82,663 - ---------------------------------------------------------------------------------------------------------- Less Expense Reductions - Note C -- -- (39,008) - ---------------------------------------------------------------------------------------------------------- Net Expenses 491,582 143,731 43,655 - ---------------------------------------------------------------------------------------------------------- Net Investment Income 194,288 271,788 25,753 - ---------------------------------------------------------------------------------------------------------- Realized and Unrealized Gain (Loss) on Investments, Options and Foreign Currency Transactions: Net realized gain (loss) on investments sold and options 692,941 (2,865,401) (193,630) Net realized gain on foreign currency transactions 3,958 -- -- Change in net unrealized appreciation (depreciation) of investments 12,308,867 4,087,137 (3,889,092) Change in net unrealized appreciation (depreciation) of foreign currency transactions (2,383) -- -- ----------------- ----------------- ----------------- Net Realized and Unrealized Gain (Loss) on Investments, Options and Foreign Currency Transactions 13,003,383 1,221,736 (4,082,722) - ---------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations $13,197,671 $1,493,524 ($4,056,969) ========================================================================================================== See notes to financial statements. Statements of Operations (continued) Year ended December 31, 2000 - -------------------------------------------------------------------------------------------------------------------------------- V.A. V.A. V.A. V.A. BOND HIGH YIELD MONEY MARKET STRATEGIC FUND BOND FUND FUND INCOME FUND ----------------- ----------------- ----------------- ----------------- Investment Income: Dividends (net of foreign withholding tax of none, $3,900, none and none, respectively) -- $123,442 -- $21,652 Interest $1,161,742 986,842 $2,511,902 2,640,081 ----------------- ----------------- ----------------- ----------------- 1,161,742 1,110,284 2,511,902 2,661,733 ----------------- ----------------- ----------------- ----------------- Expenses: Investment management fee - Note C 80,502 51,368 194,539 165,020 Custodian fee 46,140 16,651 16,717 22,549 Auditing fee 12,164 13,667 8,000 8,000 Accounting and legal services fee - Note C 3,048 1,605 7,395 5,193 Printing 2,230 1,214 1,232 4,355 Organization expense - Note B 2,141 -- 2,141 2,141 Trustees' fee 835 576 1,950 1,457 Registration and filing fees 790 27 27 27 Miscellaneous 695 457 908 1,352 Legal fees 125 20,928 241 251 ----------------- ----------------- ----------------- ----------------- Total Expenses 148,670 106,493 233,150 210,345 - -------------------------------------------------------------------------------------------------------------------------------- Less Expense Reductions - Note C (27,848) (33,670) -- -- - -------------------------------------------------------------------------------------------------------------------------------- Net Expenses 120,822 72,823 233,150 210,345 - -------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 1,040,920 1,037,461 2,278,752 2,451,388 - -------------------------------------------------------------------------------------------------------------------------------- Realized and Unrealized Gain (Loss) on Investments, Options and Foreign Currency Transactions: Net realized gain (loss) on investments sold and options (153,038) 13,846 -- (980,624) Net realized gain on foreign currency transactions 988 127,478 -- 280,348 Change in net unrealized appreciation (depreciation) of investments 1,086,406 (1,600,466) -- (1,250,037) Change in net unrealized appreciation (depreciation) of foreign currency transactions (909) (65,941) -- (72,198) ----------------- ----------------- ----------------- ----------------- Net Realized and Unrealized Gain (Loss) on Investments, Options and Foreign Currency Transactions 933,447 (1,525,083) -- (2,022,511) - -------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations $1,974,367 ($487,622) $2,278,752 $428,877 ================================================================================================================================ See notes to financial statements. Statements of Changes in Net Assets - ---------------------------------------------------------------------------------------------------------------------------------- V.A. CORE EQUITY FUND V.A. 500 INDEX FUND V.A. LARGE CAP GROWTH FUND --------------------------- --------------------------- --------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, --------------------------- --------------------------- --------------------------- 1999 2000 1999 2000 1999 2000 ----------- ----------- ----------- ----------- ----------- ----------- Increase (Decrease) in Net Assets: From Operations: Net investment income (loss) $170,261 $196,241 $344,397 $284,283 ($40,884) ($116,390) Net realized gain (loss) on investments sold and financial futures contracts 1,489,402 153,575 91,519 510,070 1,316,751 (1,715,484) Change in net unrealized appreciation (depreciation) of investments and financial futures contracts 3,097,564 (3,702,349) 5,755,226 (3,816,126) 1,878,149 (4,414,002) ----------- ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) in Net Assets Resulting from Operations 4,757,227 (3,352,533) 6,191,142 (3,021,773) 3,154,016 (6,245,876) ----------- ----------- ----------- ----------- ----------- ----------- Distributions to Shareholders: * Dividends from net investment income (174,331) (199,287) (344,375) (279,659) -- -- Distributions in excess of net investment income (86) -- -- -- -- -- Distributions from net realized gain on investments sold and financial futures contracts (895,808) (695,716) (231,893) (92,786) (491,445) (643,661) Distributions in excess of net realized gain on investments sold, financial futures contracts -- (844,741) (15,178) -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Total Distributions to Shareholders (1,070,225) (1,739,744) (591,446) (372,445) (491,445) (643,661) ----------- ----------- ----------- ----------- ----------- ----------- From Fund Share Transactions: ** Shares sold 21,277,999 11,671,817 13,349,010 2,172,521 10,666,325 5,563,562 Shares issued to shareholders in reinvestment of distributions 1,070,225 1,739,743 591,446 372,407 491,445 643,661 ----------- ----------- ----------- ----------- ----------- ----------- 22,348,224 13,411,560 13,940,456 2,544,928 11,157,770 6,207,223 Less shares repurchased (7,735,163) (12,638,050) (8,044,099) (12,009,903) (2,320,226) (8,885,412) ----------- ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) 14,613,061 773,510 5,896,357 (9,464,975) 8,837,544 (2,678,189) ----------- ----------- ----------- ----------- ----------- ----------- Net Assets: Beginning of period 26,691,254 44,991,317 26,457,163 37,953,216 10,371,817 21,871,932 ----------- ----------- ----------- ----------- ----------- ----------- End of period (including undistributed net investment income (distributions in excess of net investment income) of ($85), ($197), $335, $5,007, ($41) and ($91), respectively) $44,991,317 $40,672,550 $37,953,216 $25,094,023 $21,871,932 $12,304,206 ----------- ----------- ----------- ----------- ----------- ----------- * Distributions to Shareholders: Per share dividends from net investment income $0.0861 $0.0888 $0.1710 $0.1530 -- -- ----------- ----------- ----------- ----------- ----------- ----------- Per share dividends in excess of net investment income $0.0001 -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Per share distributions from net realized gain on investments sold and financial futures contracts $0.4028 $0.6886 $0.1105 $0.0585 $0.3598 $0.5666 ----------- ----------- ----------- ----------- ----------- ----------- Per share distributions in excess of net realized gain on investments sold and financial futures contracts -- -- $0.0072 -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ** Analysis of Fund Share Transactions: Shares sold 1,133,853 601,375 816,451 123,028 738,312 376,363 Shares issued to shareholders in reinvestment of distributions 55,765 99,280 34,866 21,738 31,974 62,310 ----------- ----------- ----------- ----------- ----------- ----------- 1,189,618 700,655 851,317 144,766 770,286 438,673 Less shares repurchased (410,573) (662,061) (490,081) (694,943) (158,856) (628,273) ----------- ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) 779,045 38,594 361,236 (550,177) 611,430 (189,600) =========== =========== =========== =========== =========== =========== See notes to financial statements. Statements of Changes in Net Assets (continued) - --------------------------------------------------------------------------------------------------------------------------------- V.A. MID CAP GROWTH FUND V.A. RELATIVE VALUE FUND V.A. SMALL CAP GROWTH FUND --------------------------- --------------------------- --------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, --------------------------- --------------------------- --------------------------- 1999 2000 1999 2000 1999 2000 ----------- ----------- ----------- ----------- ----------- ----------- Increase (Decrease) in Net Assets: From Operations: Net investment income (loss) ($6,426) ($55,546) $161,304 $54,327 ($82,296) ($194,883) Net realized gain (loss) on investments sold and foreign currency transactions 187,318 (691,193) 5,322,397 13,434,131 2,352,183 (2,221,923) Change in net unrealized appreciation (depreciation) of investments and foreign currency transactions 1,607,019 (1,246,996) 7,741,197 (15,296,586) 5,122,311 (5,140,485) ---------- ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) in Net Assets Resulting from Operations 1,787,911 (1,993,735) 13,224,898 (1,808,128) 7,392,198 (7,557,291) ---------- ----------- ----------- ----------- ----------- ----------- Distributions to Shareholders: * Dividends from net investment income -- -- (162,651) (42,822) -- -- Distributions from net realized gain on investments sold and foreign currency transactions (5,407) (78,273) (1,365,816) (15,128,734) (441,478) (1,193,201) ---------- ----------- ----------- ----------- ----------- ----------- Total Distributions to Shareholders (5,407) (78,273) (1,528,467) (15,171,556) (441,478) (1,193,201) ---------- ----------- ----------- ----------- ----------- ----------- From Fund Share Transactions: ** Shares sold 3,390,736 12,664,811 12,838,972 13,227,216 7,383,931 18,612,044 Shares issued to shareholders in reinvestment of distributions 5,407 78,273 1,528,467 15,171,557 441,478 1,193,201 ---------- ----------- ----------- ----------- ----------- ----------- 3,396,143 12,743,084 14,367,439 28,398,773 7,825,409 19,805,245 Less shares repurchased (594,918) (5,552,026) (4,666,018) (11,142,581) (2,141,408) (12,149,701) ---------- ----------- ----------- ----------- ----------- ----------- Net Increase 2,801,225 7,191,058 9,701,421 17,256,192 5,684,001 7,655,544 ---------- ----------- ----------- ----------- ----------- ----------- Net Assets: Beginning of period 1,779,071 6,362,800 17,368,252 38,766,104 8,231,889 20,866,610 ---------- ----------- ----------- ----------- ----------- ----------- End of period (including undistributed net investment income (distributions in excess of net investment income) of none, ($8), ($3,436), $7,190, ($40) and ($76), respectively) $6,362,800 $11,481,850 $38,766,104 $39,042,612 $20,866,610 $19,771,662 ---------- ----------- ----------- ----------- ----------- ----------- * Distributions to Shareholders: Per share dividends from net investment income -- -- $0.0980 $0.0186 -- -- ---------- ----------- ----------- ----------- ----------- ----------- Per share distributions from net realized gain on investments sold and foreign currency transactions $0.0160 $0.1010 $0.6493 $6.5883 $0.4314 $0.9031 ---------- ----------- ----------- ----------- ----------- ----------- ** Analysis of Fund Share Transactions: Shares sold 257,673 699,219 949,975 744,370 499,482 888,422 Shares issued to shareholders in reinvestment of distributions 329 5,222 91,349 1,406,946 23,955 86,905 ---------- ----------- ----------- ----------- ----------- ----------- 258,002 704,441 1,041,324 2,151,316 523,437 975,327 Less shares repurchased (49,945) (313,149) (334,023) (631,982) (153,686) (658,355) ---------- ----------- ----------- ----------- ----------- ----------- Net Increase 208,057 391,292 707,301 1,519,334 369,751 316,972 ========== =========== =========== =========== =========== =========== The Statement of Changes in Net Assets shows how the value of each Fund's net assets has changed since the end of the previous period. The difference reflects earnings less expenses, any investment and foreign currency gains and losses, distributions paid to shareholders, if any, and any increase or decrease in money shareholders invested in each Fund. The footnotes illustrate the number of Fund shares sold, reinvested and repurchased during the last two periods, along with the per share amount of distributions made to shareholders of each Fund for the periods indicated. See notes to financial statements. Statements of Changes in Net Assets (continued) - --------------------------------------------------------------------------------------------------------------------------------- V.A. SOVEREIGN INVESTORS FUND V.A. INTERNATIONAL FUND V.A. FINANCIAL INDUSTRIES FUND ----------------------------- --------------------------- ------------------------------ YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, --------------------------- --------------------------- --------------------------- 1999 2000 1999 2000 1999 2000 ----------- ----------- ----------- ----------- ----------- ----------- Increase (Decrease) in Net Assets: From Operations: Net investment income $651,984 $675,781 $38,442 $17,595 $385,825 $194,288 Net realized gain (loss) on investments sold and foreign currency transactions (211,594) (1,886,401) 681,683 (451,324) (3,550,224) 696,899 Change in net unrealized appreciation (depreciation) of investments and foreign currency transactions 1,075,319 1,083,527 1,497,165 (2,179,238) 3,537,348 12,306,484 ----------- ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) in Net Assets Resulting from Operations 1,515,709 (127,093) 2,217,290 (2,612,967) 372,949 13,197,671 ----------- ----------- ----------- ----------- ----------- ----------- Distributions to Shareholders: * Dividends from net investment income (651,984) (678,637) (46,076) (107,471) (362,866) (169,614) Distributions in excess of net investment income (617) -- (9,515) -- -- -- Distributions from net realized gain on investments sold and foreign currency transactions -- -- (259,599) (238,923) (153,776) -- Tax return of capital (2,297) -- -- -- (23,257) -- ----------- ----------- ----------- ----------- ----------- ----------- Total Distributions to Shareholders (654,898) (678,637) (315,190) (346,394) (539,899) (169,614) ----------- ----------- ----------- ----------- ----------- ----------- From Fund Share Transactions: ** Shares sold 19,084,625 16,811,905 1,131,817 1,932,741 10,055,880 20,739,283 Shares issued to shareholders in reinvestment of distributions 654,898 678,636 315,190 346,394 539,899 169,614 ----------- ----------- ----------- ----------- ----------- ----------- 19,739,523 17,490,541 1,447,007 2,279,135 10,595,779 20,908,897 Less shares repurchased (4,515,757) (11,610,910) (1,175,008) (1,364,748) (15,685,364) (11,882,798) ----------- ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) 15,223,766 5,879,631 271,999 914,387 (5,089,585) 9,026,099 ----------- ----------- ----------- ----------- ----------- ----------- Net Assets: Beginning of period 34,169,620 50,254,197 7,200,514 9,374,613 54,568,975 49,312,440 ----------- ----------- ----------- ----------- ----------- ----------- End of period (including undistributed net investment income (distributions in excess of net investment income) of ($105), ($253), ($46,722), ($80,691), ($2,491) and $2,898, respectively) $50,254,197 $55,328,098 $9,374,613 $7,329,639 $49,312,440 $71,366,596 ----------- ----------- ----------- ----------- ----------- ----------- * Distributions to Shareholders: Per share dividends from net investment income $0.2404 $0.2077 $0.0791 $0.1684 $0.1078 $0.0450 ----------- ----------- ----------- ----------- ----------- ----------- Per share distributions in excess of net investment income $0.0002 -- $0.0163 -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Per share distributions from net realized gain on investments sold and foreign currency transactions -- -- $0.4454 $0.3744 -- -- ----------- ----------- ----------- ----------- ----------- ----------- Tax return of capital $0.0009 -- -- -- $0.0069 -- ----------- ----------- ----------- ----------- ----------- ----------- ** Analysis of Fund Share Transactions: Shares sold 1,204,042 1,103,469 86,360 131,349 691,929 1,252,923 Shares issued to shareholders in reinvestment of distributions 42,073 44,976 21,633 31,955 38,926 9,578 ----------- ----------- ----------- ----------- ----------- ----------- 1,246,115 1,148,445 107,993 163,304 730,855 1,262,501 Less shares repurchased (285,296) (771,887) (92,089) (104,357) (1,096,716) (779,897) ----------- ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) 960,819 376,558 15,904 58,947 (365,861) 482,604 =========== =========== =========== =========== =========== =========== See notes to financial statements. Statements of Changes in Net Assets (continued) - ----------------------------------------------------------------------------------------------------------------- V.A. TECHNOLOGY V.A. REGIONAL BANK FUND FUND V.A. BOND FUND --------------------------- ------------ --------------------------- YEAR ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED DECEMBER 31, --------------------------- DECEMBER 31, --------------------------- 1999 2000 2000(1) 1999 2000 ----------- ----------- ------------ ----------- ----------- Increase (Decrease) in Net Assets: From Operations: Net investment income $281,620 $271,788 $25,753 $740,529 $1,040,920 Net realized gain (loss) on investments sold, options and foreign currency transactions 232,178 (2,865,401) (193,630) (216,376) (152,050) Change in net unrealized appreciation (depreciation) of investments and foreign currency transactions (1,578,109) 4,087,137 (3,889,092) (583,796) 1,085,497 ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) in Net Assets Resulting from Operations (1,064,311) 1,493,524 (4,056,969) (59,643) 1,974,367 ----------- ----------- ----------- ----------- ----------- Distributions to Shareholders: * Dividends from net investment income (281,482) (275,181) (24,458) (740,530) (1,040,858) Distributions from net realized gain on investments sold, options and foreign currency transactions (347,453) -- -- -- -- ----------- ----------- ----------- ----------- ----------- Total Distributions to Shareholders (628,935) (275,181) (24,458) (740,530) (1,040,858) ----------- ----------- ----------- ----------- ----------- From Fund Share Transactions: ** Shares sold 7,383,736 1,198,441 18,589,255 5,640,516 13,994,748 Shares issued to shareholders in reinvestment of distributions 628,935 275,181 24,458 740,530 1,040,858 ----------- ----------- ----------- ----------- ----------- 8,012,671 1,473,622 18,613,713 6,381,046 15,035,606 Less shares repurchased (6,280,747) (9,253,630) (490,242) (3,719,713) (3,326,986) ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) 1,731,924 (7,780,008) 18,123,471 2,661,333 11,708,620 ----------- ----------- ----------- ----------- ----------- Net Assets: Beginning of period 20,256,417 20,295,095 -- 10,669,428 12,530,588 ----------- ----------- ----------- ----------- ----------- End of period (including undistributed net investment income of $3,154, ($209), $1,295, $21,494 and $21,556, respectively) $20,295,095 $13,733,430 $14,042,044 $12,530,588 $25,172,717 ----------- ----------- ----------- ----------- ----------- * Distributions to Shareholders: Per share dividends from net investment income $0.1190 $0.1686 $0.0143 $0.6448 $0.6434 ----------- ----------- ----------- ----------- ----------- Per share distributions from net realized gain on investments sold, options and foreign currency transactions $0.1489 -- -- -- -- ----------- ----------- ----------- ----------- ----------- ** Analysis of Fund Share Transactions: Shares sold 798,204 150,452 1,961,452 556,313 1,400,901 Shares issued to shareholders in reinvestment of distributions 73,089 33,504 3,292 73,574 104,450 ----------- ----------- ----------- ----------- ----------- 871,293 183,956 1,964,744 629,887 1,505,351 Less shares repurchased (683,009) (1,166,423) (48,490) (367,396) (336,738) ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) 188,284 (982,467) 1,916,254 262,491 1,168,613 =========== =========== =========== =========== =========== (1) Commenced operations on May 1, 2000. See notes to financial statements. Statements of Changes in Net Assets (continued) - -------------------------------------------------------------------------------------------------------------------------------- V.A. HIGH YIELD BOND FUND V.A. MONEY MARKET FUND V.A. STRATEGIC INCOME FUND --------------------------- --------------------------- --------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, --------------------------- --------------------------- --------------------------- 1999 2000 1999 2000 1999 2000 ----------- ----------- ----------- ----------- ----------- ----------- Increase (Decrease) in Net Assets: From Operations: Net investment income $951,874 $1,037,461 $1,072,850 $2,278,752 $1,576,575 $2,451,388 Net realized gain (loss) on investments sold, options and foreign currency transactions 104,240 141,324 -- -- (156,823) (700,276) Change in net unrealized appreciation (depreciation) of investments and foreign currency transactions 59,411 (1,666,407) -- -- (534,751) (1,322,235) ----------- ----------- ----------- ------------ ----------- ----------- Net Increase (Decrease) in Net Assets Resulting from Operations 1,115,525 (487,622) 1,072,850 2,278,752 885,001 428,877 ----------- ----------- ----------- ------------ ----------- ----------- Distributions to Shareholders: * Dividends from net investment income (945,546) (1,039,972) (1,072,850) (2,278,752) (1,576,590) (2,359,734) Tax Return of Capital -- -- -- -- -- (91,654) Distributions from net realized gain on investments sold, options and foreign currency transactions (74,253) (241,224) -- -- -- (350,215) ----------- ----------- ----------- ------------ ----------- ----------- Total Distributions to Shareholders (1,019,799) (1,281,196) (1,072,850) (2,278,752) (1,576,590) (2,801,603) ----------- ----------- ----------- ------------ ----------- ----------- From Fund Share Transactions: ** Shares sold 2,548,352 858,489 48,097,999 188,358,513 8,665,787 14,978,386 Shares issued in reorganization - Note F -- -- -- -- 2,569,836 -- Shares issued to shareholders in reinvestment of distributions 1,019,800 1,281,195 944,404 2,374,022 1,576,592 2,801,603 ----------- ----------- ----------- ------------ ----------- ----------- 3,568,152 2,139,684 49,042,403 190,732,535 12,812,215 17,779,989 Less shares repurchased (2,496,893) (2,438,764) (32,610,270) (149,766,710) (4,858,040) (3,217,447) ----------- ----------- ----------- ------------ ----------- ----------- Net Increase (Decrease) 1,071,259 (299,080) 16,432,133 40,965,825 7,954,175 14,562,542 ----------- ----------- ----------- ------------ ----------- ----------- Net Assets: Beginning of period 8,119,547 9,286,532 16,519,374 32,951,507 15,019,397 22,281,983 ----------- ----------- ----------- ------------ ----------- ----------- End of period (including undistributed net investment income (distributions in excess of net investment income) of $5,028, $33,938, $52, $193, ($47,169) and ($126,198), respectively) $9,286,532 $7,218,634 $32,951,507 $73,917,332 $22,281,983 $34,471,799 ----------- ----------- ----------- ------------ ----------- ----------- * Distributions to Shareholders: Per share dividends from net investment income $0.8767 $0.9394 $0.0452 $0.0576 $0.7977 $0.8345 ----------- ----------- ----------- ------------ ----------- ----------- Per share distributions from net realized gain on investments sold, options and foreign currency transactions $0.0657 $0.2290 -- -- -- $0.0945 ----------- ----------- ----------- ------------ ----------- ----------- ** Analysis of Fund Share Transactions: Shares sold 305,760 110,078 48,097,999 188,358,513 872,439 1,598,355 Shares issued in reorganization - Note F -- -- -- -- 253,313 -- Shares issued to shareholders in reinvestment of distributions 122,160 172,859 94,404 2,374,022 159,651 302,236 ----------- ----------- ----------- ------------ ----------- ----------- 427,920 282,937 48,192,403 190,732,535 1,285,403 1,900,591 Less shares repurchased (297,910) (320,600) (32,610,270) (149,766,710) (491,471) (339,848) ----------- ----------- ----------- ------------ ----------- ----------- Net Increase (Decrease) 130,010 (37,663) 15,582,133 40,965,825 793,932 1,560,743 =========== =========== =========== ============ =========== =========== See notes to financial statements. Financial Highlights Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------------------------------------------- V.A. CORE EQUITY FUND ------------------------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------------------------------- 1996(1) 1997 1998 1999 2000 ------------- ------------- ------------- ------------- ------------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $11.11 $14.11 $17.74 $19.70 ------------- ------------- ------------- ------------- ------------- Net Investment Income(2) 0.06 0.16 0.10 0.09 0.08 Net Realized and Unrealized Gain (Loss) on Investments 1.12 3.23 3.90 2.36 (1.48) ------------- ------------- ------------- ------------- ------------- Total from Investment Operations 1.18 3.39 4.00 2.45 (1.40) ------------- ------------- ------------- ------------- ------------- Less Distributions: Dividends from Net Investment Income (0.06) (0.14) (0.10) (0.09) (0.09) Distributions in Excess of Net Investment Income -- -- -- --(3) -- Distributions from Net Realized Gain on Investments Sold (0.01) (0.25) (0.27) (0.40) (0.31) Distributions in Excess of Net Realized Gain on Investments Sold -- -- -- -- (0.38) ------------- ------------- ------------- ------------- ------------- Total Distributions (0.07) (0.39) (0.37) (0.49) (0.78) ------------- ------------- ------------- ------------- ------------- Net Asset Value, End of Period $11.11 $14.11 $17.74 $19.70 $17.52 ============= ============= ============= ============= ============= Total Investment Return(4) 11.78%(5,6) 30.68%(6) 28.42% 13.89% (7.11%) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $1,149 $8,719 $26,691 $44,991 $40,673 Ratio of Expenses to Average Net Assets 0.95%(7) 0.95% 0.95% 0.83% 0.85% Ratio of Adjusted Expenses to Average Net Assets(8) 4.23%(7) 1.59% -- -- -- Ratio of Net Investment Income to Average Net Assets 1.60%(7) 1.24% 0.65% 0.47% 0.45% Portfolio Turnover Rate 24% 53% 55% 77% 97% (1) Commenced 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. The Financial Highlights summarizes the impact of the following factors on a single share for each period indi cated: net investment income, gains (losses), distributions and total investment return of each Fund. It shows how the Fund's net asset value for a share has changed since the end of the previous period. Additionally, important rela tionships between some items presented in the financial statements are expressed in ratio form. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------------------------------------------- V.A. 500 INDEX FUND ------------------------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------------------------------- 1996(1) 1997 1998 1999 2000 ------------- ------------- ------------- ------------- ------------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $10.44 $12.62 $15.23 $18.09 ------------- ------------- ------------- ------------- ------------- Net Investment Income(2) 0.17 0.30 0.20 0.17 0.14 Net Realized and Unrealized Gain (Loss) on Investments 0.98 2.72 3.37 2.98 (1.81) ------------- ------------- ------------- ------------- ------------- Total from Investment Operations 1.15 3.02 3.57 3.15 (1.67) ------------- ------------- ------------- ------------- ------------- Less Distributions: Dividends from Net Investment Income (0.16) (0.30) (0.20) (0.17) (0.15) Distributions from Net Realized Gain on Investments Sold (0.55) (0.54) (0.76) (0.11) (0.06) Distributions in Excess of Net Realized Gain on Investments Sold -- -- -- (0.01) -- ------------- ------------- ------------- ------------- ------------- Total Distributions (0.71) (0.84) (0.96) (0.29) (0.21) ------------- ------------- ------------- ------------- ------------- Net Asset Value, End of Period $10.44 $12.62 $15.23 $18.09 $16.21 ============= ============= ============= ============= ============= Total Investment Return(3,4) 11.49%(5) 29.51% 28.44% 20.81% (9.28%) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $4,049 $20,008 $26,457 $37,953 $25,094 Ratio of Expenses to Average Net Assets 0.60%(6) 0.36% 0.35% 0.35% 0.35% Ratio of Adjusted Expenses to Average Net Assets(7) 1.31%(6) 0.83% 0.92% 0.75% 0.93% Ratio of Net Investment Income to Average Net Assets 4.57%(6) 2.45% 1.44% 1.06% 0.86% Portfolio Turnover Rate 0% 9% 47% 5% 7% (1) Commenced 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) The total returns would have been lower had certain expenses not been reduced during the periods shown. (5) Not annualized. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------------------------------------------- V.A. LARGE CAP GROWTH FUND ------------------------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------------------------------- 1996(1) 1997 1998 1999 2000 ------------- ------------- ------------- ------------- ------------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $9.39 $10.73 $13.37 $15.77 ------------- ------------- ------------- ------------- ------------- Net Investment Loss(2) (0.01) (0.04) --(3) (0.04) (0.08) Net Realized and Unrealized Gain (Loss) on Investments (0.60) 1.38 2.64 2.80 (4.85) ------------- ------------- ------------- ------------- ------------- Total from Investment Operations (0.61) 1.34 2.64 2.76 (4.93) ------------- ------------- ------------- ------------- ------------- Less Distributions: Distributions from Net Realized Gain on Investments Sold -- -- -- (0.36) (0.57) ------------- ------------- ------------- ------------- ------------- Net Asset Value, End of Period $9.39 $10.73 $13.37 $15.77 $10.27 ============= ============= ============= ============= ============= Total Investment Return(4) (6.10%)(5,6) 14.27%(6) 24.60%(6) 20.71%(6) (31.30%) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $994 $3,733 $10,372 $21,872 $12,304 Ratio of Expenses to Average Net Assets 1.00%(7) 1.00% 1.00% 1.00% 0.96% Ratio of Adjusted Expenses to Average Net Assets(8) 4.76%(7) 2.37% 1.33% 1.02% -- Ratio of Net Investment Loss to Average Net Assets (0.23%)(7) (0.39%) (0.00%) (0.25%) (0.59%) Portfolio Turnover Rate 68% 136% 176% 172% 170% (1) Commenced 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. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------- V.A. MID CAP GROWTH FUND ------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------- 1998(1) 1999 2000 - ----------------------------------------------------------------------------------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $11.03 $17.21 ------------- ------------- ------------- Net Investment Income (Loss)(2) 0.01 (0.03) (0.08) Net Realized and Unrealized Gain (Loss) on Investments 1.03 6.23 (1.94) ------------- ------------- ------------- Total from Investment Operations 1.04 6.20 (2.02) ------------- ------------- ------------- Less Distributions: Dividends from Net Investment Income (0.01) -- -- Distributions from Net Realized Gain on Investments Sold -- (0.02) (0.10) Tax Return of Capital --(3) -- -- ------------- ------------- ------------- Total Distributions (0.01) (0.02) (0.10) ------------- ------------- ------------- Net Asset Value, End of Period $11.03 $17.21 $15.09 ============= ============= ============= Total Investment Return(4,5) 10.35%(6) 56.18% (11.73%) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $1,779 $6,363 $11,482 Ratio of Expenses to Average Net Assets 1.00%(7) 1.00% 1.00% Ratio of Adjusted Expenses to Average Net Assets(8) 4.23%(7) 2.36% 1.10% Ratio of Net Investment Income (Loss) to Average Net Assets 0.06%(7) (0.23%) (0.42%) Portfolio Turnover Rate 103% 136% 155% (1) Commenced operations on January 7, 1998. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment. (5) The total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Not annualized. (7) Annualized. (8) Does not take into consideration expense reductions during the periods shown. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------- V.A. RELATIVE VALUE FUND ------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------- 1998(1) 1999 2000 - ----------------------------------------------------------------------------------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $12.03 $18.03 ------------- ------------- ------------- Net Investment Income(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 to Average Net Assets 1.17%(6) 0.66% 0.13% Portfolio Turnover Rate 242% 166% 164% (1) Commenced 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 return would have been lower had certain expenses not been reduced during the period shown. (6) Annualized. (7) Does not take into consideration expense reductions during the period shown. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------------------------------------------- V.A. SMALL CAP GROWTH FUND ------------------------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------------------------------- 1996(1) 1997 1998 1999 2000 ------------- ------------- ------------- ------------- ------------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $9.32 $10.35 $12.00 $19.76 ------------- ------------- ------------- ------------- ------------- Net Investment Income (Loss)(2) 0.02 (0.02) (0.06) (0.10) (0.13) Net Realized and Unrealized Gain (Loss) on Investments (0.68) 1.05 1.71 8.29 (4.33) ------------- ------------- ------------- ------------- ------------- Total from Investment Operations (0.66) 1.03 1.65 8.19 (4.46) ------------- ------------- ------------- ------------- ------------- Less Distributions: Dividends from Net Investment Income (0.02) --(3) -- -- -- Distributions from Net Realized Gain on Investments Sold -- -- -- (0.43) (0.90) ------------- ------------- ------------- ------------- ------------- Total Distributions to Shareholders (0.02) -- -- (0.43) (0.90) ------------- ------------- ------------- ------------- ------------- Net Asset Value, End of Period $9.32 $10.35 $12.00 $19.76 $14.40 ============= ============= ============= ============= ============= Total Investment Return(4,5) (6.62%)(6) 11.06% 15.94% 68.52% (22.33%) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $975 $3,841 $8,232 $20,867 $19,772 Ratio of Expenses to Average Net Assets 1.00%(7) 1.00% 1.00% 1.00% 1.00% Ratio of Adjusted Expenses to Average Net Assets(8) 5.19%(7) 2.72% 1.63% 1.38% 1.10% Ratio of Net Investment Income (Loss) to Average Net Assets 0.62%(7) (0.16%) (0.59%) (0.76%) (0.68%) Portfolio Turnover Rate 31% 79% 93% 120% 104% (1) Commenced 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) The total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Not annualized. (7) Annualized. (8) Does not take into consideration expense reductions during the periods shown. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------------------------------------------- V.A. SOVEREIGN INVESTORS FUND ------------------------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------------------------------- 1996(1) 1997 1998 1999 2000 ------------- ------------- ------------- ------------- ------------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $10.74 $13.59 $15.61 $15.96 ------------- ------------- ------------- ------------- ------------- Net Investment Income(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 to Average Net Assets 1.90%(7) 1.81% 1.88% 1.57% 1.37% Portfolio Turnover Rate 17% 11% 19% 26% 46% (1) Commenced 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. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------------------------------------------- V.A. INTERNATIONAL FUND ------------------------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------------------------------- 1996(1) 1997 1998 1999 2000 ------------- ------------- ------------- ------------- ------------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $11.23 $10.50 $12.18 $15.45 ------------- ------------- ------------- ------------- ------------- Net Investment Income(2) 0.07 0.05 0.07 0.07 0.03 Net Realized and Unrealized Gain (Loss) on Investments 1.20 (0.13) 1.69 3.75 (3.93) ------------- ------------- ------------- ------------- ------------- Total from Investment Operations 1.27 (0.08) 1.76 3.82 (3.90) ------------- ------------- ------------- ------------- ------------- Less Distributions: Dividends from Net Investment Income (0.04) (0.01) (0.07) (0.08) (0.17) Dividends in Excess of Net Investment Income -- -- (0.01) (0.02) -- Distributions from Net Realized Gain on Investments Sold -- (0.64) -- (0.45) (0.37) ------------- ------------- ------------- ------------- ------------- Total Distributions (0.04) (0.65) (0.08) (0.55) (0.54) ------------- ------------- ------------- ------------- ------------- Net Asset Value, End of Period $11.23 $10.50 $12.18 $15.45 $11.01 ============= ============= ============= ============= ============= Total Investment Return(3,4) 12.75%(5) (0.54%) 16.75% 31.55% (25.17%) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $2,267 $3,792 $7,201 $9,375 $7,330 Ratio of Expenses to Average Net Assets 1.15%(6) 1.15% 1.15% 1.15% 1.15% Ratio of Adjusted Expenses to Average Net Assets(7) 3.13%(6) 2.04% 3.13% 2.51% 3.24% Ratio of Net Investment Income to Average Net Assets 2.03%(6) 0.43% 0.59% 0.52% 0.19% Portfolio Turnover Rate 14% 273% 89% 116% 177% (1) Commenced 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) The total returns would have been lower had certain expenses not been reduced during the periods shown. (5) Not annualized. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------------------------- V.A. FINANCIAL INDUSTRIES FUND ------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------------- 1997(1) 1998 1999 2000 ------------- ------------- ------------- ------------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $13.44 $14.45 $14.46 ------------- ------------- ------------- ------------- Net Investment Income(2) 0.11 0.18 0.11 0.06 Net Realized and Unrealized Gain 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 to Average Net Assets 1.32%(7) 1.25% 0.77% 0.36% Portfolio Turnover Rate 11% 38% 72% 41% (1) Commenced 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. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------- V.A. REGIONAL BANK FUND ------------------------------------------------ PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------- 1998(1) 1999 2000 - ----------------------------------------------------------------------------------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $9.28 $8.56 ------------- ------------- ------------- Net Investment Income(2) 0.09 0.12 0.16 Net Realized and Unrealized Gain (Loss) on Investments (0.74) (0.57) 1.34 ------------- ------------- ------------- Total from Investment Operations (0.65) (0.45) 1.50 ------------- ------------- ------------- Less Distributions: Dividends from Net Investment Income (0.07) (0.12) (0.17) Distributions from Net Realized Gain on Investments Sold --(3) (0.15) -- ------------- ------------- ------------- Total Distributions (0.07) (0.27) (0.17) ------------- ------------- ------------- Net Asset Value, End of Period $9.28 $8.56 $9.89 ============= ============= ============= Total Investment Return(4) (6.43%)(5,6) (4.86%) 17.91% Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $20,256 $20,295 $13,733 Ratio of Expenses to Average Net Assets 1.05%(7) 1.00% 1.01% Ratio of Adjusted Expenses to Average Net Assets(8) 1.14%(7) -- -- Ratio of Net Investment Income to Average Net Assets 1.39%(7) 1.30% 1.92% Portfolio Turnover Rate 28% 49% 32% (1) Commenced operations on May 1, 1998. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment. (5) 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. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - --------------------------------------------------- V.A. TECHNOLOGY FUND -------------------- PERIOD ENDED DECEMBER 31, 2000(1) -------------------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 ------------- Net Investment Income(2) 0.03 Net Realized and Unrealized 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(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 to Average Net Assets 0.62%(6) Portfolio Turnover Rate 75% (1) Commenced 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. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------------------------------------------- V.A. BOND FUND ------------------------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------------------------------- 1996(1) 1997 1998 1999 2000 ------------- ------------- ------------- ------------- ------------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $10.19 $10.36 $10.51 $9.81 ------------- ------------- ------------- ------------- ------------- Net Investment Income(2) 0.23 0.68 0.63 0.64 0.64 Net Realized and Unrealized Gain (Loss) on Investments 0.21 0.24 0.32 (0.70) 0.50 ------------- ------------- ------------- ------------- ------------- Total from Investment Operations 0.44 0.92 0.95 (0.06) 1.12 ------------- ------------- ------------- ------------- ------------- Less Distributions: Dividends from Net Investment Income (0.23) (0.68) (0.63) (0.64) (0.64) Distributions from Net Realized Gain on Investments Sold (0.02) (0.07) (0.17) -- -- ------------- ------------- ------------- ------------- ------------- Total Distributions (0.25) (0.75) (0.80) (0.64) (0.64) ------------- ------------- ------------- ------------- ------------- Net Asset Value, End of Period $10.19 $10.36 $10.51 $9.81 $10.29 ============= ============= ============= ============= ============= Total Investment Return(3,4) 4.42%(5) 9.30% 9.41% (0.51%) 11.89% Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $1,056 $3,682 $10,669 $12,531 $25,173 Ratio of Expenses to Average Net Assets 0.75%(6) 0.75% 0.75% 0.75% 0.75% Ratio of Adjusted Expenses to Average Net Assets(7) 4.15%(6) 2.53% 1.34% 1.01% 0.92% Ratio of Net Investment Income to Average Net Assets 6.69%(6) 6.57% 5.93% 6.39% 6.47% Portfolio Turnover Rate 45% 193% 367% 307% 298% (1) Commenced 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) The total returns would have been lower had certain expenses not been reduced during the periods shown. (5) Not annualized. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------- V.A. HIGH YIELD BOND FUND ------------------------------------------------ PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------- 1998(1) 1999 2000 - ----------------------------------------------------------------------------------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $8.22 $8.31 ------------- ------------- ------------- Net Investment Income(2) 0.90 0.88 0.94 Net Realized and Unrealized Gain (Loss) on Investments (1.82) 0.16 (1.40) ------------- ------------- ------------- Total from Investment Operations (0.92) 1.04 (0.46) ------------- ------------- ------------- Less Distributions: Dividends from Net Investment Income (0.84) (0.88) (0.94) Distributions from Net Realized Gain on Investments Sold -- (0.07) (0.23) Tax Return of Capital (0.02) -- -- ------------- ------------- ------------- Total Distributions (0.86) (0.95) (1.17) ------------- ------------- ------------- Net Asset Value, End of Period $8.22 $8.31 $6.68 ============= ============= ============= Total Investment Return(3,4) (9.80%)(5) 13.12% (6.08%) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $8,120 $9,287 $7,219 Ratio of Expenses to Average Net Assets 0.85%(6) 0.85% 0.85% Ratio of Adjusted Expenses to Average Net Assets(7) 1.15%(6) 1.03% 1.24% Ratio of Net Investment Income to Average Net Assets 9.85%(6) 10.56% 12.12% Portfolio Turnover Rate 102% 122% 56% (1) Commenced 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) The total returns would have been lower had certain expenses not been reduced during the periods shown. (5) Not annualized. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------------------------------------------- V.A. MONEY MARKET FUND ------------------------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------------------------------- 1996(1) 1997 1998 1999 2000 ------------- ------------- ------------- ------------- ------------- Per Share Operating Performance Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 ------------- ------------- ------------- ------------- ------------- Net Investment Income(2) 0.02 0.05 0.05 0.05 0.06 ------------- ------------- ------------- ------------- ------------- Less Distributions: Dividends from Net Investment Income (0.02) (0.05) (0.05) (0.05) (0.06) ------------- ------------- ------------- ------------- ------------- Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 ============= ============= ============= ============= ============= Total Investment Return(3) 1.61%(4,5) 4.88%(5) 4.87% 4.58% 5.90% Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $207 $8,377 $16,519 $32,952 $73,917 Ratio of Expenses to Average Net Assets 0.75%(6) 0.75% 0.74% 0.66% 0.60% Ratio of Adjusted Expenses to Average Net Assets(7) 27.48%(6) 1.27% -- -- -- Ratio of Net Investment Income to Average Net Assets 4.68%(6) 4.86% 4.70% 4.55% 5.86% (1) Commenced 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. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------------------------------------------- V.A. STRATEGIC INCOME FUND ------------------------------------------------------------------------------------- PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------------------------------- 1996(1) 1997 1998 1999 2000 ------------- ------------- ------------- ------------- ------------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $10.30 $10.47 $10.10 $9.77 ------------- ------------- ------------- ------------- ------------- Net Investment Income(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 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) Commenced 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) Portfolio turnover rate excludes merger activity. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Core Equity Fund Schedule of Investments December 31, 2000 - ------------------------------------------------------------------------------ The Schedule of Investments is a complete list of all securities owned by the V.A. Core Equity Fund on December 31, 2000. It is divided into two main categories: common stocks and short-term investments. Common stocks are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- ------------ ------------ COMMON STOCKS Advertising (1.86%) Interpublic Group of Cos., Inc. (The) 8,400 $357,525 Omnicom Group, Inc. 4,800 397,800 ------------ 755,325 ------------ Aerospace (1.93%) General Dynamics Corp. 3,700 288,600 United Technologies Corp. 6,300 495,338 ------------ 783,938 ------------ Automobile/Trucks (1.01%) Ford Motor Co. 12,800 300,000 Lear Corp.* 4,400 109,175 ------------ 409,175 ------------ Banks - United States (6.08%) Bank of America Corp. 10,000 458,750 Bank of New York Co., Inc. (The) 9,600 529,800 Comerica, Inc. 3,900 231,563 Firstar Corp. 8,500 197,625 FleetBoston Financial Corp. 15,800 593,488 J.P. Morgan Chase & Co. 1,800 297,900 Mellon Financial Corp. 3,300 162,319 ------------ 2,471,445 ------------ Beverages (0.56%) Anheuser-Busch Cos., Inc. 5,000 227,500 ------------ Broker Services (0.47%) Merrill Lynch & Co., Inc. 2,800 190,925 ------------ Building (0.61%) Black & Decker Corp. (The) 6,300 247,275 ------------ Chemicals (1.14%) Air Products & Chemicals, Inc. 5,200 213,200 Dow Chemical Co. 6,900 252,713 ------------ 465,913 ------------ Computers (13.95%) Adobe Systems, Inc. 1,700 98,919 America Online, Inc.* 10,600 368,880 Cisco Systems, Inc.* 27,600 1,055,700 Compaq Computer Corp. 5,700 85,785 EMC Corp.* 8,900 591,850 First Data Corp. 13,500 711,281 Hewlett-Packard Co. 6,600 208,312 International Business Machines Corp. 5,400 459,000 Microsoft Corp.* 17,900 776,413 Network Appliance, Inc.* 1,200 77,025 Oracle Corp.* 17,700 514,406 Siebel Systems, Inc.* 1,800 121,725 Sun Microsystems, Inc.* 11,400 317,775 VERITAS Software Corp.* 2,500 218,750 Yahoo! Inc.* 2,200 66,378 ------------ 5,672,199 ------------ Diversified Operations (3.02%) Honeywell International, Inc. 2,800 132,475 Illinois Tool Works, Inc. 3,100 184,644 Minnesota Mining & Manufacturing Co. 3,200 385,600 Tyco International Ltd. 9,500 527,250 ------------ 1,229,969 ------------ Electronics (9.31%) Altera Corp.* 3,000 78,937 Analog Devices, Inc.* 2,000 102,375 Applied Materials, Inc.* 3,100 118,381 General Electric Co. 39,300 1,883,944 Intel Corp. 23,600 709,475 Linear Technology Corp. 1,500 69,375 Maxim Integrated Products, Inc.* 2,200 105,187 Motorola, Inc. 7,600 153,900 Parker-Hannifin Corp. 3,700 163,262 Texas Instruments, Inc. 6,600 312,675 Xilinx, Inc.* 1,900 87,637 ------------ 3,785,148 ------------ Fiber Optics (0.25%) JDS Uniphase Corp.* 2,400 100,050 ------------ Finance (4.40%) Citigroup, Inc. 35,033 1,788,873 ------------ Insurance (4.28%) American International Group, Inc. 3,100 305,544 Hartford Financial Services Group, Inc. (The) 5,400 381,375 Lincoln National Corp. 5,200 246,025 Marsh & McLennan Cos., Inc. 1,300 152,100 St. Paul Cos., Inc. (The) 5,600 304,150 Torchmark Corp. 4,200 161,437 XL Capital Ltd. (Class A) 2,200 192,225 ------------ 1,742,856 ------------ Leisure (0.48%) Disney (Walt) Co. (The) 6,700 193,881 ------------ Machinery (0.56%) Ingersoll-Rand Co. 5,400 226,125 ------------ Media (3.15%) AT&T Corp. - Liberty Media Group* 12,900 174,956 Clear Channel Communications, Inc.* 4,700 227,656 Infinity Broadcasting Corp. (Class A)* 4,900 136,894 Time Warner, Inc. 3,000 156,720 Viacom, Inc. (Class B)* 12,507 584,702 ------------ 1,280,928 ------------ Medical (18.01%) Abbott Laboratories 7,900 382,656 Allergan, Inc. 3,200 309,800 ALZA Corp.* 5,400 229,500 American Home Products Corp. 5,700 362,235 Baxter International, Inc. 5,900 521,044 Bristol-Myers Squibb Co. 12,900 953,794 Johnson & Johnson 8,800 924,550 Lilly (Eli) & Co. 1,300 120,981 Merck & Co., Inc. 14,100 1,320,113 Pfizer, Inc. 32,100 1,476,600 Pharmacia Corp. 4,700 286,700 Schering-Plough Corp. 4,800 272,400 St. Jude Medical, Inc. * 2,700 165,881 ------------ 7,326,254 ------------ Mortgage Banking (1.68%) Fannie Mae 7,900 685,325 ------------ Office (0.46%) Avery Dennison Corp. 3,400 186,575 ------------ Oil & Gas (7.40%) Apache Corp. 3,300 231,206 Chevron Corp. 2,900 244,869 El Paso Energy Corp. 6,300 451,238 Exxon Mobil Corp. 14,112 1,226,862 Kerr-McGee Corp. 2,400 160,650 Royal Dutch Petroleum Co., American Depositary Receipt (Netherlands) 8,900 539,006 USX - Marathon Group 5,600 155,400 ------------ 3,009,231 ------------ Paper & Paper Products (0.62%) Kimberly-Clark Corp. 3,600 254,484 ------------ Retail (6.45%) CVS Corp. 3,800 227,762 Home Depot, Inc. (The) 8,100 370,069 Intimate Brands, Inc. 4,500 67,500 Kohl's Corp.* 7,800 475,800 Limited, Inc. (The) 7,100 121,144 Lowe's Cos., Inc. 6,200 275,900 RadioShack Corp. 3,500 149,844 TJX Cos., Inc. 8,800 244,200 Wal-Mart Stores, Inc. 13,000 690,625 ------------ 2,622,844 ------------ Soap & Cleaning Preparations (0.38%) Procter & Gamble Co. (The) 2,000 156,875 ------------ Telecommunications (4.37%) Comverse Technology, Inc.* 1,500 162,937 Corning, Inc. 4,200 221,812 Nortel Networks Corp. (Canada) 12,200 391,163 Qwest Communications International, Inc.* 9,100 373,100 Sprint Corp. 7,900 160,469 Sprint PCS* 3,500 71,531 Verizon Communications, Inc. 7,900 395,988 ------------ 1,777,000 ------------ Tobacco (0.72%) Philip Morris Cos., Inc. 6,700 294,800 ------------ Utilities (5.09%) BellSouth Corp. 4,300 176,031 Dominion Resources, Inc. 5,500 368,500 Duke Energy Corp. 6,900 588,225 Exelon Corp. 4,900 344,029 SBC Communications, Inc. 12,400 592,100 ------------ 2,068,885 ------------ TOTAL COMMON STOCKS (Cost $36,110,454) (98.24%) 39,953,798 ------------ INTEREST PAR VALUE RATE (000s OMITTED) -------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (1.79%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 12-29-00, due 01-02-01 (Secured by U.S. Treasury Bonds, 6.750% thru 8.875%, due 08-15-17 thru 08-15-26) - Note B 5.95% $730 730,000 ------------ Corporate Savings Account (0.00%) Investors Bank & Trust Company Daily Interest Savings Account Current Rate 5.20% 735 ------------ TOTAL SHORT-TERM INVESTMENTS (1.79%) 730,735 --------- ------------ TOTAL INVESTMENTS (100.03%) 40,684,533 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (0.03%) (11,983) --------- ------------ TOTAL NET ASSETS (100.00%) $40,672,550 ========= ============ * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. 500 Index Fund Schedule of Investments December 31, 2000 - ------------------------------------------------------------------------------ The Schedule of Investments is a complete list of all securities owned by the V.A. 500 Index Fund on December 31, 2000. It is divided into two main categories: common stocks and short-term investments. Common stocks are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- ------------ ------------ COMMON STOCKS Advertising (0.23%) Interpublic Group of Companies, Inc. (The) 629 $26,772 Omnicom Group, Inc. 362 30,001 ------------ 56,773 ------------ Aerospace (1.19%) Boeing Co. (The) 1,817 119,922 General Dynamics Corp. 407 31,746 Goodrich (B.F.) Co. (The) 208 7,566 Lockheed Martin Corp. 881 29,910 Northrop Grumman Corp. 147 12,201 Raytheon Co. (Class B) 695 21,588 United Technologies Corp. 958 75,323 ------------ 298,256 ------------ Automobile/Trucks (0.77%) Cummins Engine Co., Inc. 85 3,225 Dana Corp. 302 4,624 Delphi Automotive Systems Corp. 1,145 12,881 Eaton Corp. 143 10,752 Ford Motor Co. 3,833 89,836 General Motors Corp. 1,155 58,833 PACCAR, Inc. 156 7,683 Ryder System, Inc. 122 2,028 Visteon Corp. 268 3,082 ------------ 192,944 ------------ Banks - United States (5.60%) AmSouth Bancorp. 768 11,712 Bank of America Corp. 3,329 152,718 Bank of New York Co., Inc. 1,514 83,554 Bank One Corp. 2,366 86,655 BB&T Corp. 811 30,260 Chase Manhattan Corp. 2,680 121,772 Comerica, Inc. 321 19,059 Fifth Third Bancorp 945 56,464 First Union Corp. 2,003 55,708 Firstar Corp. 1,943 45,175 FleetBoston Financial Corp. 1,851 69,528 Huntington Bancshares, Inc. 513 8,304 KeyCorp. 871 24,388 Mellon Financial Corp. 998 49,089 Morgan (J.P.) & Co., Inc. 327 54,118 National City Corp. 1,244 35,765 Northern Trust Corp. 454 37,029 Old Kent Financial Corp. 283 12,381 PNC Bank Corp. 591 43,180 Regions Financial Corp. 453 12,373 SouthTrust Corp. 344 13,997 State Street Corp. 330 40,989 Summit Bancorp. 357 13,633 SunTrust Banks, Inc. 606 38,178 Synovus Financial Corp. 581 15,651 U.S. Bancorp 1,540 44,949 Union Planters Corp. 276 9,867 Wachovia Corp. 416 24,180 Wells Fargo Co. 3,496 194,684 ------------ 1,405,360 ------------ Beverages (2.28%) Anheuser-Busch Cos., Inc. 1,845 83,947 Brown-Forman Corp. 140 9,310 Coca-Cola Co. (The) 5,072 309,075 Coca-Cola Enterprises, Inc. 855 16,245 Coors (Adolph) Co. (Class B) 75 6,023 PepsiCo, Inc. 2,952 146,309 ------------ 570,909 ------------ Broker Services (1.67%) Bear Stearns Cos., Inc. 218 11,050 Lehman Brothers Holdings, Inc. 488 33,001 Merrill Lynch & Co., Inc. 1,657 112,987 Morgan Stanley Dean Witter & Co. 2,292 181,641 Schwab (Charles) Corp. 2,830 80,301 ------------ 418,980 ------------ Building (0.57%) Black & Decker Corp. 166 6,515 Centex Corp. 121 4,545 Danaher Corp. 290 19,829 Fluor Corp. 155 5,125 Georgia-Pacific Corp. 460 14,317 Kaufman & Broad Home Corp. 88 2,964 Louisiana-Pacific Corp. 213 2,157 Masco Corp. 913 23,453 Pulte Corp. 83 3,502 Sherwin-Williams Co. 328 8,631 Snap-on, Inc. 119 3,317 Stanley Works (The) 176 5,489 Vulcan Materials Co. 207 9,910 Weyerhauser Co. 448 22,736 Willamette Industries, Inc. 223 10,467 ------------ 142,957 ------------ Business Services - Misc. (0.40%) Block, H & R, Inc. 187 7,737 Cendant Corp. * 1,491 14,351 Convergys Corp.* 315 14,273 Equifax, Inc. 290 8,319 Moody's Corp. 332 8,528 Paychex, Inc. 761 37,004 Robert Half International, Inc. 363 9,620 ------------ 99,832 ------------ Chemicals (0.65%) Air Products & Chemicals, Inc. 469 19,229 Dow Chemical Co. 1,388 50,835 Eastman Chemical Co. 157 7,654 Engelhard Corp. 261 5,318 FMC Corp. * 62 4,445 Great Lakes Chemical Corp. 103 3,830 Hercules, Inc. 220 4,194 PPG Industries, Inc. 345 15,978 Praxair, Inc. 324 14,378 Rohm & Haas Co. 449 16,304 Sigma-Aldrich Corp. 158 6,211 Union Carbide Corp. 276 14,852 ------------ 163,228 ------------ Computers (12.22%) Adaptec, Inc.* 202 2,070 Adobe Systems, Inc. 492 28,628 Apple Computer, Inc. * 665 9,892 Autodesk, Inc. 118 3,179 Automatic Data Processing, Inc. 1,291 81,736 BMC Software, Inc.* 502 7,028 Cabletron Systems, Inc.* 377 5,679 Ceridian Corp.* 298 5,941 Cisco Systems, Inc.* 14,719 563,002 Citrix Systems, Inc.* 379 8,527 Compaq Computer Corp. 3,477 52,329 Computer Associates International, Inc. 1,187 23,146 Computer Sciences Corp.* 344 20,683 Compuware Corp.* 747 4,669 Dell Computer Corp.* 5,291 92,262 Electronic Data Systems Corp. 956 55,209 EMC Corp.* 4,475 297,587 First Data Corp. 808 42,571 Gateway 2000, Inc.* 661 11,891 Hewlett-Packard Co. 4,044 127,639 IMS Health, Inc. 601 16,227 International Business Machines Corp. 3,588 304,980 Intuit, Inc.* 422 16,643 Lexmark International Group, Inc. (Class A)* 260 11,521 Mercury Interactive Corp.* 165 14,891 Microsoft Corp.* 10,905 473,004 NCR Corp.* 197 9,678 Network Appliance, Inc.* 646 41,495 Novell, Inc.* 671 3,502 Oracle Corp.* 11,448 332,708 Palm, Inc.* 1,157 32,758 Parametric Technology Corp.* 557 7,485 PeopleSoft, Inc.* 584 21,718 Sabre Holdings Corp.* 264 11,385 Sapient Corp.* 248 2,961 Siebel Systems, Inc.* 878 59,375 Sun Microsystems, Inc.* 6,585 183,557 Unisys Corp.* 640 9,360 VERITAS Software Corp.* 798 69,825 ------------ 3,066,741 ------------ Consumer Products - Misc. (0.00%) American Greetings Corp. (Class A) 130 1,227 ------------ Containers (0.06%) Ball Corp. 58 2,672 Bemis Co., Inc. 109 3,658 Pactiv Corp.* 323 3,997 Sealed Air Corp. * 171 5,216 ------------ 15,543 ------------ Cosmetics & Personal Care (0.44%) Alberto Culver Co. (Class B) 114 4,881 Avon Products, Inc. 487 23,315 Gillette Co. 2,154 77,813 International Flavors & Fragrances, Inc. 200 4,062 ------------ 110,071 ------------ Diversified Operations (2.34%) Crane Co. 123 3,498 Du Pont (E.I.) De Nemours & Co. 2,133 103,051 Fortune Brands, Inc. 316 9,480 Honeywell International, Inc. 1,631 77,167 Illinois Tool Works, Inc. 618 36,810 ITT Industries, Inc. 180 6,975 Johnson Controls, Inc. 176 9,152 Loews Corp. 202 20,920 Minnesota Mining & Manufacturing Co. 807 97,243 National Service Industries, Inc. 84 2,158 Textron, Inc. 291 13,532 TRW, Inc. 254 9,843 Tyco International Ltd. 3,577 198,524 ------------ 588,353 ------------ Electronics (9.21%) Advanced Micro Devices, Inc.* 641 8,854 Agilent Technologies, Inc.* 926 50,698 Altera Corp.* 811 21,339 American Power Conversion Corp.* 398 4,925 Analog Devices, Inc.* 731 37,418 Applied Materials, Inc.* 1,659 63,353 Broadcom Corp. (Class A)* 481 40,644 Conexant Systems, Inc.* 466 7,165 Emerson Electric Co. 874 68,882 General Electric Co. 20,265 971,453 Grainger (W.W.), Inc. 192 7,008 Intel Corp. 13,764 416,361 KLA-Tencor Corp.* 380 12,801 Linear Technology Corp. 648 29,970 LSI Logic Corp.* 653 11,160 Maxim Integrated Products, Inc.* 581 27,779 Micron Technology, Inc. 1,160 41,180 Molex Inc. 400 14,200 Motorola, Inc. 4,467 90,457 National Semiconductor Corp.* 365 7,346 Novellus Systems, Inc.* 269 9,667 Parker- Hannifin Corp. 238 10,502 PerkinElmer, Inc. 102 10,710 Power-One, Inc.* 161 6,329 QLogic Corp.* 187 14,399 Rockwell International Corp. 375 17,859 Sanmina Corp.* 310 23,754 Solectron Corp.* 1,302 44,138 Tektronix, Inc. 193 6,502 Teradyne, Inc.* 357 13,298 Texas Instruments, Inc. 3,538 167,613 Thomas & Betts Corp. 119 1,926 Vitesse Semiconductor Corp.* 367 20,300 Xilinx, Inc.* 674 31,088 ------------ 2,311,078 ------------ Fiber Optics (0.72%) Corning, Inc. 1,881 99,340 JDS Uniphase Corp.* 1,966 81,958 ------------ 181,298 ------------ Finance (4.09%) American Express Co. 2,720 149,430 Capital One Financial Corp. 403 26,522 Charter One Financial, Inc. 425 12,272 CIT Group, Inc. (The) (Class A) 536 10,787 Citigroup, Inc. 10,281 524,974 Franklin Resources, Inc. 498 18,974 Golden West Financial Corp. 324 21,870 Household International, Inc. 963 52,965 MBNA Corp. 1,742 64,345 Price (T. Rowe) Associates, Inc. 248 10,482 Providian Financial Corp. 585 33,638 Stilwell Financial, Inc. 455 17,944 USA Education, Inc. 336 22,848 Washington Mutual, Inc. 1,103 58,528 ------------ 1,025,579 ------------ Food (1.42%) Archer-Daniels-Midland Co. 1,295 19,425 Campbell Soup Co. 861 29,812 ConAgra, Inc. 1,091 28,366 General Mills, Inc. 578 25,757 Heinz (H.J.) Co. 709 33,633 Hershey Foods Corp. 278 17,896 Kellogg Co. 830 21,787 Quaker Oats Co. 268 26,097 Ralston Purina Group 628 16,407 Sara Lee Corp. 1,705 41,879 Unilever NV, American Depositary Receipts (ADR) (Netherlands) 1,169 73,574 Wrigley (WM) Jr. Co. 231 22,133 ------------ 356,766 ------------ Furniture (0.03%) Leggett & Platt, Inc. 401 7,594 ------------ Household (0.11%) Maytag Corp. 157 5,073 Newell Rubbermaid, Inc. 545 12,399 Tupperware Corp. 118 2,412 Whirlpool Corp. 136 6,486 ------------ 26,370 ------------ Instruments - Scientific (0.23%) Applera Corp. - Applied Biosystems Group 430 40,447 Millipore Corp. 95 5,985 Thermo Electron Corp.* 368 10,948 ------------ 57,380 ------------ Insurance (4.15%) Aetna, Inc. 289 11,867 AFLAC, Inc. 542 39,126 Allstate Corp. (The) 1,496 65,169 Ambac Financial Group, Inc. 215 12,537 American General Corp. 514 41,891 American International Group, Inc. 4,761 469,256 Aon Corp. 524 17,947 Chubb Corp. (The) 358 30,967 CIGNA Corp. 314 41,542 Cincinnati Financial Corp. 329 13,016 Conseco, Inc. 665 8,770 Hartford Financial Services Group, Inc. (The) 461 32,558 Jefferson Pilot Corp. 211 15,772 Lincoln National Corp. 392 18,546 Marsh & McLennan Cos., Inc. 563 65,871 MBIA, Inc. 201 14,899 MetLife, Inc. 1,564 54,740 MGIC Investment Corp. 218 14,701 Progressive Corp. 150 15,544 SAFECO Corp. 261 8,580 St. Paul Cos., Inc. (The) 445 24,169 Torchmark Corp. 258 9,917 UnumProvident Corp. 493 13,249 ------------ 1,040,634 ------------ Internet Services (0.83%) America Online, Inc.* 4,777 166,240 BroadVision, Inc.* 550 6,497 Yahoo! Inc.* 1,142 34,456 ------------ 207,193 ------------ Leisure (1.10%) Brunswick Corp. 179 2,942 Carnival Corp. (Class A) 1,195 36,821 Disney (Walt) Co., (The) 4,263 123,361 Eastman Kodak Co. 614 24,176 Harley-Davidson, Inc. 620 24,645 Harrah's Entertainment, Inc. * 239 6,304 Hasbro, Inc. 352 3,740 Hilton Hotels Corp. 753 7,906 Marriott International, Inc. (Class A) 491 20,745 Mattel, Inc. 873 12,606 Starwood Hotels & Resorts Worldwide, Inc. 395 13,924 ------------ 277,170 ------------ Machinery (0.38%) Briggs & Stratton Corp. 44 1,952 Caterpiller Tractor, Inc. 703 33,261 Cooper Industries, Inc. 191 8,774 Deere & Co. 480 21,990 Dover Corp. 415 16,833 Ingersoll-Rand Co. 328 13,735 ------------ 96,545 ------------ Media (2.19%) Clear Channel Communications, Inc.* 1,196 57,931 Comcast Corp. 1,846 77,070 Dow Jones & Co., Inc. 179 10,136 Gannett Co., Inc. 539 33,991 Harcourt General, Inc. 150 8,580 Knight-Ridder, Inc. 150 8,531 McGraw-Hill Cos., Inc. (The) 400 23,450 Meredith Corp. 102 3,283 New York Times Co. (Class A) 333 13,341 Time Warner, Inc. 2,715 141,832 Tribune Co. 618 26,111 Viacom, Inc. (Class B)* 3,094 144,645 ------------ 548,901 ------------ Medical (13.36%) Abbott Laboratories 3,163 153,208 Allergan, Inc. 269 26,043 ALZA Corp.* 484 20,570 American Home Products Corp. 2,680 170,314 Amgen, Inc.* 2,113 135,100 Bard (C.R.), Inc. 104 4,842 Bausch & Lomb, Inc. 109 4,408 Baxter International, Inc. 602 53,164 Becton, Dickinson & Co. 518 17,936 Biogen, Inc.* 303 18,199 Biomet, Inc. 365 14,486 Boston Scientific Corp.* 829 11,347 Bristol-Myers Squibb Co. 3,999 295,676 Cardinal Health, Inc. 571 56,886 Chiron Corp. * 392 17,444 Forest Laboratories, Inc.* 179 23,785 Guidant Corp. 629 33,927 HCA-The Healthcare Co. 1,130 49,731 HEALTHSOUTH Corp.* 790 12,887 Humana, Inc.* 346 5,276 Johnson & Johnson 2,843 298,693 King Pharmaceuticals, Inc.* 345 17,832 Lilly (Eli) & Co. 2,305 214,509 Manor Care, Inc.* 210 4,331 McKesson HBOC, Inc. 581 20,852 MedImmune, Inc.* 431 20,553 Medtronic, Inc. 2,457 148,341 Merck & Co., Inc. 4,716 441,535 Pall Corp. 252 5,371 Pfizer Inc. 12,903 593,538 Pharmacia Corp. 2,638 160,918 Quintiles Transnational Corp.* 236 4,941 Schering-Plough Corp. 2,990 169,683 St. Jude Medical, Inc. * 174 10,690 Stryker Corp. 400 20,236 Tenet Healthcare Corp.* 648 28,796 UnitedHealth Group, Inc. 652 40,017 Watson Pharmaceutical, Inc.* 210 10,749 Wellpoint Health Networks, Inc.* 128 14,752 ------------ 3,351,566 ------------ Metal (0.52%) Alcan Aluminium Ltd. (Canada) 661 22,598 Alcoa Inc. 1,769 59,261 Barrick Gold Corp. (Canada) 810 13,268 Freeport-McMoran Copper & Gold, Inc. (Class B)* 304 2,603 Homestake Mining Co. 538 2,253 Inco, Ltd. (Canada) 372 6,235 Newmont Mining Corp. 344 5,869 Phelps Dodge Corp. 161 8,986 Placer Dome, Inc. (Canada) 670 6,449 Timken Co. (The) 123 1,860 Worthington Industries, Inc. 175 1,411 ------------ 130,793 ------------ Mortgage Banking (1.15%) Countrywide Credit Industries, Inc. 234 11,758 Fannie Mae 2,060 178,705 Freddie Mac 1,422 97,940 ------------ 288,403 ------------ Office (0.16%) Avery Dennison Corp. 226 12,402 Deluxe Corp. 148 3,740 Pitney Bowes, Inc. 516 17,093 Xerox Corp. 1,365 6,313 ------------ 39,548 ------------ Oil & Gas (6.92%) Amerada Hess Corp. 181 13,224 Anadarko Petroleum Corp. 509 36,180 Apache Corp. 253 17,726 Ashland, Inc. 143 5,132 Baker Hughes, Inc. 679 28,221 Burlington Resources, Inc. 440 22,220 Chevron Corp. 1,313 110,866 Coastal Corp. (The) 440 38,857 Conoco, Inc. (Class B) 1,275 36,895 Devon Energy Corp. 262 15,974 El Paso Energy Corp. 475 34,022 Enron Corp. 1,527 126,932 EOG Resources, Inc. 239 13,070 Exxon Mobil Corp. 7,109 618,039 Halliburton Co. 905 32,806 Kerr-McGee Corp. 193 12,919 McDermott International, Inc. 124 1,333 Nabors Industries, Inc.* 301 17,804 Occidental Petroleum Corp. 755 18,309 Phillips Petroleum Co. 522 29,689 Rowan Cos., Inc.* 193 5,211 Royal Dutch Petroleum Co. (ADR) (Netherlands) 4,385 265,567 Schlumberger Ltd. 1,171 93,607 Sunoco, Inc. 174 5,862 Texaco, Inc. 1,125 69,891 Tosco Corp. 296 10,046 Transocean Sedco Forex, Inc. 431 19,826 Unocal Corp. 497 19,228 USX - Marathon Group 635 17,621 ------------ 1,737,077 ------------ Paper & Paper Products (0.56%) Boise Cascade Corp. 117 3,934 International Paper Co. 984 40,159 Kimberly-Clark Corp. 1,092 77,193 Mead Corp. (The) 206 6,463 Potlatch Corp. 58 1,947 Temple-Inland, Inc. 101 5,416 Westvaco Corp. 206 6,013 ------------ 141,125 ------------ Pollution Control (0.16%) Allied Waste Industries, Inc.* 402 5,854 Waste Management, Inc. 1,271 35,270 ------------ 41,124 ------------ Printing - Commercial (0.03%) Donnelley (R.R.) & Sons 250 6,750 ------------ Retail (6.32%) Albertson's, Inc. 861 22,816 AutoZone, Inc.* 261 7,438 Bed Bath & Beyond, Inc.* 579 12,955 Best Buy Co., Inc.* 425 12,564 Circuit City Stores-Circuit City Group 420 4,830 Consolidated Stores Corp.* 228 2,422 Costco Wholesale Corp. 915 36,543 CVS Corp. 801 48,010 Darden Restaurants, Inc. 244 5,581 Dillards, Inc. 188 2,221 Dollar General Corp. 674 12,722 Federated Department Stores, Inc. * 413 14,455 Gap, Inc. (The) 1,738 44,319 Genuine Parts Co. 354 9,270 Home Depot, Inc. (The) 4,736 216,376 Kmart Corp.* 989 5,254 Kohl's Corp.* 678 41,358 Kroger Co.* 1,683 45,546 Limited, Inc. (The) 870 14,844 Longs Drug Stores Corp. 76 1,833 Lowe's Cos., Inc. 783 34,843 May Department Stores 609 19,945 McDonald's Corp. 2,682 91,188 Nordstrom, Inc. 264 4,802 Office Depot, Inc.* 609 4,339 Penney (J. C.) Co., Inc. 536 5,829 RadioShack Corp. 380 16,269 Reebok International Ltd. * 117 3,199 Safeway, Inc.* 1,025 64,063 Sears, Roebuck & Co. 683 23,734 Staples, Inc.* 929 10,974 Starbucks Corp.* 383 16,948 SUPERVALU, Inc. 271 3,760 SYSCO Corp. 1,367 41,010 Target Corp. 1,832 59,082 Tiffany & Co. 298 9,424 TJX Cos., Inc. 575 15,956 Toys "R" Us, Inc.* 417 6,959 Tricon Global Restaurants, Inc. * 299 9,867 Walgreen Co. 2,072 86,636 Wal-Mart Stores, Inc. 9,135 485,297 Wendy's International, Inc. 233 6,116 Winn-Dixie Stores, Inc. 285 5,522 ------------ 1,587,119 ------------ Rubber - Tires & Misc. (0.04%) Cooper Tire & Rubber Co. 148 1,572 Goodyear Tire & Rubber Co. (The) 322 7,403 ------------ 8,975 ------------ Shoes & Related Apparel (0.12%) Nike, Inc. (Class B) 552 30,809 ------------ Soap & Cleaning Preparations (1.25%) Clorox Co. 482 17,111 Colgate-Palmolive Co. 1,170 75,523 Ecolab, Inc. 260 11,229 Proctor & Gamble Co. (The) 2,666 209,114 ------------ 312,977 ------------ Steel (0.05%) Allegheny Technologies, Inc. 164 2,603 Nucor Corp. 159 6,310 USX-U.S. Steel Group, Inc. 182 3,276 ------------ 12,189 ------------ Telecommunications (7.46%) ADC Telecommunications, Inc.* 1,579 28,619 ALLTEL Corp. 639 39,898 Andrew Corp.* 166 3,610 AT&T Corp. 7,676 132,891 Avaya, Inc.* 569 5,868 BellSouth Corp. 3,821 156,422 CenturyTel, Inc. 288 10,296 Comverse Technology, Inc.* 337 36,607 Global Crossing Ltd.* (Bermuda) 1,811 25,920 Lucent Technologies, Inc. 6,830 92,205 Nextel Communications, Inc. (Class A)* 1,558 38,560 Nortel Networks Corp. (Canada) 6,335 203,116 QUALCOMM, Inc.* 1,529 125,665 Qwest Communications International, Inc.* 3,387 138,867 SBC Communications, Inc. 6,923 330,573 Scientific-Atlanta, Inc. 330 10,746 Sprint Corp. 1,809 36,745 Sprint PCS* 1,907 38,974 Symbol Technologies, Inc. 299 10,764 Tellabs, Inc.* 840 47,460 Verizon Communications, Inc. 5,520 276,690 WorldCom, Inc.* 5,888 82,432 ------------ 1,872,928 ------------ Textile (0.05%) Liz Claiborne, Inc. 106 4,412 VF Corp. 233 8,444 ------------ 12,856 ------------ Tobacco (0.83%) Philip Morris Cos., Inc. 4,547 200,068 UST, Inc. 333 9,345 ------------ 209,413 ------------ Transport (0.64%) AMR Corp.* 308 12,070 Burlington Northern Santa Fe Corp. 807 22,848 CSX Corp. 444 11,516 Delta Air Lines, Inc. 251 12,597 FedEx Corp.* 583 23,297 Navistar International Corp. * 121 3,169 Norfolk Southern Corp. 785 10,450 Southwest Airlines Co. 1,026 34,402 Union Pacific Corp. 507 25,730 US Airways Group, Inc.* 137 5,557 ------------ 161,636 ------------ Utilities (2.98%) AES Corp. (The)* 938 51,942 Allegheny Energy, Inc. 226 10,890 Ameren Corp. 281 13,014 American Electric Power Co., Inc. 659 30,643 Calpine Corp.* 576 25,956 Cinergy Corp. 325 11,416 CMS Energy Corp. 247 7,827 Consolidated Edison, Inc. 434 16,709 Constellation Energy Group, Inc. 308 13,879 Dominion Resources, Inc. 489 32,763 DTE Energy Co. 292 11,370 Duke Energy Corp. 754 64,278 Dynegy, Inc. (Class A) 661 37,057 Edison International 666 10,406 Entergy Corp. 456 19,294 Exelon Corp. 651 45,707 FirstEnergy Corp. * 461 14,550 FPL Group, Inc. 362 25,973 GPU, Inc. 248 9,129 KeySpan Corp. 275 11,653 Kinder Morgan, Inc. 234 12,212 Massey Energy Co. 155 1,976 Niagara Mohawk Holdings, Inc.* 328 5,474 NICOR, Inc. 93 4,016 NiSource, Inc. 417 12,823 ONEOK, Inc. 60 2,888 Peoples Energy Corp. 72 3,222 PG&E Corp. 792 15,840 Pinnacle West Capital Corp. 173 8,239 PPL Corp. 296 13,376 Progress Energy, Inc. 420 20,659 Public Service Enterprise Group, Inc. 438 21,298 Reliant Energy, Inc. 603 26,117 Sempra Energy 418 9,719 Southern Co. 1,382 45,952 TXU Corp. 528 23,397 Williams Cos., Inc. (The) 900 35,944 Xcel Energy, Inc. 697 20,257 ------------ 747,865 ------------ TOTAL COMMON STOCKS (Cost $16,676,006) (95.48%) 23,960,835 --------- ------------ INTEREST PAR VALUE RATE (000s OMITTED) -------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (4.47%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 12-29-00, due 01-02-01(Secured by U.S. Treasury Bonds 10.750% and 13.875% due 02-15-03 and 05-15-11) - Note B 5.95% $1,121 $1,121,000 --------- ------------ TOTAL SHORT-TERM INVESTMENTS (4.47%) 1,121,000 --------- ------------ TOTAL INVESTMENTS (99.95%) 25,081,835 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (0.05%) 12,188 --------- ------------ TOTAL NET ASSETS (100.00%) $25,094,023 ========= ============ * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Large Cap Growth Fund Schedule of Investments December 31, 2000 - ------------------------------------------------------------------------------ The Schedule of Investments is a complete list of all securities owned by the V.A. Large Cap Growth Fund on December 31, 2000. It's divided into two main categories: common stocks and short-term investments. Common stocks are further broken down by industry groups. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- ------------ ------------ Banks - United States (2.94%) State Street Corp. 1,520 $188,799 Wells Fargo & Co. 3,115 173,467 ------------ 362,266 ------------ Broker Services (0.61%) Schwab (Charles) Corp. (The) 2,649 75,165 ------------ Business Services - Misc. (0.53%) Paychex, Inc. 1,350 65,644 ------------ Computers (22.85%) Adobe Systems, Inc. 1,900 110,556 BEA Systems, Inc.* 2,550 171,647 Brocade Communications Systems, Inc.* 1,300 119,356 Cisco Systems, Inc.* 13,100 501,075 Compaq Computer Corp. 7,720 116,186 EMC Corp.* 6,536 434,644 Juniper Networks, Inc.* 1,150 144,972 Oracle Corp.* 15,200 441,750 Palm, Inc.* 3,050 86,353 Redback Networks, Inc.* 1,000 41,000 Sun Microsystems, Inc.* 11,050 308,019 VeriSign, Inc.* 1,200 89,025 VERITAS Software Corp.* 2,050 179,375 Yahoo! Inc.* 2,250 67,887 ------------ 2,811,845 ------------ Diversified Operations (8.33%) General Electric Co. 12,170 583,399 Tyco International Ltd. 7,942 440,781 ------------ 1,024,180 ------------ Electronics (4.87%) Altera Corp.* 3,800 99,988 Analog Devices, Inc.* 1,807 92,496 Broadcom Corp. (Class A)* 1,600 134,400 Flextronics International Ltd. (Singapore)* 3,700 105,450 PMC-Sierra, Inc.* 800 62,900 Xilinx, Inc.* 2,250 103,781 ------------ 599,015 ------------ Fiber Optics (4.14%) CIENA Corp.* 1,600 130,000 JDS Uniphase Corp.* 3,200 133,400 SDL, Inc.* 500 74,094 Sycamore Networks, Inc.* 2,600 96,850 TyCom, Ltd. (Bermuda)* 3,345 74,844 ------------ 509,188 ------------ Finance (4.16%) Citigroup, Inc. 6,149 313,983 MBNA Corp. 5,346 197,468 ------------ 511,451 ------------ Instruments - Scientific (2.01%) Applera Corp. - Applied Biosystems Group 1,098 103,281 Waters Corp.* 1,723 143,870 ------------ 247,151 ------------ Insurance (3.16%) AFLAC, Inc. 1,513 109,220 American International Group, Inc. 2,834 279,326 ------------ 388,546 ------------ Media (3.64%) Clear Channel Communications, Inc.* 3,142 152,191 Time Warner, Inc. 5,668 296,096 ------------ 448,287 ------------ Medical (21.53%) Cardinal Health, Inc. 3,216 320,394 Genentech, Inc.* 2,056 167,564 Johnson & Johnson 2,408 252,991 Medtronic, Inc. 6,668 402,580 Merck & Co., Inc. 4,428 414,572 Millennium Pharmaceuticals, Inc.* 1,800 111,375 Pfizer, Inc. 14,080 647,680 Pharmacia Corp. 5,446 332,206 ------------ 2,649,362 ------------ Mortgage Banking (1.24%) Fannie Mae 1,765 153,114 ------------ Retail (7.51%) Bed Bath & Beyond, Inc.* 4,600 102,925 Home Depot, Inc. (The) 8,490 387,887 Wal-Mart Stores, Inc. 8,153 433,128 ------------ 923,940 ------------ Telecommunications (11.11%) American Tower Corp. (Class A)* 3,120 118,170 Comverse Technology, Inc.* 1,450 157,506 Corning, Inc. 4,703 248,377 McLeodUSA, Inc. (Class A)* 5,450 76,981 Nokia Corp., American Depositary Receipts (Finland) 7,477 325,249 Nortel Networks Corp. 6,896 221,103 Scientific-Atlanta, Inc. 2,207 71,865 Verizon Communications, Inc. 2,942 147,468 ------------ 1,366,719 ------------ Utilities (1.03%) AES Corp. (The)* 2,292 126,920 ------------ TOTAL COMMON STOCKS (Cost $12,655,003) (99.66%) 12,262,793 ------------ INTEREST PAR VALUE RATE (000s OMITTED) -------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (0.77%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 12-29-00, due 01-02-01 (Secured by U.S. Treasury Bonds, 6.750% thru 8.875%, due 08-15-17 thru 08-15-26) - Note B 5.95% $95 $95,000 ------------ Corporate Savings Account (0.01%) Investors Bank & Trust Company Daily Interest Savings Account Current Rate 5.20% 402 ------------ TOTAL SHORT-TERM INVESTMENTS (0.78%) 95,402 --------- ------------ TOTAL INVESTMENTS (100.44%) 12,358,195 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (0.44%) (53,989) --------- ------------ TOTAL NET ASSETS (100.00%) $12,304,206 ========= ============ * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Mid Cap Growth Fund Schedule of Investments December 31, 2000 - ------------------------------------------------------------------------------ The Schedule of Investments is a complete list of all securities owned by the V.A. Mid Cap Growth Fund on December 31, 2000. Common stocks are broken down by industry groups. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- ------------ ------------ COMMON STOCKS Banks - United States (3.84%) Fifth Third Bancorp 1,700 $101,575 Mellon Financial Corp. 3,453 169,844 Northern Trust Corp. 2,070 168,834 ------------ 440,253 ------------ Beverages (0.82%) Pepsi Bottling Group, Inc. 2,362 94,332 ------------ Broker Services (1.17%) Bear Stearns Cos., Inc. 831 42,121 Lehman Brothers Holdings, Inc. 1,364 92,240 ------------ 134,361 ------------ Computers (21.07%) Adobe Systems, Inc. 1,200 69,825 Ariba, Inc.* 1,700 91,162 Brocade Communications Systems, Inc.* 2,180 200,151 Commerce One, Inc. 2,000 50,625 DST Systems, Inc.* 704 47,168 EMC Corp.* 910 60,515 Emulex Corp.* 1,800 143,887 Exodus Communications, Inc.* 2,910 58,200 Fiserv, Inc.* 1,365 64,752 Handspring, Inc.* 2,200 85,663 i2 Technologies, Inc.* 3,340 181,612 Interwoven, Inc.* 1,000 65,938 Intuit, Inc.* 2,900 114,369 McDATA Corp. (Class B)* 50 2,738 Mercury Interactive Corp.* 1,270 114,617 Palm, Inc.* 4,250 120,328 Parametric Technology Corp.* 14,000 188,125 Rational Software Corp.* 3,220 125,379 Research in Motion Ltd.* (Canada) 1,010 80,800 Siebel Systems, Inc.* 1,600 108,200 SunGard Data Systems, Inc.* 2,834 133,552 TIBCO Software, Inc.* 2,300 110,256 VeriSign, Inc.* 1,800 133,538 VERITAS Software Corp.* 776 67,900 ------------ 2,419,300 ------------ Electronics (12.68%) Aeroflex, Inc.* 7,194 207,389 Alpha Industries, Inc.* 2,300 85,100 Amphenol Corp. (Class A)* 2,344 91,855 Analog Devices, Inc.* 985 50,420 Applied Micro Circuits Corp.* 680 51,032 Flextronics International Ltd.* (Singapore) 5,080 144,780 Jabil Circuit, Inc.* 3,571 90,614 Molex, Inc. 1,250 44,375 QLogic Corp.* 1,450 111,650 Sanmina Corp.* 1,320 101,145 Tektronix, Inc. 4,826 162,576 Vitesse Semiconductor Corp.* 930 51,441 Waters Corp.* 3,160 263,860 ------------ 1,456,237 ------------ Fiber Optics (2.01%) SDL, Inc.* 850 125,959 Sycamore Networks, Inc.* 2,800 104,300 ------------ 230,259 ------------ Finance (4.38%) Affiliated Managers Group, Inc.* 1,632 89,556 Concord EFS, Inc.* 2,470 108,526 Golden West Financial Corp. 2,378 160,515 USA Education, Inc. 2,120 144,160 ------------ 502,757 ------------ Insurance (5.22%) AFLAC, Inc. 2,833 204,507 Ambac Financial Group, Inc. 3,484 203,161 American General Corp. 458 37,327 Everest Re Group Ltd. (Bermuda) 2,158 154,567 ------------ 599,562 ------------ Media (3.47%) Clear Channel Communications, Inc.* 2,390 115,766 Hispanic Broadcasting Corp.* 3,544 90,372 Reader's Digest Association, Inc. (Class A) 2,544 99,534 Univision Communications, Inc. (Class A)* 2,258 92,437 ------------ 398,109 ------------ Medical (17.00%) Alkermes, Inc.* 1,800 56,475 Allergan, Inc. 1,181 114,336 ALZA Corp.* 3,688 156,740 Applera Corp. - Applied Biosystems Group 2,060 193,769 Cardinal Health, Inc. 1,874 186,697 Community Health Systems, Inc.* 2,439 85,365 Express Scripts, Inc. (Class A)* 750 76,688 Health Management Associates, Inc. (Class A)* 4,209 87,337 HEALTHSOUTH Corp.* 8,128 132,588 Human Genome Sciences, Inc.* 970 67,233 IDEC Pharmaceuticals Corp.* 400 75,825 Immunex Corp.* 3,680 149,500 MedImmune, Inc.* 1,740 82,976 Millennium Pharmaceuticals, Inc.* 3,440 212,850 Oxford Health Plans, Inc.* 3,100 122,450 Stryker Corp. 709 35,868 Trigon Healthcare, Inc.* 812 63,184 Wellpoint Health Networks, Inc.* 454 52,324 ------------ 1,952,205 ------------ Oil & Gas (8.42%) Baker Hughes, Inc. 2,960 123,025 BJ Services Co.* 2,580 177,697 Cooper Cameron Corp.* 1,620 107,021 El Paso Energy Corp. 2,632 188,517 R&B Falcon Corp.* 6,281 144,070 Santa Fe International Corp. 2,815 90,256 Weatherford International, Inc.* 2,889 136,505 ------------ 967,091 ------------ Pollution Control (1.52%) Waste Management, Inc. 6,296 174,714 ------------ Retail (1.97%) Bed Bath & Beyond, Inc.* 4,300 96,212 RadioShack Corp. 1,739 74,451 Staples, Inc.* 4,650 54,928 ------------ 225,591 ------------ Telecommunications (12.90%) Allegiance Telecom, Inc.* 5,580 124,242 American Tower Corp. (Class A)* 4,434 167,938 COLT Telecom Group Plc* American Depositary Receipts (United Kingdom) 374 32,819 Comverse Technology, Inc.* 1,870 203,129 Crown Castle International Corp.* 4,060 109,874 Dobson Communications Corp. (Class A)* 11,480 167,895 Global Crossing Ltd.* (Bermuda) 5,963 85,345 McLeodUSA, Inc. (Class A)* 14,430 203,824 Scientific-Atlanta, Inc. 3,162 102,963 Western Wireless Corp. (Class A)* 3,850 150,872 XO Communications, Inc. (Class A)* 7,450 132,703 ------------ 1,481,604 ------------ Utilities (2.96%) Calpine Corp.* 3,966 178,718 Dynegy, Inc. (Class A) 1,214 68,060 Orion Power Holdings, Inc.* 2,220 54,668 TNPC, Inc.* 3,952 38,779 ------------ 340,225 ------------ TOTAL COMMON STOCKS (Cost $10,826,748) (99.43%) 11,416,600 --------- ------------ TOTAL INVESTMENTS (99.43%) 11,416,600 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (0.57%) 65,250 --------- ------------ TOTAL NET ASSETS (100.00%) $11,481,850 ========= ============ * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. Portfolio Concentration December 31, 2000 (Unaudited) - ----------------------------------------------------------------------- The V.A. Mid Cap Growth Fund invests primarily in common stocks of U.S. and foreign issuers. The performance of the Fund is closely tied to the economic and financial conditions within the countries in which it invests. The concentration of investments by industry category for individual securities held by the Fund is shown in the schedule of investments. In addition, concentration of investments can be aggregated by various countries. The table below shows the percentages of the Fund's investments at December 31, 2000 assigned to country categories. MARKET VALUE AS A % COUNTRY DIVERSIFICATION OF FUND NET ASSETS - ----------------------- ------------------ Bermuda 2.09% Canada 0.70 Singapore 1.26 United Kingdom 0.29 United States 95.09 ------- TOTAL INVESTMENTS 99.43% ======= See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Relative Value Fund Schedule of Investments December 31, 2000 - ------------------------------------------------------------------------------ The Schedule of Investments is a complete list of all securities owned by the V.A. Relative Value Fund on December 31, 2000. It's divided into two main categories: common stocks and bonds. Common stocks and bonds are further broken down by industry groups. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- ------------ ------------ COMMON STOCKS Business Services - Misc. (5.70%) Cendant Corp. * 100,000 $962,500 Iron Mountain, Inc.* 25,000 928,125 Moody's Corp. 13,000 333,937 ------------ 2,224,562 ------------ Computers (16.24%) Computer Associates International, Inc. 36,493 711,614 Dell Computer Corp.* 44,450 775,097 Hyperion Solutions Corp.* 14,000 216,125 IMS Health, Inc. 10,000 270,000 Microsoft Corp.* 22,000 954,250 MicroStrategy, Inc.* 50,000 475,000 Parametric Technology Corp.* 153,000 2,055,938 Viant Corp.* 25,000 99,220 Wind River Systems, Inc.* 22,950 783,169 ------------ 6,340,413 ------------ Cosmetics & Personal Care (1.85%) Gillette Co. 20,000 722,500 ------------ Diversified Operations (4.90%) Tyco International, Ltd. 34,500 1,914,750 ------------ Electronics (12.62%) Alpha Industries, Inc. 34,700 1,283,900 Conexant Systems, Inc.* 78,300 1,203,862 SBS Technologies, Inc.* 17,000 508,938 SCI Systems, Inc.* 15,840 417,780 Sony Corp. (Japan) 4,800 332,049 Vicor Corp.* 38,900 1,181,588 ------------ 4,928,117 ------------ Finance (1.29%) Citigroup, Inc. 9,841 502,506 ------------ Food (0.62%) Hain Celestial Group, Inc.* 7,500 243,750 ------------ Insurance (7.11%) Ace, Ltd. (Bermuda) 29,505 1,252,118 Ambac Financial Group, Inc. 10,000 583,125 Progressive Corp. 4,000 414,500 XL Capital, Ltd. (Class A) 6,032 527,046 ------------ 2,776,789 ------------ Machinery (0.68%) Applied Science & Technology, Inc.* 22,000 264,000 ------------ Media (11.56%) AT&T Corp. - Liberty Media Group (Class A)* 145,744 1,976,653 Clear Channel Communications, Inc.* 11,000 532,812 Pegasus Communications Corp.* 40,700 1,048,025 Viacom, Inc. (Class B)* 17,000 794,750 XM Satellite Radio Holdings, Inc. (Class A)* 10,000 160,625 ------------ 4,512,865 ------------ Medical (5.37%) Abbott Laboratories 15,500 750,781 Alpharma, Inc. (Class A) 12,000 526,500 Apogent Technologies, Inc.* 40,000 820,000 ------------ 2,097,281 ------------ Oil & Gas (1.19%) Unocal Corp. 12,000 464,250 ------------ Pollution Control (2.13%) Waste Management, Inc. 30,000 832,500 ------------ Printing - Commercial (1.42%) Valassis Communications, Inc.* 17,500 552,344 ------------ Telecommunications (24.02%) ANTEC Corp.* 57,750 456,589 CenturyTel, Inc. 35,000 1,251,250 CTC Communications Group, Inc.* 60,000 277,500 Hughes Electronics 85,000 1,955,000 Lucent Technologies, Inc. 95,953 1,295,365 Motient Corp.* 30,000 120,000 Nextel Partners, Inc. (Class A)* 28,000 470,750 Sprint Corp. 85,000 1,726,563 TeleCorp PCS, Inc. (Class A)* 30,000 671,250 Verizon Communications, Inc. 23,000 1,152,875 ------------ 9,377,142 ------------ TOTAL COMMON STOCKS (Cost $43,121,074) (96.70%) 37,753,769 --------- ------------ INTEREST CREDIT PAR VALUE RATE RATING** (000s OMITTED) ----- -------- -------------- BONDS Office (0.21%) Danka Business Systems Plc, Conv Note (United Kingdom) 04-01-02 6.750% B+ $500 82,500 --------- ------------ TOTAL BONDS (Cost $401,957) (0.21%) 82,500 --------- ------------ TOTAL INVESTMENTS (96.91%) 37,836,269 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (3.09%) 1,206,343 --------- ------------ TOTAL NET ASSETS (100.00%) $39,042,612 ========= ============ * Non-income producing security. ** Credit ratings are unaudited and rated by Standard & Poor's where available, or Moody's Investor Services or John Hancock Advisers, Inc., where Standard & Poor's ratings are not available. Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. The percentage shown for each investment category is the total of that category as a percentage of the nest assets of the Fund. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Small Cap Growth Fund Schedule of Investments December 31, 2000 - ------------------------------------------------------------------------------ The Schedule of Investments is a complete list of all securities owned by the V.A. Small Cap Growth Fund on December 31, 2000. It's divided into two main categories: common stocks and short-term investments. Common stocks are further broken down by industry groups. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- ------------ ------------ COMMON STOCKS Advertising (1.00%) Getty Images, Inc.* 6,200 $198,400 ------------ Banks - United States (3.42%) Greater Bay Bancorp. 5,800 237,800 Investors Financial Services Corp. 2,000 172,000 Southwest Bancorp. of Texas, Inc.* 3,550 152,428 Sterling Bancshares, Inc. 5,800 114,550 ------------ 676,778 ------------ Building (1.08%) Standard-Pacific Corp. 4,350 101,681 Toll Brothers, Inc.* 2,750 112,406 ------------ 214,087 ------------ Business Services - Misc. (6.19%) Corporate Executive Board Co. (The)* 7,350 292,277 Forrester Research, Inc.* 4,500 225,281 Heidrick & Struggles International, Inc.* 3,800 159,837 Management Network Group, Inc. (The)* 9,150 108,656 On Assignment, Inc.* 8,450 240,825 Pivotal Corp.* 2,400 88,950 Quanta Services, Inc.* 3,379 108,762 ------------ 1,224,588 ------------ Computers (9.97%) Advent Software, Inc.* 3,950 158,247 Aspen Technology, Inc.* 1,900 63,175 AvantGo, Inc.* 2,600 16,250 Avocent Corp.* 2,450 66,150 Broadbase Software, Inc.* 4,850 30,312 Cerner Corp.* 3,300 152,625 Data Return Corp.* 10,250 38,437 DigitalThink, Inc.* 5,500 93,844 Embarcadero Technologies, Inc.* 3,600 162,000 Genomica Corp.* 1,350 7,130 IDX Systems Corp.* 5,750 143,750 IntraNet Solutions, Inc.* 2,650 135,150 Manugistics Group, Inc.* 3,500 199,500 M-Systems Flash Disk Pioneers Ltd.* (Israel) 8,350 116,378 National Instruments Corp.* 2,750 133,547 NetRatings, Inc.* 6,500 95,469 Novatel Wireless, Inc.* 8,450 104,569 Secure Computing Corp.* 11,100 109,613 TeleCommunication Systems, Inc. (Class A)* 3,800 12,825 WatchGuard Technologies, Inc.* 4,200 132,825 ------------ 1,971,796 ------------ Consumer Products - Misc. (0.37%) CoorsTek, Inc.* 2,300 72,162 ------------ Electronics (14.14%) Aeroflex, Inc.* 7,700 221,976 ATMI, Inc.* 5,800 113,100 Brooks Automation, Inc.* 2,850 79,978 Caliper Technologies Corp.* 1,200 56,400 Credence Systems Corp.* 3,750 86,250 DDi Corp.* 6,500 177,125 DuPont Photomasks, Inc.* 3,950 208,733 Elantec Semiconductor, Inc.* 2,250 62,437 Electro Scientific Industries, Inc.* 3,950 110,600 Exar Corp.* 4,350 134,782 Kent Electronics Corp.* 4,400 72,600 Merix Corp.* 5,750 76,906 Microsemi Corp.* 4,700 130,719 Nanometrics, Inc.* 5,650 78,041 Nu Horizons Electronics Corp.* 4,175 37,314 Pixelworks, Inc.* 3,950 88,381 Plexus Corp.* 4,000 121,562 PLX Technology, Inc.* 9,600 79,800 Powerwave Technologies, Inc.* 2,300 134,550 PRI Automation, Inc.* 5,400 101,250 Rudolph Technologies, Inc.* 5,350 161,503 Semtech Corp.* 5,700 125,756 Stratos Lightwave, Inc.* 6,500 110,906 Wilson Greatbatch Technologies, Inc.* 7,950 224,588 ------------ 2,795,257 ------------ Finance (2.98%) Actrade Financial Technologies, Ltd.* 5,750 126,859 Affiliated Managers Group, Inc.* 4,450 244,194 Medallion Financial Corp. 3,600 52,650 Metris Cos., Inc. 6,275 165,111 ------------ 588,814 ------------ Instruments - Scientific (0.59%) Varian, Inc.* 3,450 116,869 ------------ Insurance (2.83%) Fidelity National Financial, Inc. 6,850 253,022 HCC Insurance Holdings, Inc. 6,250 168,359 Philadelphia Consolidated Holding Corp.* 1,450 44,769 RenaissanceRe Holdings Ltd. (Bermuda) 1,200 93,975 ------------ 560,125 ------------ Machinery (0.63%) Hydril Co.* 7,100 124,694 ------------ Media (3.07%) Entercom Communications Corp.* 2,000 68,875 Pegasus Communications Corp.* 1,900 48,925 Radio One, Inc. (Class A)* 3,750 40,078 Radio One, Inc. (Class D)* 6,650 73,150 Regent Communications, Inc.* 19,000 112,813 Scholastic Corp.* 2,000 177,250 Westwood One, Inc.* 4,450 85,941 ------------ 607,032 ------------ Medical (24.45%) Accredo Health, Inc.* 4,700 235,881 Alexion Pharmaceuticals, Inc.* 2,500 162,344 Alkermes, Inc.* 4,450 139,619 Alpharma, Inc. (Class A) 4,500 197,437 AmeriSource Health Corp. (Class A)* 5,350 270,175 Arena Pharmaceuticals, Inc.* 400 6,200 Aurora Biosciences Corp.* 4,050 127,322 Bindley Western Industries, Inc. 6,800 282,625 Cell Therapeutics, Inc.* 3,050 137,441 COR Therapeutics, Inc.* 4,100 144,269 Corvas International, Inc.* 7,900 113,562 CV Therapeutics, Inc.* 2,750 194,562 Cytyc Corp.* 2,900 181,431 Exelixis, Inc.* 5,700 83,362 Genome Therapeutics Corp.* 550 3,833 Human Genome Sciences, Inc.* 1,350 93,572 Inhale Therapeutic Systems, Inc.* 4,400 222,200 Inspire Pharmaceuticals, Inc.* 4,700 122,494 Invitrogen Corp.* 2,500 215,938 LifePoint Hospitals, Inc.* 5,250 263,156 Lincare Holdings, Inc.* 3,750 213,984 NPS Pharmaceuticals, Inc.* 4,900 235,200 Physiometrix, Inc.* 8,300 132,281 Province Healthcare Co.* 6,100 240,188 Renal Care Group, Inc.* 6,850 187,840 Techne Corp.* 4,200 151,463 Titan Pharmaceuticals, Inc.* 4,300 152,091 Transgenomic, Inc.* 3,450 36,225 Vascular Solutions, Inc.* 5,450 40,194 Virologic, Inc.* 7,750 70,719 Visible Genetics, Inc.* (Canada) 4,650 175,538 ------------ 4,833,146 ------------ Oil & Gas (9.38%) Dril-Quip, Inc.* 2,750 94,016 Hanover Compressor Co.* 5,859 261,092 Marine Drilling Cos., Inc.* 9,000 240,750 Newfield Exploration Co.* 6,200 294,113 Patterson Energy, Inc.* 5,800 216,050 Pride International, Inc.* 9,900 243,788 Spinnaker Exploration Co.* 450 19,125 Stone Energy Corp.* 3,600 232,380 Universal Compression Holdings, Inc.* 6,700 252,506 ------------ 1,853,820 ------------ Printing - Commercial (0.81%) Houghton Mifflin Co. 3,450 159,994 ------------ Retail (9.27%) 99 Cents Only Stores* 5,840 159,870 Brightpoint, Inc.* 19,850 69,475 Columbia Sportswear Co.* 3,950 196,512 Cost Plus, Inc.* 6,750 198,281 Gymboree Corp. (The)* 6,100 84,637 Insight Enterprises, Inc.* 6,675 119,733 P.F. Chang's China Bistro, Inc.* 1,800 56,588 Performance Food Group Co.* 2,200 112,784 RARE Hospitality International, Inc.* 7,375 164,555 ScanSource, Inc.* 4,450 173,550 Tech Data Corp.* 4,700 127,120 Too, Inc.* 6,250 78,125 Tweeter Home Entertainment Group, Inc.* 5,600 68,250 Whole Foods Market, Inc.* 3,650 223,106 ------------ 1,832,586 ------------ Schools/Education (2.95%) Corinthian Colleges, Inc.* 5,000 189,687 Education Management Corp.* 5,150 184,112 ProsoftTraining.com* 7,500 90,938 University of Phoenix Online* 3,650 117,712 ------------ 582,449 ------------ Steel (1.26%) Lone Star Technologies, Inc.* 6,450 248,325 ------------ Telecommunications (3.54%) AirGate PCS, Inc.* 4,350 154,425 o2wireless Solutions, Inc.* 1,400 13,038 Powertel, Inc.* 1,350 83,616 Rural Cellular Corp. (Class A)* 2,400 71,100 SBA Communications Corp.* 5,950 244,322 UbiquiTel, Inc.* 5,350 29,425 WJ Communications, Inc.* 7,350 104,738 ------------ 700,664 ------------ Transport (1.82%) Expeditors International of Washington, Inc. 3,300 177,169 Forward Air Corp.* 4,900 182,831 ------------ 360,000 ------------ TOTAL COMMON STOCKS (Cost $17,936,487) (99.75%) 19,721,586 --------- ------------ INTEREST PAR VALUE RATE (000s OMITTED) -------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (0.73%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 12-29-00, due 01-02-01 (Secured by U.S. Treasury Bonds, 6.750% thru 8.875%, due 08-15-17 thru 08-15-26) - Note B 5.95% $144 144,000 ------------ Corporate Savings Account (0.00%) Investors Bank & Trust Company Daily Interest Savings Account Current Rate 5.20% 527 ------------ TOTAL SHORT-TERM INVESTMENTS (0.73%) 144,527 --------- ------------ TOTAL INVESTMENTS (100.48%) 19,866,113 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (0.48%) (94,451) --------- ------------ TOTAL NET ASSETS (100.00%) $19,771,662 ========= ============ * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Sovereign Investors Fund Schedule of Investments December 31, 2000 - ------------------------------------------------------------------------------ The Schedule of Investments is a complete list of all securities owned by the V.A. Sovereign Investors Fund on December 31, 2000. It is divided into three main categories: common stocks, U.S. government obligations and short-term investments. Common stocks are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- ------------ ------------ COMMON STOCKS Advertising (2.55%) Interpublic Group of Cos., Inc. (The) 33,200 $1,413,075 ------------ Banks - United States (7.37%) Chase Manhattan Corp. (The)* 30,000 1,363,125 Mellon Financial Corp. 25,000 1,229,688 State Street Corp. 5,000 621,050 Wells Fargo Co. 15,500 863,156 ------------ 4,077,019 ------------ Beverages (1.52%) PepsiCo, Inc. 17,000 842,563 ------------ Chemicals (1.48%) Air Products & Chemicals, Inc. 20,000 820,000 ------------ Computers (7.35%) Automatic Data Processing, Inc. 8,000 506,500 Cisco Systems, Inc.* 25,000 956,250 Compaq Computer Corp. 30,000 451,500 Hewlett-Packard Co. 8,000 252,500 International Business Machines Corp. 12,500 1,062,500 Sun Microsystems, Inc.* 30,000 836,250 ------------ 4,065,500 ------------ Diversified Operations (2.94%) Minnesota Mining & Manufacturing Co. 11,200 1,349,600 Tyco International Ltd. 5,000 277,500 ------------ 1,627,100 ------------ Electronics (6.67%) Emerson Electric Co. 14,700 1,158,544 General Electric Co. 19,800 949,163 Intel Corp. 16,000 481,000 Motorola, Inc. 31,000 627,750 Texas Instruments, Inc. 10,000 473,750 ------------ 3,690,207 ------------ Finance (4.93%) Citigroup, Inc. 29,500 1,506,344 Household International, Inc. 15,000 825,000 Morgan Stanley Dean Witter & Co. 5,000 396,250 ------------ 2,727,594 ------------ Furniture (0.65%) Leggett & Platt, Inc. 19,000 359,813 ------------ Insurance (5.45%) AFLAC, Inc. 12,400 895,125 American General Corp. 15,000 1,222,500 American International Group, Inc. 9,093 896,229 ------------ 3,013,854 ------------ Machinery (1.65%) Dover Corp. 22,500 912,656 ------------ Media (3.29%) Gannett Co., Inc. 19,400 1,223,413 McGraw-Hill Cos., Inc. (The) 10,200 597,975 ------------ 1,821,388 ------------ Medical (12.58%) Abbott Laboratories 26,000 1,259,375 American Home Products Corp. 13,000 826,150 Bard (C.R.), Inc. 12,800 596,000 Baxter International, Inc. 11,100 980,269 Johnson & Johnson 9,000 945,563 Merck & Co., Inc. 9,000 842,625 Pfizer, Inc. 19,250 885,500 Schering-Plough Corp. 11,000 624,250 ------------ 6,959,732 ------------ Mortgage Banking (4.22%) Fannie Mae 15,000 1,301,250 Freddie Mac 15,000 1,033,125 ------------ 2,334,375 ------------ Office (1.50%) Avery Dennison Corp. 15,150 831,356 ------------ Oil & Gas (6.78%) Chevron Corp. 17,200 1,452,325 Conoco, Inc. (Class B) 30,000 868,125 Exxon Mobil Corp. 10,184 885,372 Royal Dutch Petroleum Co., American Depositary Receipts (Netherlands) 9,000 545,063 ------------ 3,750,885 ------------ Paper & Paper Products (2.43%) Kimberly-Clark Corp. 19,000 1,343,110 ------------ Retail (5.91%) Home Depot, Inc. (The) 9,000 411,188 Lowe's Cos., Inc. 28,000 1,246,000 McDonald's Corp. 14,000 476,000 SYSCO Corp. 16,400 492,000 Target Corp. 20,000 645,000 ------------ 3,270,188 ------------ Telecommunications (4.35%) CenturyTel, Inc. 35,000 1,251,250 Verizon Communications, Inc. 23,000 1,152,875 ------------ 2,404,125 ------------ Tobacco (1.99%) Philip Morris Cos., Inc. 25,000 1,100,000 ------------ Utilities (3.89%) ALLTEL Corp. 17,000 1,061,434 SBC Communications, Inc. 22,844 1,090,800 ------------ 2,152,234 ------------ TOTAL COMMON STOCKS (Cost $42,749,147) (89.50%) 49,516,774 --------- ------------ INTEREST CREDIT PAR VALUE RATE RATING** (000s OMITTED) -------- -------- ------------ U.S. GOVERNMENT OBLIGATIONS Government - U.S. (0.73%) United States Treasury, Note 09-30-02 5.88% AAA $400 404,188 ------------ TOTAL U.S. GOVERNMENT AND AGENCIES SECURITIES (Cost $401,813) (0.73%) 404,188 --------- ------------ SHORT-TERM INVESTMENTS Joint Repurchase Agreement (9.69%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 12-29-00, due 01-02-01 (Secured by U.S. Treasury Bonds, 6.750% thru 8.875%, due 08-15-17 thru 08-15-26) - Note B 5.95% 5,365 5,365,000 ------------ Corporate Savings Account (0.00%) Investors Bank & Trust Company Daily Interest Savings Account Current Rate 5.20% 6 ------------ TOTAL SHORT-TERM INVESTMENTS (9.69%) 5,365,006 --------- ------------ TOTAL INVESTMENTS (99.92%) 55,285,968 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (0.08%) 42,130 --------- ------------ TOTAL NET ASETS (100.00%) $55,328,098 ========= ============ * Non-income producing security. ** Credit ratings are rated by Moody's Investor Services or John Hancock Advisers, Inc. where Standard and Poor's ratings are not available. Parenthetical disclosure of a foreign country in the security description represents country of foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. International Fund Schedule of Investments December 31, 2000 - ------------------------------------------------------------------------------ The Schedule of Investments is a complete list of all securities owned by the V.A. International Fund on December 31, 2000. It's divided into two main categories: common stocks and short-term investments. Common stocks are further broken down by country. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- ------------ ------------ COMMON STOCKS Australia (2.11%) BHP, Ltd. (Diversified Operations) 3,797 $40,044 Lend Lease Corp., Ltd. (Real Estate Operations) 1,113 10,366 National Australia Bank, Ltd. (Banks - Foreign) 580 9,296 News Corp., Ltd. (The), American Depositary Receipts (ADR) (Media) 3,580 27,884 OneSteel, Ltd.* (Steel) 1 1 Publishing & Broadcasting, Ltd. (Media) 1,195 8,674 ResMed, Inc.* (Medical) 900 3,652 Securenet, Ltd.* (Computers) 5,477 14,648 Telstra Corp., Ltd. (Telecommunications) 1,999 7,143 Westpac Banking Corp., Ltd. (Banks - Foreign) 805 5,909 Woodside Petroleum, Ltd. (Oil & Gas) 3,294 27,026 ------------ 154,643 ------------ Belgium (0.41%) Fortis (B) (Insurance) 378 4 UCB SA (Medical) 800 29,657 ------------ 29,661 ------------ Brazil (1.09%) Companhia Brasileira de Distribuicao Grupo Pao de Acucar (ADR) (Retail) 720 26,280 Telecomunicacoes Brasileiras SA (ADR) (Telecommunications) 380 27,693 Uniao de Bancos Brasileiros SA, Global Depositary Receipts (GDR) (Finance) 890 26,199 ------------ 80,172 ------------ Canada (4.86%) BCE, Inc. (Telecommunications) 729 21,040 Bombardier, Inc. (Diversified Operations) 5,000 77,151 Celestica, Inc.* (Electronics) 580 31,314 Nortel Networks Corp. (Telecommunications) 3,369 108,348 Sun Life Financial Services of Canada (Insurance) 2,339 62,361 Thomson Corp. (Computers) 949 36,308 Weston (George) Ltd. (Food) 356 19,956 ------------ 356,478 ------------ China (0.15%) Shandong International Power Development Co., Ltd. (Utilities) 70,000 11,039 ------------ Denmark (0.59%) Vestas Wind Systems AS (Utilities) 800 43,310 ------------ Finland (1.53%) Nokia Oyj (Telecommunications) 2,520 112,398 ------------ France (6.02%) Alcatel SA (Telecommunications) 1,620 92,031 Dassault Systemes SA (Computers) 300 20,564 Renault SA (Automobile/Trucks) 720 37,522 Schneider Electric SA (Machinery) 360 26,266 Societe Generale (Banks - Foreign) 950 59,054 Total Fina Elf SA (Oil & Gas) 830 123,452 Vivendi SA (Diversified Operations) 1,250 82,280 ------------ 441,169 ------------ Germany (3.72%) Allianz AG (Insurance) 290 108,543 BASF AG (Chemicals) 617 27,908 Dresdner Bank AG (Banks - Foreign) 420 18,319 Muenchener Rueckversicherungs-Gesellschaft AG (Insurance) 147 52,599 Siemens AG (Diversified Operations) 500 65,354 ------------ 272,723 ------------ Greece (0.38%) Hellenic Telecommunications Organization SA (ADR) (Telecommunications) 3,800 27,550 ------------ Hong Kong (2.34%) Aeon Credit Service Co., Ltd. (Finance) 29,400 8,952 ASM Pacific Technology, Ltd. (Electronics) 3,500 4,981 Cathay Pacific Airways (Transport) 2,000 3,692 Cheung Kong Holdings, Ltd. (Real Estate Operations) 2,000 25,578 China Everbright, Ltd. (Finance) 16,000 16,513 China Resources Enterprise, Ltd. (Diversified Operations) 14,000 17,860 Giordano International, Ltd. (Retail) 4,000 1,846 Guoco Group, Ltd. (Finance) 4,000 11,924 Hang Seng Bank, Ltd. (Banks - Foreign) 700 9,423 Hongkong Electric Holdings, Ltd. (Utilities) 1,000 3,692 HSBC Holdings Plc (Banks - Foreign) 1,437 21,372 Hutchison Whampoa, Ltd. (Diversified Operations) 2,000 24,937 Sun Hung Kai Properties, Ltd. (Real Estate Operations) 1,000 9,968 Swire Pacific, Ltd. (Class A) (Diversified Operations) 1,500 10,770 ------------ 171,508 ------------ India (0.43%) Infosys Technologies, Ltd. (ADR) (Computers) 130 11,992 Videsh Sanchar Nigam, Ltd. (ADR) (Telecommunications) 1,575 19,687 ------------ 31,679 ------------ Ireland (0.52%) CRH Plc (Building) 2,050 38,153 ------------ Israel (0.32%) Bank Hapoalim, Ltd. (Banks - Foreign) 8,100 23,498 ------------ Italy (3.06%) Assicurazioni Generali SpA (Insurance) 2,700 107,243 ENI SpA (Oil & Gas) 11,070 70,684 Riunione Adriatica di Sicurta SpA (Insurance) 2,982 46,510 ------------ 224,437 ------------ Japan (21.09%) Aiful Corp. (Finance) 300 24,484 Asahi Glass Co., Ltd. (Glass Products) 3,000 24,746 Daibiru Corp. (Real Estate Operations) 3,000 21,256 Daito Trust Construction Co., Ltd. (Real Estate Operations) 2,000 35,864 Fuji Television Network, Inc. (Media) 3 20,889 Fujitsu, Ltd. (Computers) 2,000 29,461 Inax Corp. (Building) 4,000 20,189 Katokichi Co., Ltd. (Food) 2,000 52,484 Kirin Brewery Co., Ltd. (Beverages) 6,000 53,691 Kurita Water Industries, Ltd. (Pollution Control) 1,000 13,077 Kyocera Corp. (Electronics) 300 32,724 Maeda Corp. (Building) 15,000 51,566 Marui Co., Ltd. (Retail) 4,000 60,357 Matsushita Electric Industrial Co., Ltd. (Electronics) 3,000 71,641 Max Co., Ltd. (Machinery) 2,000 19,244 Melco, Inc. (Computers) 600 12,544 Mitsubishi Estate Co., Ltd. (Real Estate Operations) 2,975 31,749 Mitsui Fudosan Co., Ltd. (Real Estate Operations) 6,000 59,570 Murata Manufacturing Co., Ltd. (Electronics) 100 11,721 NEC Corp. (Electronics) 1,000 18,282 Nippon Meat Packers, Inc. (Food) 3,000 40,833 Nissan Motor Co., Ltd. (Automobile/Trucks) 8,000 46,046 Nissin Food Products Co., Ltd. (Food) 1,000 24,405 Nitto Denko Corp. (Electronics) 900 24,405 Nomura Securities Co., Ltd. (Broker Services) 2,000 35,952 NTT DoCoMo, Inc. (Telecommunications) 1 17,232 Orix Corp. (Leasing Companies) 100 10,024 Q.P. Corp. (Food) 9,000 74,633 Rohm Co., Ltd. (Electronics) 200 37,964 Santen Pharmaceutical Co., Ltd. (Medical) 1,000 19,769 Sekisui House, Ltd. (Building) 5,000 45,705 Sharp Corp. (Electronics) 1,000 12,054 Shin-Etsu Chemical Co., Ltd. (Chemicals) 1,000 38,488 Shiseido Co., Ltd. (Cosmetics & Personal Care) 3,000 33,459 Sony Corp. (Electronics) 1,000 69,104 Stanley Electric Co., Ltd. (Electronics) 3,000 27,292 Sumitomo Bakelite Co., Ltd. (Chemicals) 2,000 18,422 Sumitomo Metal Mining Co., Ltd. (Metal) 5,000 26,155 Takefuji Corp. (Finance) 300 18,894 Terumo Corp. (Medical) 1,000 21,868 Toho Gas Co., Ltd. (Oil & Gas) 13,000 23,312 Tokyo Electric Power Co., Inc. (Utilities) 2,400 59,517 Tokyu Corp. (Transport) 4,000 21,554 Toshiba Corp. (Electronics) 3,000 20,049 Toyota Motor Corp. (Automobile/Trucks) 2,200 70,241 Yamanouchi Pharmaceutical Co., Ltd. (Medical) 1,000 43,212 ------------ 1,546,128 ------------ Malaysia (0.39%) Petronas Gas Berhad (Oil & Gas) 17,000 28,855 ------------ Mexico (0.20%) Telefonos de Mexico SA (ADR) (Telecommunications) 320 14,440 ------------ Netherlands (4.57%) AEGON NV (Insurance) 1,400 57,921 Akzo Nobel NV (Chemicals) 630 33,838 ING Groep NV (Banks - Foreign) 1,050 83,885 Koninklijke Ahold NV (Retail) 2,245 72,433 Koninklijke Numico NV (Food) 720 36,238 Unilever Plc (Food) 5,900 50,552 ------------ 334,867 ------------ New Zealand (0.13%) Auckand International Airport, Ltd. (Transport) 3,900 5,419 Telecom Corp of New Zealand, Ltd. (Telecommunications) 2,000 4,257 ------------ 9,676 ------------ Norway (0.90%) Tomra Systems ASA * (Machinery) 3,400 66,084 ------------ Singapore (0.67%) Capitaland, Ltd.* (Real Estate Operations) 2,000 3,464 DBS Group Holdings, Ltd. (Banks - Foreign) 1,000 11,316 Flextech Holdings, Ltd. (Electronics) 2,000 1,097 Keppel Capital Holdings, Ltd. (Finance) 1,250 1,653 Neptune Orient Lines, Ltd. (Transport) 4,000 3,141 Overseas Union Bank, Ltd. (Banks - Foreign) 1,000 4,677 Pacific Century Regional Developments, Ltd. (Real Estate Operations) 5,000 2,555 Singapore Technologies Engineering, Ltd. (Engineering/R&D Services) 7,000 11,276 United Overseas Bank, Ltd. (Banks - Foreign) 1,000 7,506 Wing Tai Holdings, Ltd. (Real Estate Operations) 3,000 2,182 ------------ 48,867 ------------ South Africa (0.75%) DataTec, Ltd.* (Computers) 5,000 23,788 Remgro, Ltd. (Diversified Operations) 4,600 31,307 ------------ 55,095 ------------ South Korea (0.68%) Samsung Electronics Co. (Electronics) 135 16,862 Shinhan Bank (Banks - Foreign) 1,700 13,976 SK Telecom Co., Ltd. (Telecommunications) 95 19,000 ------------ 49,838 ------------ Sweden (1.36%) Ericsson (LM) Telefonaktiebolaget (Telecommunications) 5,800 66,056 Nordic Baltic Holding AB (Banks - Foreign) 4,250 33,522 ------------ 99,578 ------------ Switzerland (2.47%) Novartis AG (Medical) 68 120,192 Roche Holding AG (Medical) 6 61,114 ------------ 181,306 ------------ Taiwan (0.89%) Hon Hai Precision Industry Co., Ltd. (Electronics) 2,000 10,145 Taiwan Semiconductor Manufacturing Co., Ltd.* (Electronics) 12,000 28,804 United Microelectronics Corp.* (Electronics) 18,000 26,141 ------------ 65,090 ------------ Thailand (0.11%) Shin Satellite Pcl* (Telecommunications) 11,500 7,751 ------------ Turkey (0.17%) Dogan Yayin Holding AS* (Diversified Operations) 1,738,100 12,058 ------------ United Kingdom (10.39%) Barclay's Plc (Banks - Foreign) 900 27,884 BP Amoco Plc (Oil & Gas) 9,200 74,287 Centrica Plc (Utilities) 17,240 66,832 CGNU Plc (Insurance) 1,400 22,651 Energis Plc* (Telecommunications) 5,550 37,345 GlaxoSmithKline Plc* (Medical) 6,149 173,778 Granada Compass Plc (Diversified Operations) 3,000 32,680 HSBC Holdings Plc (Banks - Foreign) 9,000 132,558 Marconi Plc (Telecommunications) 2,500 26,878 Reckitt Benckiser Plc (Soap & Cleaning Preparations) 3,000 41,360 Vodafone AirTouch Plc (Telecommunications) 34,080 125,106 ------------ 761,359 ------------ TOTAL COMMON STOCKS (Cost $5,094,561) (72.30%) 5,299,410 --------- ------------ INTEREST PAR VALUE RATE (000s OMITTED) -------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (1.21%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 12-29-00, due 01-02-01 (Secured by U.S. Treasury Bonds, 10.750% and 13.875% due 02-15-03 and 05-15-11) - Note B 5.95% $89 89,000 ------------ NUMBER OF SHARES --------- Cash Equivalents (12.74%) Navigator Securities Lending Prime Portfolio** 933,457 933,457 ------------ TOTAL SHORT-TERM INVESTMENTS (13.95%) 1,022,457 --------- ------------ TOTAL INVESTMENTS (86.25%) 6,321,867 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (13.75%) 1,007,772 --------- ------------ TOTAL NET ASSETS (100.00%) $7,329,639 ========= ============ * Non-income producing security. ** Represents investment of security lending collateral - Note A. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. Industry Diversification (Unaudited) - ----------------------------------------------------------------------- The Fund primarily invests in securities issued by companies of other countries. The performance of the Fund is closely tied to the economic conditions within the countries in which it invests. The concentration of investments by country for individual securities held by the Fund is shown in the schedule of investments. In addition, the concentration of investments can be aggregated by various industry groups. The table below shows the percentages of the Fund's investments at December 31, 2000 assigned to the various investment categories. MARKET VALUE AS A % INVESTMENT CATEGORIES OF FUND NET ASSETS - ----------------------- ------------------ Automobile/Trucks 2.10% Banks - Foreign 6.30 Beverages 0.73 Broker Services 0.49 Building 2.12 Chemicals 1.62 Computers 2.04 Cosmetics & Personal Care 0.46 Diversified Operations 5.14 Electronics 6.06 Engineering/R&D Services 0.15 Finance 1.48 Food 4.08 Glass Products 0.34 Insurance 6.25 Leasing Companies 0.14 Machinery 1.52 Media 0.78 Medical 6.46 Metal 0.36 Oil & Gas 4.74 Pollution Control 0.18 Real Estate Operations 3.01 Retail 2.20 Soap & Cleaning Preparations 0.56 Steel 0.00 Telecommunications 10.01 Transport 0.46 Utilities 2.52 Short-Term Investments 13.95 ------- TOTAL INVESTMENTS 86.25% ======= See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Financial Industries Fund Schedule of Investments December 31, 2000 - ------------------------------------------------------------------------------ The Schedule of Investments is a complete list of all securities owned by the V.A. Financial Industries Fund on December 31, 2000. It's divided into two main categories: common stocks and short-term investments. Common stocks are further broken down by industry groups. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- ------------ ------------ COMMON STOCK Banks - Foreign (4.63%) Bipop-Carire SpA (Italy) 107,000 $698,175 HSBC Holdings Plc (United Kingdom) 85,000 1,250,681 Nordic Baltic Holding (Sweden) 178,020 1,353,789 ------------ 3,302,645 ------------ Banks - Midwest (7.22%) Fifth Third Bancorp 49,250 2,942,688 Northern Trust Corp. 27,100 2,210,344 ------------ 5,153,032 ------------ Banks - Money Center (3.36%) Citigroup, Inc. 47,000 2,399,938 ------------ Banks - Northeast (3.53%) State Street Corp. 20,300 2,521,461 ------------ Banks - Superregional (8.25%) Bank of New York Co., Inc. 39,500 2,179,906 FleetBoston Financial Corp. 30,536 1,147,009 Wells Fargo & Co. 46,000 2,561,625 ------------ 5,888,540 ------------ Broker Services (8.49%) Legg Mason, Inc. 24,500 1,335,250 Merrill Lynch & Co., Inc. 33,500 2,284,280 Schwab (Charles) Corp. (The) 86,076 2,442,407 ------------ 6,061,937 ------------ Computer - Services (9.32%) Automatic Data Processing, Inc. 13,000 823,063 BISYS Group, Inc. (The)* 42,000 2,189,250 First Data Corp. 28,500 1,501,594 Fiserv, Inc.* 45,000 2,134,688 ------------ 6,648,595 ------------ Computer - Software (1.35%) Intuit, Inc.* 24,500 966,219 ------------ Finance - Consumer Loans (7.25%) American Express Co. 44,400 2,439,225 Household International, Inc. 17,000 935,000 MBNA Corp. 48,650 1,797,009 ------------ 5,171,234 ------------ Finance - Investment Management (8.62%) Amvescap Plc, American Depositary Receipts (ADR) (United Kingdom) 53,000 2,305,500 Morgan Stanley Dean Witter & Co. 24,000 1,902,000 Price (T. Rowe) Associates, Inc. 46,000 1,944,218 ------------ 6,151,718 ------------ Insurance - Brokers (2.79%) Marsh & McLennan Cos., Inc. 17,000 1,989,000 ------------ Insurance - Life (11.01%) AFLAC, Inc. 37,000 2,670,938 American General Corp. 25,700 2,094,550 Protective Life Corp. 48,000 1,548,000 Reinsurance Group of America, Inc. 43,500 1,544,250 ------------ 7,857,738 ------------ Insurance - Multi Line (3.29%) Allmerica Financial Corp. 15,600 1,131,000 Fortis (NL) NV (Netherlands) 37,454 1,216,659 ------------ 2,347,659 ------------ Insurance - Property & Casualty (13.35%) Ambac Financial Group, Inc. 45,750 2,667,797 American International Group, Inc. 25,625 2,525,664 MBIA, Inc. 29,000 2,149,625 XL Capital Ltd. (Class A) 25,000 2,184,375 ------------ 9,527,461 ------------ Mortgage & RE Services (2.74%) Fannie Mae 22,500 1,951,875 ------------ TOTAL COMMON STOCKS (Cost $48,938,306) (95.20%) 67,939,052 ------------ INTEREST PAR VALUE RATE (000s OMITTED) -------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (4.91%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Date 12-29-00, due 01-02-01 (Secured by U.S. Treasury Bonds, 6.750% thru 8.875%, due 08-15-17 thru 08-15-26) - Note B 5.95% $3,504 3,504,000 ------------ Corporate Savings Account (0.00%) Investors Bank & Trust Company Daily Interest Savings Account Current Rate 5.20% 879 ------------ TOTAL SHORT-TERM INVESTMENTS (4.91%) 3,504,879 --------- ------------ TOTAL INVESTMENTS (100.11%) 71,443,931 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (0.11%) (77,335) --------- ------------ TOTAL NET ASETS (100.00%) $71,366,596 ========= ============ * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. Portfolio Concentration December 31, 2000 (Unaudited) - ----------------------------------------------------------------------- The V.A. Financial Industries Fund invests primarily in equity securities in the financial sector in the United States and abroad. The concentration of investments by industry category for individual securities held by the Fund is shown in the schedule of investments. In addition, concentration of investments can be aggregated by various countries. The table below shows the percentage of the Fund's investments at December 31, 2000 assigned to the various countries. MARKET VALUE AS A % COUNTRY DIVERSIFICATION OF FUND NET ASSETS - ----------------------- ------------------ Italy 0.98% Netherlands 1.70 Sweden 1.90 United Kingdom 4.98 United States 90.55 ------- TOTAL INVESTMENTS 100.11% ======= See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Regional Bank Fund Schedule of Investments December 31, 2000 - ------------------------------------------------------------------------------ The Schedule of Investments is a complete list of all securities owned by the V.A. Regional Bank Fund on December 31, 2000. It's divided into two main categories: common stocks and short-term investments. Common stocks are further broken down by industry groups. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION, STATE SHARES VALUE - -------------------------- ------------ ------------ COMMON STOCKS Superregional Banks (6.87%) Mellon Financial Corp. (PA) 8,500 $418,094 U.S. Bancorp (MN) 7,500 218,906 Wells Fargo & Co. (CA) 5,500 306,281 ------------ 943,281 ------------ Banks - Money Center (4.92%) Chase Manhattan Corp. (The) (NY) 7,000 318,062 Citigroup, Inc. (NY) 7,000 357,437 ------------ 675,499 ------------ Banks - United States (79.05%) BancFirst Corp. (OK) 1,500 59,531 BancWest Corp. (HI) 16,000 418,000 BB&T Corp. (NC) 4,000 149,250 Cascade Bancorp (OR) 33,010 445,635 Chittenden Corp. (VT) 7,500 227,344 City National Corp. (CA) 8,000 310,500 Comerica, Inc. (MI) 4,500 267,187 Commerce Bancshares, Inc. (MO) 12,047 511,998 Community First Bankshares, Inc. (ND) 10,000 188,750 Cullen/Frost Bankers, Inc. (TX) 6,500 271,781 Fifth Third Bancorp (OH) 8,592 513,372 Financial Institutions, Inc. (NY) 19,750 266,625 First Midwest Bancorp., Inc. (IL) 5,000 143,750 FirstMerit Corp. (OH) 5,000 133,672 Independent Bank Corp. (MI) 23,887 471,768 M & T Bank Corp. (NY) 4,500 306,000 Marshall & Ilsley Corp. (WI) 3,500 177,905 Mercantile Bankshares Corp. (MD) 9,500 410,281 Mid-State Bancshares (CA) 15,000 532,500 Mississippi Valley Bancshares, Inc. (MO) 10,350 304,031 National Commerce Bancorp. (TN) 14,465 358,009 Northrim Bank (AK) 16,695 169,037 Pacific Capital Bancorp. (CA) 13,500 379,688 PNC Financial Service Group (PA) 3,500 255,719 Prosperity Bancshares, Inc. (TX) 14,000 276,500 SJNB Financial Corp. (CA) 8,000 292,000 SouthTrust Corp. (AL) 4,000 162,750 Southwest Bancorp. of Texas, Inc.* (TX) 5,000 214,688 Sterling Bancshares, Inc. (TX) 12,000 237,000 Summit Bancshares, Inc. (TX) 14,800 320,975 Texas Regional Bancshares, Inc. (Class A) (TX) 11,000 357,500 Umpqua Holdings Corp. (OR) 38,000 323,000 Valley National Bancorp. (NJ) 15,700 523,006 Whitney Holding Corp. (LA) 5,500 199,719 Yardville National Bancorp. (NJ) 25,000 301,563 Zions Bancorp. (UT) 6,000 374,625 ------------ 10,855,659 ------------ Thrifts (4.19%) Charter One Financial, Inc. (OH) 6,017 173,741 First Financial Holdings, Inc. (SC) 12,300 242,156 Warren Bancorp., Inc. (MA) 20,000 160,000 ------------ 575,897 ------------ TOTAL COMMON STOCKS (Cost $10,935,579) (95.03%) 13,050,336 ------------ INTEREST PAR VALUE ISSUER, DESCRIPTION RATE (000s OMITTED) - ------------------- -------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (4.94%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 12-29-00, due 01-02-01 (Secured by U.S. Treasury Bonds, 6.750% thru 8.875%, due 08-15-17 thru 08-15-26) - Note B 5.95% $679 679,000 ------------ Corporate Savings Account (0.00%) Investors Bank & Trust Company Current Rate 5.20% 382 ------------ TOTAL SHORT-TERM INVESTMENTS (4.94%) 679,382 --------- ------------ TOTAL INVESTMENTS (99.97%) 13,729,718 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (0.03%) 3,712 --------- ------------ TOTAL NET ASSETS (100.00%) $13,733,430 ========= ============ * Non-income producing security. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Technology Fund Schedule of Investments December 31, 2000 - ------------------------------------------------------------------------------ The Schedule of Investments is a complete list of all securities owned by the V.A. Technology Fund on December 31, 2000. It is divided into two main categories: common stocks and short-term investments. Common stocks are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- ------------ ------------ COMMON STOCKS Computer - Graphics (1.34%) Cadence Design Systems, Inc.* 6,850 $188,375 ------------ Computer - Internet Services (10.56%) America Online, Inc.* 10,325 359,310 Art Technology Group, Inc.* 3,800 116,138 Ask Jeeves, Inc.* 2,820 6,874 DoubleClick, Inc.* 700 7,700 Exodus Communications, Inc.* 7,700 154,000 Exult, Inc.* 3,400 45,050 Genuity, Inc.* 5,000 25,312 Infospace, Inc.* 6,750 59,696 Inktomi Corp.* 2,975 53,178 Openwave Systems, Inc.* 2,600 124,638 Portal Software, Inc.* 3,300 25,884 RealNetworks, Inc.* 5,750 49,953 ScreamingMedia, Inc.* 8,350 25,050 TIBCO Software, Inc.* 2,500 119,844 VeriSign, Inc.* 2,300 170,631 VerticalNet, Inc.* 3,000 19,969 Viant Corp.* 1,700 6,747 Vignette Corp.* 6,250 112,500 ------------ 1,482,474 ------------ Computer - Local Networks (5.24%) Cisco Systems, Inc.* 10,500 401,625 JNI Corp.* 3,300 74,869 Lucent Technologies, Inc. 2,600 35,100 Network Appliance, Inc.* 3,500 224,656 ------------ 736,250 ------------ Computer - Memory Devices (6.97%) EMC Corp.* 6,600 438,900 Emulex Corp.* 2,400 191,850 VERITAS Software Corp.* 3,775 330,312 Western Digital Corp.* 6,950 16,941 ------------ 978,003 ------------ Computer - Micro/Macro (1.44%) Dell Computer Corp.* 6,600 115,088 Gateway, Inc.* 4,800 86,352 ------------ 201,440 ------------ Computer - Services (0.64%) Unisys Corp.* 6,150 89,944 ------------ Computer - Software (17.35%) BEA Systems, Inc.* 6,550 440,897 Citrix Systems, Inc.* 10,300 231,750 i2 Technologies, Inc.* 4,300 233,812 Mercury Interactive Corp.* 6,075 548,269 Microsoft Corp.* 2,000 86,750 Oracle Corp.* 12,150 353,109 Networks Associates, Inc.* 3,000 12,562 Parametric Technology Corp.* 9,900 133,031 Rational Software Corp.* 5,650 219,997 SmartForce Plc,* American Depositary Receipt (ADR) (Ireland) 4,700 176,544 ------------ 2,436,721 ------------ Electronics - Components Misc. (5.37%) Sanmina Corp.* 2,800 214,550 SCI Systems, Inc.* 3,800 100,225 Solectron Corp.* 12,950 439,005 ------------ 753,780 ------------ Electronics - Products Misc. (1.70%) Aeroflex, Inc.* 8,300 239,273 ------------ Electronics - Semiconductor Components (10.70%) Altera Corp.* 2,650 69,728 Amkor Technology, Inc.* 3,250 50,426 Analog Devices, Inc.* 5,350 273,853 Applied Materials, Inc.* 4,725 180,436 Applied Science & Technology, Inc.* 1,200 14,400 ASM Lithography Holding N.V.* (Netherlands) 3,500 78,969 Atmel Corp.* 13,250 154,031 Cypress Semiconductor Corp.* 4,750 93,516 Integrated Device Technology, Inc.* 4,150 137,469 Intel Corp. 2,000 60,125 KLA-Tencor Corp.* 2,800 94,325 Micron Technology, Inc. 7,100 252,050 PRI Automation, Inc.* 2,300 43,125 ------------ 1,502,453 ------------ Fiber Optics (7.06%) CIENA Corp.* 3,500 284,375 Corning, Inc. 5,900 311,594 Finisar Corp.* 7,050 204,450 JDS Uniphase Corp.* 3,100 129,231 Sycamore Networks, Inc.* 1,650 61,462 ------------ 991,112 ------------ Media - Radio/TV (0.36%) Infinity Broadcasting Corp. (Class A)* 1,800 50,287 ------------ Telecom - Equipment (4.91%) Advanced Fibre Communications, Inc.* 4,150 74,959 ANTEC Corp.* 1,220 9,646 Nokia Corp. (ADR) (Finland) 5,750 250,125 Nortel Networks Corp. (Canada) 6,400 205,200 QUALCOMM, Inc.* 1,550 127,391 Tut Systems, Inc.* 2,750 22,687 ------------ 690,008 ------------ Telecom - Services (1.44%) Global Crossing Ltd.* (Bermuda) 9,250 132,391 Global Light Telecommunications, Inc.* (Canada) 1,600 6,960 Metromedia Fiber Network, Inc. (Class A)* 5,300 53,663 Primus Telecommunications Group, Inc. * 4,250 9,828 ------------ 202,842 ------------ TOTAL COMMON STOCKS (Cost $14,432,054) (75.08%) 10,542,962 ------------ INTEREST PAR VALUE RATE (000s OMITTED) -------- -------------- SHORT-TERM INVESTMENTS Government - U.S. Agencies (10.68%) FHLMC Discount Note Due 01-02-01 5.05% $1,500 1,499,369 ------------ Joint Repurchase Agreement (19.57%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 12-29-00, due 01-02-01 (Secured by U.S. Treasury Bonds, 6.750% thru 8.875%, due 08-15-17 thru 08-15-26) - Note B 5.95 2,748 2,747,789 ------------ Corporate Savings Account (0.00%) Investors Bank & Trust Company Daily Interest Savings Account Current Rate 5.20% 792 ------------ TOTAL SHORT-TERM INVESTMENTS (30.25%) 4,247,950 --------- ------------ TOTAL INVESTMENTS (105.33%) 14,790,912 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (5.33%) (748,868) --------- ------------ TOTAL NET ASSETS (100.00%) $14,042,044 ========= ============ * Non-income producing security Parenthetical disclosure of a foreign country in the security description represents country of foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. Portfolio Concentration December 31, 2000 (Unaudited) - ----------------------------------------------------------------------- The V.A. Technology Fund invests primarily in equity securities of technology companies in the United States and abroad. The concentration of investments by industry category for individual securities held by the Fund is shown in the schedule of investments. In addition, concentration of investments can be aggregated by various countries. The table below shows the percentage of the Fund's investments at December 31, 2000 assigned to the various countries. MARKET VALUE AS A % COUNTRY DIVERSIFICATION OF FUND NET ASSETS - ----------------------- ------------------ Bermuda 0.94% Canada 1.51 Finland 1.78 Ireland 1.26 Netherlands 0.56 United States 99.28 ------- TOTAL INVESTMENTS 105.33% ======= See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Bond Fund Schedule of Investments December 31, 2000 - -------------------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. Bond Fund on December 31, 2000. It is divided into three main categories: bonds, warrants and short-term investments. Bonds and warrants are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. INTEREST CREDIT PAR VALUE MARKET ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE - -------------------------- -------- ------- -------------- ------------- BONDS Aerospace (0.70%) Lockheed Martin Corp., Bond 12-01-29 8.500% BBB- $75 $84,880 Raytheon Co., Note 03-01-03 7.900 BBB- 40 41,017 Note 03-01-10 8.300 BBB- 45 49,135 ------------- 175,032 ------------- Automobile/Trucks (0.66%) ERAC USA Finance Co., Note 02-15-05 (R) 6.625 BBB+ 19 18,426 Note 12-15-09 (R) 7.950 BBB+ 35 36,094 Ford Capital B.V., Gtd Deb (Netherlands) 05-15-02 (Y) 9.875 A 50 52,044 Ford Motor Co., Note 07-16-31 7.450 A 65 60,161 ------------- 166,725 ------------- Banks - Foreign (0.83%) Abbey National First Capital, B.V., Sub Note (United Kingdom) 10-15-04 (Y) 8.200 AA- 30 31,849 Royal Bank of Scotland Plc, Bond (United Kingdom) 03-31-05 (Y) 8.817 A- 30 31,641 Scotland International Finance No. 2, B.V., Gtd Sub Note (Netherlands) 11-01-06 (R) (Y) 8.850 A 95 104,251 UBS PFD Funding Trust I, Gtd Bond 10-01-49 8.622# AA- 40 41,905 ------------- 209,646 ------------- Banks - United States (0.94%) Bank of America Corp., Jr Sub Note 02-15-10 7.800 A 60 62,441 Bank of New York, Cap Security 12-01-26 (R) 7.780 A- 50 46,179 BNP Paribas Capital Trust, Sub Note 12-27-49 (R) 9.003# A- 45 46,849 National Westminster Bank Plc -- New York Branch, Sub Note 05-01-01 9.450 A+ 5 5,041 NB Capital Trust IV, Gtd Cap Security 04-15-27 8.250 A- 20 18,837 RBSG Capital Corp., Gtd Cap Note 03-01-04 10.125 A 15 16,467 Security Pacific Corp., Sub Note 03-01-01 11.000 A 40 40,260 ------------- 236,074 ------------- Beverages (0.12%) Canandaigua Brands, Inc., Sr Sub Note Ser C 12-15-03 8.750 B+ 30 29,700 ------------- Chemicals (0.17%) Akzo Nobel, Inc., Bond 11-15-03 (R) 6.000 A- 45 43,614 ------------- Cosmetics & Personal Care (0.19%) Procter & Gamble Co., Deb 01-15-26 6.450 AA 50 47,919 ------------- Energy (0.63%) Enron Corp., Note 08-15-05 (R) 8.000 BBB+ 60 62,402 MidAmerican Energy Holdings, Sr Bond 09-15-28 8.480 BBB- 60 64,901 P&L Coal Holdings Corp., Sr Sub Note Ser B 05-15-08 9.625 B 30 30,000 ------------- 157,303 ------------- Finance (4.32%) Boeing Capital Corp., Sr Note 09-27-10 7.375 AA- 60 64,577 Bombardier Capital, Inc., Note 01-15-02 (R) 6.000 A- 30 29,859 Citigroup, Inc., Sub Note 10-01-10 7.250 A+ 85 87,958 EES Coke Battery Co., Inc., Sr Sec Note Ser A 04-15-02 (R) 7.125 BBB 3 3,194 Ford Credit Auto Owner Trust, Pass Thru Ctf Ser 2000-F Class A-3 11-15-04 6.580 AAA 115 116,905 Ford Motor Credit Co., Note 04-28-03 6.125 A 35 34,771 General Electric Capital Corp., Med Term Note Ser A 11-15-10 6.875 AAA 65 68,044 General Motors Acceptance Corp., Note 07-15-05 7.500 A 60 61,726 Household Finance Corp., Note 11-01-02 5.875 A 70 69,431 Sr Unsub Note 02-01-09 5.875 A 30 27,572 HSBC Capital Funding, L.P., Gtd Note (Channel Islands) 12-31-49 (R) (Y) 9.547# A- 55 60,338 ING Capital Funding Trust III, Gtd Trust Preferred Security 12-31-49 8.439# A 50 50,756 Marlin Water Trust/Marlin Water Capital Corp., Sr Sec Note 12-15-01 (R) 7.090 BBB 30 30,039 Midland Funding Corp. I, Deb Ser C-94 07-23-02 10.330 BBB- 7 6,882 Sec Deb Ser C-91 07-23-02 10.330 BBB- 9 9,584 Midland Funding Corp. II, Deb Ser A 07-23-05 11.750 BB+ 65 68,843 MMCA Automobile Trust, Pass Thru Ctf Ser 2000-2 Class A-4 06-15-05 6.860 AAA 100 102,182 Nisource Finance Corp., Gtd Bond 11-15-10 (R) 7.875 BBB 55 57,528 Spear Leeds & Kellogg, L.P., Note 08-15-05 (R) 8.250 A+ 40 42,393 Toyota Auto Receivables Owner Trust, Asset Backed Note Ser 2000-B Class A-4 04-15-07 6.800 AAA 90 91,800 Yanacocha Receivables Master Trust, Pass Thru Cert Ser 1997-A 06-15-04 (R) 8.400 BBB- 3 2,972 ------------- 1,087,354 ------------- Food (0.20%) Earthgrains Co. (The), Note 08-01-03 8.375 BBB 50 50,665 ------------- Government - Foreign (0.39%) Nova Scotia, Province of, Deb (Canada) 11-15-19 (Y) 8.250 A- 20 23,285 Quebec, Province of, Deb (Canada) 09-15-29 (Y) 7.500 A+ 70 74,704 ------------- 97,989 ------------- Government - U.S. (36.85%) United States Treasury, Bond 08-15-17 8.875 AAA 482 655,144 Bond 02-15-23 7.125 AAA 1,360 1,620,522 Bond 08-15-29 6.125 AAA 230 250,162 Note 08-15-03 5.750 AAA 1,665 1,689,192 Note 02-15-05 7.500 AAA 1,025 1,114,524 Note 07-15-06 7.000 AAA 1,142 1,242,998 Note 05-15-08 5.625 AAA 2,375 2,437,344 Note 08-15-10 5.750 AAA 255 267,232 ------------- 9,277,118 ------------- Government - U.S. Agencies (24.03%) Federal National Mortgage Assn., 15 Yr Pass Thru Ctf 12-01-12 6.500 AAA 31 31,120 15 Yr Pass Thru Ctf 11-01-14 7.000 AAA 52 53,032 30 Yr Pass Thru Ctf 06-01-29 6.000 AAA 19 18,200 Note 04-15-03 5.750 AAA 310 310,629 Note 09-15-09 6.625 AAA 780 812,783 Note 01-15-30 7.125 AAA 240 268,649 Pass Thru Ctf Ser 1997-M8 Class A-1 01-25-22 6.940 AAA 3 2,684 Government National Mortgage Assn., 30 Yr Pass thru Ctf 07-15-26 8.000 AAA 23 23,747 30 Yr Pass Thru Ctf 04-15-28 to 06-15-29 6.500 AAA 3,153 3,117,377 30 Yr Pass Thru Ctf 06-15-28 to 07-15-29 7.000 AAA 1,284 1,289,673 30 Yr Pass Thru Ctf 10-15-29 to 10-15-30 7.500 AAA 118 120,016 ------------- 6,047,910 ------------- Insurance (0.61%) AXA, Sub Note (France) 12-15-30 (Y) 8.600 A- 50 51,815 Equitable Life Assurance Society USA, Surplus Note 12-01-05 (R) 6.950 A+ 15 15,099 Massachusetts Mutual Life Insurance Co., Surplus Note 11-15-23 (R) 7.625 AA 5 4,928 MONY Group, Inc. (The), Sr Note 12-15-05 7.450 A- 30 30,447 New York Life Insurance Co., Surplus Note 12-15-23 (R) 7.500 AA- 5 4,449 Sun Canada Financial Co., Gtd Sub Note 12-15-07 (R) 6.625 AA- 20 19,732 URC Holdings Corp., Sr Note 06-30-06 (R) 7.875 A- 25 25,989 ------------- 152,459 ------------- Leisure (0.31%) HMH Properties, Inc., Gtd Sr Note Ser A 08-01-05 7.875 BB 30 28,875 MGM Mirage, Inc., Gtd Sr Note 09-15-10 8.500 BBB- 30 30,749 Waterford Gaming LLC/Waterford Gaming Finance Corp., Sr Note 03-15-10 (R) 9.500 B+ 20 19,100 ------------- 78,724 ------------- Media (2.27%) Adelphia Communications Corp., Sr Note Ser B 10-01-02 9.250 B+ 17 16,405 Sr Note Ser B 07-15-03 8.125 B+ 15 13,931 British Sky Broadcasting Group Plc, Gtd Sr Note (United Kingdom) 07-15-09 (Y) 8.200 BB+ 40 37,638 Clear Channel Communications, Inc., Note 06-15-05 7.875 BBB- 40 41,337 Continental Cablevision, Inc., Sr Note 05-15-06 8.300 A 60 62,316 CSC Holdings, Inc., Sr Note Ser B 07-15-09 8.125 BB+ 55 55,525 Sr Sub Deb 05-15-16 10.500 BB- 20 21,900 Garden State Newspapers, Inc., Sr Sub Note 07-01-11 8.625 B+ 45 40,725 Jones Intercable, Inc., Sr Note 04-15-08 7.625 BBB 90 91,301 Lenfest Communications, Inc., Sr Note 11-01-05 8.375 BBB 40 42,822 Mediacom LLC/Mediacom Capital Corp., Sr Note Ser B 04-15-08 8.500 B+ 20 18,300 News America Holdings, Inc., Gtd Sr Deb 08-10-18 8.250 BBB- 20 18,418 TCI Communications, Inc., Sr Deb 02-15-26 7.875 A 45 42,261 Time Warner, Inc., Deb 01-15-13 9.125 BBB 58 67,415 ------------- 570,294 ------------- Medical (0.46%) Dynacare, Inc., Sr Note (Canada) 01-15-06 (Y) 10.750 B+ 37 35,520 Fresenius Medical Care Capital Trust II, Gtd Trust Preferred Security 02-01-08 7.875 B+ 10 9,225 HCA - The Healthcare Co., Note 09-01-10 8.750 BB+ 20 21,050 Quest Diagnostics, Inc., Sr Sub Note 12-15-06 10.750 B+ 23 24,495 Tenet Healthcare Corp., Sr Note 01-15-05 8.000 BB+ 25 25,313 ------------- 115,603 ------------- Metal (0.32%) WMC Finance (USA), Ltd., Gtd Note (Australia) 11-15-03 (Y) 6.500 A 80 80,029 ------------- Mortgage Banking (5.52%) AMRESCO Residential Securities Corp. Mortgage Loan Trust, Pass Thru Ctf Ser 1998-1 Class A-6 08-25-27 6.510 AAA 150 149,555 Citibank Credit Card Master Trust I, Class A Credit Card Part Cert Ser 1997-2 02-15-04 6.550 AAA 130 130,650 Commercial Mortgage Acceptance Corp., Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-08 6.790 Aaa 73 74,577 ContiMortgage Home Equity Loan Trust, Pass Thru Ctf Ser 1995-2 Class A-5 08-15-25 8.100 AAA 10 10,063 Credit Suisse First Boston Mortgage Securities Corp., Commercial Mtg Pass Thru Ctf Ser 1998-C1 Class A-1A 12-17-07 6.260 AAA 20 20,221 EQCC Home Equity Loan Trust, Pass Thru Ctf Ser 1997-3 Class A-9 02-15-29 6.570 AAA 145 144,297 GMAC Commercial Mortgage Securities, Inc., Pass Thru Ctf Ser 1997-C1 Class A-2 09-15-06 6.853 Aaa 50 50,953 Pass Thru Ctf Ser 1997-C2 Class A-3 11-15-07 6.566 Aaa 175 174,631 IMC Home Equity Loan Trust, Pass Thru Ctf Ser 1998-1 Class A-4 03-20-25 6.600 AAA 15 14,864 LB Commercial Conduit Mortgage Trust, Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-07 6.410 Aaa 52 51,851 Money Store Home Equity Trust (The), Pass Thru Ctf Ser 1997-D Class AF-7 12-15-38 6.485 AAA 16 15,840 Morgan Stanley Capital I, Inc., Pass Thru Ctf Ser 1997-WF1 Class A-1 10-15-06 (R) 6.830 AAA 228 230,773 Pass Thru Ctf Ser 1999-CAM1 Class A-3 11-15-08 6.920 AAA 140 143,866 Salomon Brothers Mortgage Securities VII, Inc., Mtg Pass Thru Ctf Ser 1997-HUD2 Class A-2 07-25-24 6.750 Aaa 6 5,987 Saxon Asset Securities Trust, Pass Thru Ctf Ser 2000-2 Class AF-2 06-25-15 7.965 AAA 105 106,805 UCFC Home Equity Loan Trust, Pass Thru Ctf Ser 1997-A1 Class A-8 06-15-28 7.220 AAA 9 9,103 Pass Thru Ctf Ser 1997-B Class A-6 10-15-28 6.900 AAA 55 55,453 ------------- 1,389,489 ------------- Oil & Gas (1.90%) Alberta Energy Co., Ltd., Note (Canada) 09-15-30 (Y) 8.125 BBB+ 45 48,028 Amerada Hess Corp., Bond 10-01-29 7.875 BBB+ 70 73,390 Apache Finance Canada Corp., Note (Canada) 12-15-29 (Y) 7.750 BBB+ 75 79,207 El Paso Energy Corp., Med Term Note 10-15-30 8.050 BBB 75 78,926 Louis Dreyfus Natural Gas Corp., Note 12-01-07 6.875 BBB 40 39,697 Occidental Petroleum Corp., Sr Deb 09-15-09 10.125 BBB- 15 17,837 Ocean Energy, Inc., Gtd Sr Sub Note Ser B 07-15-07 8.875 BB+ 20 20,700 Petroleum Geo-Services ASA, Sr Note (Norway) 03-30-28 (Y) 7.125 BBB 50 40,692 Santa Fe Snyder Corp., Sr Sub Note 06-15-07 8.750 BBB+ 20 21,132 Tosco Corp., Note 02-15-30 8.125 BBB 55 59,173 ------------- 478,782 ------------- Paper & Paper Products (0.19%) International Paper Co., Note 07-08-05 (R) 8.125 BBB+ 45 46,637 ------------- Real Estate Investment Trust (0.57%) American Health Properties, Inc., Note 01-15-07 7.500 BBB- 20 19,080 Cabot Industrial Properties, L.P., Note 05-01-04 7.125 BBB- 25 24,925 Camden Property Trust, Sr Note 04-15-04 7.000 BBB 30 29,801 Liberty Property, L.P., Med Term Note 06-05-02 6.600 BBB- 40 41,037 ProLogis Trust, Sr Note 04-15-04 6.700 BBB+ 25 24,756 TriNet Corporate Realty Trust, Inc., Note 05-15-01 7.300 BB 5 4,913 ------------- 144,512 ------------- Telecommunications (2.01%) BellSouth Capital Funding Corp., Deb 02-15-30 7.875 AA- 50 51,556 Clearnet Communications, Inc., Sr Disc Note, Step Coupon (10.125%, 05-01-04) (Canada) 05-01-09 (A) (Y) Zero B3 30 24,000 Cox Communications, Inc., Note 11-01-10 7.750 BBB 40 41,321 Dominion Resources, Inc., Sr Note Ser A 06-15-10 8.125 BBB+ 60 65,217 LCI International, Inc., Sr Note 06-15-07 7.250 BBB+ 30 29,978 McLeodUSA, Inc., Sr Note 11-01-08 9.500 B+ 25 22,750 MetroNet Communications Corp., Sr Note (Canada) 08-15-07 (Y) 12.000 BBB 15 16,500 NTL Communications Corp., Sr Note Ser B 10-01-08 11.500 B 40 35,600 Qwest Capital Funding, Inc., Gtd Note 07-15-28 6.875 BBB+ 65 57,407 TeleCorp PCS, Inc., Sr Sub Disc Note, Step Coupon (11.625%, 04-15-04) 04-15-09 (A) Zero B3 25 17,000 Verizon Global Funding Corp., Bond 12-01-30 (R) 7.750 A+ 70 72,073 VoiceStream Wireless Corp., Sr Note 09-15-09 11.500 CCC+ 20 21,950 Sr Note 11-15-09 10.375 B- 10 10,775 WorldCom, Inc., Note 05-15-06 8.000 A- 40 40,864 ------------- 506,991 ------------- Transportation (2.55%) America West Airlines, Pass Thru Ctf Ser 1996-1B 01-02-08 6.930 A- 3 3,290 Burlington Northern & Santa Fe Railway Co., Deb 08-15-30 7.950 BBB+ 70 72,758 Continental Airlines, Inc., Pass Thru Ctf Ser 1997-2C 06-30-04 7.206 BBB 102 101,835 Pass Thru Ctf Ser 1999-1A 02-02-19 6.545 AA+ 58 56,722 Delta Air Lines, Inc., Pass Thru Ctf Ser 2000-1 Class A-2 11-18-10 7.570 AAA 45 47,655 Northwest Airlines, Inc., Gtd Note 03-15-04 8.375 BB 25 24,536 Pass Thru Ctf Ser 1996-1D 01-02-15 8.970 BBB- 5 4,772 NWA Trust, Sr Note Ser A 12-21-12 9.250 AA 37 41,165 Railcar Trust No. 1992-1, Pass Thru Ser 1992-1 Class A 06-01-04 7.750 AAA 61 62,568 United Air Lines, Inc., Pass Thru Ctf Ser 2000-1 Class A-1 01-01-14 7.783 AAA 75 78,191 Pass Thru Ctf Ser 2000-2 Class A-1 04-01-12 7.032 AAA 70 70,398 US Airways, Inc., Pass Thru Ctf Ser 1989-A2 01-01-13 9.820 BB- 40 35,650 Pass Thru Ctf Ser 1990-A1 03-19-05 11.200 BB- 35 35,994 Wisconsin Central Transportation Corp., Note 04-15-08 6.625 BBB- 8 7,479 ------------- 643,013 ------------- Utilities (5.53%) AES Corp., Sr Note 06-01-09 9.500 BB 35 36,225 Sr Note 09-15-10 9.375 BB 20 20,350 Sr Sub Note 07-15-06 10.250 B+ 10 10,400 AES Eastern Energy, L.P., Pass Thru Ctf Ser 1999-A 01-02-17 9.000 BBB- 25 25,755 Avon Energy Partners Holdings, Sr Note (United Kingdom) 12-11-02 (R) (Y) 6.730 BBB+ 40 39,693 Beaver Valley Funding Corp., Deb 06-01-07 8.625 BB- 60 62,145 Sec Lease Oblig Bond 06-01-17 9.000 BB- 23 25,081 BVPS II Funding Corp., Collateralized Lease Bond 06-01-17 8.890 BB- 5 5,512 Calpine Corp., Sr Note 08-15-05 8.250 BB+ 70 71,004 Sr Note 04-01-08 7.875 BB+ 15 14,700 Cleveland Electric Illuminating Co., 1st Mtg Ser B 05-15-05 9.500 BB+ 45 46,575 Sr Sec Note Ser D 11-01-17 7.880 BB+ 20 20,401 CMS Energy Corp., Sr Note 05-15-02 8.125 BB 60 60,023 Sr Note 10-15-07 9.875 BB 15 15,563 Sr Note Ser B 01-15-04 6.750 BB 55 51,975 Connecticut Light & Power Co., 1st Mtg Ser C 06-01-02 7.750 BBB- 45 45,177 East Coast Power LLC, Sr Sec Note 03-31-12 7.066 BBB- 30 28,730 EIP Funding-PNM, Sec Fac Bond 10-01-12 10.250 BBB- 38 42,370 GG1B Funding Corp., Deb 01-15-11 7.430 BBB- 25 24,523 Hydro-Quebec, Gtd Bond (Canada) 02-01-21 (Y) 9.400 A+ 30 37,800 Gtd Bond Ser HY (Canada) 01-15-22 (Y) 8.400 A+ 20 23,636 Iberdrola International B.V., Note 10-01-02 7.500 AA- 35 35,833 Keyspan Corp., Note 11-15-10 7.625 A 45 47,768 Long Island Lighting Co., Deb 03-15-23 8.200 A- 40 39,800 Niagara Mohawk Power Corp., Sec Fac Bond 01-01-18 8.770 BBB 44 46,317 North Atlantic Energy Corp., 1st Mtg Ser A 06-01-02 9.050 BB+ 15 15,211 Northeast Utilities, Note Ser A 12-01-06 8.580 BB+ 6 6,366 PECO Energy Transition Trust, Pass Thru Ctf Ser 1999-A Class A-6 03-01-09 6.050 AAA 35 34,627 Pass Thru Ctf Ser 2000-A Class A-3 03-01-10 7.625 AAA 125 134,541 Pinnacle One Partners, L.P., Sr Note 08-15-04 (R) 8.830 BBB- 25 25,657 PNPP II Funding Corp., Deb 05-30-16 9.120 BB- 40 43,271 Puget Sound Energy, Inc., 1st Mtg Med Term Note Ser C 02-01-11 7.690 A- 40 41,786 Sierra Pacific Resources, Note 05-15-05 8.750 BBB 45 47,163 TXU Corp., Gtd Note 01-30-37 8.175 BBB- 35 33,121 Waterford 3 Funding Corp., Sec Lease Oblig Bond 01-02-17 8.090 BBB- 61 63,217 Xcel Energy, Inc., Sr Note 12-01-10 7.000 BBB+ 70 70,075 ------------- 1,392,391 ------------- TOTAL BONDS (Cost $22,605,396) (92.27%) 23,225,973 --------- ------------- NUMBER OF WARRANTS ----------- WARRANTS Telecommunications (0.00%) MetroNet Communications Corp. (Canada) (R) (Y) * 5 475 ------------- TOTAL WARRANTS (Cost $51) (0.00%) 475 --------- ------------- INTEREST PAR VALUE RATE (000s OMITTED) --------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (6.38%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 12-29-00, due 01-02-01 (Secured by U.S. Treasury Bonds, 6.750% thru 8.875%, due 08-15-17 thru 08-15-26) - Note B 5.950% $1,606 $1,606,000 ------------ Corporate Savings Account (0.00%) Investors Bank & Trust Company Daily Interest Savings Account Current Rate 5.20% 749 ------------ TOTAL SHORT-TERM INVESTMENTS (6.38%) 1,606,749 --------- ------------ TOTAL INVESTMENTS (98.65%) 24,833,197 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (1.35%) 339,520 --------- ------------ TOTAL NET ASSETS (100.00%) $25,172,717 ========= ============ (A) Cash interest will be paid on this obligation at the stated rate beginning on the stated date. (R) These securities are exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers, in transactions exempt from registration. Rule 144A securities amounted to $1,088,743 or 4.33% of net assets as of December 31, 2000. (Y) Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer; however, security is U.S. dollar denominated. * Non-income producing security. ** Credit ratings are unaudited and rated by Standard & Poor's where available, or Moody's Investor Services or John Hancock Advisers, Inc., where Standard & Poor's ratings are not available. # Represents rate in effect on December 31, 2000. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. High Yield Bond Fund Schedule of Investments December 31, 2000 - ----------------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. High Yield Bond Fund on December 31, 2000. It is divided into four main categories: bonds, common stocks, pre ferred stocks and warrants, and short-term investments. Bonds are further broken down by industry group. Short-term invest ments, which represent the Fund's "cash" position, are listed last. INTEREST CREDIT PAR VALUE MARKET ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE - ------------------------------------------ --------- ---------- -------------- ------------- BONDS Aerospace (0.06%) Compass Aerospace Corp., Gtd Sr Sub Note Ser D 04-15-05 10.125% CCC- $25 $4,250 ------------- Agricultural Operations (0.03%) Iowa Select Farms L.P./ISF Finance, Inc., Sr Sub Note 12-01-05 (B) (R) 10.750 D 10 2,200 ------------- Automobile/Trucks (0.91%) AM General Corp., Sr Note Ser B 05-01-02 12.875 B 50 46,500 J.B. Poindexter & Co., Inc., Sr Note 05-15-04 12.500 B 25 19,500 ------------- 66,000 ------------- Building (0.24%) Amatek Industries Property Ltd., Sr Sub Note (Australia) 02-15-08 (Y) 12.000 B 25 17,000 ------------- Business Services - Misc. (0.19%) AP Holdings, Inc., Sr Disc Note, Step Coupon (11.25%, 03-15-03) 03-15-08 (A) Zero CCC+ 200 14,000 ------------- Chemicals (2.87%) Huntsman ICI Chemicals LLC, Sr Sub Note 07-01-09 10.125 B+ 100 95,000 Huntsman ICI Holdings LLC, Sr Disc Note 12-31-09 Zero B+ 75 20,531 Trikem S.A., Bond (Brazil) 07-24-07 (R) (Y) 10.625 B+ 125 91,250 ------------- 206,781 ------------- Consumer Products Misc. (0.82%) Diamond Brands Operating Corp., Sr Sub Note 04-15-08 10.125 CCC 100 40,000 Indesco International, Inc., Sr Sub Note 04-15-08 9.750 D 100 19,000 ------------- 59,000 ------------- Containers (3.71%) Gaylord Container Corp., Sr Note Ser B 06-15-07 9.375 B- 15 9,450 Sr Sub Note Ser B 02-15-08 9.875 CCC+ 100 40,000 Kappa Beheer B.V., Sr Sub Bond (Netherlands) 07-15-09 (Y) 10.625 B 75 75,750 Sr Sub Bond, Step Coupon (12.50%, 07-15-04) (Netherlands) 07-15-09 (A) (E) Zero B 100 64,232 Riverwood International Corp., Gtd Sr Sub Note 04-01-08 10.875 CCC+ 20 17,900 Stone Container Corp., Unit (Sr Sub Deb & Supplemental Int Cert) 04-01-02 12.250 B- 60 60,600 ------------- 267,932 ------------- Cosmetics & Personal Care (0.08%) Global Health Sciences, Inc., Gtd Sr Note 05-01-08 (B) 11.000 D 75 6,000 ------------- Diversified Operations (0.84%) Diamond Holdings Plc, Bond (United Kingdom) 02-01-08 # 10.000 B- 50 60,462 ------------- Energy (1.48%) AEI Resources, Inc./AEI Resources Holdings, Inc., Gtd Note 12-15-05 (R) 10.500 CCC- 75 6,750 P&L Coal Holdings Corp., Sr Sub Note Ser B 05-15-08 9.625 B 100 100,000 ------------- 106,750 ------------- Food (3.11%) Agrilink Foods, Inc., Sr Sub Note 11-01-08 11.875 B 100 66,500 Mastellone Hermanos S.A., Sr Note (Argentina) 04-01-08 (Y) 11.750 B+ 125 86,250 RAB Holdings, Inc., Sr Note 05-01-08 (R) 13.000 Caa2 120 72,000 ------------- 224,750 ------------- Insurance (0.62%) Willis Corroon Corp., Gtd Sr Sub Note 02-01-09 9.000 B+ 50 44,750 ------------- Leisure (2.02%) Claridge Hotel & Casino Corp., 1st Mtg Note 02-01-02 (B) 11.750 Ca1 50 35,000 Fitzgeralds Gaming Corp., Gtd Sr Sec Note Ser B 12-15-04 (B) 12.250 Caa1 50 28,000 Production Resource Group LLC, Sr Sub Note 01-15-08 11.500 CCC- 25 5,250 SC International Services, Inc., Sr Sub Note Ser B 09-01-07 9.250 B 30 28,500 Trump Atlantic City Associates, 1st Mtg Note 05-01-06 11.250 B- 75 49,125 ------------- 145,875 ------------- Machinery (0.23%) Glasstech, Inc., Sr Note Ser B 07-01-04 12.750 B3 25 16,250 ------------- Manufacturing (0.17%) ICON Health & Fitness, Inc., Gtd Note 09-27-05 12.000 B 22 12,210 ------------- Media (3.31%) DIVA Systems Corp., Sr Disc Note Ser B, Step Coupon (12.625%, 03-01-03) 03-01-08 (A) Zero B- 50 20,000 Pegasus Communications Corp., Sr Note Ser B 08-01-07 12.500 CCC+ 35 36,400 Regional Independent Media Group Plc, Sr Disc Note, Step Coupon (12.875%, 07-01-03) (United Kingdom) 07-01-08 (A) # Zero B- 20 23,737 Sr Note (United Kingdom) 07-01-08 (Y) 10.500 B- 5 5,112 Sirius Satellite Radio, Inc., Sr Disc Note, Step Coupon (15.00%, 12-01-02) 12-01-07 (A) Zero CCC+ 110 45,100 United International Holdings, Inc., Sr Disc Note, Step Coupon (10.75%, 02-15-03) 02-15-08 (A) Zero B- 75 29,250 XM Satellite Radio, Inc., Sr Sec Note 03-15-10 14.000 CCC+ 150 79,500 ------------- 239,099 ------------- Medical (0.55%) Total Renal Care Holdings, Inc., Conv Sub Note 05-15-09 (R) 7.000 B- 50 39,375 ------------- Metal (6.38%) Apatief Freeport Finance Co. B.V. (P.T.), Sr Note 04-15-01 9.750 CCC+ 280 263,200 Doe Run Resources Corp., Gtd Sr Note Ser B 03-15-03 13.070*** B- 25 12,500 Gtd Sr Note Ser B 03-15-05 11.250 B- 10 5,000 Freeport-McMoRan Copper & Gold, Inc., Sr Note 11-15-06 7.500 CCC+ 75 44,250 Golden Northwest Aluminum, Inc., 1st Mtg Note 12-15-06 12.000 BB- 25 22,250 Great Lakes Acquisition Corp., Sr Disc Deb, Step Coupon (13.125%, 05-15-03) 05-15-09 (A) Zero B- 200 36,000 TVX Gold, Inc., Conv Sub Note (Canada) 03-28-02 (Y) 5.000 B- 100 77,000 ------------- 460,200 ------------- Oil & Gas (8.99%) Comstock Resources, Inc., Gtd Sr Note 05-01-07 11.250 B 75 77,438 Giant Industries, Inc., Sr Sub Note 11-15-03 9.750 B+ 25 24,312 Gothic Production Corp., Sr Sec Note Ser B 05-01-05 11.125 CCC 100 107,000 Key Energy Services, Inc., Conv Sub Note 09-15-04 5.000 B3 143 120,120 Conv Sub Note 09-15-04 (R) 5.000 B3 80 67,200 Sr Sub Note Ser B 01-15-09 14.000 B- 100 113,750 Mariner Energy, Inc., Sr Sub Note Ser B 08-01-06 10.500 B- 10 9,600 Ocean Rig Norway A.S., Gtd Sr Sec Note (Norway) 06-01-08 (Y) 10.250 B- 55 48,400 Universal Compression, Inc., Sr Disc Note, Step Coupon (9.875%, 02-15-03) 02-15-08 (A) Zero B 100 81,000 ------------- 648,820 ------------- Paper & Paper Products (3.25%) APP China Group Ltd., Unit (Sr Disc Note & Warrant) (Indonesia) 03-15-10 (R) (Y) 14.000 CCC+ 250 95,000 APP Finance (VII) Mauritius Ltd., Gtd Note (Indonesia) 04-30-03 (R) (Y) 3.500 CCC+ 10 3,100 Grupo Industrial Durango, S.A., Note (Mexico) 08-01-03 (Y) 12.625 BB- 125 126,563 Sappi BVI Finance Ltd., Gtd Conv Bond (South Africa) 08-01-02 (R) (Y) 7.500 BB- 10 9,745 ------------- 234,408 ------------- Real Estate Operations (0.01%) Signature Resorts, Inc., Conv Sub Note 01-15-07 (B) 5.750 Caa1 35 875 ------------- Retail (0.73%) Imperial Home Decor Group, Inc, Gtd Sr Sub Note 03-15-08 (B) 11.000 C 125 625 SpinCycle, Inc., Sr Disc Note, Step Coupon (12.75%, 05-01-01) 05-01-05 (A) Zero CCC+ 25 7,250 St. John Knits International, Inc., Sr Sub Note 07-01-09 12.500 B- 50 45,000 ------------- 52,875 ------------- Steel (1.19%) Gulf States Steel, Inc. of Alabama, 1st Mtg Bond 04-15-03 (B) 13.500 Caa3 100 250 LTV Corp. (The), Gtd Sr Sub Note 11-15-09 11.750 B 50 7,750 Metallurg Holdings, Inc., Sr Disc Note, Step Coupon (12.75%, 07-15-03) 07-15-08 (A) Zero CCC+ 50 12,500 Metallurg, Inc., Gtd Sr Note Ser B 12-01-07 11.000 B- 30 23,400 NSM Steel, Inc./NSM Steel Ltd., Gtd Sr Sub Mtg Note Ser B 02-01-08 (B) (R) 12.250 D 75 750 Oregon Steel CF&I, Note 03-31-03 (r) 9.500 B 56 41,218 ------------- 85,868 ------------- Telecommunications (10.68%) AMSC Acquisition Co., Inc., Sr Note Ser B 04-01-08 12.250 B- 40 17,600 CTI Holdings S.A., Sr Note, Step Coupon (11.25%, 04-15-03) (Argentina) 04-15-08 (A) (Y) Zero B 75 28,500 Esprit Telecom Group Plc, Sr Note (Germany) 06-15-08 # 11.000 BB- 40 192 Grupo Iusacell S.A. de C.V., Sr Note (Mexico) 12-01-06 (Y) 14.250 B+ 35 34,650 GT Group Telecom, Inc., Unit (Sr Disc Note & Warrant), Step Coupon (13.25%, 02-01-05) 02-01-10 1.000 B- 100 42,000 ITC DeltaCom, Inc., Sr Note 11-15-08 9.750 B+ 100 76,000 Jazztel Plc, Sr Note (United Kingdom) 12-15-09 (E) 13.250 CCC+ 50 30,475 McLeodUSA, Inc., Sr Note 03-15-08 8.375 B+ 35 30,450 Metromedia Fiber Network, Inc., Sr Note Ser B 11-15-08 10.000 B+ 75 62,437 Nextel Partners, Inc., Sr Disc Note, Step Coupon (14.00%, 02-01-04) 02-01-09 (A) Zero CCC+ 15 9,900 NTL Communications Corp., Sr Note Ser B 10-01-08 11.500 B 50 44,500 Sr Note Ser B, Step Coupon (12.375%, 10-01-03) 10-01-08 (A) Zero B 100 55,000 ONO Finance Plc, Sr Note (United Kingdom) 07-15-10 (E) (R) 14.000 CCC+ 50 35,633 Primus Telecommunications Group, Inc., Sr Note 10-15-09 12.750 B- 50 15,500 PTC International Finance II S.A., Gtd Sr Sub Note (Luxembourg) 12-01-09 (E) 11.250 B+ 25 22,622 Telewest Communications Plc, Sr Disc Note, Step Coupon (9.875%, 04-15-04) (United Kingdom) 04-15-09 (A) # Zero B+ 25 16,795 United Pan-Europe Communicatons N.V., Sr Disc Note Ser B, Step Coupon (13.375%, 11-01-04) (Netherlands) 11-01-09 (A) (E) Zero B- 30 9,565 Sr Note (Netherlands) 11-01-07 (E) 10.875 B- 50 30,475 Sr Note (Netherlands) 11-01-09 (E) 11.250 B- 25 15,238 Versatel Telecom International N.V., Sr Note (Netherlands) 05-15-08 (Y) 13.250 B- 125 76,250 Viatel, Inc., Sr Note (Germany) 04-15-08 # 11.150 Caa1 170 26,896 Sr Sec Note 04-15-08 11.250 B- 75 22,500 World Access, Inc., Sr Note Ser B 01-15-08 13.250 B- 100 68,000 ------------- 771,178 ------------- Textile (1.58%) Coyne International Enterprises Corp., Sr Sub Note 06-01-08 11.250 B- 75 54,000 Steel Heddle Group, Inc., Sr Disc Deb, Step Coupon (13.75%, 06-01-03) 06-01-09 (A) Zero Caa2 200 10,000 Steel Heddle Manufacturing Co., Gtd Sr Sub Note Ser B 06-01-08 10.625 Caa1 50 7,500 Tropical Sportswear International Corp., Sr Sub Note Ser A 06-15-08 11.000 B- 50 42,500 ------------- 114,000 ------------- Transport (6.95%) Amtran, Inc., Sr Note 08-01-04 10.500 B+ 50 45,250 Cenargo International Plc, 1st Mtg Note (United Kingdom) 06-15-08 (Y) 9.750 B+ 20 15,800 CHC Helicopter Corp., Sr Sub Note (Canada) 07-15-07 (E) 11.750 B 100 98,927 Fine Air Services, Inc., Sr Note 06-01-08 (B) 9.875 CC 105 5,247 North American Van Lines, Inc., Sr Sub Note 12-01-09 (R) 13.375 B- 75 61,500 Northwest Airlines Corp., Gtd Note 03-15-07 8.700 BB 100 96,592 Pacer International, Inc., Sr Sub Note 06-01-07 11.750 B- 50 48,250 Pacific & Atlantic Holdings, Inc., Sr Sec Note 12-31-07 (R) 10.500 CC 20 10,996 US Airways, Inc., Pass Thru Ctf Ser 1993-A3 03-01-13 10.375 BB- 50 44,500 Sr Note 02-01-01 9.625 CCC+ 75 74,875 ------------- 501,937 ------------- Utilities (0.66%) CMS Energy Corp., Sr Note 10-15-07 9.875 BB 25 25,937 Monterrey Power S.A. de C.V., Sr Sec Bond (Mexico) 11-15-09 (R) (Y) 9.625 BB+ 23 21,768 ------------- 47,705 ------------- Waste Disposal Service & Equip (1.69%) Allied Waste North America, Inc., Sr Sub Note Ser B 08-01-09 10.000 B+ 125 116,875 Waste Systems International, Inc., Gtd Sr Note 01-15-06 11.500 D 15 5,250 ------------- 122,125 ------------- TOTAL BONDS (Cost 6,946,112) (63.35%) 4,572,675 --------- ------------- NUMBER OF SHARES OR WARRANTS -------- COMMON STOCKS Abitibi-Consolidated, Inc., Common Stock (Canada) (Y) 12,500 114,844 American Pacific Corp., Common Stock** 5,000 27,500 AMR Corp., Common Stock ** 2,000 78,375 Chesapeake Energy Corp., Common Stock** 772 7,865 Gaylord Container Corp. (Class A), Common Stock** 6,500 6,500 Grey Wolf, Inc., Common Stock** 28,850 169,494 International Wireless Communications Holdings, Inc., Common Stock 2,417 1,329 KLM Royal Dutch Airlines N.V., Common Stock (Netherlands) (Y) 78 1,755 Northwest Airlines Corp., Common Stock** 6,500 195,813 Pathmark Stores, Inc., Common Stock** 1,046 17,259 Star Gas Partners, L.P., Common Stock 3,300 57,750 Waste Systems International, Inc., Common Stock** 8,715 1,634 ------------- TOTAL COMMON STOCKS (Cost 892,077) (9.42%) 680,118 --------- ------------- PREFERRED STOCKS AND WARRANTS Asia Pulp & Paper Co. Ltd., Warrant (R)** 250 3 DIVA Systems Corp., Warrant (R)** 150 263 Georgia-Pacific Corp., Unit (Common & Preferred Shares) 3,000 02,938 Gothic Energy Corp., Warrant** 79 0 GT Group Telecom, Inc., Warrant** 100 7,000 HF Holdings, Inc., Warrant** 212 106 Hills Stores Co., Warrant** 35,000 0 Motient Corp., Warrant (R)** 40 400 Nakornthai Strip Mill Plc, Warrant (Thailand) (R) (Y)** 63,309 63 Nextel Communications, Inc., 11.125%, Ser E, Preferred Stock 198 68,300 ONO Finance Plc, Warrant (United Kingdom) (R) (Y)** 50 3,000 Pacific & Atlantic Holdings, Inc., 7.50%, Preferred Stock 1,172 5,860 Pathmark Stores, Inc., Warrant** 740 3,561 Smurfit-Stone Container Corp., 7.00%, Ser A, Preferred Stock 3,000 49,500 SpinCycle, Inc., Warrant (R)** 25 0 TimberWest Forest Corp., Unit (Common & Preferred Shares) (Canada) # 38,000 74,501 Waste Systems International, Inc., 8.00%, Ser E, Preferred Stock 160 7,360 Waste Systems International, Inc., Warrant (R)** 225 2 XM Satellite Radio Holdings, Inc., Warrant (R)** 150 3,750 ------------- TOTAL PREFERRED STOCKS AND WARRANTS (Cost $820,929) (8.68%) 626,607 --------- ------------- INTEREST PAR VALUE RATE (000s OMITTED) -------- ------------ SHORT-TERM INVESTMENTS Joint Repurchase Agreement (16.10%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 12-29-00, due 01-02-01 (Secured by U.S. Treasury Bonds, 6.750% thru 8.875%, due 08-15-17 thru 08-15-26) - Note B 5.950% $1,162 $1,162,000 ------------ Corporate Savings Account (0.01%) Investors Bank & Trust Company Daily Interest Savings Account Current Rate 5.20% 951 ------------ TOTAL SHORT-TERM INVESTMENTS (16.11%) 1,162, 951 --------- ------------ TOTAL INVESTMENTS (97.56%) 7,042,351 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (2.44%) 176,283 --------- ------------ TOTAL NET ASSETS (100.00%) $7,218,634 ========= ============ * Credit ratings are unaudited and rated by Moody's Investors Service or John Hancock Advisers, Inc. where Standard & Poor's ratings are not available. ** Non-income producing security. *** Represents rate in effect on December 31, 2000. # Par value of foreign bonds and common stocks is expressed in local currency, as shown parenthetically in security description. (A) Cash interest will be paid on this obligation at the stated rate beginning on the stated date. (B) Non-income producing issuer, filed for protection under Federal Bankruptcy Code or is in default of interest payment. (E) Parenthetical disclosure of a country in the security description represents country of issuer; however, security is euro-denominated. (R) These securities are exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers, in transactions exempt from registration. Rule 144A securities amounted to $524,748 or 7.27% of net assets as of December 31, 2000. (Y) Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer; however, security is U.S. dollar-denominated. (r) Direct placement securities are restricted as to resale. They have been valued in accordance with procedures approved by the Trustees after consideration of restrictions as to resale, financial condition and prospects of the issuer, general market conditions and pertinent information in accordance with the Fund's By-laws and the Investment Company Act of 1940, as amended. The Fund has limited rights to registration under the Securities Act of 1933 with respect to these restricted securities. Additional information on these securities is as follows: MARKET MARKET VALUE AS A VALUE AT ACQUISITION ACQUISITION % OF FUND DECENBER 31, ISSUER, DESCRIPTION DATE COST NET ASSETS 2000 - ------------------- ---- ---- ---------- ---- Oregon Steel CF&I 05-14-98 $54,039 0.57% $41,218 The percentage shown for each investment category is the total value of that category expressed as a percentage of the net assets of the Fund. See notes to financial statements. Portfolio Concentration December 31, 2000 (Unaudited) - ------------------------------------------------------------------------- The V.A. High Yield Bond Fund invests primarily in securities issued in the United States of America. The performance of this Fund is closely tied to the economic and financial conditions of the countries within which it invests. The concentration of investments by industry category for individual securities held by the Fund is shown in the schedule of investments. In addition, concentration of investments can be aggregated by various countries. The table below shows the percentages of the Fund's investments at December 31, 2000 assigned to country categories. MARKET VALUE AS A % COUNTRY DIVERSIFICATION OF FUND NET ASSETS - ----------------------- ------------------ Argentina 1.59% Australia 0.24 Brazil 1.26 Canada 7.83 Germany 0.38 Indonesia 1.36 Luxembourg 0.31 Mexico 2.53 Netherlands 3.79 Norway 0.67 South Africa 0.13 Thailand 0.00 United Kingdom 2.65 United States 74.82 ------- TOTAL INVESTMENTS 97.56% ======= Additionally, the concentration of investments can be aggregated by the quality rating for each debt security. QUALITY DISTRIBUTION - -------------------- BB 4.81% B 41.87 CCC 15.49 CC 0.71 C 0.01 D 0.46 ------- TOTAL BONDS 63.35% ======= See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Money Market Fund Schedule of Investments December 31, 2000 - ----------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. Money Market Fund on December 31, 2000. INTEREST QUALITY PAR VALUE MARKET ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE - ------------------- --------- ---------- -------------- ------------- COMMERCIAL PAPER Automobile/Trucks (7.97%) Ford Motor Credit Co., 01-11-01 6.570% Tier 1 $800 $798,540 Ford Motor Credit Co., 01-16-01 6.530 Tier 1 2,100 2,094,286 General Motors Acceptance Corp., 01-10-01 6.560 Tier 1 1,500 1,497,540 General Motors Acceptance Corp., 01-10-01 6.510 Tier 1 1,000 998,372 General Motors Acceptance Corp., 01-11-01 6.520 Tier 1 500 499,094 ------------- 5,887,832 ------------- Banks - Foreign (10.75%) Abbey National North America Corp., 01-25-01 6.570 Tier 1 1,000 995,620 Abbey National North America Corp., 02-01-01 6.500 Tier 1 2,000 1,988,806 Deutsche Bank Financial, 02-07-01 6.510 Tier 1 2,000 1,986,618 Deutsche Bank Financial, 05-10-01 6.170 Tier 1 1,000 977,891 UBS Financial, Inc., 01-02-01 6.480 Tier 1 2,000 1,999,640 ------------- 7,948,575 ------------- Banks - United States (4.03%) Morgan (J.P.) & Co., Inc., 02-05-01 6.520 Tier 1 3,000 2,980,983 ------------- Beverages (3.34%) Coca-Cola Co., 03-09-01 6.460 Tier 1 2,500 2,469,943 ------------- Broker Services (9.97%) Bear Stearns Cos., Inc., 01-23-01 6.500 Tier 1 1,500 1,494,042 Bear Stearns Cos., Inc., 01-26-01 6.500 Tier 1 1,500 1,493,229 Goldman Sachs Group, L.P., 01-11-01 6.530 Tier 1 1,000 998,186 Goldman Sachs Group, L.P., 02-05-01 6.510 Tier 1 1,400 1,391,139 Merrill Lynch & Co., 01-19-01 6.510 Tier 1 1,400 1,395,443 Merrill Lynch & Co., 01-31-01 6.710 Tier 1 600 596,645 ------------- 7,368,684 ------------- Building (2.97%) Halifax Group PLC, 01-18-01 6.510 Tier 1 2,200 2,193,237 ------------- Finance (19.79%) American Express Credit Corp., 01-12-01 6.530 Tier 1 3,000 2,994,014 Associates Corp. N. A., 01-12-01 6.540 Tier 1 2,500 2,495,004 CIT Group Holdings, Inc., 01-23-01 6.500 Tier 1 2,000 1,992,056 General Electric Capital Corp., 01-19-01 6.530 Tier 1 1,200 1,196,082 General Electric Capital Corp., 05-21-01 6.000 Tier 1 1,500 1,465,000 Household Financial Corp., 01-16-01 6.540 Tier 1 3,200 3,191,280 International Lease Finance, 01-23-01 6.500 Tier 1 1,300 1,294,836 ------------- 14,628,272 ------------- Food (3.35%) Heinz (H.J.) Co., 02-23-01 6.460 Tier 1 2,500 2,476,224 ------------- Insurance (2.96%) American General Corp., 01-17-01 6.520 Tier 1 700 697,972 American General Corp., 02-08-01 6.510 Tier 1 1,500 1,489,693 ------------- 2,187,665 ------------- Mortgage Banking (4.05%) Countrywide Home Loans, 01-19-01 6.550 Tier 1 3,000 2,990,175 ------------- Utilities (2.16%) Duke Energy Co., 01-04-01 6.480 Tier 1 1,600 1,599,136 ------------- TOTAL COMMERCIAL PAPER (Cost $52,730,726) (71.34%) 52,730,726 ------------- CORPORATE INTEREST-BEARING OBLIGATIONS Finance (0.68%) General Electric Capital Corp., 05-04-01 6.020 Tier 1 500 499,199 ------------- TOTAL CORPORATE INTEREST-BEARING OBLIGATIONS (Cost $499,199) (0.68%) 499,199 ------------- U.S. GOVERNMENT OBLIGATIONS Government - U.S. Agencies (11.34%) Federal Home Loan Bank, 06-15-01 5.930 Tier 1 5,000 4,864,104 Federal National Mortgage Assn., 03-15-01 5.625 Tier 1 600 598,832 Federal National Mortgage Assn., 06-14-01 5.915 Tier 1 3,000 2,919,162 ------------- 8,382,098 ------------- TOTAL U.S. GOVERNMENT OBLIGATIONS (Cost $8,382,098) (11.34%) 8,382,098 ------------- TOTAL SHORT-TERM INVESTMENTS (Cost $61,612,023) (83.36%) 61,612,023 ------------- JOINT REPURCHASE AGREEMENT (8.53%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 12-29-00, due 01-02-01 (Secured by U.S. Treasury Bonds, 10.750% and 13.875%, due 02-15-03 and 05-15-11) - Note B 5.950% Tier 1 $6,307 $6,307,000 ------------ TOTAL JOINT REPURCHASE AGREEMENT (8.53%) 6,307,000 --------- ------------ TOTAL INVESTMENTS (91.89%) 67,919,023 --------- ------------ OTHER ASSETS AND LIABILITIES, NET (8.11%) 5,998,309 --------- ------------ TOTAL NET ASSETS (100.00%) $73,917,332 ========= ============ * Quality ratings indicate the categories of eligible securities, as defined by Rule 2a-7 of the Investment Company Act of 1940, owned by the Fund. The percentage shown for each investment category is the total value of that category expressed as a percentage of the net assets of the Fund. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Strategic Income Fund Schedule of Investments December 31, 2000 - ----------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. Strategic Income Fund on December 31, 2000. It is divided into four main categories: bonds, common stocks, pre ferred stocks and warrants, and short-term investments. Bonds are further broken down by industry group. Short-term invest ments, which represent the Fund's "cash" position, are listed last. INTEREST CREDIT PAR VALUE MARKET ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE - ------------------------------------------ --------- ---------- -------------- ---------------- BONDS Advertising (0.32%) Go Outdoor Systems Holding S.A., Sr Sub Note (France) 07-15-09 (E) 10.500% B- $100 $108,773 ------------- Building (0.26%) Standard Pacific Corp., Sr Note 04-01-09 8.500 BB 100 90,000 ------------- Chemicals (0.28%) Huntsman ICI Chemicals LLC, Sr Sub Note 07-01-09 10.125 B+ 100 95,000 ------------- Computers (0.08%) Unisys Corp., Sr Note 10-15-04 11.750 BB+ 25 26,313 ------------- Containers (0.49%) Berry Plastics Corp., Sr Sub Note 04-15-04 12.250 B- 100 84,000 Consolidated Containers Co. LLC/Cons. Container Capital, Inc., Sr Sub Note 07-15-09 10.125 B 100 85,500 ------------- 169,500 ------------- Electronics (0.25%) Communications Instruments, Inc., Sr Sub Note Ser B 09-15-04 10.000 B- 100 85,500 ------------- Energy (0.03%) AEI Resources, Inc./AEI Resources Holdings, Inc., Note 12-15-05 (R) 10.500 CCC- 100 9,000 ------------- Finance (0.26%) PTC International Finance II S.A., Sr Sub Note (Luxembourg) 12-01-09 (E) (R) 11.250 B+ 100 90,488 ------------- Government - Foreign (10.03%) Canada, Government of, Government Bond (Canada) 09-01-02# 5.500 AAA 150 100,223 Government Bond (Canada) 12-01-05# 8.750 AAA 300 228,787 Government Bond (Canada) 12-01-06# 7.000 AAA 2,000 1,442,029 Government Bond (Canada) 06-01-09# 5.500 AAA 750 503,462 Government Bond (Canada) 06-01-10# 5.500 AA+ 300 201,624 Russia, Federation of, Sr Unsub Note (Russia) 06-10-03 (Y) 11.750 B- 440 412,500 Unsub Note (Russia) 06-24-28 (Y) 12.750 B- 200 167,000 Venezuela, Republic of, Floating Rate Bond Ser DL (Venezuela) 12-18-07 (Y) 6.813 B 500 402,496 ------------- 3,458,121 ------------- Government - U.S. (48.73%) United States Treasury, Bond 08-15-01 13.375 AAA 7,000 7,320,460 Bond 08-15-05 6.500 AAA 400 422,936 Bond 08-15-05 10.750 AAA 400 490,876 Bond 02-15-16 9.250 AAA 615 849,278 Bond 08-15-19 8.125 AAA 1,340 1,732,164 Bond 08-15-23 6.250 AAA 1,100 1,189,716 Bond 02-15-27 6.625 AAA 1,100 1,256,409 Bond 11-15-28 5.250 AAA 750 717,893 Note 08-31-02 6.250 AAA 870 883,189 Note 08-15-04 7.250 AAA 590 630,745 Note 05-15-05 6.500 AAA 300 316,500 Note 08-15-07 6.125 AAA 940 989,792 ------------- 16,799,958 ------------- Leisure (1.22%) HMH Properties, Inc., Sr Note Ser B 08-01-08 7.875 BB 100 94,750 Jupiters Ltd., Sr Note (Australia) 03-01-06 (Y) 8.500 BB+ 150 144,375 Sun International Hotels Ltd., Sr Sub Note (Bahamas) 12-15-07 (Y) 8.625 B+ 100 91,000 Waterford Gaming LLC Sr Note 03-15-10 (R) 9.500 B+ 95 90,725 ------------- 420,850 ------------- Machinery (0.24%) Columbus McKinnon Corp., Sr Sub Note 04-01-08 8.500 B 100 83,500 ------------- Media (2.16%) American Media Operations, Inc., Sr Sub Note 05-01-09 10.250 B- 150 146,250 AMFM Operating, Inc., Sr Sub Deb 10-31-06 12.625 B- 64 70,866 Diamond Holdings Plc, Bond (United Kingdom) 02-01-08# 10.000 B- 50 60,462 DIVA Systems Corp., Sr Disc Note Ser B, Step Coupon (12.625%, 03-01-03) 03-01-08 (A) Zero B- 250 100,000 Garden State Newspapers, Inc., Sr Sub Note 07-01-11 8.625 B+ 100 90,500 Regional Independent Media Group Plc, Sr Note (United Kingdom) 07-01-08 (Y) 10.500 B- 175 178,938 STC Broadcasting, Inc., Sr Sub Note 03-15-07 11.000 B- 100 96,000 ------------- 743,016 ------------- Metal (0.77%) Euramax International Plc, Sr Sub Note (United Kingdom) 10-01-06 (Y) 11.250 B 100 78,000 P.T. Alatief Freeport Finance Co. B.V., Sr Note (Netherlands) 04-15-01 9.750 CCC+ 200 188,000 ------------- 266,000 ------------- Oil & Gas (1.60%) Chesapeake Energy Sr Note Ser B 05-01-05 9.625 B 200 206,000 Comstock Resources, Inc., Sr Note 05-01-07 11.250 B 100 103,250 Gothic Production Corp., Sr Sec Note Ser B 05-01-05 11.125 CCC 150 160,500 Universal Compression, Inc., Sr Disc Note, Step Coupon (9.875%, 02-15-03) 02-15-08 (A) Zero B 100 81,000 ------------- 550,750 ------------- Paper & Paper Products (1.73%) Grupo Industrial Durango, S.A., Note (Mexico) 08-01-03 (Y) 12.625 BB- 200 202,500 Kappa Beheer BV, Sr Sub Note (Netherlands) 07-15-09 (E) (R) 10.625 B 150 144,171 Packaging Corp. of America, Sr Sub Note Ser B 04-01-09 9.625 BB- 200 207,000 Stone Container Corp., Unit (Sr Sub Deb & Supplemental Int Cert) 04-01-02 12.250 B- 41 41,410 ------------- 595,081 ------------- Retail (0.40%) United Stationers Supply Co., Sr Sub Note 04-15-08 8.375 B 150 139,500 ------------- Telecommunications (6.51%) Allegiance Telecom, Inc., Sr Disc Note, Ser B, Step Coupon (11.75%, 02-15-03) 02-15-08 (A) Zero B 250 152,500 AMSC Acquisition Co., Inc., Sr Note Ser B 04-01-08 12.250 B- 100 44,000 Comunicacion Celular S.A., Sr Def Bond (Colombia) 03-01-05 (R) (Y) 14.125 B 100 77,000 Esprit Telecom Group Plc, Sr Note (United Kingdom) 12-15-07 (Y) 11.500 D 100 2,000 Sr Note (Deutsche Mark) 06-15-08# 11.000 BB- 140 671 Exodus Comm., Inc., Sr Note (United States) 12-15-09 (E) 10.750 B- 200 163,160 Grupo Iusacell S.A. de C.V., Sr Note (Mexico) 12-01-06, (Y) 14.250 B+ 200 198,000 GT Group Telecom, Inc., Sr Disc Note, Step Coupon (13.25%, 02-01-05) (Canada) 02-01-10 (A) Zero B- 200 84,000 Intercel, Inc., Unit (Sr Discount Note & Warrant), Step Coupon (12.00%, 02-01-01) 02-01-06 (A) Zero B 200 200,000 Ionica PLC, Sr Disc Note, Step Coupon (15.00%, 05-01-02) (United Kingdom) 05-01-07 (A) (Y) Zero Ca 200 3,000 MetroNet Communications Corp., Sr Discount Note, Step Coupon (10.75%, 11-01-02) (Canada) 11-01-07 (A) (Y) Zero BBB 200 161,944 Sr Note (Canada) 08-15-07 (Y) 12.000 BBB 50 55,000 Nextel International, Inc., Sr Note 08-01-10 (R) 12.750 B- 100 80,000 NorthEast Optic Network, Inc., Sr Note 08-15-08 12.750 B- 100 60,000 ONO Finance Plc, Sr Note (United Kingdom) 07-15-10 (E) 14.000 CCC+ 200 142,530 Sr Sub Note (United Kingdom) 05-01-09 (E) 13.000 CCC+ 100 70,328 Pronet Inc., Sr Sub Note 06-15-05 11.875 CCC 280 229,600 Spectrasite Holdings, Inc., Sr Disc Note, Step Coupon (11.25%, 04-15-04) 04-15-09 (A) Zero B- 200 104,000 Telecorp PCS, Inc., Sr Sub Disc Note, Step Coupon (11.625%, 04-15-04) 04-15-09 (A) Zero B3 175 119,000 Telewest Communication Plc, Sr Disc Note, Step Coupon (9.25%, 04-15-04) (United Kingdom) 04-15-09 (A) (Y) Zero B+ 100 67,181 Sr Note (United Kingdom) 02-01-10 (R) # 9.875 B+ 100 121,671 VoiceStream Wireless Corp., Sr Note 09-15-09 11.500 CCC+ 100 109,750 ------------- 2,245,335 ------------- Telecommunications - Services (7.88%) Clearnet Communications Inc., Sr Disc Note, Step Coupon (10.40%, 05-15-03) (Canada) 05-15-08 (A)# Zero BBB+ 150 83,885 Sr Disc Note, Step Coupon (10.125%, 05-01-04) (Canada) 05-01-09 (A) (Y) Zero B3 150 120,000 COLT Telecom Group Plc, (United Kingdom) Sr Note (Deutsche Mark) 07-31-08# 7.625 B 300 130,167 Crown Castle International Corp., Sr Disc Note, Step Coupon (10.625%, 11-15-02) 11-15-07 (A) Zero B 150 119,250 Energis Plc, Sr Note (United Kingdom) 06-15-09 (R)# 9.500 B+ 130 180,492 Jazztel Plc, Sr Note (United Kingdom) 12-15-09 (E) 13.250 CCC+ 200 121,901 Level 3 Communications, Inc., Conv Sub Note 03-15-10 6.000 CCC+ 50 23,500 Sr Note (United States) 03-15-08 (E) 10.750 B 100 77,829 Sr Note 05-01-08 9.125 B 100 80,000 McLeodUSA, Inc., Sr Note 07-15-07 9.250 B+ 100 91,000 Sr Note 11-01-08 9.500 B+ 50 45,500 Metromedia Fiber Network, Inc., Sr Note 11-15-08 10.000 B+ 300 249,750 Sr Note (United States) 12-15-09 (E) 10.000 B+ 100 78,767 Nextel Communications, Inc., Sr Disc Note, Step Coupon (9.95%, 02-15-03) 02-15-08 (A) Zero B 125 90,000 Nextel Partners, Inc., Sr Disc Note, Step Coupon (14.00%, 02-01-04) 02-01-09 (A) Zero CCC+ 165 108,900 Sr Note 03-15-10 11.000 CCC+ 100 96,000 NEXTLINK Communications, Inc., Sr Disc Note, Step Coupon (12.125%, 12-01-04) 12-01-09 (A) Zero B 100 44,500 Sr Note 11-15-08 10.750 B 100 81,500 NTL Communications Corp., Sr Note Ser B 10-01-08 11.500 B 100 89,000 Sr Note, Ser B, Step Coupon (12.375%, 10-01-03) 10-01-08 (A) Zero B 150 82,500 Orion Network Systems, Sr Note 01-15-07 11.250 CCC+ 100 35,000 Primus Telecommunications Group, Inc., Sr Note 10-15-09 12.750 B- 250 77,500 Qwest Communications International, Inc., Sr Note Ser B 04-01-07 10.875 BBB+ 65 71,466 Time Warner Telecom LLC, Sr Note 07-15-08 9.750 B- 100 92,250 Tritel PCS, Inc., Sr Disc Note, Step Coupon (12.75%, 05-15-04) 05-15-09 (A) Zero B3 100 67,000 United Pan-Europe Communicatons N.V., Sr Disc Note, Step Coupon (13.375%, 11-01-04) (Netherlands) 11-01-09 (A) (E) Zero B- 100 31,882 Sr Note (Netherlands) 11-01-07 (E) 10.875 B- 100 60,951 Sr Note (Netherlands) 11-01-09 (E) 11.250 B- 100 60,951 Versatel Telecom International NV, Sr Note (Netherlands) 05-15-08 (Y) 13.250 B- 100 61,000 Sr Note Ser EU (Netherlands) 07-15-09 (E) 11.875 B- 100 58,606 Viatel, Inc., Sr Note 04-15-08 11.250 B- 350 105,000 ------------- 2,716,047 ------------- Transportation (0.59%) CHC Helicopter Corp., Sr Sub Note (Canada) 07-15-07# (E) 11.750 B 200 197,855 Fine Air Services, Corp., Sr Note 06-01-08 (B) 9.875 CC 105 5,247 ------------- 203,102 ------------- Utilities (2.67%) Calpine Corp., Sr Note 04-01-08 7.875 BB+ 100 98,000 CMS Energy Corp., Sr Note 10-15-07 9.875 BB 200 207,500 Midland Funding Corp. II, Deb Ser A 07-23-05 11.750 BB+ 200 211,826 Deb Ser B 07-23-06 13.250 BB+ 150 166,094 Monterrey Power S.A. de C.V., Sr Sec Bond (Mexico) 11-15-09 (R) (Y) 9.625 BB+ 90 87,074 Niagara Mohawk Power Corp., Sec Fac Bond 01-01-18 8.770 BBB 143 150,529 ------------- 921,023 ------------- TOTAL BONDS (Cost 31,955,894) (86.50%) 29,816,857 ------------- NUMBER OF SHARES OR WARRANTS ----------- COMMON STOCKS KLM Royal Dutch Airlines, N.V. American Depositary Receipt (ADR) Common Stock (Netherlands) 397 932 Nextel Communications, Inc. (Class A) Common Stock** 464 11,484 Northeast Utilities, Common Stock 6,000 145,500 Versatel Telecom International NV* Common Stock (ADR) (Netherlands)** 1,333 11,497 ------------- 177,413 ------------- TOTAL COMMON STOCKS (Cost $122,883) (0.52%) 177,413 ------------- PREFERRED STOCKS AND WARRANTS Allegiance Telecom, Inc. Warrant** 250 16,250 Comunicacion Celular S.A. Warrant (Colombia)** 100 0 DIVA Systems Corp., Warrant (R)** 750 1,313 GT Group Telecom, Inc. Warrant (Canada) (R) ** 200 14,000 Loral Space & Communications Ltd. Warrant** 100 600 Motient Corp., Warrant (R)** 100 1,000 ONO Finance Plc, Warrant (United Kingdom) (R) (E)** 50 2,813 ONO Finance Plc, Warrant (United Kingdom) (R) (Y)** 50 3,000 XO Communications Inc., 14 Preferred Stock 2,340 65,520 ------------- 104,496 ------------- TOTAL PREFERRED STOCKS AND WARRANTS (Cost $178,105) (0.30%) 104,496 --------- ------------- INTEREST PAR VALUE RATE (000s OMITTED) -------- ------------ SHORT-TERM INVESTMENTS Joint Repurchase Agreement (9.97%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 12-29-00, due 01-02-01 (Secured by U.S. Treasury Bonds, 6.750% thru 8.875%, due 08-15-17 thru 08-15-26) - Note B 5.950% $3,437 $3,437,000 ------------ Corporate Savings Account (0.00%) Investors Bank & Trust Company Daily Interest Savings Account Current Rate 5.20% 346 ------------- TOTAL SHORT-TERM INVESTMENTS (9.97%) 3,437,346 --------- ------------- TOTAL INVESTMENTS (97.29%) 33,536,112 --------- ------------- OTHER ASSETS AND LIABILITIES, NET (2.71%) 935,687 --------- ------------- TOTAL NET ASSETS (100.00%) $34,471,799 ========= ------------- * Credit ratings are unaudited and rated by Moody's Investors Service or John Hancock Advisers, Inc. where Standard & Poor's ratings are not available. ** Non-income producing security. # Par value of foreign bonds is expressed in local currency, as shown parenthetically in security description. (A) Cash interest will be paid on this obligation at the stated rate beginning on the stated date. (B) Non-income producing issuer, filed for protection under Federal Bankruptcy Code or is in default of interest payment. (E) Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer; however, security is euro-denominated. (R) These securities are exempt from registration under rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers, in transactions exempt from registration. Rule 144A securities amounted to $902,747 or 2.62% of the Fund's net assets as of December 31, 2000. (Y) Parenthetical disclosure of a foreign country in the security description represents country of foreign issuer, however, security is U.S. dollar-denominated. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. Portfolio Concentration December 31, 2000 (Unaudited) - ------------------------------------------------------------------------- The V.A. Strategic Income Fund invests primarily in securities issued in the United States of America. The performance of this Fund is closely tied to the economic and financial conditions of the countries within which it invests. The concentration of investments by industry category for individual securities held by the Fund is shown in the schedule of investments. In addition, con centration of investments can be aggregated by various countries. The table below shows the percentages of the Fund's investments at December 31, 2000 assigned to country categories. MARKET VALUE AS A % OF COUNTRY DIVERSIFICATION FUND'S NET ASSETS - ----------------------- ----------------- Australia 0.42% Bahamas 0.26 Canada 9.26 Colombia 0.22 France 0.32 Luxembourg 0.26 Mexico 1.41 Netherlands 1.82 Russia 1.68 United Kingdom 3.37 United States 77.10 Venezuela 1.17 ------- TOTAL INVESTMENTS 97.29% ======= Additionally, the concentration of investments can be aggregated by the quality rating for each debt security. MARKET VALUE AS A % OF QUALITY DISTRIBUTION FUND'S NET ASSETS - -------------------- ----------------- AAA 55.33% AA 0.58 BBB 1.52 BB 4.46 B 20.82 CCC 3.76 CC 0.02 D 0.01 ------- TOTAL BONDS 86.50% ======= See notes to financial statements. NOTES TO FINANCIAL STATEMENTS John Hancock Funds - Declaration Trust NOTE A-- ORGANIZATION John Hancock V.A. Core Equity Fund ("V.A. Core Equity Fund"), John Hancock V.A. 500 Index Fund ("V.A. 500 Index Fund"), John Hancock V.A. Large Cap Growth Fund ("V.A. Large Cap Growth Fund"), John Hancock V.A. Mid Cap Growth Fund ("V.A. Mid Cap Growth Fund"), John Hancock V.A. Relative Value Fund ("V.A. Relative Value Fund," formerly John Hancock V.A. Large Cap Value Fund), John Hancock V.A. Small Cap Growth Fund ("V.A. Small Cap Growth Fund"), John Hancock V.A. Sovereign Investors Fund ("V.A. Sovereign Investors Fund"), John Hancock V.A. International Fund ("V.A. International Fund"), John Hancock V.A. Financial Industries Fund ("V.A. Financial Industries Fund"), John Hancock V.A. Regional Bank Fund ("V.A. Regional Bank Fund"), John Hancock V.A. Technology Fund ("V.A. Technology Fund"), John Hancock V.A. Bond Fund ("V.A. Bond Fund"), John Hancock V.A. High Yield Bond Fund ("V.A. High Yield Bond Fund"), John Hancock V.A. Money Market Fund ("V.A. Money Market Fund") and John Hancock V.A. Strategic Income Fund ("V.A. Strategic Income Fund"), (each a "Fund," collectively the "Funds"), are separate series of John Hancock Declaration Trust (the "Trust"), an open-end management investment company, registered under the Investment Company Act of 1940. The Trust, organized as a Massachusetts business trust in 1995, consists of fifteen different series at December 31, 2000. Each Fund currently has one class of shares with equal rights as to voting, redemption, dividends and liquidation within its respective Fund. The Trustees may authorize the creation of additional series from time to time to satisfy various investment objectives. An insurance company issuing a Variable Contract that participates in the Trust will vote shares of the Funds held by the insurance company's separate accounts as required by law. In accordance with current law and interpretations thereof, participating insurance companies are required to request voting instructions from policy owners and must vote shares of the Funds in proportion to the voting instructions received. The investment objective of the V.A. Core Equity Fund is to seek above-average total return, consisting of capital appreciation and income. The investment objective of the V.A. 500 Index Fund is to provide investment results that correspond with the total return performance of the Standard & Poor's 500 Stock Price Index (the "S&P 500 Index"). The investment objective of the V.A. Large Cap Growth Fund is to seek long-term capital appreciation. The investment objective of the V.A. Mid Cap Growth Fund is to seek long-term capital appreciation. The investment objective of the V.A. Relative Value Fund is to seek the highest total return (capital appreciation plus current income) that is consistent with reasonable safety of capital. The investment objective of the V.A. Small Cap Growth Fund is to seek long-term capital appreciation. The investment objective of the V.A. Sovereign Investors Fund is to seek long-term growth of capital and income without assuming undue market risks. The investment objective of the V.A. International Fund is to seek long-term growth of capital. The investment objective of the V.A. Financial Industries Fund is to seek capital appreciation. The investment objective of the V.A. Regional Bank Fund is to seek long-term capital appreciation. The investment objective of the V.A. Technology Fund is to seek long-term growth of capital. The investment objective of the V.A. Bond Fund is to seek a high level of current income consistent with prudent investment risk. The investment objective of the V.A. High Yield Bond Fund is to seek maximum current income without assuming undue risk. The investment objective of the V.A. Money Market Fund is to seek maximum current income consistent with capital preservation and liquidity. The investment objective of the V.A. Strategic Income Fund is to seek a high level of current income. NOTE B-- ACCOUNTING POLICIES VALUATION OF INVESTMENTS Securities in the Funds' portfolios (except for V.A. Money Market Fund) are valued on the basis of market quotations, valuations provided by independent pricing services or at fair value as determined in good faith in accordance with procedures approved by the Trustees. Short-term debt investments maturing within 60 days are valued at amortized cost, which approximates market value. All Portfolio transactions initially expressed in terms of foreign currencies have been translated into U.S. dollars as described in "Foreign Currency Translation" below. The V.A. Money Market Fund's portfolio of securities is valued at amortized cost, in accordance with Rule 2a-7 of the Investment Company Act of 1940, which approximates market value. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between the principal amount due at maturity and the cost of the security to the Funds. Interest income on certain portfolio securities such as negotiable bank certificates of deposit and interest-bearing notes is accrued daily and included in interest receivable. The Funds may invest in indexed securities whose value is linked either directly or inversely to changes in foreign currencies, interest rates, indexes or other reference instruments. Indexed securities may be more volatile than the reference instrument itself, but any loss is limited to the amount of the original investment. JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Funds, along with other registered investment companies having a management contract with John Hancock Advisers, Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, Inc., may participate in joint repurchase agreement transactions. Aggregate cash balances are invested in one or more large repurchase agreements, whose underlying securities are obligations of the U.S. government and/or its agencies. The Funds' custodian bank receives delivery of the underlying securities for the joint account on the Funds' behalf. The Adviser is responsible for ensuring that the agreement is fully collateralized at all times. FOREIGN CURRENCY TRANSLATION All assets or liabilities initially expressed in terms of foreign currencies are translated into U.S. dollars based on London currency exchange quotations as of 5:00 p.m., London time, on the date of any determination of the net asset value of the Funds. Transactions affecting statement of operations accounts and net realized gain (loss) on investments are translated at the rates prevailing at the dates of the transactions. The Funds do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gains or losses from investments. Reported net realized foreign exchange gains or losses arise from sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Funds' books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities other than investments in securities, resulting from changes in the exchange rate. INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of purchase, sale or maturity. Net realized gains and losses on sales of investments are determined on the identified cost basis. Capital gains realized on some foreign securities are subject to foreign taxes, which are accrued as applicable. DISCOUNT ON SECURITIES The Funds accrete discount from par value on securities from either the date of issue or the date of purchase over the life of the security. EXPENSES The majority of the expenses are directly identifiable to an individual fund. Expenses that are not readily identifiable to specific Funds will be allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative size of the Funds. ORGANIZATION EXPENSES Expenses incurred in connection with the organization of the Funds have been capitalized and are being charged to the Funds' operations ratably over a five-year period that began with the commencement of the investment operations of the Funds. BANK BORROWINGS The Funds (except for V.A. Money Market Fund) are permitted to have bank borrowings for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Funds have entered into a syndicated line of credit agreement with various banks. This agreement enables the Funds to participate with other funds managed by the Adviser in an unsecured line of credit with banks which permit borrowings up to $500 million, collectively. Interest is charged to each Fund, based on its borrowing. In addition, a commitment fee is charged to each Fund based on the average daily unused portion of the line of credit and is allocated among the participating Funds. The following Funds had borrowings under the line of credit during the year ended December 31, 2000: AVERAGE DAILY LOAN BALANCE DURING THE PERIOD FOR WHICH WEIGHTED AVERAGE FUND LOANS WERE OUTSTANDING INTEREST RATE INTEREST EXPENSE - ----- --------------------------- ---------------- ---------------- V.A. Large Cap Growth $2,618,000 6.93% $5,152 V.A. Relative Value 911,750 7.02 1,217 V.A. Small Cap Growth 1,373,750 7.03 1,055 SECURITIES LENDING The Funds may lend their securities to certain qualified brokers who pay the Funds negotiated lender fees. These fees are included in interest income. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Funds may bear the risk of delay of the loaned securities in recovery or even loss of rights in the collateral, should the borrower of the securities fail financially. At December 31, 2000, V.A. Relative Value Fund loaned securities having a market value of $474,050 collateralized by securities in the amount of $500,149, V.A. Small Cap Growth Fund loaned securities having a market value of $431,062 collateralized by securities in the amount of $441,188, V.A. International Fund loaned securities having a market value of $886,726 collateralized by cash in the amount of $933,457 and V.A. Regional Bank Fund loaned securities having a market value of $467,250 collateralized by securities in the amount of $505,964. The cash collateral was invested in a short-term instrument. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Funds (except for V.A. Core Equity, V.A. 500 Index, V.A. Sovereign Investors and V.A. Money Market Funds) may enter into forward foreign currency exchange contracts as a hedge against the effect of fluctuations in currency exchange rates. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date at a set price. The aggregate principal amounts of the contracts are marked to market daily at the applicable foreign currency exchange rates. Any resulting unrealized gains and losses are included in the determination of the Funds' daily net assets. The Funds record realized gains and losses at the time the forward foreign currency exchange contracts are closed out or offset by matching contracts. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of the contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. These contracts involve market or credit risk in excess of the unrealized gain or loss reflected in the Funds' Statements of Assets and Liabilities. The Funds may also purchase and sell forward contracts to facilitate the settlement of foreign currency denominated portfolio transactions, under which they intend to take delivery of the foreign currency. Such contracts normally involve no market risk if they are offset by the currency amounts of the underlying transactions. The Funds had the following open forward foreign currency exchange contracts at December 31, 2000: UNREALIZED PRINCIPAL AMOUNT EXPIRATION APPRECIATION/ CURRENCY COVERED BY CONTRACT MONTH (DEPRECIATION) - -------- ------------------- ---------- ------------ V.A. HIGH YIELD BOND FUND Buys Euro Currency 23,343 Feb 01 $2,091 ======= Sells Euro Currency 265,610 Jan 01 ($19,139) Euro Currency 97,405 Feb 01 (8,891) Euro Currency 55,903 Mar 01 (3,467) Pound Sterling 12,500 Jan 01 (243) Pound Sterling 64,050 Feb 01 (2,488) ------- ($34,228) ======= V.A. STRATEGIC INCOME FUND Buys Australian Dollar 301,550 Feb 01 $11,115 Pound Sterling 49,876 Feb 01 2,410 ------- 13,525 ======= Sells Australian Dollar 301,550 Feb 01 ($10,521) Pound Sterling 262,805 Jan 01 (5,103) Pound Sterling 335,217 Feb 01 (13,021) Pound Sterling 308,646 Mar 01 (12,309) ------- ($40,954) ======= FINANCIAL FUTURES CONTRACTS The Funds (except for V.A. Money Market Fund) may buy and sell financial futures contracts. Buying futures tends to increase the Funds' exposure to the underlying instrument. Selling futures tends to decrease the Funds' exposure to the underlying instrument or hedge other Funds instruments. At the time each Fund enters into a financial futures contract, it is required to deposit with its custodian a specified amount of cash or U.S. government securities, known as "initial margin," equal to a certain percentage of the value of the financial futures contract being traded. Each day, the futures contract is valued at the official settlement price of the board of trade or U.S. commodities exchange on which it trades. Subsequent payments to and from the broker, known as "variation margin," are made on a daily basis as the market price of the financial futures contract fluctuates. Daily variation margin adjustments, arising from this "mark to market," are recorded by the Funds as unrealized gains or losses. When the contracts are closed, the Funds recognize a gain or loss. Risks of entering into futures contracts include the possibility that there may be an illiquid market and/or that a change in the value of the contracts may not correlate with changes in the value of the underlying securities. In addition, the Funds could be prevented from opening or realizing the benefits of closing out futures positions because of position limits or limits on daily price fluctuation imposed by an exchange. For federal income tax purposes, the amount, character and timing of the Funds' gains and/or losses can be affected as a result of futures contracts. The Funds had the following open financial futures contracts at December 31, 2000: UNREALIZED OPEN APPRECIATION EXPIRATION CONTRACTS POSITION (DEPRECIATION) - ---------- --------- -------- ------------ V.A. 500 INDEX FUND Mar 01 4 S&P 500 Long $17,847 ======= At December 31, 2000, the V.A. 500 Index Fund had deposited $75,000 in a segregated account to cover margin requirements on open futures contracts. OPTIONS The Funds (except for V.A. Money Market Fund) may enter into option contracts. Listed options will be valued at the last quoted sales price on the exchange on which they are primarily traded. Over-the-counter options are valued at the mean between the last bid and asked prices. Upon the writing of a call or put option, an amount equal to the premium received by the Funds will be included in the Statements of Assets and Liabilities as an asset and corresponding liability. The amount of the liability will be subsequently marked to market to reflect the current market value of the written option. The Funds may use option contracts to manage their exposure to the price volatility of financial instruments. Writing puts and buying calls will tend to increase the Funds' exposure to the underlying instrument and buying puts and writing calls will tend to decrease the Funds' exposure to the underlying instrument, or hedge other Funds' investments. The maximum exposure to loss for any purchased options will be limited to the premium initially paid for the option. In all other cases, the face (or "notional") amount of each contract at value will reflect the maximum exposure of the Funds in these contracts, but the actual exposure will be limited to the change in value of the contract over the period the contract remains open. Risks may also arise if counterparties do not perform under the contracts' terms ("credit risk") or if the Funds are unable to offset a contract with a counterparty on a timely basis ("liquidity risk"). Exchange-traded options have minimal credit risk as the exchanges act as counterparties to each transaction, and only present liquidity risk in highly unusual market conditions. To minimize credit and liquidity risks in over-the-counter option contracts, the Funds will continuously monitor the creditworthiness of all their counterparties. At any particular time, except for purchased options, market or credit risk may involve amounts in excess of those reflected in the Funds' year-end Statements of Assets and Liabilities. Written option transactions for the year ended December 31, 2000, were as follows: CONTRACTS (000s OMITTED) PREMIUM ------------ ------- V.A. STRATEGIC INCOME FUND Outstanding, beginning of period -- -- Options written -- Mexican Peso 3,750 $3,639 Options expired -- Mexican Peso (3,750) ($3,639) ------- ------- Outstanding, end of period -- -- CONTRACTS (000s OMITTED) PREMIUM ------------ ------- V.A. TECHNOLOGY FUND Outstanding, beginning of period -- -- Options written 2 $661 Options expired (2) ($661) ------- ------- Outstanding, end of period -- -- FEDERAL INCOME TAXES The Funds' policy is to comply with the requirements of the Internal Revenue Code that are applicable to regulated investment companies. They will not be subject to federal income tax on taxable earnings which are distributed to shareholders. For federal income tax purposes, net currency gains and losses from sales of foreign debt securities may be treated as ordinary income even though such items are capital gains and losses for accounting purposes. For federal income tax purposes, the following funds had capital loss carryforwards available to the extent provided by regulations to offset future net realized capital gains: CAPITAL LOSS CARRYFORWARD EXPIRING POST 10/31/2000 ------------------------------------ LOSS TREATED AS FUND 12/31/2006 12/31/2007 12/31/2008 ARISING 1/1/2001 - ---- ---------- ---------- ---------- ---------------- V.A. Core Equity Fund -- -- -- $814,496 V.A. 500 Index Fund -- -- -- -- V.A. Large Cap Growth Fund -- -- $1,306,804 419,653 V.A. Mid Cap Growth Fund -- -- 633,415 -- V.A. Small Cap Growth Fund -- -- 2,089,105 -- V.A. Sovereign Investors Fund $157,877 $101,159 1,206,695 789,935 V.A. International Fund -- -- 265,560 277,503 V.A. Financial Industries Fund -- 2,140,648 1,313,228 -- V.A. Regional Bank Fund -- -- 2,212,041 638,852 V.A. Technology Fund -- -- 14,000 132,115 V.A. Bond Fund -- 67,593 215,568 8,807 V.A. High Yield Bond Fund -- -- -- 275,404 V.A. Strategic Income Fund 4,130 136,493 455,777 580,413 Expired capital loss carryforwards are reclassified to capital paid-in, in the year of expiration. Additionally, net capital losses attributable to security transactions occurring after October 31, 2000 are treated as arising on the first day (January 1, 2001) of the Funds' next taxable year. DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment securities is recorded on the ex-dividend date or, in the case of some foreign securities, on the date thereafter when the Funds identify the dividend. Interest income on investment securities is recorded on the accrual basis. The Funds may place a debt obligation on non-accrual status and reduce related interest income by ceasing current accruals and writing off interest receivables when the collection of interest has become doubtful. Foreign income may be subject to foreign withholding taxes, capital gains and repatriation taxes imposed by certain countries in which the Funds invest, that are accrued as applicable. The Funds record all dividends and distributions to shareholders from net investment income and realized gains on the ex-dividend date. Such distributions are determined in conformity with income tax regulations, which may differ from generally accepted accounting principles. USE OF ESTIMATES The preparation of these financial statements, in accordance with accounting principles generally accepted in the United States of America, incorporates estimates made by management in determining the reported amount of assets, liabilities, revenues and expenses of the Funds. Actual results could differ from these estimates. NOTE C-- MANAGEMENT FEE AND TRANSACTIONS WITH AFFILIATES AND OTHERS The Funds have an investment management contract with the Adviser. Under the investment management contract, the Funds pay a monthly management fee to the Adviser equivalent, on an annual basis, as follows: RATE AS A PERCENTAGE OF FUND AVERAGE DAILY NET ASSETS - ---- ------------------------ V.A. Core Equity Fund 0.70% V.A. 500 Index Fund 0.35 V.A. Large CapGrowth Fund 0.75 V.A. Mid Cap Growth Fund 0.75 V.A. Relative Value Fund 0.60 V.A. Small Cap Growth Fund 0.75 V.A. Sovereign Investors Fund 0.60 V.A. International Fund 0.90 V.A. Financial Industries Fund 0.80 V.A. Regional Bank Fund 0.80 V.A. Technology Fund 0.80 V.A. Bond Fund 0.50 V.A. High Yield Bond Fund 0.60 V.A. Money Market Fund 0.50 V.A. Strategic Income Fund 0.60 The V.A. Core Equity Fund and the Adviser have a subadvisory contract with Independence Investment Associates, Inc. ("IIA"). IIA is a wholly-owned indirect subsidiary of John Hancock Life Insurance Company ("JHLICo"). From January 1, 2000, until March 1, 2000, the V.A. International Fund and the Adviser had subadvisory contracts with John Hancock Advisers International Limited ("JHAI"), the Fund's original subadviser, and Indocam International Investments Services ("IIIS"). The Adviser terminated the contract with JHAI on March 1, 2000 and with IIIS on December 14, 2000. Effective December 14, 2000, the Fund and the Adviser entered into a subadvisory contract with Nicholas-Applegate Capital Management LP, who is the Fund's sole subadviser. The V.A. Technology Fund and the Adviser have a subadvisory contract with American Fund Advisors, Inc. The Funds are not responsible for payment of subadvisers' fees. The Adviser has voluntarily agreed to limit the management fee on the V.A. 500 Index Funds to 0.10% of the Funds' average daily net assets, at least until April 30, 2001. Accordingly, the management fee reduction amounted to $82,948 during the year ended December 31, 2000. The Adviser reserves the right to terminate this limitation in the future. 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 at least until April 30, 2001. Accordingly, the reductions in the Funds' expenses for the year ended December 31, 2000 were as follows: FUND FEE REDUCTION - ---- ------------- V.A. 500 Index Fund $108,198 V.A. Mid Cap Growth Fund 13,517 V.A. Small Cap Growth Fund 29,736 V.A. International Fund 189,610 V.A. Technology Fund 39,008 V.A. Bond Fund 27,848 V.A. High Yield Bond Fund 33,670 The Adviser reserves the right to terminate this limitation in the future. The Funds have an agreement with the Adviser to perform necessary tax, accounting and legal services for the Funds. The compensation for the year was at an annual rate of less than 0.02% of the average net assets of each Fund. The V.A. 500 Index Fund has an agreement with Standard & Poor's ("S&P") to license certain trademarks and trade names of S&P and of the S&P 500 Index, which is determined, composed and calculated by S&P without regard to the Adviser or the V.A. 500 Index Fund. (Requisite disclosure regarding the use of the Standard & Poor's name is included in the Funds' prospectus.) Mr. Stephen L. Brown and Ms. Maureen R. Ford are directors and/or officers of the Adviser and/or its affiliates, as well as Trustees of the Funds. The compensation of unaffiliated Trustees is borne by the Funds. The unaffiliated Trustees may elect to defer, for tax purposes, their receipt of this compensation under the John Hancock Group of Fund Deferred Compensation Plan. The Funds make investments into other John Hancock funds, as applicable, to cover their liability for the deferred compensation. Investments to cover the Funds' deferred compensation liability are recorded on the Funds' books as an other assets. The deferred compensation liability and the related other assets are always equal and are marked to market on a quarterly basis to reflect any income earned by the investments as well as any unrealized gains or losses. The Deferred Compensation Plan investments had no impact on the operations of the Funds. The Adviser and other subsidiaries of John Hancock Life Insurance Company owned the following shares of beneficial interest of the Funds as of December 31, 2000: FUND SHARES OF BENEFICIAL INTEREST - ---- ----------------------------- V.A. Large Cap Growth Fund 102,341 V.A. Mid Cap Growth Fund 50,071 V.A. Relative Value Fund 52,777 V.A. Small Cap Growth Fund 102,547 V.A. International Fund 222,987 V.A. Regional Bank Fund 52,589 V.A. Technology Fund 50,000 V.A. Bond Fund 131,418 V.A. High Yield Bond Fund 264,334 V.A. Money Market Fund 120,098 V.A. Strategic Income Fund 523,521 NOTE D-- INVESTMENT TRANSACTIONS Purchases and proceeds from sales of securities for the Funds, other than short-term securities and obligations of the U.S. government, during the year ended December 31, 2000, were as follows: FUND PURCHASES SALES - ---- ----------- ----------- V.A. Core Equity Fund $42,115,835 $41,675,001 V.A. 500 Index Fund 2,307,449 12,894,479 V.A. Large Cap Growth Fund 31,296,632 34,612,666 V.A. Mid Cap Growth Fund 26,398,947 18,795,733 V.A. Relative Value Fund 70,514,895 69,223,742 V.A. Small Cap Growth Fund 34,977,801 28,519,888 V.A. Sovereign Investors Fund 24,474,993 19,435,997 V.A. International Fund 14,985,994 15,776,436 V.A. Financial Industries Fund 29,716,172 22,019,465 V.A. Regional Bank Fund 4,345,596 12,035,766 V.A. Technology Fund 18,361,163 3,734,817 V.A. Bond Fund 37,105,046 31,197,443 V.A. High Yield Bond Fund 4,376,128 6,109,749 V.A. Strategic Income Fund 23,089,638 12,639,620 At December 31, 2000, the cost (excluding the corporate savings account) and gross unrealized appreciation and depreciation in value of investments owned by the Funds, as computed on a federal income tax basis, were as follows: GROSS GROSS NET UNREALIZED UNREALIZED UNREALIZED APPRECIATION/ FUND COST APPRECIATION DEPRECIATION (DEPRECIATION) - ---- ----------- ------------ ------------ ------------ V.A. Core Equity Fund $36,890,096 $7,804,058 $4,010,356 $3,793,702 V.A. 500 Index Fund 17,840,933 8,398,062 1,697,160 7,240,902 V.A. Large Cap Growth Fund 12,789,433 2,239,349 2,670,989 (431,640) V.A. Mid Cap Growth Fund 10,897,906 2,093,387 1,574,693 518,694 V.A. Relative Value Fund 43,590,186 4,854,560 10,608,477 (5,753,917) V.A. Small Cap Growth Fund 18,232,549 5,165,484 3,532,447 1,633,037 V.A. Sovereign Investors Fund 48,515,960 10,191,217 3,421,215 6,770,002 V.A. International Fund 6,171,294 702,258 551,685 150,573 V.A. Financial Industries Fund 52,470,820 19,632,068 659,836 18,972,232 V.A. Regional Bank Fund 11,709,207 2,334,146 314,017 2,020,129 V.A. Technology Fund 18,726,727 401,010 4,337,617 (3,936,607) V.A. Bond Fund 24,311,360 654,628 133,540 521,088 V.A High Yield Bond Fund 9,825,406 240,539 3,024,545 (2,784,006) V.A. Money Market Fund 67,919,023 -- -- -- V.A. Strategic Income Fund 35,693,882 656,841 2,814,957 (2,158,116) NOTE E-- RECLASSIFICATION OF ACCOUNTS During the year ended December 31, 2000, reclassifications have been made in each Fund's capital balances to report these balances on a tax basis, excluding certain temporary differences, as of December 31, 2000. Additional adjustments may be needed in subsequent reporting periods. These reclassifications, which have no impact on the net asset value of the Funds, are primarily attributable to certain differences in the treatment of net operating losses, foreign currency gains and losses and return of capital under federal tax rules versus generally accepted accounting principles. The calculation of net investment income (loss) per share in the financial highlights excludes these adjustments. UNDISTRIBUTED ACCUMULATED CAPITAL NET INVESTMENT NET REALIZED FUND PAID-IN INCOME (LOSS) GAIN (LOSS) - ---- ------- ------------- ----------- V.A. Core Equity Fund ($3,088) $2,934 $154 V.A. 500 Index Fund (177) 48 129 V.A. Large Cap Growth Fund (116,413) 116,340 73 V.A. Mid Cap Growth Fund (55,559) 55,538 21 V.A. Relative Value Fund (158) (879) 1,037 V.A. Small Cap Growth Fund (194,912) 194,847 65 V.A. Sovereign Investors Fund (2,880) 2,708 172 V.A. International Fund (39) 59,513 (59,474) V.A. Financial Industries Fund (241) (19,285) 19,526 V.A. Regional Bank Fund (214) 135 79 V.A. Bond Fund (61) (76) 137 V.A. High Yield Bond Fund (47) (7,319) 7,366 V.A. Money Market Fund (141) 141 -- V.A. Strategic Income Fund (91,761) (79,029) 170,790 NOTE F -- REORGANIZATION On March 18, 1999, the shareholders of John Hancock V.A. World Bond Fund (VAWBF) approved a plan of reorganization between VAWBF and V.A. Strategic Income Fund, providing for the transfer of substantially all of the assets and liabilities of VAWBF to V.A. Strategic Income Fund in exchange solely for shares of V.A. Strategic Income Fund. The acquisition of VAWBF was accounted for as a tax-free exchange of 253,313 shares of V.A. Strategic Income for the net assets of VAWBF, which amounted to $2,569,839, including $17,012 of unrealized depreciation, after the close of business on March 26, 1999. NOTE G -- CHANGE IN ACCOUNTING PRINCIPLE The Funds will adopt the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, effective for fiscal years beginning after December 15, 2000. As required, the Funds will begin amortizing premiums on debt securities effective January 1, 2001. Prior to this date, the Funds did not amortize premiums on debt securities. The cumulative effect of this accounting change will have no impact on the total net assets of the Funds. The impact of this accounting change has not been determined but will result in a reclassification between the cost of securities and a corresponding reclassification in net unrealized appreciation/depreciation, based on securities held as of December 31, 2000. REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Contract Owners and Trustees of John Hancock Declaration Trust We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of John Hancock Declaration Trust (the Trust) (comprising, respectively, V.A. Core Equity Fund, V.A. 500 Index Fund, V.A. Large Cap Growth Fund, V.A. Mid Cap Growth Fund, V.A. Relative Value Fund (formerly, V.A. Large Cap Value Fund), V.A. Small Cap Growth Fund, V.A. Sovereign Investors Fund, V.A. International Fund, V.A. Financial Industries Fund, V.A. Regional Bank Fund, V.A. Technology Fund, V.A. Bond Fund, V.A. High Yield Bond Fund, V.A. Money Market Fund and V.A. Strategic Income Fund) as of December 31, 2000, and the related statements of operations for the year then ended, the statements of changes in net assets and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2000, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the respective portfolios constituting the John Hancock Declaration Trust at December 31, 2000, the results of their operations for the year then ended, and the changes in their net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. /S/ ERNST & YOUNG LLP Boston, Massachusetts February 9, 2001 TAX INFORMATION (UNAUDITED) The Funds designated the following as long-term capital gain divi dends during the fiscal year ended December 31, 2000. Additionally, the following dividend distributions qualify for the dividends received deduction available to corporations. DIVIDENDS CAPITAL GAINS RECEIVED FUND DESIGNATED DEDUCTION - ---- ----------- ----------- V.A. Core Equity Fund $1,330,264 67.30% V.A. 500 Index Fund 92,786 99.99 V.A. Large Cap Growth Fund 323,779 12.13 V.A. Mid Cap Growth Fund 7,822 8.34 V.A. Relative Value Fund 3,679,699 1.58 V.A. Small Cap Growth Fund 315,995 0.91 V.A. Sovereign Investors Fund -- 100.00 V.A. International Fund 238,923 -- V.A. Financial Industries Fund -- 76.12 V.A. Regional Bank Fund -- 99.85 V.A. Technology Fund -- 1.87 V.A. High Yield Bond Fund -- 5.80 V.A. Strategic Income Fund -- 0.81 SHAREHOLDER MEETING (UNAUDITED) On December 1, 2000, the shareholders of John Hancock V.A. Financial Industries Fund approved a proposal to eliminate the investment restriction requiring the Fund to invest more than 25% of its assets in the banking industry (3,132,756 FOR, 131,200 AGAINST and 192,513 ABSTAINING). [A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner.] John Hancock Funds, Inc. MEMBER NASD 101 Huntington Avenue Boston, MA 02199-7603 1-800-225-5291 1-800-554-6713 TDD 1-800-338-8080 EASI-Line www.jhfunds.com This report is for the information of the shareholders of the John Hancock Declaration Trust. It is not authorized for distribution to prospective investors unless it is preceded or accompanied by the current prospectus, which details charges, investment objectives and operating policies. A recycled logo in lower left hand corner with caption "Printed on Recycled Paper." DEC0A 12/00 2/01 SEMIANNUAL REPORT Declaration Trust Equity V.A. Core Equity Fund V.A. Relative Value Fund V.A. Sovereign Investors Fund - ------------------------------------------------------ Sector V.A. Financial Industries Fund V.A. Technology Fund - ------------------------------------------------------ Income V.A. Bond Fund V.A. Money Market Fund V.A. Strategic Income Fund JUNE 30, 2001 [A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower, center middle of page. A tag line below reads "JOHN HANCOCK FUNDS".] Table of Contents Page 1) CEO Corner 3 2) Portfolio Manager Commentary These commentaries reflect the views of the portfolio managers or portfolio management teams through the end of the period discussed in this report. Of course, the managers' or team's views are subject to change as market and other conditions warrant. Equity V.A. Core Equity Fund 4 V.A. Relative Value Fund 7 V.A. Sovereign Investors Fund 10 Sector V.A. Financial Industries Fund 13 V.A. Technology Fund 16 Income V.A. Bond Fund 19 V.A. Money Market Fund 22 V.A. Strategic Income Fund 24 3) Financial Statements 27 4) Notes to Financial Statements 63 TRUSTEES Dennis S. Aronowitz* Richard P. Chapman, Jr. William J. Cosgrove* John M. DeCiccio Richard A. Farrell* Maureen R. Ford Gail D. Fosler William F. Glavin Dr. John A. Moore Patti McGill Peterson John W. Pratt* * Members of the Audit Committee OFFICERS Maureen R. Ford Chairman, President and Chief Executive Officer William L. Braman Executive Vice President and Chief Investment Officer Richard A. Brown Senior Vice President and Chief Financial Officer Susan S. Newton Senior Vice President and Secretary William H. King Vice President and Treasurer Thomas H. Connors Vice President and Compliance Officer CUSTODIANS Investors Bank & Trust Company 200 Clarendon Street Boston, Massachusetts 02116 V.A. Bond Fund V.A. Core Equity Fund V.A. Financial Industries Fund V.A. Relative Value Fund V.A. Sovereign Investors Fund V.A. Strategic Income Fund V.A. Technology Fund State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110 V.A. Money Market Fund TRANSFER AGENT John Hancock Annuity Servicing Office 529 Main Street (X-4) Charlestown, Massachusetts 02129 INVESTMENT ADVISER John Hancock Advisers, Inc. 101 Huntington Avenue Boston, Massachusetts 02199-7603 SUB-INVESTMENT ADVISERS American Fund Advisors, Inc. 1415 Kellum Place Garden City, New York 11530 V.A. Technology Fund Independence Investment LLC 53 State Street Boston, Massachusetts 02109 V.A. Core Equity Fund ISSUER John Hancock Life Insurance Company John Hancock Variable Life Insurance Company* 200 Clarendon Street Boston, Massachusetts 02117 *Not Licensed in New York PRINCIPAL DISTRIBUTOR John Hancock Funds, Inc. 101 Huntington Avenue Boston, Massachusetts 02199-7603 LEGAL COUNSEL Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109-1803 CEO CORNER [A 1" x 1" photo of Maureen R. Ford, Chairman and Chief Executive Officer, flush right next to first paragraph.] DEAR SHAREHOLDERS: The U.S. stock market has had a rough beginning in 2001, as last year's downward spiral continued due to growing concern over the slowing economy and a parade of disappointing earnings announcements. The Standard & Poor's 500 Index, a leading benchmark of large-cap stocks, fell by 6.69% in the first six months of the year. The Federal Reserve aggressively began to attack the economic slowdown with interest-rate cuts totaling 2.75 percentage points between January and the end of June. By April, investors began to believe the worst might be over, prompting a sharp stock rally that month. Bonds wound up outperforming stocks overall. Even with the spring upturn, the stock market remains indecisive, as investors try to get a clearer sense of the timetable for economic and corporate recovery. More than ever, this is a time to keep a long-term investment perspective and check in with your investment professional to ensure that your portfolio is adequately diversified. In the midst of this year's market disappointments, one significant event occurred that has positive short- and long-term implications for investors. On June 7, President George W. Bush signed into law the most sweeping tax-cut bill in two decades. The bill's first benefit comes this summer in the form of a tax refund, ranging from $300 to $600, to almost everyone who filed a 2000 tax return. Gradual cuts in taxes will follow the rebate checks. For investors, the bill also provides a number of extra incentives for retirement and college savings through changes to IRA and 401(k) plan contributions and enhancements to Education IRAs, among other things. The new tax law has a variety of provisions, many of which are phased in over a number of years. We encourage you to consult with your investment professional to determine how to take the best, and most timely, advantage of the benefits it contains. Sincerely, /S/ MAUREEN R. FORD MAUREEN R. FORD, CHAIRMAN AND CHIEF EXECUTIVE OFFICER BY PAUL MCMANUS FOR THE PORTFOLIO MANAGEMENT TEAM John Hancock V.A. Core Equity Fund Fed cuts interest rates aggressively amid further slowing of the economy The first half of 2001 witnessed a pitched battle between two powerful forces. On the one hand, prices were undermined -- especially in February and March -- by continued economic slowing and the resulting damage to corporate earnings prospects. On the other hand, the Federal Reserve Board weighed in with six reductions in short-term interest rates since the beginning of the year in an aggressive effort to head off a recession. Two of the cuts -- on January 3 and April 18 -- came between regularly scheduled meetings of the Fed's Open Market Committee. Both surprise moves gave all of the popular market averages a notable boost. The Standard & Poor's 500 Index reached an interim peak on May 22, five business days after the May 15 reduction. From there the Index drifted irregularly lower until the end of the period, consolidating its recent gains. "With a few exceptions, the stocks that detracted most from performance were technology and telecommunications stocks..." Although announcements of corporate layoffs continued unabated during the period, unemployment rose only modestly, and consumers continued to spend freely. Accounting for approximately two-thirds of total economic activity, consumer spending is considered vital to keep the economy growing at a healthy rate. Energy prices, while still high, eased somewhat from their extreme levels in the fall of 2000. Overall, inflation remained well under control, allowing the Fed free rein to trim rates as it saw fit. [Table at bottom left hand column entitled "Top Five Stock Holdings." The first listing is General Electric 4.7%, the second is Microsoft 4.5%, the third Citigroup 4.2%, the fourth Pfizer 3.3% and the fifth ExxonMobil 3.0%. A note below the table reads "As a percentage of net assets on June 30, 2001."] Performance review Technology and telecommunications stocks continued to fare poorly, reflecting sagging demand and overbuilding of the telecom infrastructure during the past few years. Meanwhile, investors flocked to defensive market sectors such as consumer staples, financial services and health care, especially the services segment. Energy stocks also did well, buoyed by continued strength in crude oil and natural gas prices. The Fund's strategy of diversification and buying undervalued stocks of companies with improving fundamentals worked well in this environment, enabling us to add value with stock selection in a number of sectors while remaining close to our benchmark index in sector weightings and risk profile. For the six months ended June 30, 2001, John Hancock V.A. Core Equity Fund had a return of -4.68% at net asset value. In comparison, the S&P 500 Index returned -6.69%, including reinvested dividends. The Fund's returns, while negative, also compared favorably with the average variable annuity large-cap core fund's -7.92%, according to Lipper, Inc. Longer-term performance information can be found on page six. Mega-cap winners Microsoft topped the list of stocks that helped the Fund's performance, bucking the overall downward trend in technology. The company was one of the first to preannounce lower-than-expected earnings last fall, and investors likewise anticipated an early recovery relative to other stocks in the sector. Another positive influence was the news near the end of June that a federal appeals court had overturned the U.S. District Court ruling that Microsoft must be split into two separate companies for antitrust reasons. The likelihood of a new generation of personal computers within the next year or so, which would trigger upgrades to a more advanced version of Microsoft's Windows operating system, added still another reason for investors to like the stock. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended June 30, 2001." The chart is scaled in increments of 2% with -10% at the bottom and 0% at the top. The first bar represents the -4.68% total return for John Hancock V.A. Core Equity Fund. The second bar represents the -7.92% total return for Average variable annuity large-cap core fund. A note below the chart reads "The total return for John Hancock V.A. Core Equity Fund is at net asset value with all distributions reinvested. The average variable annuity large-cap core fund is tracked by Lipper, Inc. See the following page for historical performance information."] AOL Time Warner also made a positive contribution to performance. The company's management appeared to be doing a good job of bringing to fruition the anticipated synergies from the recent mega-merger of America Online and Time Warner -- in spite of lower income from advertising, which constitutes a large percentage of the company's revenue base. Finally, Chevron and ExxonMobil reflected the ongoing strength in energy prices. Tech and drug losers With a few exceptions, the stocks that detracted most from performance were technology and telecommunications stocks in which the Fund had market-weighted or underweighted positions. Included in this category were Cisco Systems, EMC, Oracle Systems, Sun Microsystems, Radio Shack, Corning, Comverse Technology and QUALCOMM. In the case of Qwest Communications, the Fund was hurt by being overweighted compared with the Index. However, we felt justified in taking this position because of Qwest's solid management, strong fundamental outlook, and the potential benefits of the company's recent merger with SBC Communications. A number of drug companies -- among them Merck, Bristol-Myers Squibb, Pfizer and Schering-Plough -- also detracted significantly from performance. While some of the drug industry's problems were attributable to currency fluctuations, we believe that most of the weakness in these stocks was due to a temporary, but widespread, lull in the product development and approval process. "...the economy is still giving off very mixed signals." Looking ahead We are as positive on the U.S. stock market as we have been for quite a while. Valuations are much more reasonable, investors are more value-conscious, and the Fed is aggressively easing monetary conditions. Short-term interest rates are now approximately two full percentage points below long-term rates, historically an extremely bullish backdrop for stocks. Consumer spending, an important driver of economic activity, should be aided by the retroactive tax cut recently passed by Congress. Despite all of these positive factors, however, we must point out that the economy is still giving off very mixed signals. Patience and the discipline to stick with our methodology of seeking out undervalued stocks of companies with improving fundamentals should provide useful guidance in this uncertain environment. A LOOK AT PERFORMANCE For the period ended June 30, 2001 SINCE SIX ONE INCEPTION MONTHS YEAR (8/29/96) ------- ------- ------- Cumulative Total Returns (4.68%) (12.02%) 89.14% Average Annual Total Returns -- (12.02%) 14.09% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Core Equity Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Core Equity Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Standard & Poor's 500 Index and is equal to $20,142 as of June 30, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Core Equity Fund on August 29, 1996 and is equal to $18,914 as of June 30, 2001. BY TIMOTHY E. QUINLISK, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND JAMES S. YU, CFA, AND R. SCOTT MAYO, CFA, PORTFOLIO MANAGERS John Hancock V.A. Relative Value Fund Stock market volatility continues as economy remains weak The first half of 2001 was not what investors had hoped. The Federal Reserve significantly lowered short-term interest rates between January and June, but the economy remained sluggish. Corporations with declining revenues and earnings cut back on spending, triggering earnings disappointments for many suppliers. Tough year-over-year earnings comparisons caused further volatility in the market, especially during the first quarter when stock prices fell sharply. The market appeared to reach bottom early in the second quarter, gaining some ground as investors began buying stocks that would benefit from an improved economy. Many stocks in sectors like technology and telecommunications, however, continued to plummet. The Standard & Poor's 500 Index returned a disappointing -6.69% for the six months ended June 30, 2001. [Table at bottom left hand column entitled "Top Five Stock Holdings." The first listing is Agere Systems 5.8%, the second is Pegasus Communications 5.2%, the third Sprint 4.5%, the fourth Parametric Technology 4.4% and the fifth AT&T Corp.-Liberty Media Group 4.3%. A note below the table reads "As a percentage of net assets on June 30, 2001."] Stock picker's market The market's volatility and weak economic environment forced investors to focus on fundamentals, such as sales and earnings, as well as valuations (or stock prices relative to earnings growth). Many growth stocks in the technology and telecom sectors suffered, while investors favored value stocks in areas like natural resources, energy and finance. Across all industries, however, stock selection -- choosing companies that could meet their earnings targets -- was key. Lower stock prices made sense where sales had fallen severely or balance sheets carried too much debt. But too often problems at one company triggered indiscriminate selling throughout the industry. This created unique opportunities to buy great businesses at bargain prices. "We found the best values in the technology, telecom and media sectors." Strong Fund performance The market's volatility allowed us to build the Fund's stakes in top-quality businesses with the ability to grow and create value over a long period. Our focus was on companies where there was a catalyst -- such as a restructuring, new management or new product -- that would help unlock the stock's intrinsic value. Strong stock selection resulted in John Hancock V.A. Relative Value Fund returning 5.87% at net asset value, during the six months ended June 30, 2001. By comparison, the average variable annuity multi-cap value fund returned 0.94%, according to Lipper, Inc. For historical performance information, please see page nine. [A 1 1/2" x 2" photo at bottom right side of page of John Hancock V.A. Relative Value Fund. Caption below reads "Timothy Quinlisk."] Winners in technology and media The Fund had above-average investments in technology and media, where selected stocks rebounded nicely. Microsoft and Dell Computer rallied as investors regained confidence in their ability to meet earnings forecasts, prompting us to take profits. Computer Associates International, a mainframe software developer, benefited from improved accounting practices and strong demand related to IBM's new mainframe offering. And ANTEC, which makes equipment that enables companies to deliver telephone services over cable, rebounded following a questionable acquisition. Media companies like AT&T's Liberty Media, Clear Channel Communications, USA Networks, Viacom and XM Satellite Radio Holdings also were strong contributors to performance as investors began recognizing the value of their assets. But our biggest gains came from Cendant, a company with hotel franchising and real estate operations. The stock made a huge comeback as management addressed past accounting problems and exceeded earnings expectations. As the stock reached our price target, we took profits. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended June 30, 2001." The chart is scaled in increments of 2% with 0% at the bottom and 6% at the top. The first bar represents the 5.87% total return for John Hancock V.A. Relative Value Fund. The second bar represents the 0.94% total return for Average variable annuity multi-cap value fund. A note below the chart reads "The total return for John Hancock V.A. Relative Value Fund is at net asset value with all distributions reinvested. The average variable annuity multi-cap value fund is tracked by Lipper, Inc. See the following page for historical performance information."] "While the economy remains sluggish, there are many indications that it could be at or near the bottom." Disappointments in telecom The Fund also had a sizable stake in telecom-related companies, many of which declined 50% or more during the period as telecom spending came to a screeching halt. Among our biggest casualties were Conexant Systems, which makes semiconductors used in broadband and wireless communications; Corning, which supplies the fiber for fiber-optics networks; Vicor, which makes power converters used in the cellular infrastructure; and Lucent Technologies, which makes telecom equipment. Nextel Communications, a wireless operator, also took a severe beating despite maintaining high monthly subscriber revenues. In addition, software stocks like Wind River Systems and Parametric Technology disappointed as companies deferred technology spending. Satellite companies like Pegasus Communications and Hughes Electronics suffered from uncertainties surrounding their possible acquisition. Buying opportunities We found the best values in the technology, telecom and media sectors. Among our new additions were Agere Systems, a leading supplier of communications semiconductors and optical components that was recently spun off by Lucent Technologies at a very attractive price, and Concord Communications, a small software company. We added substantially to our stake in Sprint, a leading provider of local and long- distance services. And we bought Cumulus Media, a company that buys and manages small radio stations in small- and mid-size markets. Finally, cheap health-care valuations and solid growth prospects prompted us to increase our stake in large pharmaceuticals like Schering-Plough, as well as smaller specialty drug companies like Alpharma. A look ahead We believe both the economy and the stock market are poised for recovery. While the economy remains sluggish, there are many indications that it could be at or near the bottom. U.S. economic growth in 2001 will not be as robust as it was in early 2000, but it should still be good, especially as lower interest rates kick in. We're also optimistic about stocks. A lot of companies announced in advance that they would miss their second quarter earnings targets, which means the bad news is already reflected in their stock prices. Stock prices should benefit as year-over-year earnings comparisons become easier and as the economic outlook improves. At current levels, the market offers attractive buying opportunities for relative value stock pickers like us. A LOOK AT PERFORMANCE For the period ended June 30, 2001 SINCE SIX ONE INCEPTION MONTHS YEAR (1/6/98) ------- ------- ------- Cumulative Total Returns 5.87% (4.99%) 91.66% Average Annual Total Returns -- (4.99%) 20.56% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Relative Value Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Relative Value Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Relative Value Fund on January 6, 1998 and is equal to $19,166 as of June 30, 2001. The second line represents the Standard & Poor's 500 Index and is equal to $13,201 as of June 30, 2001. BY JOHN F. SNYDER, III, PORTFOLIO MANAGEMENT TEAM LEADER, AND BARRY H. EVANS, CFA, AND PETER M. SCHOFIELD, PORTFOLIO MANAGERS John Hancock V.A. Sovereign Investors Fund Stock market stays in negative territory The stock market's malaise extended into 2001. Under the pressure of corporate cost-cutting and layoffs as well as a sagging U.S. economy, stocks continued their treacherous decline in the first quarter of the year. Once again, technology and telecommunications stocks were among the sectors hardest hit by the market slump. Investors continued their migration to safer havens -- those stocks with steady earnings growth, even in a slower economy, and more reasonable valuations. "Once again, technology and telecommunications stocks were among the sectors hardest hit by the market slump." After four straight quarters of tumbling prices, investors finally got some relief when stocks staged a springtime rally. With the Federal Reserve's fifth interest-rate cut, investors began to believe that the worst might finally be over for the U.S. economy. Although stocks surged on the news, most experts remained skeptical about whether the rally signaled the start of a sustained market recovery. At the end of the period, doubt still pervaded the market and many gun-shy investors continued to take a cautious wait-and-see attitude. The result was a negative return for the broad Standard & Poor's 500 Index, which lost 6.69% in the first six months of 2001. [Table at bottom left hand column entitled "Top Five Stock Holdings." The first listing is Citigroup 3.5%, the second is IBM 2.6%, the third Johnson & Johnson 2.3%, the fourth Chevron 2.3% and the fifth BellSouth 2.2%. A note below the table reads "As a percentage of net assets on June 30, 2001."] Performance scorecard For the six months ended June 30, 2001, John Hancock V.A. Sovereign Investors Fund returned -5.70% at net asset value. By comparison, the average variable annuity equity income fund returned -1.79%, according to Lipper, Inc. See page 12 for historical performance information. What put a damper on the Fund's relative performance was our focus on high-quality growth financials. As interest rates fell in the first half of the year, investors flocked to lower-quality regional banks with hopes that an economic uptick would eventually improve their credit situations. On the flip side, our high-quality growth financials -- including American International Group, AFLAC and Citigroup -- languished. [A 1 1/2" x 2" photo at bottom right side of page of John Hancock V.A. Sovereign Investors Fund. Caption below reads "John Snyder."] Several of our longtime holdings also had a negative impact on performance. Consumer products company Kimberly-Clark dropped under the pressure of rising material costs, an increasingly competitive environment and a strong U.S. dollar that hurt profits overseas. Given its reasonable valuation and strong product line-up, we're sticking with our position. Advertising giant Interpublic Group fell prey to a weak economy and difficulty digesting several large acquisitions, and we've cut back on our position. In this difficult environment, we were once again reminded how important stock selectivity is. For example, thanks to its strong product cycle and accelerating earnings, Baxter International turned in a strong performance, despite the declining health-care sector. At a time when most technology stocks were still reeling from tremendous losses, IBM jumped more than 30%. This is a testament to its solid fundamentals -- diverse product line, strong earnings and reasonable valuation. Finally, our largest energy holdings -- Chevron and ExxonMobil -- rose sharply thanks to higher oil prices, strong earnings and the perception of their being safe havens in a stormy market. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended June 30, 2001." The chart is scaled in increments of 2% with -6% at the bottom and 0% at the top. The first bar represents the -5.70% total return for John Hancock V.A. Sovereign Investors Fund. The second bar represents the -1.79% total return for Average variable annuity equity income fund. A note below the chart reads "The total return for John Hancock V.A. Sovereign Investors Fund is at net asset value with all distributions reinvested. The average variable annuity equity income fund is tracked by Lipper, Inc. See the following page for historical performance information."] Fine-tuning the portfolio Our strong focus on stock selectivity has led us to make several adjustments to the portfolio during the first half of the year. Once again, the Fund's unwavering investment philosophy has always led us to invest in high-quality companies with steady earnings growth and reasonable valuations. Given that, we've continued to pare our retail holdings such as Home Depot and Lowe's. Our concern is that valuations have become extended and there's a risk of softer consumer spending as corporate layoffs become more widespread. High valuations also led us to take profits in several of our longtime health-care holdings such as pharmaceutical giant Schering-Plough and medical device maker Medtronic. We viewed the lackluster performance of high-quality financials as a buying opportunity, since we believe that investors will eventually recognize the outstanding growth potential of these stocks. As a result, we've added a position in PNC Bank, which stands to benefit from an increase in its fee-based business. We've also beefed up our position in capital goods and basic materials stocks, believing they will perform strongly when the economy recovers. Our emphasis here is on companies such as Rohm and Haas, and Tyco International, both of which have successfully weathered the recent downturn and are well positioned to leverage the eventual upturn in the economy. "...it's clear that the Federal Reserve is committed to preventing the economy from hitting a hard landing." A look ahead In the midst of this difficult market, we do see some positive signs on the horizon. With its six interest-rate cuts so far this year, it's clear that the Federal Reserve is committed to preventing the economy from hitting a hard landing. We're also starting to see rates come down overseas, which can only be positive for the United States. Probably the most important factor is that inflation remains well under control, despite the recent rate cuts and the surge in energy prices. Does this mean the worst is over? Now more than ever, investors are questioning when the stock market and the economy will turn the corner. Since no one knows, we're not putting our efforts into trying to time the turnaround, but rather we're maintaining our steadfast focus on high-quality stocks with strong growth potential and reasonable valuations. A LOOK AT PERFORMANCE For the period ended June 30, 2001 SINCE SIX ONE INCEPTION MONTHS YEAR (8/29/96) ------- ------- ------- Cumulative Total Returns (5.70%) (1.59%) 58.65% Average Annual Total Returns -- (1.59%) 10.02% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Sovereign Investors Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Sovereign Investors Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Standard & Poor's 500 Index and is equal to $20,142 as of June 30, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Sovereign Investors Fund on August 29, 1996 and is equal to $15,865 as of June 30, 2001. BY JAMES K. SCHMIDT, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND THOMAS M. FINUCANE AND THOMAS C. GOGGINS, PORTFOLIO MANAGERS John Hancock V.A. Financial Industries Fund Financial stocks outperform the volatile stock market It was a difficult six months for the stock market, which lost ground and was fraught with heightened volatility. An economy that slowed precipitously and a barrage of corporate earnings disappointments turned investors into bears, especially in the first quarter. In response to the sagging economy, the Federal Reserve began cutting interest rates. Between January and the end of June, it lowered the federal funds rate that banks charge each other for overnight loans by 2.75 percentage points in a bid to avoid a recession. Financial stocks held up better than the market as a whole, although the sector had its decided winners and losers. With the market growing increasingly dicey, financial companies connected to the stock market, like asset managers and brokerage houses, suffered, as did those whose stocks had run up the most by late last year. In a reversal of last year's fortunes, the smaller banks and those most sensitive to interest-rate moves made a comeback. For the six months ended June 30, 2001, the Standard & Poor's Financial Index returned -2.52%, while the Standard & Poor's 500 Index returned -6.69%. [Table at bottom left hand column entitled "Top Five Stock Holdings." The first listing is Fifth Third Bancorp 4.2%, the second is American International Group 4.0%, the third Citigroup 4.0%, the fourth AFLAC 3.8% and the fifth General Electric 3.7%. A note below the table reads "As a percentage of net assets on June 30, 2001."] Fund performance For the six months ended June 30, 2001, John Hancock V.A. Financial Industries Fund posted a total return -9.54% at net asset value. That compared with the 0.54% return of the average open-end financial services fund and the -14.72% return of the average variable annuity specialty/miscellaneous fund, according to Lipper, Inc. See page 15 for historical performance information. "We also moved to boost our stake in U.S. banks..." Brokers, asset managers struggle Our overweighting in the brokerage firms and asset managers, which helped us significantly outperform our peers last year, accounted for our relative performance lag so far this year. That included brokerage and investment banking firms Charles Schwab, Merrill Lynch and Morgan Stanley, whose fundamentals deteriorated as trading, IPO and merger activity slowed in the negative market environment. Marsh McLennan, with its Putnam asset-manager subsidiary, and American Express were similarly affected. [A 1 1/2" x 2" photo at bottom right side of page of John Hancock V.A. Financial Industries Fund. Caption below reads "Jim Schmidt."] While we moved to cut our stake in these market-sensitive stocks, we did not do so aggressively enough. But we believe the securities business is close to a bottom, and will begin to look better later this year as the economy stabilizes with lower rates. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended June 30, 2001." The chart is scaled in increments of 5% with -15% at the bottom and 10% at the top. The first bar represents the -9.54% total return for John Hancock V.A. Financial Industries Fund. The second bar represents the 0.54% total return for Average open-end financial services fund. The third bar represents the -14.72% total return for Average variable annuity specialty/miscellaneous fund. A note below the chart reads "The total return for John Hancock V.A. Financial Industries Fund is at net asset value with all distributions reinvested. The average open-end financial services fund and variable annuity specialty/miscellaneous fund are tracked by Lipper, Inc. See the following page for historical performance information."] Insurance Several of our larger insurance company stocks that had been our best performers last year also sold off, not because of any fundamental changes, but simply because their valuations, as measured by price-earnings ratios, had become too high for value-conscious investors. Two examples were American International Group (AIG) and AFLAC. Furthering the consolidation trend among life insurers, AIG made a successful bid for American General during the period. We continued to shift our insurance assets from life insurance companies to property and casualty companies, since the pricing environment is improving for property and casualty names like Allstate. Life insurance companies, on the other hand, face some challenges the property and casualty companies don't. These include stock-market and economic sensitivity, a rash of new demutualization offerings that have put pressure on stock prices, and the potential passage of estate-tax reform legislation that could dampen variable life sales. "...we expect the U.S. economy to avoid a recession and produce modest growth for the rest of 2001." Banks, finance companies boosted We also moved to boost our stake in U.S. banks, since we had previously been significantly underweighted there and anticipated that falling rates would lift the stocks. We increased our exposure to the more interest-rate sensitive, less expensive, banks, and they did well, including FleetBoston. On the other hand, our emphasis on trust banks with less interest-rate sensitivity, like State Street and Northern Trust Company, held us back this period after serving us so well last year. Like some of our premium insurance names, their higher valuations put them out of investor favor. Our effort to increase the Fund's exposure to stocks sensitive to falling interest rates also prompted us to take larger positions in Fannie Mae and Household International. They were both near the top of our performance chart as loan and mortgage activity picked up. Toward the end of the period, we also bought General Electric at an attractive price so that we could tap into its subsidiary General Electric Credit Corp., a well-managed company that provides a range of financial services including consumer and commercial lending and life insurance. REITs, foreign holdings cut We upped our bank and finance company stakes by taking profits and nearly eliminating our position in real estate investment trusts after their strong runup last year. We also cut our foreign holdings and shifted our emphasis there to asset managers such as Amvescap. They stand to benefit most from the move in Europe to privatize pension funding. Outlook Although the Fed's aggressive stance to stabilize the economy appears to be winding down, its efforts should begin to have a positive effect later this year, and we expect the U.S. economy to avoid a recession and produce modest growth for the rest of 2001. Once investors become more confident in this scenario, we anticipate a pickup in trading, underwriting and merger activity. This bodes well for all financial services stocks, including the banks with exposure to market-related revenues, and we believe the Fund is poised to benefit from the upturn. - ----------------------------------------------------------------------------- Sector investing is subject to greater risks than the market as a whole. A LOOK AT PERFORMANCE For the period ended June 30, 2001 SINCE SIX ONE INCEPTION MONTHS YEAR (4/30/97) ------- ------- ------- Cumulative Total Returns (9.54%) 8.78% 70.72% Average Annual Total Returns -- 8.78% 13.70% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Financial Industries Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Financial Industries Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Financial Industries Fund on April 30, 1997 and is equal to $17,072 as of June 30, 2001. The second line represents the Standard & Poor's 500 Index and is equal to $16,178 as of June 30, 2001. BY BARRY GORDON, MARC H. KLEE, CFA, AND ALAN LOEWENSTEIN, CFA, PORTFOLIO MANAGERS John Hancock V.A. Technology Fund Tech stocks suffer first quarter 2001 decline as economy weakens Technology stocks declined sharply in the first three months of 2001, although a spring rally helped erase some of those losses. In the beginning of the year, technology stocks suffered steep losses as economic growth slowed to a near crawl, leading corporations to dramatically curtail their technology spending. This reminded investors that the tech sector is a cyclical group whose fortunes are closely linked to the economy's ups and downs. Consequently, tech companies were forced to lower earnings and revenue expectations, causing the technology-dominated Nasdaq Composite Index to shed more than 25% in the first quarter of 2001. "Despite the spring rebound, most tech stocks -- like the Nasdaq -- ended the period with sizable losses..." In early April, however, the tide began to turn in favor of technology stocks. Shrugging off signs that the economy remained weak, investors became increasingly optimistic that the worst of the economic and stock price deterioration was behind them, fueling hopes for a recovery. That renewed enthusiasm was due in no small part to economically stimulative moves by the Federal Reserve, which cut interest rates six times totaling 2.75 percentage points in the first half of the year. That helped tech stocks rack up decent gains in April, with the Nasdaq posting a gain of 15% in the month of April alone. But the group remained volatile through the end of June and the Nasdaq was still in negative territory through June, losing 13% in the first six months of 2001. [Table at bottom left hand column entitled "Top Five Stock Holdings." The first listing is AOL Time Warner 4.0%, the second is Micron Technology 3.4%, the third KLA-Tencor 3.4%, the fourth Applied Materials 3.0% and the fifth Mercury Interactive 2.9%. A note below the table reads "As a percentage of net assets on June 30, 2001."] Fund performance For the six-month period ended June 30, 2001, John Hancock V.A. Technology Fund posted a total return of -28.10% at net asset value, compared with the -25.86% return of the average open-end science and technology fund and the -14.72% return of the average variable annuity specialty/miscellaneous fund, according to Lipper, Inc. See page 18 for historical performance information. [A 3" x 2" photo at bottom right side of page of John Hancock V.A. Technology Fund. Caption below reads "Fund management team members (l-r): Barry Gordon, Marc Klee and Alan Loewenstein."] Leaders and laggards Despite the spring rebound, most tech stocks -- like the Nasdaq -- ended the period with sizable losses, most of which were sustained in the first quarter. Among the few holdings that posted gains were semiconductor and related companies KLA-Tencor, Applied Materials, Micron Technology and Cypress Semiconductor. They bounced back this spring when global investors started to adjust their portfolios toward cyclical and growth-oriented stocks. Investors also reasoned that semiconductor stocks might be the first to take off in a rally, just as they were the first to go down in the sell-off. Some Internet-related stocks staged a bit of a comeback, with AOL Time Warner advancing after the merger between the leading Internet service provider and the media giant was approved. Amazon.com, the world's largest online retailer, also posted strong returns thanks to smaller-than-expected losses and the company's prediction that it will pull into the black by year end. Microsoft's stock price surged more than 50% during the period, thanks in large part to its better-than-expected quarterly earnings announced in mid-April, driven by strong sales of its Windows 2000 product. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended June 30, 2001." The chart is scaled in increments of 10% with -30% at the bottom and 0% at the top. The first bar represents the -28.10% total return for John Hancock V.A. Technology Fund. The second bar represents the -25.86% total return for Average open-end science and technology fund. The third bar represents the -14.72% total return for Average variable annuity specialty/miscellaneous fund. A note below the chart reads "The total return for John Hancock V.A. Technology Fund is at net asset value with all distributions reinvested. The average open-end science and technology fund and variable annuity specialty/miscellaneous fund are tracked by Lipper, Inc. See the following page for historical performance information."] On the flip side were the vast majority of tech stocks that posted sizable losses. Among the biggest detractors from the Fund's performance were storage companies EMC and Network Appliance. Last year, businesses had to pay top dollar to warehouse the reams of data they generated. Even as the rest of the tech sector suffered a slowdown, storage companies seemed immune. But the sinking reality of the economy's slowdown began to take its toll, and competition among storage vendors ratcheted up. Another major detractor was Cisco Systems, the leading supplier of data networking products to business. Its stock held up relatively well during most of 2000, but got hit hard in the first quarter of 2001 as the company's growth rates dropped from 50% to 60% per year to showing year-over-year declines. Computer software and service stocks also were hard hit. Although many software projects remain under way, a growing number of corporations have re-evaluated their spending at this time because of economic conditions. Software companies i2 Technologies, BEA Systems and Mercury Interactive all saw their stock prices at least halved during the period. Despite these disappointing results, we continue to believe that these stocks offer well-above-average growth prospects. "...technology stocks as a whole are reasonably valued, with excellent growth prospects." The stock prices of communications equipment companies, including Corning and JDS Uniphase, also posted sharp declines as many of their customers -- the telecommunications carriers -- faced problems. Without the necessary capital, the carriers were forced to curtail spending to build out their networks. Furthermore, the communications equipment industry's inability to anticipate demand caused large inventory buildups that need to be worked down. Outlook We're optimistic about the prospects for technology stocks. Despite the April rally, technology stocks as a whole are reasonably valued, with excellent growth prospects. Given the increasing reliance on technology by consumers and corporations, our view is that five-year growth rates for the tech sector will be higher than those of the broad S&P 500 Index. We believe this is an attractive time to buy technology stocks, which historically do well in a declining interest-rate environment. Finally, we believe better economic growth later this year should spur technology spending and provide a boost for the group. - ----------------------------------------------------------------------------- Sector investing is subject to greater risks than the market as a whole. A LOOK AT PERFORMANCE For the period ended June 30, 2001 SINCE SIX ONE INCEPTION MONTHS YEAR (5/1/00) ------- ------- ------- Cumulative Total Returns (28.10%) (52.22%) (47.20%) Average Annual Total Returns -- (52.22%) (42.22%) Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Technology Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Technology Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Standard & Poor's 500 Index and is equal to $8,549 as of June 30, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Technology Fund on May 1, 2000 and is equal to $5,280 as of June 30, 2001. BY JAMES K. HO, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND BENJAMIN A. MATTHEWS, PORTFOLIO MANAGER John Hancock V.A. Bond Fund Bonds outperform stocks in volatile market; slowing economy increases individual credit disappointments During the six months ended June 30, 2001, the broad fixed-income market was helped by the Federal Reserve's rate-cutting efforts aimed at preventing the economy from slipping into a recession, although the widespread deterioration in corporate profits created somewhat of a minefield. Many companies, particularly technology-related firms, found it increasingly difficult to service the debt on their books. Throughout the first half, we maintained the Fund's focus on individual, in-depth credit research. Doing so enabled the Fund to participate in the positive events taking place, while sidestepping many of the securities experiencing an implosion of their creditworthiness. Fund performance For the six months ended June 30, 2001, John Hancock V.A. Bond Fund produced a total return of 2.78% at net asset value. This compares with the 3.10% return of the average variable annuity corporate debt A-rated fund, according to Lipper, Inc. For historical performance information, please turn to page 21. [Table at bottom left hand column entitled "Top Five Sectors." The first listing is U.S. Agencies 30%, the second is U.S. Government 28%, the third Telecommunications 4%, the fourth Utilities 4% and the fifth Finance 4%. A note below the table reads "As a percentage of net assets on June 30, 2001."] Credit spreads narrow Since January, a greater-than-anticipated slowing of the economy has assaulted the financial markets. To head off a recession, the Federal Reserve Board got aggressive and cut short-term interest rates six times during the period, totaling 2.75 percentage points. The federal funds rate - -- the rate that banks charge each other for overnight loans -- stood at 3.75% on June 30, down from 6.50% on December 31, 2000. The Fed's concerted efforts to inject liquidity into the markets and make it easier for corporations to raise capital enabled credit spreads to contract. A "spread" is the difference in yield between bonds of varying credit quality. Bonds offering attractive risk premiums enjoyed renewed investor interest as a result. These included investment-grade and high-yield corporate issues, emerging-market bonds and government agency securities such as mortgage-backed issues. "Where and when we could, we added to or initiated positions in corporate bonds, particularly investment-grade issues..." [A 1 1/2" x 2" photo at bottom right side of page of John Hancock V.A. Bond Fund. Caption below reads "James Ho."] Throughout the period, we carefully bolstered the portfolio's stake in the so-called spread products. We primarily targeted mortgage-backed issues, such as Ginnie Mae and Fannie Mae to pursue the higher-yields and participate in the narrowing of credit spreads. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended June 30, 2001." The chart is scaled in increments of 1% with 0% at the bottom and 4% at the top. The first bar represents the 2.78% total return for John Hancock V.A. Bond Fund. The second bar represents the 3.10% total return for Average variable annuity corporate debt A-rated fund. A note below the chart reads "The total return for John Hancock V.A. Bond Fund is at net asset value with all distributions reinvested. The average variable annuity corporate debt A-rated fund is tracked by Lipper, Inc. See the following page for historical performance information."] Corporate bond exposure increases selectively Where and when we could, we added to or initiated positions in corporate bonds, particularly investment-grade issues, but we also targeted select high-yield securities. For the most part, our focus was economically sensitive companies that we believe are well positioned to benefit first from what we anticipate will be an eventual economic rebound. These include such names as Northwest Airlines, Delphi Auto Systems, Newmont Mining, Phelps Dodge, Georgia Pacific, AOL Time Warner, Viacom and Bank One Corporation. We also slightly increased the Fund's weighting in foreign bonds, purchasing Deutsche Telekom, France Telecom, Brazil C-bonds, Colombia sovereign debt and BBVA Bancomer, a Mexican corporate bond that we sold for profits by period's end. "The Fed has certainly demonstrated its commitment to jump-starting an economic recovery..." We also maintained fair representation in recession-resistant industries such as defense, utilities, health care, media and energy. Noteworthy performers in this area include BellSouth, Qwest Communications, Progress Energy, HEALTHSOUTH and Cox Communications. Yield curve steepens throughout the period With each interest-rate cut, U.S. Treasury bonds rallied. The shorter end of the yield curve experienced the most price appreciation and the yield curve finally returned to its historic steep slope. The Fund's Treasury positions were laddered in varying maturities, all of which contributed to performance throughout the period. As 2001 began, our duration was relatively neutral, as we wanted to wait and see how the interest-rate drama would unfold. Because duration mathematically measures a Fund's sensitivity to interest rate changes, actively managing it provides us with an additional means with which to pursue performance. The surprising rapidity of the Fed's initial rate reductions -- and the bond market's substantial response -- led us to believe that investors had fully discounted further rate cuts. It appeared long-term rates would not have much more room to fall. Looking beyond the current environment as we often do, we slightly shortened the portfolio's relative duration to position it for what we believed would be the next turn in the road: a flattening of the yield curve. In hindsight, it seems our move was a bit premature, as evidence of a protracted economic slowdown -- and thus the need for additional financial stimulus -- continued to mount. The yield curve continued to steepen as the period progressed. Outlook Our outlook for bonds is, for the most part, upbeat. The Fed has certainly demonstrated its commitment to jump-starting an economic recovery and there is no reason to believe it will fail to continue reducing short-term rates if that is what the economy mandates. Furthermore, the current scenario is not unlike that which preceded the dramatic corporate bond rally between 1992 and 1996, with one exception: current credit spreads are presently wider than they were back then, presenting discerning investors with some attractive investment opportunities. Selectivity and knowing what issues to buy and sell will be what separates those who profit from those who do not. A LOOK AT PERFORMANCE For the period ended June 30, 2001 SINCE SIX ONE INCEPTION MONTHS YEAR (8/29/96) ------- ------- ------- Cumulative Total Returns 2.78% 10.38% 42.89% Average Annual Total Returns -- 10.38% 7.66% YIELD For the period ended June 30, 2001 SEC 30-DAY YIELD ------- John Hancock V.A. Bond Fund 5.70% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Bond Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Lehman Brothers Corporate Bond Index -- an unmanaged index that mirrors the investment objectives and characteristics of the Fund. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Bond Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Bond Fund on August 29, 1996 and is equal to $14,290 as of June 30, 2001. The second line represents the Lehman Brothers Corporate Bond Index and is equal to $14,149 as of June 30, 2001. BY DAWN M. BAILLIE FOR THE PORTFOLIO MANAGEMENT TEAM John Hancock V.A. Money Market Fund Federal Reserve cuts interest rates six times to bolster the lagging economy; money market yields fell in tandem Money market yields fell in the first six months of 2001, as the Federal Reserve embarked on an aggressive program to cut short-term interest rates to prevent the economy from slipping into recession. With the economy slowing precipitously, the Fed stepped in beginning in January, cutting the federal funds rate by half a percentage point in a surprise move between its regularly scheduled meetings. The effects of the slowing economy began to show up in earnest in the form of corporate earnings disappointments, sending the stock market reeling. The Fed cut rates five more times through the end of June, sending the federal funds rate that banks charge each other for overnight loans from 6.50% at the start of the year to 3.75% by the end of June -- the lowest level in more than seven years. The first five cuts were for a half a percentage point each, and the last one in June was for one-quarter percentage point, an indication that the Fed could be winding down its rate-cut, or easing, cycle. Money market yields fell in this period, since the federal funds rate is also a key pricing benchmark for money market securities. "...we began to lengthen the Fund's average maturity to lock in higher-yielding securities for a longer time in the face of falling rates." 7-day effective yield On June 30, 2001, John Hancock V.A. Money Market Fund had a 7-day effective yield of 3.67%. By comparison, the average taxable money market fund had a 7-day effective yield of 3.38%, according to Lipper, Inc. Lengthening maturity As it became evident from the start of 2001 that the Fed, with its concerns about a too-slow economy, would continue to cut rates, we began to lengthen the Fund's average maturity to lock in higher-yielding securities for a longer time in the face of falling rates. Although the Fed clearly remained on its easing path, we did not extend the Fund's maturity beyond our peers' average. As is typically the case during an economic downturn, there are increased concerns about corporate defaults and credit downgrades, so money market funds typically scale back their exposure to longer-dated credits. In fact, we paid particular attention to buying and holding only the highest-quality top-tier securities. [A 1 1/2" x 2" photo at bottom middle of page of John Hancock V.A. Money Market Fund. Caption below reads "Dawn Baillie."] Uncertainty ahead The Fed appears to be slowing down, or even nearing the end of, its rate-cut cycle, as it waits to see the full impact of the steps it has already taken this year. But it has maintained its easing bias and not yet declared victory in its efforts to avert a recession, instead indicating it still has concerns about the economy's ongoing weakness. The Fed's stance will undoubtedly remain the same until there are clearer signs of an upturn in both the U.S. and global economies, where a slowdown has weighed on the U.S. economy. Other key elements to watch for are a rebound in corporate earnings growth and corporate capital spending, which has ground almost to a halt. In this uncertain environment, we'll keep the Fund's maturity in line with, if not slightly shorter than, our peers, until we have a clearer sense of the economy's health. As always, we will also continue to focus on providing the Fund with a competitive yield and on preserving stability of principal. [Bar chart at the top of left hand column with heading "7-Day Effective Yield." Under the heading is a note that reads "As of June 30, 2001." The chart is scaled in increments of 1% with 0% at the bottom and 4% at the top. The first bar represents the 3.67% total return for John Hancock V.A. Money Market Fund. The second bar represents the 3.38% total return for Average taxable money-market fund. A note below the chart reads "The average taxable money-market fund is tracked by Lipper, Inc. Past performance is no guarantee of future results."] "The Fed appears to be slowing down, or even nearing the end of, its rate-cut cycle..." The Fund is neither insured nor guaranteed by the U.S. government. Although the Fund seeks to maintain a net asset value of $1.00 per share, it is possible to lose money by investing in the Fund. BY FREDERICK L. CAVANAUGH, JR., MANAGEMENT TEAM LEADER, AND ARTHUR N. CALAVRITINOS, CFA, JANET L. CLAY, CFA, AND DANIEL S. JANIS, PORTFOLIO MANAGERS John Hancock V.A. Strategic Income Fund Falling interest rates lift U.S. bonds, as U.S. economy slows The first six months of 2001 marked a significant shift for the global bond markets. U.S. Treasuries had posted significant gains in 2000, as investors began to anticipate that the Federal Reserve Board would cut interest rates in response to slowing economic conditions. Although the Fed cut rates six times for a total of 2.75 percentage points in the first six months of 2001, U.S. Treasury securities posted mixed results in the period. Short- and intermediate-term Treasury securities continued to perform well in tandem with those rate cuts, with their yields falling and their prices rising. Ironically, long-term Treasury bond yields and prices were stalled throughout much of this spring as investors worried that the Fed may have risked re-igniting inflationary pressures with its dramatic rate cuts. "Recognizing that U.S. Treasury securities had enjoyed a nice run, we reduced our stake in them." In contrast, some high-yield bonds perked up a bit this year, after posting significant losses in 2000. The catalyst for their better performance was growing confidence that rate cuts would translate into improved economic conditions and stronger corporate performance. Furthermore, investors increasingly moved toward high-yield bonds in search of cheap valuations and higher yields. But the somewhat better performance of the broad high-yield sector masked continued disappointing losses among telecommunications bonds, which have been depressed for more than a year. [Table at bottom left hand column entitled "Top Five Sectors." The first listing is U.S. Government 39%, the second is Foreign Government 25%, the third Telecommunications 6%, the fourth Media 5% and the fifth Oil & Gas 3%. A note below the table reads "As a percentage of net assets on June 30, 2001."] In the foreign markets, performance was, as always, mixed. European bonds languished, primarily because the European Central Bank, citing decent economic growth on that continent, held interest rates steady. Emerging-market bonds, however, posted good performances as conditions in their markets generally improved, and Canadian bonds continued to benefit from relatively low and stable inflation. Japanese bonds didn't attract much attention throughout the year, due to the fact that their yields remained substantially lower than in other parts of the world. [A 1 1/2" x 2" photo at bottom right side of page of John Hancock V.A. Strategic Income Fund. Caption below reads "Fred Cavanaugh."] Fund performance For the six months ended June 30, 2001, John Hancock V.A. Strategic Income Fund posted a total return of 1.79% at net asset value. This compared with the 1.70% return of the average variable annuity general bond fund, according to Lipper, Inc. Historical performance information can be found on page 26. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended June 30, 2001." The chart is scaled in increments of 1% with 0% at the bottom and 2% at the top. The first bar represents the 1.79% total return for John Hancock V.A. Strategic Income Fund. The second bar represents the 1.70% total return for Average variable annuity general bond fund. A note below the chart reads "The total return for John Hancock V.A. Strategic Income Fund is at net asset value with all distributions reinvested. The average variable annuity general bond fund is tracked by Lipper, Inc. See the following page for historical performance information."] Turning from defensive to opportunistic Throughout much of 2000, we maintained a relatively defensive posture, but by January 2001, we began to take on a more opportunistic approach. Recognizing that U.S. Treasury securities had enjoyed a nice run, we reduced our stake in them. At the same time, we increased our holdings in emerging-market bonds. Not only were many dollar-denominated emerging-market bonds attractively valued, but they also were benefiting from some fundamental improvements, such as rising economic growth, declining interest rates, falling inflation and improving trade balances. Our increased exposure to government bonds issued by Mexico, Russia and Peru generally helped performance. Fortunately, we did not own any Argentinean bonds, which performed poorly as that country struggled with a weak economy and high levels of debt. The rest of the world Apart from emerging-market bonds, few foreign markets offered attractive value by our assessment. Because European bond yields remained below those offered by U.S. Treasuries, and the European Central Bank refused to lower interest rates, European bonds offered little upside potential for investors. Most Asian bonds also were decidedly unattractive, offering yields far lower than those found in the U.S. and emerging markets. Canada, however, offered an attractive combination of high quality and competitive yields. High-yield winners and losers Despite the choppy market, some of our high-yield holdings performed well. Coal producer AEI Resources benefited from stronger demand for that fuel, as well as a restructuring of its business. Columbia's Comunicacion Cellular was buoyed by strong interest in the country's bonds. Canada's MetroNet Communications was lifted by last year's merger with AT&T Canada. The telecommunications sector continued to be plagued by doubts during the past six months and handed us some of our biggest disappointments. Two-way messaging company Metro Call filed for bankruptcy protection, while fiber-optic company NorthEast Optic Network was hurt by weaker pricing in its key markets. Finally, video-on-demand company DIVA Systems struggled against slower-than-expected demand for its products and its failure to complete a planned IPO. "In our view, the Federal Reserve still has some work to do..." Outlook In our view, the Federal Reserve still has some work to do since the U.S. economy continues to struggle. Overseas, Europe already is showing some signs of weakening and Japan stands again at the brink of a recession, if it hasn't already entered one. That's why we believe the Fed will remain accommodative, perhaps cutting interest rates another three-quarters of a percentage point from current levels. With that backdrop in mind, we believe that emerging-market bonds will continue to perform well as investors seek out higher yields and position themselves to benefit from the fundamental economic and policy changes that are helping to improve conditions in many countries. We'll also keep our eyes out for attractively valued high-yield bonds. So far this year, a lack of liquidity and other market-driven factors have limited our high-yield purchases. If liquidity returns, we will look to expand our high-yield allocation. International investing involves special risks such as political, economic and currency risks and differences in accounting standards and financial reporting. See the prospectus for the risks of investing in high-yield bonds. A LOOK AT PERFORMANCE For the period ended June 30, 2001 SINCE SIX ONE INCEPTION MONTHS YEAR (8/29/96) ------- ------- ------- Cumulative Total Returns 1.79% 1.95% 35.07% Average Annual Total Returns -- 1.95% 6.41% YIELD For the period ended June 30, 2001 SEC 30-DAY YIELD ------- John Hancock V.A. Strategic Income Fund 7.14% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Strategic Income Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Lehman Brothers Government/Credit Bond Index -- an unmanaged index that measures the performance of U.S. government bonds, U.S. corporate bonds and Yankee bonds. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Strategic Income Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Lehman Brothers Government/Credit Bond Index and is equal to $14,278 as of June 30, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Strategic Income Fund on August 29, 1996 and is equal to $13,508 as of June 30, 2001. FINANCIAL STATEMENTS John Hancock Funds - Declaration Trust Statements of Assets and Liabilities June 30, 2001 (Unaudited) - --------------------------------------------------------------------------------------------------- V.A. V.A. V.A. V.A. CORE RELATIVE SOVEREIGN FINANCIAL EQUITY VALUE INVESTORS INDUSTRIES FUND FUND FUND FUND ----------- ----------- ----------- ----------- Assets: Investments at value (cost - $36,203,706, $53,741,513, $57,496,454 and $68,696,240, respectively) $40,984,082 $48,517,103 $61,866,211 $76,588,973 Joint repurchase agreements (cost - $558,000, $2,863,000, $6,474,000 and $5,059,000, respectively) 558,000 2,863,000 6,474,000 5,059,000 ----------- ----------- ----------- ----------- 41,542,082 51,380,103 68,340,211 81,647,973 Cash 345 661 738 793 Receivable for investments sold 21,871 -- -- 44,308 Receivable for shares sold -- 605,015 -- 265,908 Dividends and interest receivable 41,627 29,903 194,185 93,093 Deferred organization expenses 360 -- 360 -- Other assets 594 353 710 5,889 ----------- ----------- ----------- ----------- Total assets 41,606,879 52,016,035 68,536,204 82,057,964 - --------------------------------------------------------------------------------------------------- Liabilities: Payable for investments purchased 305,411 -- -- -- Payable for shares repurchased 120,067 -- 19,636 -- Payable to affiliates 24,621 22,921 35,307 53,787 Accounts payable and accrued expenses 20,788 6,303 13,432 14,582 ----------- ----------- ----------- ----------- Total liabilities 470,887 29,224 68,375 68,369 - --------------------------------------------------------------------------------------------------- Net Assets: Capital paid-in 40,153,629 52,889,850 67,695,696 73,522,524 Accumulated net realized gain (loss) on investments and foreign currency transactions (3,800,675) 4,322,497 (3,584,573) 340,035 Net unrealized appreciation (depreciation) of investments and translation of assets and liabilities in foreign currencies. 4,780,376 (5,224,410) 4,369,757 7,892,324 Undistributed (distributions in excess of) net investment income 2,662 (1,126) (13,051) 234,712 ----------- ----------- ----------- ----------- Net assets $41,135,992 $51,986,811 $68,467,829 $81,989,595 =================================================================================================== Net Asset Value Per Share: (Based on 2,469,310, 4,622,886, 4,664,964, and 4,941,476 shares, respectively, of beneficial interest outstanding - unlimited number of shares authorized with no par value) $16.66 $11.25 $14.68 $16.59 =================================================================================================== The Statement of Assets and Liabilities is each Fund's balance sheet and shows the value of what the Fund owns, is due and owes on June 30, 2001. You'll also find the net asset value per share as of that date. See notes to financial statements. Statements of Assets and Liabilities (continued) June 30, 2001 (Unaudited) - --------------------------------------------------------------------------------------------------- V.A. V.A. V.A. V.A. TECHNOLOGY BOND MONEY MARKET STRATEGIC FUND FUND FUND INCOME FUND ----------- ----------- ----------- ----------- Assets: Investments at value (cost - $26,597,872, $63,029,448, $124,243,085 and $48,106,465, respectively) $19,378,231 $63,141,671 $124,243,085 $45,878,321 Joint repurchase agreements (cost - $2,658,000, $6,265,000, $19,099,000 and $12,252,000, respectively) 2,658,000 6,265,000 19,099,000 12,252,000 ----------- ----------- ----------- ----------- 22,036,231 69,406,671 143,342,085 58,130,321 Cash 270 935 508 831 Receivable for investments sold 6,300 1,400,073 -- 577,828 Receivable for shares sold 183,531 28,993 -- 371,520 Dividends and interest receivable 1,218 911,363 244,121 1,255,406 Receivable for forward foreign currency exchange contracts sold -- -- -- 23,060 Deferred organization expenses -- 360 360 360 Other assets -- 227 3,037 1,548 ----------- ----------- ----------- ----------- Total assets 22,227,550 71,748,622 143,590,111 60,360,874 - --------------------------------------------------------------------------------------------------- Liabilities: Payable for investments purchased 605,978 3,983,931 -- 7,457,921 Payable for shares repurchased 760 9,723 -- 9,288 Dividends payable -- 22,275 28,204 23,677 Payable for forward foreign currency exchange contracts purchased -- -- -- 7,045 Payable to affiliates 13,367 28,158 60,892 24,642 Accounts payable and accrued expenses 26,164 12,674 6,173 2,091 ----------- ----------- ----------- ----------- Total liabilities 646,269 4,056,761 95,269 7,524,664 - --------------------------------------------------------------------------------------------------- Net Assets: Capital paid-in 30,789,537 67,763,216 143,494,649 57,331,052 Accumulated net realized loss on investments and foreign currency transactions (1,972,282) (117,077) -- (1,624,165) Net unrealized appreciation (depreciation) of investments and translation of assets and liabilities in foreign currencies. (7,219,642) 112,223 -- (2,222,895) Undistributed net investment income (accumulated net investment loss) (16,332) (66,501) 193 (647,782) ----------- ----------- ----------- ----------- Net assets $21,581,281 $67,691,861 $143,494,842 $52,836,210 =================================================================================================== Net Asset Value Per Share: (Based on 4,093,449, 6,582,826, 143,494,842 and 6,055,354 shares, respectively, of beneficial interest outstanding - unlimited number of shares authorized with no par value.) $5.27 $10.28 $1.00 $8.73 =================================================================================================== See notes to financial statements. Statements of Operations Six months ended June 30, 2001 (Unaudited) - --------------------------------------------------------------------------------------------------- V.A. V.A. V.A. V.A. CORE RELATIVE SOVEREIGN FINANCIAL EQUITY VALUE INVESTORS INDUSTRIES FUND FUND FUND FUND ----------- ----------- ----------- ----------- Investment Income: Dividends (net of foreign withholding tax of $1,473, $73, $1,224, $14,006, respectively) $243,052 $91,109 $369,001 $494,937 Interest -- 78,419 -- -- Securities lending 23,934 30,035 313,191 57,233 ----------- ----------- ----------- ----------- Total investment income 266,986 199,563 682,192 552,170 - --------------------------------------------------------------------------------------------------- Expenses: Investment management fee 137,988 120,565 178,874 283,808 Custodian fee 12,603 3,970 9,511 14,534 Auditing fee 10,198 9,157 8,927 10,319 Accounting and legal services fee 3,857 3,931 5,833 6,941 Miscellaneous 2,182 468 938 802 Printing 1,710 1,577 1,338 1,198 Trustees' fees 1,275 1,112 1,415 2,082 Organization expense 1,053 -- 1,053 -- Legal fees 233 252 279 516 Registration and filing fees 21 9 8 156 Interest expense -- 10,430 -- -- ----------- ----------- ----------- ----------- Total expenses 171,120 151,471 208,176 320,356 - --------------------------------------------------------------------------------------------------- Net investment income 95,866 48,092 474,016 231,814 - --------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on: Investments (2,936,537) 2,071,440 (1,328,907) 3,833,796 Foreign currency transactions -- -- -- (11,371) Change in unrealized appreciation (depreciation) on: Investments 937,032 462,352 (2,400,245) (11,108,013) Translation of assets and liabilities in foreign currencies -- -- -- (270) ----------- ----------- ----------- ----------- Net realized and unrealized gain (loss) (1,999,505) 2,533,792 (3,729,152) (7,285,858) - --------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from operations ($1,903,639) $2,581,884 ($3,255,136) ($7,054,044) =================================================================================================== The Statement of Operations summarizes for each of the Funds the investment income earned and expenses incurred in operating the Fund. It also shows net gains (losses) for the period stated. See notes to financial statements. Statements of Operations (continued) Six months ended June 30, 2001 (Unaudited) - --------------------------------------------------------------------------------------------------- V.A. V.A. V.A. V.A. TECHNOLOGY BOND MONEY MARKET STRATEGIC FUND FUND FUND INCOME FUND ----------- ----------- ----------- ----------- Investment Income: Dividends (net of foreign withholding tax of $425, none, none and none, respectively) $4,033 -- -- $8,332 Interest 61,129 $1,274,160 $2,597,886 1,604,967 Securities lending 1,931 -- -- -- ----------- ----------- ----------- ----------- Total investment income 67,093 1,274,160 2,597,886 1,613,299 - --------------------------------------------------------------------------------------------------- Expenses: Investment management fee 64,569 103,111 255,409 116,449 Custodian fee 15,732 23,415 16,685 10,181 Auditing fee 5,951 5,495 4,336 4,796 Printing 2,217 2,127 932 577 Legal fees 1,603 284 612 154 Accounting and legal services fee 1,579 4,034 9,994 3,797 Trustees' fee 374 647 1,735 515 Miscellaneous 238 360 199 239 Registration and filing fees 8 8 7 21 Organization expense -- 1,053 1,053 1,053 ----------- ----------- ----------- ----------- Total expenses 92,271 140,534 290,962 137,782 Less expense reductions (7,551) -- -- -- - --------------------------------------------------------------------------------------------------- Net expenses 84,720 140,534 290,962 137,782 - --------------------------------------------------------------------------------------------------- Net investment income (loss) (17,627) 1,133,626 2,306,924 1,475,517 - --------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on: Investments (1,778,652) 274,804 -- (625,492) Foreign currency transactions -- -- -- 30,346 Change in unrealized appreciation (depreciation) on: Investments (3,330,550) (541,491) -- (300,466) Translation of assets and liabilities in foreign currencies -- -- -- 37,333 ----------- ----------- ----------- ----------- Net realized and unrealized loss (5,109,202) (266,687) -- (858,279) - --------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from operations ($5,126,829) $866,939 $2,306,924 $617,238 =================================================================================================== See notes to financial statements. Statements of Changes in Net Assets - ----------------------------------------------------------------------------------------------------------------------------- V.A. V.A. V.A. CORE EQUITY FUND RELATIVE VALUE FUND SOVEREIGN INVESTORS FUND ------------------------ ------------------------ ------------------------ SIX MONTHS SIX MONTHS SIX MONTHS YEAR ENDED YEAR ENDED YEAR ENDED ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, DECEMBER 31, 2001 DECEMBER 31, 2001 DECEMBER 31, 2001 2000 (UNAUDITED) 2000 (UNAUDITED) 2000 (UNAUDITED) ----------- ----------- ----------- ----------- ----------- ----------- Increase (Decrease) in Net Assets: From Operations: Net investment income $196,241 $95,866 $54,327 $48,092 $675,781 $474,016 Net realized gain (loss) 153,575 (2,936,537) 13,434,131 2,071,440 (1,886,401) (1,328,907) Change in net unrealized appreciation (depreciation) (3,702,349) 937,032 (15,296,586) 462,352 1,083,527 (2,400,245) ----------- ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in net assets resulting from operations (3,352,533) (1,903,639) (1,808,128) 2,581,884 (127,093) (3,255,136) ----------- ----------- ----------- ----------- ----------- ----------- Distributions to Shareholders: * From net investment income (199,287) (93,007) (42,822) (56,408) (678,637) (486,814) From net realized gain (695,716) -- (15,128,734) -- -- -- In excess of net realized gain (844,741) -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Total distributions to shareholders (1,739,744) (93,007) (15,171,556) (56,408) (678,637) (486,814) ----------- ----------- ----------- ----------- ----------- ----------- From Fund Share Transactions: Shares sold 11,671,817 6,436,466 13,227,216 37,266,291 16,811,905 22,295,811 Shares issued to shareholders in reinvestment of distributions 1,739,743 93,007 15,171,557 56,408 678,636 486,814 Less shares repurchased (12,638,050) (4,069,385) (11,142,581) (26,903,976) (11,610,910) (5,900,944) ----------- ----------- ----------- ----------- ----------- ----------- Net increase 773,510 2,460,088 17,256,192 10,418,723 5,879,631 16,881,681 ----------- ----------- ----------- ----------- ----------- ----------- Net Assets: Beginning of period 44,991,317 40,672,550 38,766,104 39,042,612 50,254,197 55,328,098 ----------- ----------- ----------- ----------- ----------- ----------- End of period (including undistributed (distributions in excess of) net investment income of ($197), $2,662, $7,190, ($1,126), ($253), and ($13,051), respectively) $40,672,550 $41,135,992 $39,042,612 $51,986,811 $55,328,098 $68,467,829 =========== =========== =========== =========== =========== =========== Distributions to Shareholders: Per share dividends from net investment income $0.0888 $0.0390 $0.0186 $0.0134 $0.2077 $0.1148 ----------- ----------- ----------- ----------- ----------- ----------- Per share distributions from net realized gain $0.6886 -- $6.5883 -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- * Analysis of Fund Share Transactions: Shares sold 601,375 384,016 744,370 3,395,712 1,103,469 1,506,526 Shares issued to shareholders in reinvestment of distributions 99,280 5,717 1,406,946 5,499 44,976 33,495 Less shares repurchased (662,061) (242,365) (631,982) (2,448,161) (771,887) (400,730) ----------- ----------- ----------- ----------- ----------- ----------- Net increase 38,594 147,368 1,519,334 953,050 376,558 1,139,291 =========== =========== =========== =========== =========== =========== The Statement of Changes in Net Assets shows how the value of each Fund's net assets has changed since the end of the previous period. The difference reflects earnings less expenses, any investment and foreign currency gains and losses, distributions paid to shareholders, if any, and any increase or decrease in money shareholders invested in each Fund. The footnotes illustrate the number of Fund shares sold, reinvested and repurchased during the last two periods, along with the per share amount of distributions made to shareholders of each Fund for the periods indicated. See notes to financial statements. Statements of Changes in Net Assets (continued) - ------------------------------------------------------------------------------------------------------------------------------ V.A. V.A. V.A. FINANCIAL INDUSTRIES FUND TECHNOLOGY FUND BOND FUND ------------------------ ------------------------- ------------------------ SIX MONTHS SIX MONTHS SIX MONTHS YEAR ENDED YEAR ENDED YEAR ENDED ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, DECEMBER 31, 2001 DECEMBER 31, 2001 DECEMBER 31, 2001 2000 (UNAUDITED) 2000(1) (UNAUDITED) 2000 (UNAUDITED) ----------- ----------- ----------- ----------- ----------- ----------- Increase (Decrease) in Net Assets: From Operations: Net investment income (loss) $194,288 $231,814 $25,753 ($17,627) $1,040,920 $1,133,626 Net realized gain (loss) 696,899 3,822,425 (193,630) (1,778,652) (152,050) 274,804 Change in net unrealized appreciation (depreciation) 12,306,484 (11,108,283) (3,889,092) (3,330,550) 1,085,497 (541,491) ----------- ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in net assets resulting from operations 13,197,671 (7,054,044) (4,056,969) (5,126,829) 1,974,367 866,939 ----------- ----------- ----------- ----------- ----------- ----------- Distributions to Shareholders: * From net investment income (169,614) -- (24,458) -- (1,040,858) (1,188,894) From net realized gain -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Total distributions to shareholders (169,614) -- (24,458) -- (1,040,858) (1,188,894) ----------- ----------- ----------- ----------- ----------- ----------- From Fund Share Transactions: Shares sold 20,739,283 23,159,825 18,589,255 14,331,670 13,994,748 46,649,420 Shares issued to shareholders in reinvestment of distributions 169,614 -- 24,458 -- 1,040,858 1,166,619 Less shares repurchased (11,882,798) (5,482,782) (490,242) (1,665,604) (3,326,986) (4,974,940) ----------- ----------- ----------- ----------- ----------- ----------- Net increase 9,026,099 17,677,043 18,123,471 12,666,066 11,708,620 42,841,099 ----------- ----------- ----------- ----------- ----------- ----------- Net Assets: Beginning of period 49,312,440 71,366,596 -- 14,042,044 12,530,588 25,172,717 ----------- ----------- ----------- ----------- ----------- ----------- End of period (including undistributed net investment income (accumulated net investment loss) of $2,898, $234,712, $1,295, ($16,332), $21,480 and ($66,501), respectively) $71,366,596 $81,989,595 $14,042,044 $21,581,281 $25,172,717 $67,691,861 =========== =========== =========== =========== =========== =========== Distributions to Shareholders: Per share dividends from net investment income $0.0450 -- $0.0143 -- $0.6434 $0.2961 ----------- ----------- ----------- ----------- ----------- ----------- Per share distributions from net realized gain -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- * Analysis of Fund Share Transactions: Shares sold 1,252,923 1,385,001 1,961,452 2,474,548 1,400,901 4,499,608 Shares issued to shareholders in reinvestment of distributions 9,578 -- 3,292 -- 104,450 113,006 Less shares repurchased (779,897) (335,670) (48,490) (297,353) (336,738) (475,645) ----------- ----------- ----------- ----------- ----------- ----------- Net increase 482,604 1,049,331 1,916,254 2,177,195 1,168,613 4,136,969 =========== =========== =========== =========== =========== =========== (1) Commenced operations on May 1, 2000. See notes to financial statements. Statements of Changes in Net Assets (continued) - ------------------------------------------------------------------------------------------------------ V.A. V.A. MONEY MARKET FUND STRATEGIC INCOME FUND ------------------------- ------------------------- SIX MONTHS SIX MONTHS YEAR ENDED YEAR ENDED ENDED JUNE 30, ENDED JUNE 30, DECEMBER 31, 2001 DECEMBER 31, 2001 2000 (UNAUDITED) 2000 (UNAUDITED) ----------- ----------- ----------- ----------- Increase (Decrease) in Net Assets: From Operations: Net investment income $2,278,752 $2,306,924 $2,451,388 $1,475,517 Net realized loss -- -- (700,276) (595,146) Change in net unrealized appreciation (depreciation) -- -- (1,322,235) (263,133) ----------- ----------- ----------- ----------- Net increase in net assets resulting from operations 2,278,752 2,306,924 428,877 617,238 ----------- ----------- ----------- ----------- Distributions to Shareholders: * From net investment income (2,278,752) (2,306,924) (2,359,734) (1,766,663) From net realized gain -- -- (350,215) -- Tax return of capital -- -- (91,654) -- ----------- ----------- ----------- ----------- Total distributions to shareholders (2,278,752) (2,306,924) (2,801,603) (1,766,663) ----------- ----------- ----------- ----------- From Fund Share Transactions: Shares sold 188,358,513 216,704,153 14,978,386 21,277,833 Shares issued to shareholders in reinvestment of distributions 2,374,022 2,311,895 2,801,603 1,742,986 Less shares repurchased (149,766,710) (149,438,538) (3,217,447) (3,506,983) ----------- ----------- ----------- ----------- Net increase 40,965,825 69,577,510 14,562,542 19,513,836 ----------- ----------- ----------- ----------- Net Assets: Beginning of period 32,951,507 73,917,332 22,281,983 34,471,799 ----------- ----------- ----------- ----------- End of period (including undistributed net investment income (loss) (distributions in excess of net investment income) of $193, $193, ($126,198) and ($647,782), respectively) $73,917,332 $143,494,842 $34,471,799 $52,836,210 =========== =========== =========== =========== Distributions to Shareholders: Per share dividends from net investment income $0.0576 $0.0232 $0.8345 $0.3978 ----------- ----------- ----------- ----------- Per share distributions from net realized gain -- -- $0.0945 -- ----------- ----------- ----------- ----------- * Analysis of Fund Share Transactions: Shares sold 188,358,513 216,704,153 1,598,355 2,410,662 Shares issued to shareholders in reinvestment of distributions 2,374,022 2,311,895 302,236 196,644 Less shares repurchased (149,766,710) (149,438,538) (339,848) (393,723) ----------- ----------- ----------- ----------- Net increase 40,965,825 69,577,510 1,560,743 2,213,583 =========== =========== =========== =========== See notes to financial statements. Financial Highlights Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ------------------------------------------------------------------------------------------------------------------------------ V.A. CORE EQUITY FUND -------------------------------------------------------------------------------- SIX MONTHS PERIOD ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, -------------------------------------------------- 2001 1996(1) 1997 1998 1999 2000 (UNAUDITED) -------- -------- -------- -------- -------- --------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $11.11 $14.11 $17.74 $19.70 $17.52 -------- -------- -------- -------- -------- -------- Net Investment Income(2) 0.06 0.16 0.10 0.09 0.08 0.04 Net Realized and Unrealized Gain (Loss) on Investments 1.12 3.23 3.90 2.36 (1.48) (0.86) -------- -------- -------- -------- -------- -------- Total from Investment Operations 1.18 3.39 4.00 2.45 (1.40) (0.82) -------- -------- -------- -------- -------- -------- Less Distributions: From Net Investment Income (0.06) (0.14) (0.10) (0.09) (0.09) (0.04) In Excess of Net Investment Income -- -- -- --(3) -- -- From Net Realized Gain (0.01) (0.25) (0.27) (0.40) (0.31) -- In Excess of Net Realized Gain -- -- -- -- (0.38) -- -------- -------- -------- -------- -------- -------- Total Distributions (0.07) (0.39) (0.37) (0.49) (0.78) (0.04) -------- -------- -------- -------- -------- -------- Net Asset Value, End of Period $11.11 $14.11 $17.74 $19.70 $17.52 $16.66 ======== ======== ======== ======== ======== ======== Total Investment Return(4) 11.78%(5,6) 30.68%(6) 28.42% 13.89% (7.11%) (4.68%)(5) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $1,149 $8,719 $26,691 $44,991 $40,673 $41,136 Ratio of Expenses to Average Net Assets 0.95%(7) 0.95% 0.95% 0.83% 0.85% 0.87%(7) Ratio of Adjusted Expenses to Average Net Assets(8) 4.23%(7) 1.59% -- -- -- -- Ratio of Net Investment Income to Average Net Assets 1.60%(7) 1.24% 0.65% 0.47% 0.45% 0.49%(7) Portfolio Turnover Rate 24% 53% 55% 77% 97% 43% (1) Commenced 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 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 periods shown. The Financial Highlights summarizes the impact of the following factors on a single share for each period indicated: net investment income, gains (losses), distributions and total investment return of each Fund. It shows how the Fund's net asset value for a share has changed since the end of the previous period. Additionally, important relationships between some items presented in the financial statements are expressed in ratio form. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: --------------------------------------------------------------------------------------------------------------- V.A. RELATIVE VALUE FUND -------------------------------------------------------- SIX MONTHS PERIOD ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, ------------------------ 2001 1998(1) 1999 2000 (UNAUDITED) -------- -------- -------- -------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $12.03 $18.03 $10.64 -------- -------- -------- -------- Net Investment Income(2) 0.11 0.10 0.02 0.01 Net Realized and Unrealized Gain (Loss) on Investments 2.02 6.65 (0.80) 0.61 -------- -------- -------- -------- Total from Investment Operations 2.13 6.75 (0.78) 0.62 -------- -------- -------- -------- Less Distributions: From Net Investment Income (0.10) (0.10) (0.02) (0.01) From Net Realized Gain -- (0.65) (6.59) -- -------- -------- -------- -------- Total Distributions (0.10) (0.75) (6.61) (0.01) -------- -------- -------- -------- Net Asset Value, End of Period $12.03 $18.03 $10.64 $11.25 ======== ======== ======== ======== Total Investment Return(3) 21.39%(4,5) 56.65% (4.80%) 5.87%(4) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $17,368 $38,766 $39,043 $51,987 Ratio of Expenses to Average Net Assets 0.85%(6) 0.77% 0.79% 0.75%(6) Ratio of Adjusted Expenses to Average Net Assets(7) 1.03%(6) -- -- -- Ratio of Net Investment Income to Average Net Assets 1.17%(6) 0.66% 0.13% 0.24%(6) Portfolio Turnover Rate 242% 166% 164% 40% (1) Commenced 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 return would have been lower had certain expenses not been reduced during the period shown. (6) Annualized. (7) Does not take into consideration expense reductions during the period shown. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ------------------------------------------------------------------------------------------------------------------------------ V.A. SOVEREIGN INVESTORS FUND -------------------------------------------------------------------------------- SIX MONTHS PERIOD ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, -------------------------------------------------- 2001 1996(1) 1997 1998 1999 2000 (UNAUDITED) -------- -------- -------- -------- -------- --------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $10.74 $13.59 $15.61 $15.96 $15.69 -------- -------- -------- -------- -------- -------- Net Investment Income(2) 0.07 0.22 0.27 0.24 0.21 0.12 Net Realized and Unrealized Gain (Loss) on Investments 0.76 2.82 2.00 0.35 (0.27) (1.02) -------- -------- -------- -------- -------- -------- Total from Investment Operations 0.83 3.04 2.27 0.59 (0.06) (0.90) -------- -------- -------- -------- -------- -------- Less Distributions: From Net Investment Income (0.07) (0.18) (0.25) (0.24) (0.21) (0.11) In Excess of Net Investment Income -- -- -- --(3) -- -- From Net Realized Gain (0.02) (0.01) -- -- -- -- Tax Return of Capital -- -- -- --(3) -- -- -------- -------- -------- -------- -------- -------- Total Distributions (0.09) (0.19) (0.25) (0.24) (0.21) (0.11) -------- -------- -------- -------- -------- -------- Net Asset Value, End of Period $10.74 $13.59 $15.61 $15.96 $15.69 $14.68 ======== ======== ======== ======== ======== ======== Total Investment Return(4) 8.30%(5,6) 28.43%(6) 16.88% 3.84% (0.33%) (5.70%)(5) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $1,111 $12,187 $34,170 $50,254 $55,328 $68,468 Ratio of Expenses to Average Net Assets 0.85%(7) 0.85% 0.74% 0.70% 0.72% 0.70%(7) Ratio of Adjusted Expenses to Average Net Assets(8) 3.78%(7) 1.16% -- -- -- -- Ratio of Net Investment Income to Average Net Assets 1.90%(7) 1.81% 1.88% 1.57% 1.37% 1.59%(7) Portfolio Turnover Rate 17% 11% 19% 26% 46% 23% (1) Commenced 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 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 periods shown. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ------------------------------------------------------------------------------------------------------------------------------ V.A. FINANCIAL INDUSTRIES FUND ------------------------------------------------------------------------ SIX MONTHS PERIOD ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, ---------------------------------------- 2001 1997(1) 1998 1999 2000 (UNAUDITED) -------- -------- -------- -------- --------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $13.44 $14.45 $14.46 $18.34 -------- -------- -------- -------- -------- Net Investment Income(2) 0.11 0.18 0.11 0.06 0.05 Net Realized and Unrealized Gain on Investments 3.39 0.97 0.06 3.87 (1.80) -------- -------- -------- -------- -------- Total from Investment Operations 3.50 1.15 0.17 3.93 (1.75) -------- -------- -------- -------- -------- Less Distributions: From Net Investment Income (0.05) (0.14) (0.10) (0.05) -- From Net Realized Gain (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 $16.59 ======== ======== ======== ======== ======== Total Investment Return(4) 35.05%(5,6) 8.55% 1.23% 27.16% (9.54%)(5) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $18,465 $54,569 $49,312 $71,367 $81,990 Ratio of Expenses to Average Net Assets 1.05%(7) 0.92% 0.90% 0.90% 0.90%(7) Ratio of Adjusted Expenses to Average Net Assets(8) 1.39%(7) -- -- -- -- Ratio of Net Investment Income to Average Net Assets 1.32%(7) 1.25% 0.77% 0.36% 0.65%(7) Portfolio Turnover Rate 11% 38% 72% 41% 53% (1) Commenced 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. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ---------------------------------------------------------------------------------- V.A. TECHNOLOGY FUND -------------------------- SIX MONTHS PERIOD ENDED ENDED JUNE 30, DECEMBER 31, 2001 2000(1) (UNAUDITED) -------- -------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $7.33 -------- -------- Net Investment Income(2) 0.03 (0.01) Net Realized and Unrealized Loss on Investments (2.69) (2.05) -------- -------- Total from Investment Operations (2.66) (2.06) -------- -------- Less Distributions: From Net Investment Income (0.01) -- -------- -------- Total Distributions (0.10) $5.27 -------- -------- Net Asset Value, End of Period $7.33 $11.25 ======== ======== Total Investment Return(3,4) (26.56%)(5) (28.10%)(5) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $14,402 $21,581 Ratio of Expenses to Average Net Assets 1.05%(6) 1.05%(6) Ratio of Adjusted Expenses to Average Net Assets(7) 1.99%(6) 1.14%(6) Ratio of Net Investment Income to Average Net Assets 0.62%(6) (0.22%)(6) Portfolio Turnover Rate 75% 21% (1) Commenced 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 returns 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. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: ---------------------------------------------------------------------------------------------------------------------------- V.A. BOND FUND ------------------------------------------------------------------------------- SIX MONTHS PERIOD ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, -------------------------------------------------- 2001 1996(1) 1997 1998 1999 2000 (UNAUDITED) -------- -------- -------- -------- -------- --------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $10.19 $10.36 $10.51 $9.81 $10.29 -------- -------- -------- -------- -------- -------- Net Investment Income(2) 0.23 0.68 0.63 0.64 0.64 0.28 Net Realized and Unrealized Gain (Loss) on Investments 0.21 0.24 0.32 (0.70) 0.50 0.01 -------- -------- -------- -------- -------- -------- Total from Investment Operations 0.44 0.92 0.95 (0.06) 1.12 0.29 -------- -------- -------- -------- -------- -------- Less Distributions: From Net Investment Income (0.23) (0.68) (0.63) (0.64) (0.64) (0.30) From Net Realized Gain (0.02) (0.07) (0.17) -- -- -- -------- -------- -------- -------- -------- -------- Total Distributions (0.25) (0.75) (0.80) (0.64) (0.64) (0.30) -------- -------- -------- -------- -------- -------- Net Asset Value, End of Period $10.19 $10.36 $10.51 $9.81 $10.29 $10.28 ======== ======== ======== ======== ======== ======== Total Investment Return(3) 4.42%(4,5) 9.30%(5) 9.41%(5) (0.51%)(5) 11.89%(5) 2.78%(4) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $1,056 $3,682 $10,669 $12,531 $25,173 $67,692 Ratio of Expenses to Average Net Assets 0.75%(6) 0.75% 0.75% 0.75% 0.75% 0.68%(6) Ratio of Adjusted Expenses to Average Net Assets(7) 4.15%(6) 2.53% 1.34% 1.01% 0.92% -- Ratio of Net Investment Income to Average Net Assets 6.69%(6) 6.57% 5.93% 6.39% 6.47% 5.50%(6,8) Portfolio Turnover Rate 45% 193% 367% 307% 298% 195% (1) Commenced 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 return would have been lower had certain expenses not been reduced during the period shown. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. (8) Had the Fund not amortized premiums on debt securities, the annualized ratio of net investment income to average net assets would have been 5.77%. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------------------------------------------------- V.A. MONEY MARKET FUND ------------------------------------------------------------------------------- SIX MONTHS PERIOD ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, -------------------------------------------------- 2001 1996(1) 1997 1998 1999 2000 (UNAUDITED) -------- -------- -------- -------- -------- --------- Per Share Operating Performance Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 -------- -------- -------- -------- -------- -------- Net Investment Income(2) 0.02 0.05 0.05 0.05 0.06 0.02 -------- -------- -------- -------- -------- -------- Less Distributions: From Net Investment Income (0.02) (0.05) (0.05) (0.05) (0.06) (0.02) -------- -------- -------- -------- -------- -------- Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 ======== ======== ======== ======== ======== ======== Total Investment Return(3) 1.61%(4,5) 4.88%(5) 4.87% 4.58% 5.90% 2.33%(4) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $207 $8,377 $16,519 $32,952 $73,917 $143,495 Ratio of Expenses to Average Net Assets 0.75%(6) 0.75% 0.74% 0.66% 0.60% 0.57%(6) Ratio of Adjusted Expenses to Average Net Assets(7) 27.48%(6) 1.27% -- -- -- -- Ratio of Net Investment Income to Average Net Assets 4.68%(6) 4.86% 4.70% 4.55% 5.86% 4.52%(6) (1) Commenced 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 return would have been lower had certain expenses not been reduced during the period shown. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ----------------------------------------------------------------------------------------------------------------------------- V.A. STRATEGIC INCOME FUND ------------------------------------------------------------------------------- SIX MONTHS PERIOD ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, -------------------------------------------------- 2001 1996(1) 1997 1998 1999 2000 (UNAUDITED) -------- -------- -------- -------- -------- --------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $10.30 $10.47 $10.10 $9.77 $8.97 -------- -------- -------- -------- -------- -------- Net Investment Income(2) 0.27 0.91 0.85 0.80 0.83 0.33 Net Realized and Unrealized Gain (Loss) on Investments 0.36 0.26 (0.35) (0.33) (0.71) (0.17) -------- -------- -------- -------- -------- -------- Total from Investment Operations 0.63 1.17 0.50 0.47 0.12 0.16 -------- -------- -------- -------- -------- -------- Less Distributions: From Net Investment Income (0.27) (0.91) (0.85) (0.80) (0.83) (0.40) From Net Realized Gain (0.06) (0.09) (0.02) -- (0.09) -- -------- -------- -------- -------- -------- -------- Total Distributions (0.33) (1.00) (0.87) (0.80) (0.92) (0.40) -------- -------- -------- -------- -------- -------- Net Asset Value, End of Period $10.30 $10.47 $10.10 $9.77 $8.97 $8.73 ======== ======== ======== ======== ======== ======== Total Investment Return(3) 6.45%(4,5) 11.77%(5) 4.92%(5) 4.82%(5) 1.40% 1.79%(4) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $2,131 $5,540 $15,019 $22,282 $34,472 $52,836 Ratio of Expenses to Average Net Assets 0.85%(6) 0.85% 0.85% 0.85% 0.76% 0.71%(6) Ratio of Adjusted Expenses to Average Net Assets(7) 2.28%(6) 1.37% 0.93% 0.87% -- -- Ratio of Net Investment Income to Average Net Assets 7.89%(6) 8.77% 8.19% 8.06% 8.91% 7.60%(6,8) Portfolio Turnover Rate 73% 110% 92% 53%(9) 53% 47% (1) Commenced 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 return would have been lower had certain expenses not been reduced during the period shown. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. (8) Had the Fund not amortized premiums on debt securities, the annualized ratio of net investment income to average net assets would have been 9.10% (9) Portfolio turnover rate excludes merger activity. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Core Equity Fund Schedule of Investments June 30, 2001 (Unaudited) - ------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. Core Equity Fund on June 30, 2001. It is divided into two main categories: common stocks and short-term investments. Common stocks are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- -------------- -------------- COMMON STOCKS Aerospace (1.72%) General Dynamics Corp. 3,800 $295,678 United Technologies Corp. 5,600 410,256 -------------- 705,934 -------------- Automobile/Trucks (1.15%) Ford Motor Co. 13,000 319,150 Lear Corp.* 4,400 153,560 -------------- 472,710 -------------- Banks - United States (4.05%) Bank of America Corp. 4,600 276,138 Comerica, Inc. 3,100 178,560 FleetBoston Financial Corp. 4,100 161,745 J.P. Morgan Chase & Co. 5,600 249,760 Mellon Financial Corp. 3,300 151,800 U.S. Bancorp 28,400 647,236 -------------- 1,665,239 -------------- Beverages (1.08%) Anheuser-Busch Cos., Inc. 4,600 189,520 PepsiCo, Inc. 5,800 256,360 -------------- 445,880 -------------- Building (0.60%) Black & Decker Corp. (The) 6,300 248,598 -------------- Chemicals (2.55%) Air Products & Chemicals, Inc. 5,200 237,900 Dow Chemical Co. 16,200 538,650 Praxair, Inc. 5,800 272,600 -------------- 1,049,150 -------------- Computers (14.07%) Adobe Systems, Inc. 2,300 108,100 Cadence Design Systems, Inc.* 6,000 111,780 Cisco Systems, Inc.* 8,600 156,520 Dell Computer Corp.* 14,000 366,100 Electronic Data Systems Corp. 6,100 381,250 First Data Corp. 4,000 257,000 Fiserv, Inc.* 3,500 223,930 International Business Machines Corp. 6,300 711,900 Lexmark International, Inc.* 7,800 524,550 Microsoft Corp.* 25,500 1,861,500 Oracle Corp.* 17,100 324,900 PeopleSoft, Inc.* 3,000 147,690 Sabre Holdings Corp.* 3,800 190,000 SunGard Data Systems, Inc.* 14,100 423,141 -------------- 5,788,361 -------------- Cosmetics & Personal Care (0.68%) Avon Products, Inc. 6,000 277,680 -------------- Diversified Operations (7.27%) General Electric Co. 39,300 1,915,875 Minnesota Mining & Manufacturing Co. 3,300 376,530 Tyco International Ltd. 12,800 697,600 -------------- 2,990,005 -------------- Electronics (6.17%) Analog Devices, Inc.* 4,200 181,650 Applied Materials, Inc.* 4,100 201,310 Intel Corp. 31,600 924,300 KLA-Tencor Corp.* 3,300 192,951 Linear Technology Corp. 4,900 216,678 LSI Logic Corp.* 7,000 131,600 Maxim Integrated Products, Inc.* 3,600 159,156 Parker- Hannifin Corp. 3,700 157,028 Texas Instruments, Inc. 7,800 245,700 Xilinx, Inc.* 3,100 127,844 -------------- 2,538,217 -------------- Energy (0.47%) Mirant Corp.* 5,600 192,640 -------------- Finance (5.84%) Citigroup, Inc. 32,600 1,722,584 Concord EFS, Inc.* 4,100 213,241 Washington Mutual, Inc. 12,450 467,498 -------------- 2,403,323 -------------- Food (0.56%) Kraft Foods, Inc. (Class A)* 3,000 93,000 Unilever NV, American Depositary Receipt (ADR) (Netherlands) 2,300 137,011 -------------- 230,011 -------------- Insurance (4.35%) American International Group, Inc. 5,600 481,600 Hartford Financial Services Group, Inc. (The) 4,900 335,160 Lincoln National Corp. 5,600 289,800 St. Paul Cos., Inc. (The) 6,500 329,485 Torchmark Corp. 4,300 172,903 XL Capital Ltd. (Class A) 2,200 180,620 -------------- 1,789,568 -------------- Leisure (0.53%) Disney (Walt) Co. (The) 7,500 216,675 -------------- Manufacturing (0.31%) Danaher Corp. 2,300 128,800 -------------- Media (4.26%) AOL Time Warner, Inc.* 20,600 1,091,800 AT&T Corp. - Liberty Media Group* 16,400 286,836 Viacom, Inc. (Class B)* 7,200 372,600 -------------- 1,751,236 -------------- Medical (11.90%) Abbott Laboratories 5,400 259,254 Allergan, Inc. 2,000 171,000 American Home Products Corp. 7,400 432,456 Bristol-Myers Squibb Co. 7,800 407,940 Invitrogen Corp.* 2,000 111,280 Johnson & Johnson 14,618 730,900 Laboratory Corp. of America Holdings* 2,200 169,180 Lincare Holdings, Inc.* 5,400 162,054 Merck & Co., Inc. 9,400 600,754 Pfizer, Inc. 34,000 1,361,700 Pharmacia Corp. 3,600 165,420 Schering-Plough Corp. 4,100 148,584 Trigon Healthcare, Inc.* 2,700 175,095 -------------- 4,895,617 -------------- Mortgage Banking (1.88%) Fannie Mae 9,100 774,865 -------------- Office (0.45%) Avery Dennison Corp. 3,600 183,780 -------------- Oil & Gas (7.25%) Apache Corp. 2,500 126,875 Chevron Corp. 3,000 271,500 El Paso Corp. 2,300 120,842 Enron Corp. 7,000 343,000 Exxon Mobil Corp. 14,112 1,232,683 Kerr-McGee Corp. 2,400 159,048 Royal Dutch Petroleum Co. (ADR) (Netherlands) 9,600 559,392 USX - Marathon Group 5,800 171,158 -------------- 2,984,498 -------------- Paper & Paper Products (0.56%) Kimberly-Clark Corp. 4,100 229,190 -------------- Retail (8.78%) Abercrombie & Fitch Co. (Class A)* 4,100 182,450 Bed Bath & Beyond, Inc.* 5,600 168,000 CVS Corp. 4,600 177,560 Home Depot, Inc. (The) 6,600 307,230 Kohl's Corp.* 7,900 495,567 Lowe's Cos., Inc. 9,200 667,460 May Department Stores Co. (The) 7,400 253,524 Target Corp. 5,600 193,760 TJX Cos., Inc. 9,700 309,139 Walgreen Co. 3,900 133,185 Wal-Mart Stores, Inc. 14,800 722,240 -------------- 3,610,115 -------------- Soap & Cleaning Preparations (1.07%) Colgate-Palmolive Co. 4,100 241,859 Procter & Gamble Co. (The) 3,100 197,780 -------------- 439,639 -------------- Telecommunications (6.15%) Broadwing, Inc.* 6,700 163,815 Comverse Technology, Inc.* 1,800 102,780 QUALCOMM, Inc.* 4,500 263,160 Qwest Communications International, Inc. 17,000 541,790 Sprint Corp* 11,700 282,555 Telephone and Data Systems, Inc. 1,800 195,750 Verizon Communications, Inc. 18,300 979,050 -------------- 2,528,900 -------------- Tobacco (1.92%) Philip Morris Cos., Inc. 15,600 791,700 -------------- Utilities (4.01%) Allegheny Energy, Inc. 4,400 212,300 Duke Energy Corp. 16,500 643,665 Exelon Corp. 8,100 519,372 SBC Communications, Inc. 6,900 276,414 -------------- 1,651,751 -------------- TOTAL COMMON STOCKS (Cost $36,203,706) (99.63%) 40,984,082 -------------- -------------- INTEREST PAR VALUE RATE (000s OMITTED) -------------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (1.36%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 06-29-01, due 07-02-01 (Secured by U.S. Treasury Bonds, 10.625% due 08-15-15 and 6.250% due 08-15-23, U.S. Treasury Note 5.625% due 11-30-02) 3.97% 558 558,000 -------------- TOTAL SHORT-TERM INVESTMENTS (1.36%) 558,000 -------------- -------------- TOTAL INVESTMENTS (100.99%) 41,542,082 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (0.99%) (406,090) -------------- -------------- TOTAL NET ASSETS (100.00%) $41,135,992 ============== ============== * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Relative Value Fund Schedule of Investments June 30, 2001 (Unaudited) - ------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. Relative Value Fund on June 30, 2001. It's divided into three main categories: common stocks, bonds and short-term investments. Common stocks and bonds are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- -------------- -------------- COMMON STOCKS Aerospace (1.53%) Raytheon Co. 30,000 $796,500 -------------- Business Services - Misc. (0.84%) Moody's Corp. 13,000 435,500 -------------- Computers (10.99%) Computer Associates International, Inc. 51,493 1,853,748 Concord Communications, Inc.* 60,000 540,000 Hyperion Solutions Corp.* 14,000 210,000 MicroStrategy, Inc.* 50,000 140,000 Parametric Technology Corp.* 162,000 2,266,380 Viant Corp.* 22,500 42,075 Wind River Systems, Inc.* 37,950 662,607 -------------- 5,714,810 -------------- Containers (0.70%) Sealed Air Corp.* 9,829 366,130 -------------- Cosmetics & Personal Care (0.11%) Gillette Co. (The) 1,900 55,081 -------------- Diversified Operations (2.75%) Tyco International, Ltd. 26,200 1,427,900 -------------- Electronics (14.39%) Agere Systems, Inc. (Class A)* 403,990 3,029,925 Alpha Industries, Inc. 44,200 1,306,110 Conexant Systems, Inc.* 90,350 808,633 Flextronics International, Ltd.* (Singapore) 9,000 234,990 MKS Instruments, Inc.* 16,871 485,885 Sanmina Corp.* 8,000 187,280 SBS Technologies, Inc.* 12,000 227,040 Sony Corp. (Japan) 4,800 315,598 Texas Instruments, Inc. 8,000 252,000 Vicor Corp.* 38,900 634,070 -------------- 7,481,531 -------------- Fiber Optics (2.87%) Finisar Corp.* 80,000 1,494,400 -------------- Finance (1.81%) Citigroup, Inc. 17,841 942,718 -------------- Food (0.32%) Hain Celestial Group, Inc.* 7,500 165,000 -------------- Insurance (3.65%) ACE, Ltd. (Bermuda) 17,505 684,270 Ambac Financial Group, Inc. 12,334 717,839 XL Capital, Ltd. (Class A) 6,032 495,227 -------------- 1,897,336 -------------- Media (19.30%) AT&T Corp. - Liberty Media Corp. (Class A)* 128,244 2,242,988 Clear Channel Communications, Inc.* 11,000 689,700 Cumulus Media, Inc. (Class A)* 75,000 1,018,500 Pegasus Communications Corp.* 120,700 2,715,750 USA Networks, Inc.* 24,000 672,000 Viacom, Inc. (Class B)* 17,000 879,750 XM Satellite Radio Holdings, Inc. (Class A)* 112,050 1,815,210 -------------- 10,033,898 -------------- Medical (8.66%) Abbott Laboratories 17,500 840,175 Alpharma, Inc. (Class A) 17,000 463,250 Apogent Technologies, Inc.* 32,500 799,500 Bristol-Myers Squibb Co. 10,000 523,000 I-STAT Corp.* 35,000 515,900 Schering-Plough Corp. 37,500 1,359,000 -------------- 4,500,825 -------------- Oil & Gas (0.87%) Unocal Corp. 13,300 454,195 -------------- Retail (1.56%) McDonald's Corp. 30,000 811,800 -------------- Telecommunications (22.70%) ANTEC Corp.* 57,750 716,100 CenturyTel, Inc. 10,000 303,000 Corning, Inc. 35,000 584,850 CTC Communications Group, Inc.* 60,000 183,600 Hughes Electronics Corp. 107,500 2,176,875 Lucent Technologies, Inc. 99,253 615,369 Motient Corp.* 30,000 32,100 Nextel Communications, Inc. (Class A)* 98,200 1,718,500 Nextel Partners, Inc. (Class A)* 33,000 512,160 QUALCOMM, Inc.* 20,000 1,169,600 Sprint Corp. 110,000 2,349,600 TeleCorp PCS, Inc. (Class A)* 30,000 581,100 Verizon Communications, Inc. 16,000 856,000 -------------- 11,798,854 -------------- TOTAL COMMON STOCKS (Cost $53,300,555) (93.05%) 48,376,478 -------------- -------------- INTEREST CREDIT PAR VALUE RATE RATING** (000s OMITTED) -------------- -------------- -------------- BONDS Office (0.27%) Danka Business Systems Plc, Conv Note (United Kingdom) 04-01-02 6.750% B+ $500 $140,625 -------------- TOTAL BONDS (Cost $440,958) (0.27%) 140,625 -------------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (5.51%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 06-29-01, due 07-02-01 (Secured by U.S. Treasury Bonds, 6.250% thru 10.625%, due 08-15-15 thru 08-15-23 and U.S. Treasury Notes, 5.625%, due 11-30-02) 3.970% 2,863 2,863,000 -------------- TOTAL SHORT-TERM INVESTMENTS (5.51%) 2,863,000 -------------- -------------- TOTAL INVESTMENTS (98.83%) 51,380,103 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (1.17%) 606,708 -------------- -------------- TOTAL NET ASSETS (100.00%) $51,986,811 ============== ============== * Non-income producing security. ** Credit ratings are unaudited and rated by Standard & Poor's where available, or Moody's Investor Services or John Hancock Advisers, Inc., where Standard & Poor's ratings are not available. Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. The percentage shown for each investment category is the total of that category as a percentage of the net assets of the Fund. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Sovereign Investors Fund Schedule of Investments June 30, 2001 (Unaudited) - ------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. Sovereign Investors Fund on June 30, 2001. It is divided into three main categories: common stocks, U.S. government obligations and short-term investments. Common stocks are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- -------------- -------------- COMMON STOCKS Advertising (1.07%) Interpublic Group of Cos., Inc. (The) 25,000 $733,750 -------------- Banks - United States (6.79%) FleetBoston Financial Corp. 22,000 867,900 Mellon Financial Corp. 25,000 1,150,000 PNC Bank Corp. 21,500 1,414,485 State Street Corp. 10,000 494,900 Wells Fargo & Co. 15,500 719,665 -------------- 4,646,950 -------------- Beverages (1.10%) PepsiCo, Inc. 17,000 751,400 -------------- Chemicals (4.43%) Air Products & Chemicals, Inc. 20,000 915,000 Dow Chemical Co. 25,000 831,250 Rohm & Haas Co. 39,000 1,283,100 -------------- 3,029,350 -------------- Computers (4.95%) Automatic Data Processing, Inc. 8,000 397,600 Cisco Systems, Inc.* 31,000 564,200 Compaq Computer Corp. 30,000 464,700 International Business Machines Corp. 16,000 1,808,000 Sun Microsystems, Inc.* 10,000 157,200 -------------- 3,391,700 -------------- Containers (1.47%) Bemis Co., Inc. 25,000 1,004,250 -------------- Diversified Operations (2.38%) Minnesota Mining & Manufacturing Co. 3,500 399,350 Tyco International Ltd. 22,500 1,226,250 -------------- 1,625,600 -------------- Electronics (5.13%) Emerson Electric Co. 12,700 768,350 General Electric Co. 28,800 1,404,000 Intel Corp. 40,000 1,170,000 Texas Instruments, Inc. 5,500 173,250 -------------- 3,515,600 -------------- Finance (8.01%) Citigroup, Inc. 45,225 2,389,689 Household International, Inc. 11,500 767,050 J.P. Morgan Chase & Co. 30,000 1,338,000 Merrill Lynch & Co., Inc. 7,500 444,375 Morgan Stanley Dean Witter & Co. 8,500 545,955 -------------- 5,485,069 -------------- Food (0.74%) Kraft Foods, Inc. (Class A)* 16,435 509,485 -------------- Insurance (2.28%) AFLAC, Inc. 24,800 780,952 American International Group, Inc. 9,093 781,998 -------------- 1,562,950 -------------- Media (1.52%) Gannett Co., Inc. 5,500 362,450 McGraw-Hill Cos., Inc. (The) 10,200 674,730 -------------- 1,037,180 -------------- Medical (10.07%) Abbott Laboratories 21,000 1,008,210 American Home Products Corp. 23,000 1,344,120 Baxter International, Inc. 22,200 1,087,800 Johnson & Johnson 32,000 1,600,000 Merck & Co., Inc. 9,000 575,190 Pfizer, Inc. 19,250 770,963 Schering-Plough Corp. 14,000 507,360 -------------- 6,893,643 -------------- Mortgage Banking (3.40%) Fannie Mae 15,000 1,277,250 Freddie Mac 15,000 1,050,000 -------------- 2,327,250 -------------- Office (1.50%) Avery Dennison Corp. 20,150 1,028,658 -------------- Oil & Gas (8.22%) Anadarko Petroleum Corp. 18,000 972,540 Chevron Corp. 17,200 1,556,600 Conoco, Inc. (Class B) 30,000 867,000 Exxon Mobil Corp. 10,184 889,572 Halliburton Co. 23,000 818,800 Royal Dutch Petroleum Co., American Depositary Receipts (Netherlands) 9,000 524,430 -------------- 5,628,942 -------------- Paper & Paper Products (1.55%) Kimberly-Clark Corp. 19,000 1,062,100 -------------- Retail (2.37%) Home Depot, Inc. (The) 9,000 418,950 Lowe's Cos., Inc. 7,000 507,850 SYSCO Corp. 16,400 445,260 Target Corp. 7,317 253,168 -------------- 1,625,228 -------------- Telecommunications (2.19%) Verizon Communications 28,000 1,498,000 -------------- Tobacco (1.85%) Philip Morris Cos., Inc. 25,000 1,268,750 -------------- Utilities (5.48%) BellSouth Corp. 38,000 1,530,260 SBC Communications, Inc. 22,844 915,130 Xcel Energy, Inc. 46,000 1,308,700 -------------- 3,754,090 -------------- TOTAL COMMON STOCKS (Cost $47,820,735) (76.50%) 52,379,945 -------------- -------------- INTEREST CREDIT PAR VALUE RATE RATING** (000s OMITTED) -------------- -------------- -------------- U.S. GOVERNMENT OBLIGATIONS Government - U.S. (13.85%) United States Treasury, Bond 05-15-30 6.25% AAA $2,000 $2,118,420 Bond 02-15-31 5.38 AAA 2,000 1,895,000 Note 09-30-02 5.88 AAA 2,400 2,453,616 Note 02-28-03 4.63 AAA 3,000 3,019,230 -------------- 9,486,266 -------------- TOTAL U.S. GOVERNMENT OBLIGATIONS (Cost $9,675,719) (13.85%) 9,486,266 -------------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (9.46%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 06-29-01, due 07-02-01 (Secured by U.S. Treasury Bonds, 10.625% due 08-15-15 and 6.250% due 08-15-23, U.S. Treasury Note 5.625% due 11-30-02) 3.97% 6,474 6,474,000 -------------- TOTAL SHORT-TERM INVESTMENTS (Cost $6,474,000) (9.46%) 6,474,000 -------------- -------------- TOTAL INVESTMENTS (99.81%) 68,340,211 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (0.19%) 127,618 -------------- -------------- TOTAL NET ASSETS (100.00%) $68,467,829 ============== ============== * Non-income producing security. ** Credit ratings by Moody's Investors Service or John Hancock Advisers, Inc. where Standard & Poor's ratings are not available. Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Financial Industries Fund Investors Fund Schedule of Investments June 30, 2001 (Unaudited) - ------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. Financial Industries Fund on June 30, 2001. It's divided into two main categories: common stocks and short-term investments. Common stocks are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- -------------- -------------- COMMON STOCKS Banks - Foreign (3.33%) Banco Popular Espanol SA (Spain) 36,500 $1,275,847 Lloyds TSB Group Plc (United Kingdom) 145,000 1,450,943 -------------- 2,726,790 -------------- Banks - Midwest (7.01%) Fifth Third Bancorp 57,250 3,437,862 Northern Trust Corp. 36,900 2,306,250 -------------- 5,744,112 -------------- Banks - Money Center (5.85%) Citigroup, Inc. 62,000 3,276,080 J.P. Morgan Chase & Co. 34,000 1,516,400 -------------- 4,792,480 -------------- Banks - Northeast (2.60%) State Street Corp. 43,100 2,133,019 -------------- Banks - Southeast (2.95%) BB&T Corp. 65,900 2,418,530 -------------- Banks - Superregional (13.62%) Bank of New York Co., Inc. (The) 44,500 2,136,000 FleetBoston Financial Corp. 66,536 2,624,845 PNC Financial Services Group. 15,000 986,850 U.S. Bancorp 106,260 2,421,665 Wells Fargo & Co. 64,500 2,994,735 -------------- 11,164,095 -------------- Banks - West (2.45%) Zions Bancorp. 34,000 2,006,000 -------------- Broker Services (11.21%) Goldman Sachs Group, Inc. 26,500 2,273,700 Instinet Group Inc.* 3,450 64,308 Lehman Brothers Holdings, Inc. 32,500 2,526,875 Merrill Lynch & Co., Inc. 40,500 2,399,625 Schwab (Charles) Corp. (The) 126,076 1,928,963 -------------- 9,193,471 -------------- Computer - Services (2.96%) Fiserv, Inc.* 38,000 2,431,240 -------------- Diversified Operations (5.01%) General Electric Co. 62,000 3,022,500 Tyco International Ltd. 20,000 1,090,000 -------------- 4,112,500 -------------- Finance - Consumer Loans (8.92%) American Express Co. 63,900 2,479,320 Household International, Inc. 42,000 2,801,400 MBNA Corp. 61,650 2,031,368 -------------- 7,312,088 -------------- Finance - Investment Management (2.73%) Amvescap Plc (United Kingdom) 129,000 2,240,601 -------------- Insurance - Brokers (3.51%) Marsh & McLennan Cos., Inc. 28,300 2,858,300 Willis Group Holdings Ltd.* 1,240 22,010 -------------- 2,880,310 -------------- Insurance - Life (4.48%) AFLAC, Inc. 98,400 3,098,616 American General Corp. 12,400 575,980 -------------- 3,674,596 -------------- Insurance - Multi Line (4.10%) AXA (France) 48,000 1,367,371 Loews Corp. 31,000 1,997,330 -------------- 3,364,701 -------------- Insurance - Property & Casualty (9.15%) Allstate Corp. (The) 46,000 2,023,540 Ambac Financial Group, Inc. 37,750 2,197,050 American International Group, Inc. 38,125 3,278,750 -------------- 7,499,340 -------------- Mortgage & Real Estate Services (3.53%) Fannie Mae 34,000 2,895,100 -------------- TOTAL COMMON STOCKS (Cost $68,696,240) (93.41%) 76,588,973 -------------- -------------- INTEREST PAR VALUE RATE (000s OMITTED) -------------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (6.17%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 06-29-01 due 07-02-01 (Secured by U.S. Treasury Bonds, 10.625% due 08-15-15 and 6.250% due 08-15-23, U.S. Treasury Note 5.625% due 11-30-02) 3.97% $5,059 5,059,000 -------------- -------------- TOTAL SHORT-TERM INVESTMENTS (6.17%) 5,059,000 -------------- -------------- TOTAL INVESTMENTS (99.58%) 81,647,973 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (0.42%) 341,622 -------------- -------------- TOTAL NET ASETS (100.00%) $81,989,595 ============== ============== * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Technology Fund Schedule of Investments June 30, 2001 (Unaudited) - ------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. Technology Fund on June 30, 2001. It is divided into three main categories: common stocks, rights and short-term investments. Common stocks are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- -------------- -------------- COMMON STOCKS Advertising (0.29%) DoubleClick, Inc.* 4,500 $62,820 -------------- Computer - Graphics (1.38%) Cadence Design Systems, Inc.* 16,000 298,080 -------------- Computer - Integrated Systems (0.68%) Redback Networks, Inc.* 16,500 147,180 -------------- Computer - Internet Services (6.18%) Amazon.com, Inc.* 13,500 191,025 Art Technology Group, Inc.* 11,000 63,800 Exodus Communications, Inc.* 19,500 40,170 Infospace, Inc.* 14,000 53,760 Inktomi Corp.* 2,975 28,530 RealNetworks, Inc.* 9,850 115,738 ScreamingMedia, Inc.* 13,250 39,088 TIBCO Software, Inc.* 7,500 95,775 VeriSign, Inc.* 9,500 570,095 VerticalNet, Inc.* 3,400 8,466 Viant Corp.* 1,700 3,179 Vignette Corp.* 14,000 124,180 -------------- 1,333,806 -------------- Computer - Local Networks (3.02%) Cisco Systems, Inc.* 24,000 436,800 JNI Corp.* 7,000 98,000 Lucent Technologies, Inc. 3,600 22,320 Network Appliance, Inc.* 7,000 95,900 -------------- 653,020 -------------- Computer - Memory Devices (6.87%) EMC Corp.* 17,500 508,375 Emulex Corp.* 10,000 404,000 VERITAS Software Corp.* 8,000 532,240 Western Digital Corp.* 9,400 37,600 -------------- 1,482,215 -------------- Computer - Micro/Macro (2.18%) Dell Computer Corp.* 18,000 470,700 -------------- Computer - Services (0.82%) Unisys Corp.* 12,000 176,520 -------------- Computer - Software (20.53%) BEA Systems, Inc.* 15,500 476,005 Citrix Systems, Inc.* 15,500 540,950 i2 Technologies, Inc.* 16,000 316,800 Mercury Interactive Corp.* 10,500 628,950 Networks Associates, Inc.* 4,500 56,025 Oracle Corp.* 18,000 342,000 Parametric Technology Corp.* 23,000 321,770 Rational Software Corp.* 18,000 504,900 Siebel Systems, Inc.* 12,000 562,800 SmartForce Plc,* American Depositary Receipt (ADR) (Ireland) 9,500 334,685 Sun Microsystems, Inc.* 22,000 345,840 -------------- 4,430,725 -------------- Electronics - Components Misc. (6.03%) Flextronics International Ltd.* (Singapore) 19,500 509,145 Sanmina Corp.* 17,000 397,970 Solectron Corp.* 21,500 393,450 -------------- 1,300,565 -------------- Electronics - Products Misc. (0.80%) Aeroflex, Inc.* 16,500 173,250 -------------- Electronics - Semiconductor Components (26.92%) Amkor Technology, Inc.* 15,000 331,500 Analog Devices, Inc.* 11,000 475,750 Applied Materials, Inc.* 13,000 638,300 Applied Micro Circuits Corp.* 8,000 137,600 ASM Lithography Holding N.V.* (Netherlands) 15,500 344,875 Atmel Corp.* 20,500 276,545 Cypress Semiconductor Corp.* 22,500 536,625 Integrated Device Technology, Inc.* 15,000 475,350 Intel Corp. 4,000 117,000 KLA-Tencor Corp.* 12,000 701,640 Micron Technology, Inc.* 17,500 719,250 MKS Instruments, Inc.* 11,000 316,800 Novellus Systems, Inc.* 8,000 454,320 PRI Automation, Inc.* 300 5,557 Taiwan Semiconductor Manufacturing Co. Ltd.* (ADR) (Taiwan) 14,995 227,774 Transmeta Corp.* 9,000 50,220 -------------- 5,809,106 -------------- Fiber Optics (3.78%) CIENA Corp.* 8,000 304,000 Finisar Corp.* 21,000 392,280 JDS Uniphase Corp.* 9,500 118,750 -------------- 815,030 -------------- Media - Cable TV (3.93%) AOL Time Warner, Inc.* 16,000 848,000 -------------- Telecom - Equipment (5.21%) Ericsson (L.M.) Telephone Co. (Class B) (ADR) (Sweden) 12,500 67,750 Nokia Corp. (ADR) (Finland) 22,500 495,900 QUALCOMM, Inc.* 9,500 555,560 Tut Systems, Inc.* 3,350 5,561 -------------- 1,124,771 -------------- Telecom - Services (1.17%) Global Crossing Ltd.* (Bermuda) 25,000 216,000 Global Light Telecommunications, Inc.* (Canada) 1,600 3,568 Metromedia Fiber Network, Inc. (Class A)* 13,000 26,520 Primus Telecommunications Group, Inc.* 7,750 6,355 -------------- 252,443 -------------- TOTAL COMMON STOCKS (Cost $26,597,872) (89.79%) 19,378,231 ------------- -------------- RIGHTS Seagate Technology, Inc. 5,200 $0 -------------- TOTAL RIGHTS (Cost $0) (0.00%) 0 ------------- -------------- INTEREST PAR VALUE RATE (000s OMITTED) -------------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (12.32%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 06-29-01, due 07-02-01 (Secured by U.S. Treasury Bonds, 6.250% thru 10.625% , due 08-15-15 thru 08-15-23 and U.S. Treasury Notes 5.625% due 11-30-02) 3.97% $2,658 2,658,000 -------------- TOTAL SHORT-TERM INVESTMENTS (12.32%) 2,658,000 -------------- -------------- TOTAL INVESTMENTS (102.11%) 22,036,231 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (2.11%) (454,950) -------------- -------------- TOTAL NET ASSETS (100.00%) $21,581,281 ============== ============== * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. Portfolio Concentration June 30, 2001 (Unaudited) - --------------------------------------------------------------------------- The V.A. Technology Fund invests primarily in equity securities of technology companies in the United States and abroad. The concentration of investments by industry category for individual securities held by the Fund is shown in the schedule of investments. In addition, concentration of investments can be aggregated by various countries. The table below shows the percentage of the Fund's investments at June 30, 2001 assigned to the various countries. MARKET VALUE AS A % OF COUNTRY DIVERSIFICATION FUND'S NET ASSETS - ----------------------- ----------------- Bermuda 1.00% Canada 0.02 Finland 2.30 Ireland 1.55 Netherlands 1.60 Singapore 2.36 Sweden 0.31 Taiwan 1.06 United States 91.91 ------- TOTAL INVESTMENTS 102.11% ======= John Hancock Funds - Declaration Trust - V.A. Bond Fund Schedule of Investments June 30, 2001 (Unaudited) - ------------------------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. Bond Fund on June 30, 2001. It is divided into three main categories: bonds, preferred stocks and warrants, and short-term investments. Bonds are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. INTEREST CREDIT PAR VALUE MARKET ISSUER, DESCRIPTION RATE RATING** (000s OMITTED) VALUE - ------------------- -------- ------ ------------ ------------- BONDS Aerospace (0.79%) BAE Systems Asset Trust, Pass Thru Ctf Ser 2001 Class B 12-15-11 (R) 7.156% A $245 $245,159 Lockheed Martin Corp., Bond 12-01-29 8.500 BBB- 265 292,685 -------------- 537,844 -------------- Agricultural Operations (0.35%) Archer-Daniels-Midland Co., Sr Deb 02-01-31 7.000 A+ 155 149,566 Cargill, Inc., Note 05-01-06 (R) 6.250 A+ 85 85,163 -------------- 234,729 -------------- Automobile/Trucks (1.49%) Delphi Automotive Systems Corp., Note 06-15-06 6.550 BBB 240 239,755 ERAC USA Finance Co., Note 02-15-05 (R) 6.625 BBB+ 19 18,866 Note 06-15-08 (R) 7.350 BBB+ 120 119,290 Note 12-15-09 (R) 7.950 BBB+ 200 204,982 Ford Capital, B.V., Gtd Deb (Netherlands) 05-15-02 (Y) 9.875 A 50 51,896 Ford Motor Co., Note 07-16-31 7.450 A 65 62,460 Honda Auto Receivables Owner Trust, Pass Thru Ctf Ser 2001-1 Class A-4 06-19-06 5.560 AAA 310 312,226 -------------- 1,009,475 -------------- Banks - Foreign (0.76%) Abbey National First Capital, B.V., Sub Note (United Kingdom) 10-15-04 (Y) 8.200 AA- 30 32,298 Barclays Bank Plc, Sub Note (United Kingdom) 06-15-49 (R) (Y) 7.375# A+ 160 161,600 Royal Bank of Scotland Group Plc, Bond (United Kingdom) 03-31-49 (Y) 8.817 A- 30 32,116 Scotland International Finance No. 2, B.V., Gtd Sub Note (Netherlands) 11-01-06 (R) (Y) 8.850 A 95 104,396 UBS Preferred Funding Trust I, Gtd Bond 10-01-49 8.622# AA- 165 180,799 -------------- 511,209 -------------- Banks - United States (1.90%) Bank of New York, Cap Security 12-01-26 (R) 7.780 A- 50 50,356 Bank One Corp., Sub Note 08-01-10 7.875 A- 70 75,032 BNP Paribas Capital Trust, Sub Note 12-27-49 (R) 9.003# A 160 175,101 Capital One Bank, Sr Note 02-01-06 6.875 BBB- 60 58,792 Colonial Bank Sub Note 06-01-11 9.375 BBB- 115 118,772 HSBC Holding Plc, Sub Note (United Kingdom) 07-15-09 (Y) 7.500 A 55 57,491 RBSG Capital Corp., Gtd Cap Note 03-01-04 10.125 A 15 16,575 Sanwa Bank, Ltd., Sub Note 06-15-11 7.400 BBB 135 131,628 Skandinaviska Enskilda, Jr Sub Note 12-29-49 (R) 6.500# BBB 250 250,493 Zions Financial Corp., Note 05-15-11 (R) 6.950# BBB- 350 353,276 -------------- 1,287,516 -------------- Beverages (0.22%) Canandaigua Brands, Inc., Sr Sub Note Ser C 12-15-03 8.750 B+ 30 30,225 Fosters Finance Corp., Note 06-15-11 (R) 6.875 BBB+ 120 118,584 -------------- 148,809 -------------- Broker Services (0.21%) Goldman Sachs Group, Inc., Bond 01-15-11 6.875 A+ 85 84,464 Salomon Smith Barney Holdings, Inc., Note 03-15-06 5.875 A 55 54,552 -------------- 139,016 -------------- Building (0.19%) Vulcan Materials Co., Note 02-01-06 6.400 A+ 125 125,734 -------------- Chemicals (1.00%) Akzo Nobel, Inc., Bond 11-15-03 (R) 6.000 A- 45 45,675 Equistar Chemicals L.P./Equistar Funding Corp., Sr Note 02-15-04 8.500 BBB- 130 127,274 Millennium America, Inc., Sr Note 06-15-08 (R) 9.250 BBB- 65 65,325 Nova Chemicals Corp., Sr Note 05-15-06 7.000 BBB 130 129,180 Potash Corp., Note (Canada) 05-31-11 (Y) 7.750 BBB+ 300 311,385 -------------- 678,839 -------------- Containers (0.27%) Sealed Air Corp., Gtd Sr Note 07-01-08 (R) 8.750 BBB 80 78,873 Stone Container Corp., Sr Note 02-01-11 (R) 9.750 B 100 102,000 -------------- 180,873 -------------- Cosmetics & Personal Care (0.17%) International Flavors & Fragrances, Inc., Note 05-15-06 (R) 6.450 BBB+ 115 114,976 -------------- Energy (0.45%) Enron Corp., Note 08-15-05 (R) 8.000 BBB+ 60 61,564 MidAmerican Energy Holdings, Sr Bond 09-15-28 8.480 BBB- 60 64,083 P&L Coal Holdings Corp., Sr Sub Note Ser B 05-15-08 9.625 B 24 25,140 Progress Energy, Inc., Sr Note 03-01-11 7.100 BBB 150 150,944 -------------- 301,731 -------------- Finance (3.57%) American Express Credit Account Master Trust, Pass Thru Ctf Ser 2000-1 Class A 09-17-07 7.200 AAA 280 296,624 Boeing Capital Corp., Sr Note 03-01-11 6.100 AA- 185 180,453 Bombardier Capital, Inc., Note 01-15-02 (R) 6.000 A- 30 30,324 Citigroup, Inc., Note 01-18-11 6.500 AA- 155 153,726 Ford Motor Credit Co., Note 02-01-06 6.875 A 140 142,713 General Motors Acceptance Corp., Note 07-15-05 7.500 A 60 62,997 Heller Financial, Inc., Sr Note 03-15-06 6.375 A- 115 116,006 Household Finance Corp., Sr Note 05-09-05 8.000 A 115 122,880 Note 01-24-06 6.500 A 150 152,407 Note 07-15-10 8.000 A 55 59,150 ING Capital Funding Trust III, Gtd Trust Preferred Security 12-31-49 8.439# A 50 52,944 Marlin Water Trust/Marlin Water Capital Corp., Sr Sec Note 12-15-01 (R) 7.090 BBB 30 30,263 Midland Funding Corp. II, Deb Ser A 07-23-05 11.750 BB+ 150 165,375 Pemex Project Funding Master Trust, Gtd Bond 10-13-10 (R) 9.125 BB+ 190 199,346 Standard Credit Master Trust, Ser 1995-1 Class A 01-07-07 8.250 AAA 400 433,124 Takefuji Corp., Sr Note (Japan) 04-15-11 (R) (Y) 9.200 A- 95 98,023 Verizon Global Funding Corp., Bond 12-01-30 (R) 7.750 A+ 110 114,510 Yanacocha Receivables Master Trust, Pass Thru Ctf Ser 1997-A 06-15-04 (R) 8.400 BBB- 3 2,783 -------------- 2,413,648 -------------- Food (0.08%) Earthgrains Co. (The), Sr Note 08-01-03 8.375 BBB 50 51,335 -------------- Government - Foreign (1.08%) Brazil, Federal Republic of, Bond (Brazil) 04-15-14 (Y) 8.000 BB- 339 250,592 Colombia, Republic of, Gtd Note (Colombia) 04-09-11 (Y) 9.750 BBB 135 137,700 Nova Scotia, Province of, Deb (Canada) 11-15-19 (Y) 8.250 A- 20 23,190 Quebec, Government of, Deb (Canada) 01-22-11 (Y) 6.125 A+ 105 102,162 Quebec, Province of, Deb (Canada) 09-15-29 (Y) 7.500 A+ 205 218,645 -------------- 732,289 -------------- Government - U.S. (28.15%) United States Treasury, Bond 08-15-17 8.875 AAA 277 363,607 Bond 02-15-23 7.125 AAA 675 773,928 Bond 05-15-30 6.250 AAA 4,085 4,326,873 Infl Indxd Note 01-15-07 3.375 AAA 541 550,347 Note 08-15-03 5.750 AAA 5,655 5,815,772 Note 02-15-05 7.500 AAA 2,295 2,497,603 Note 07-15-06 7.000 AAA 1,582 1,715,980 Note 05-15-08 5.625 AAA 1,145 1,190,079 Note 08-15-10 5.750 AAA 1,780 1,821,207 -------------- 19,055,396 -------------- Government - U.S. Agencies (29.71%) Federal National Mortgage Assn., 15 Yr Pass Thru Ctf 12-01-12 to 05-01-16 6.500 AAA 2,420 2,427,789 15 Yr Pass Thru Ctf 11-01-14 to 02-01-16 7.000 AAA 904 920,088 15 Yr Pass Thru Ctf 12-01-14 5.500 AAA 516 498,568 15 Yr Pass Thru Ctf 05-01-16 to 06-01-16 6.000 AAA 1,273 1,228,800 Note 03-15-11 5.500 AAA 1,780 1,692,104 Note 01-15-30 7.125 AAA 1,650 1,758,784 Pass Thru Ctf Ser 1997-M8 Class A-1 01-25-22 6.940 AAA 3 2,628 30 Yr Pass Thru Ctf 06-01-30 to 02-01-31 7.500 AAA 1,330 1,358,115 30 Yr Pass Thru Ctf 12-01-30 to 06-01-31 7.000 AAA 1,795 1,782,649 30 Yr Pass Thru Ctf 02-01-31 to 05-01-31 6.000 AAA 179 174,590 Government National Mortgage Assn., 30 Yr Pass Thru Ctf 07-15-26 8.000 AAA 20 21,180 30 Yr Pass Thru Ctf 04-15-28 to 06-15-29 6.500 AAA 2,405 2,381,979 30 Yr Pass Thru Ctf 08-15-28 to 06-15-31 7.000 AAA 3,857 3,901,733 30 Yr Pass Thru Ctf 12-15-30 7.500 AAA 1,915 1,964,829 -------------- 20,113,836 -------------- Insurance (0.67%) AXA, Sub Note (France) 12-15-30 (Y) 8.600 A- 95 106,238 Equitable Life Assurance Society USA, Surplus Note 12-01-05 (R) 6.950 A+ 15 15,499 Hartford Life, Inc., Sr Note 03-01-31 7.375 A 55 55,370 Massachusetts Mutual Life Insurance Co., Surplus Note 11-15-23 (R) 7.625 AA 5 5,075 MONY Group, Inc. (The), Sr Note 12-15-05 7.450 A- 215 220,313 New York Life Insurance Co., Surplus Note 12-15-23 (R) 7.500 AA- 5 4,878 Sun Canada Financial Co., Gtd Sub Note 12-15-07 (R) 6.625 AA- 20 21,046 URC Holdings Corp., Sr Note 06-30-06 (R) 7.875 AA+ 25 27,056 -------------- 455,475 -------------- Leisure (0.68%) Harrah's Operating Co., Inc., Note 06-01-07 (R) 7.125 BBB- 180 177,475 Gtd Sr Sub Note 12-15-05 7.875 BB+ 40 40,600 HMH Properties, Inc., Gtd Sr Sec Note Ser A 08-01-05 7.875 BB 30 29,325 MGM Mirage, Inc., Gtd Sr Note 09-15-10 8.500 BBB- 165 172,135 Station Casinos, Inc., Sr Note 02-15-08 8.375 BB- 20 20,100 Waterford Gaming LLC/Waterford Gaming Finance Corp., Sr Note 03-15-10 (R) 9.500 B+ 20 19,600 -------------- 459,235 -------------- Media (2.96%) Adelphia Communications Corp., Sr Note 03-01-05 9.500 B+ 80 77,600 Sr Note 06-15-11 10.250 B+ 75 72,937 Sr Note Ser B 10-01-02 9.250 B+ 17 17,170 Sr Note Ser B 07-15-03 8.125 B+ 15 14,475 AOL Time Warner, Inc., Bond 04-15-31 7.625 BBB+ 165 164,959 British Sky Broadcasting Group Plc, Gtd Sr Note (United Kingdom) 07-15-09 (Y) 8.200 BB+ 40 39,550 Charter Comm. Holdings, LLC/Charter Comm. Holdings Capital Corp., Sr Note 01-15-11 11.125 B+ 20 21,000 Sr Note 05-15-11 (R) 10.000 B+ 60 60,000 Clear Channel Communications, Inc., Sr Note 06-15-05 7.875 BBB- 320 335,133 Continental Cablevision, Inc., Sr Note 05-15-06 8.300 A 120 129,203 CSC Holdings, Inc., Sr Note 04-01-11 (R) 7.625 BB+ 185 176,175 Sr Sub Deb 05-15-16 10.500 BB- 20 22,050 EchoStar DBS Corp., Sr Note 02-01-09 9.375 B+ 35 34,125 Garden State Newspapers, Inc., Sr Sub Note 07-01-11 8.625 B+ 45 41,850 Jones Intercable, Inc., Sr Note 04-15-08 7.625 BBB 90 92,255 Lenfest Communications, Inc., Sr Note 11-01-05 8.375 BBB 40 43,022 Mediacom LLC/Mediacom Capital Corp., Sr Note Ser B 04-15-08 8.500 B+ 20 18,900 Sr Note 01-15-13 (R) 9.500 B+ 85 81,387 News America Holdings, Inc., Gtd Sr Deb 08-10-18 8.250 BBB- 125 126,495 News America, Inc., Gtd Sr Note 04-30-28 7.300 BBB- 55 49,284 TCI Communications, Inc., Sr Deb 02-15-26 7.875 A 155 156,310 Time Warner, Inc., Deb 01-15-13 9.125 BBB+ 58 66,402 Viacom, Inc., Gtd Sr Note 01-30-06 6.400 A- 80 81,114 Gtd Sr Note 01-30-06 (R) 6.400 A- 85 85,000 -------------- 2,006,396 -------------- Medical (1.15%) Dynacare, Inc., Sr Note (Canada) 01-15-06 (Y) 10.750 B+ 37 37,555 Fresenius Medical Care Capital Trust II, Gtd Trust Preferred Security 02-01-08 7.875 B+ 10 9,750 Fresenius Medical Care Capital Trust IV, Gtd Trust Preferred Security 06-15-11 (R) 7.875 B+ 95 92,625 HCA - The Healthcare Co., Sr Note 06-01-06 7.125 BB+ 340 332,772 Note 09-01-10 8.750 BB+ 35 37,187 HEALTHSOUTH Corp., Sr Note 02-01-08 8.500 BBB- 55 55,412 Quest Diagnostic, Inc., Gtd Sr Note 07-12-06 6.750 BBB- 135 133,694 Tenet Healthcare Corp., Sr Note 01-15-05 8.000 BB+ 20 20,525 Triad Hospitals, Inc., Gtd Sr Note 05-01-09 (R) 8.750 B- 60 61,050 -------------- 780,570 -------------- Metal (0.48%) Newmont Mining Corp., Note 05-15-11 8.625 BBB 100 98,155 Phelps Dodge Corp., Sr Note 06-01-11 8.750 BBB 150 148,447 WMC Finance (USA), Ltd., Gtd Note (Australia) 11-15-03 (Y) 6.500 A 80 81,391 -------------- 327,993 -------------- Mortgage Banking (2.47%) AMRESCO Residential Securities Corp. Mortgage Loan Trust, Pass Thru Ctf Ser 1998-1 Class A-6 08-25-27 6.510 AAA 143 144,462 Citibank Credit Card Master Trust I, Class A Credit Card Part Cert Ser 1997-2 02-15-04 6.550 AAA 130 131,665 Commercial Mortgage Acceptance Corp., Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-08 6.790 Aaa 70 72,135 ContiMortgage Home Equity Loan Trust, Pass Thru Ctf Ser 1995-2 Class A-5 08-15-25 8.100 AAA 9 8,947 Credit Suisse First Boston Mortgage Securities Corp., Commercial Mtg Pass Thru Ctf Ser 1998-C1 Class A-1A 12-17-07 6.260 AAA 239 242,101 EQCC Home Equity Loan Trust, Pass Thru Ctf Ser 1997-3 Class A-9 02-15-29 6.570 AAA 145 146,029 GMAC Commercial Mortgage Securities, Inc., Pass Thru Ctf Ser 1997-C1 Class A-2 07-15-29 6.853 Aaa 50 51,484 Pass Thru Ctf Ser 1998-C1 Class A-1 05-15-30 6.411 Aaa 244 246,751 IMC Home Equity Loan Trust, Pass Thru Ctf Ser 1998-1 Class A-4 03-20-25 6.600 AAA 15 15,112 LB Commercial Conduit Mortgage Trust, Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-07 6.410 Aaa 50 51,424 Money Store Home Equity Trust (The), Pass Thru Ctf Ser 1997-D Class AF-7 12-15-38 6.485 AAA 15 15,019 Morgan Stanley Capital I, Inc., Pass Thru Ctf Ser 1997-WF1 Class A-1 10-15-06 (R) 6.830 AAA 217 223,581 Pass Thru Ctf Ser 1999-CAM1 Class A-3 11-15-08 6.920 AAA 140 143,948 Salomon Brothers Mortgage Securities VII, Inc., Mtg Pass Thru Ctf Ser 1997-HUD2 Class A-2 07-25-24 6.750 Aaa 6 6,022 Saxon Asset Securities Trust, Pass Thru Ctf Ser 2000-2 Class AF-2 06-25-15 7.965 AAA 105 106,804 UCFC Home Equity Loan Trust, Pass Thru Ctf Ser 1997-A1 Class A-8 06-15-28 7.220 AAA 8 8,313 Pass Thru Ctf Ser 1997-B Class A-6 10-15-28 6.900 AAA 56 57,666 -------------- 1,671,463 -------------- Oil & Gas (1.22%) Alberta Energy Co., Ltd., Note (Canada) 09-15-30 (Y) 8.125 BBB+ 200 218,028 Anadarko Petroleum Corp., Deb 05-15-28 7.150 BBB+ 75 72,898 Chesapeake Energy Corp., Gtd Sr Note 04-01-11 (R) 8.125 B+ 45 41,962 Forest Oil Corp., Sr Note 06-15-08 (R) 8.000 BB 80 78,000 Louis Dreyfus Natural Gas Corp., Note 12-01-07 6.875 BBB 40 39,764 Occidental Petroleum Corp., Sr Deb 09-15-09 10.125 BBB- 15 17,936 Ocean Energy, Inc., Gtd Sr Sub Note Ser B 07-15-07 8.875 BB+ 20 21,070 Petrobras International Finance Co., Sr Note 07-06-11 (R)+ 9.750 Baa1 70 69,825 Petroleum Geo-Services ASA, Sr Note (Norway) 03-30-28 (Y) 7.125 BBB- 50 41,356 Santa Fe Snyder Corp., Sr Sub Note 06-15-07 8.750 BBB+ 20 21,254 Transocean Sedco Forex, Inc., Note 04-15-31 (R) 7.500 A- 115 115,139 Valero Energy Corp., Note 06-15-05 8.375 BBB- 80 85,584 -------------- 822,816 -------------- Paper & Paper Products (1.34%) Georgia-Pacific Corp., Sr Note 05-15-06 7.500 BBB- 120 120,336 Sr Note 05-15-31 8.875 BBB- 135 136,505 International Paper Co., Sr Note 07-08-05 8.125 BBB 260 274,950 Stora Enso Oyj, Sr Note (Finland) 05-15-11 (Y) 7.375 BBB+ 370 375,391 -------------- 907,182 -------------- Real Estate Operations (0.31%) EOP Operating, L.P., Sr Note 02-15-05 6.625 BBB+ 170 172,827 Liberty Property, L.P., Med Term Note 06-05-02 6.600 BBB 40 40,300 -------------- 213,127 -------------- Real Estate Investment Trust (0.62%) Cabot Industrial Properties, L.P., Note 05-01-04 7.125 BBB 25 25,319 Camden Property Trust, Sr Note 04-15-04 7.000 BBB 30 30,510 Health Care Property Investors, Inc., Note 01-15-07 7.500 BBB+ 20 19,450 Healthcare Realty Trust, Inc., Sr Note 05-01-11 8.125 BBB- 105 105,262 Mack-Cali Realty, L.P., Sr Note 02-15-11 7.750 BBB 210 212,102 ProLogis Trust, Sr Note 04-15-04 6.700 BBB+ 25 25,355 -------------- 417,998 -------------- Retail (0.60%) Delhaize America Inc., Note 04-15-11 (R) 8.125 BBB- 110 114,325 Kmart Corp., Sr Note 06-15-08 (R) 9.875 BB+ 125 122,812 Kohl's Corp., Note 03-01-11 (R) 6.300 A- 170 170,326 -------------- 407,463 -------------- Telecommunications (4.48%) AT&T Canada, Inc., Sr Disc Note, Step Coupon (10.750%, 11-01-02) (Canada) 11-01-07 (A) Zero BBB 135 127,836 Sr Note (Canada) 08-15-07 (Y) 12.000 BBB 15 16,350 AT&T Wireless Group, Sr Note 03-01-31 (R) 8.750 BBB 260 270,150 BellSouth Capital Funding Corp., Deb 02-15-30 7.875 AA- 80 85,398 Citizens Communications Co., Sr Note 05-15-06 8.500 BBB 115 118,050 Sr Note 05-15-11 9.250 BBB 115 120,778 Cox Communications, Inc., Note 11-01-10 7.750 BBB 155 162,359 Crown Castle International Corp., Sr Note 05-15-11 9.000 B 30 26,400 Sr Note 08-01-11 (R) 9.375 B 65 58,012 Deutsche Telekom International Finance B.V., Gtd Bond (Netherlands) 06-15-05 (Y) 7.750 A- 230 240,295 Gtd Bond (Netherlands) 06-15-30 (Y) 8.250 A- 130 131,891 Dominion Resources, Inc., Sr Note Ser A 06-15-10 8.125 BBB+ 60 64,725 France Telecom, Bond (France) 03-01-31 (R) (Y) 8.500 A- 195 204,368 LCI International, Inc., Sr Note 06-15-07 7.250 BBB+ 30 29,945 Qwest Capital Funding, Inc., Bond 02-15-31 (R) 7.750 BBB+ 260 254,072 Sprint Capital Corp., Gtd Note 01-30-06 7.125 BBB+ 120 120,824 Gtd Sr Note 11-15-28 6.875 BBB+ 200 168,076 Telefonos de Mexico S.A. de C.V., Sr Note (Mexico) 01-26-06 (R) (Y) 8.250 BB+ 200 206,500 Telus Corp., Note 06-01-11 8.000 BBB+ 200 203,000 Triton PCS, Inc., Gtd Sr Sub Note 02-01-11 9.375 B- 30 28,800 VoiceStream Wireless Corp., Sr Note 09-15-09 11.500 A- 20 23,000 WorldCom, Inc., Bond 05-15-31 8.250 BBB+ 135 135,498 Note 05-15-06 8.000 BBB+ 225 233,154 -------------- 3,029,481 -------------- Transportation (1.39%) America West Airlines, Pass Thru Ctf Ser 1996-1B 01-02-08 6.930 A- 3 3,275 Burlington Northern Santa Fe Corp., Deb 08-15-30 7.950 BBB+ 255 268,849 Continental Airlines, Inc., Pass Thru Ctf Ser 1997-2C 06-30-04 7.206 BBB 102 105,177 Pass Thru Ctf Ser 1999-1A 02-02-19 6.545 AA+ 56 54,377 Delta Air Lines, Inc., Note 12-15-05 7.700 BBB- 100 98,336 Northwest Airlines, Inc., Gtd Note 03-15-04 8.375 BB 25 24,571 Gtd Note 06-01-06 8.875 BB 115 109,250 Pass Thru Ctf Ser 1996-1D 01-02-15 8.970 BBB- 4 4,544 NWA Trust, Sr Note Ser A 12-21-12 9.250 AA 36 39,337 Railcar Trust No. 1992-1, Pass Thru Ser 1992-1 Class A 06-01-04 7.750 AAA 54 56,053 United Air Lines, Inc., Pass Thru Ctf Ser 2000-1 Class A-1 01-01-14 7.783 AAA 71 72,830 Pass Thru Ctf Ser 2000-2 Class A-1 04-01-12 7.032 AAA 66 66,184 US Airways, Inc., Pass Thru Ctf Ser 1990-A1 03-19-05 11.200 BB- 29 29,953 Wisconsin Central Transportation Corp., Note 04-15-08 6.625 BBB- 8 7,837 -------------- 940,573 -------------- Utilities (4.13%) AES Corp., Sr Note 06-01-09 9.500 BB 35 35,700 Sr Note 09-15-10 9.375 BB 20 20,200 Sr Sub Note 07-15-06 10.250 B+ 10 10,250 AES Eastern Energy, L.P., Pass Thru Ctf Ser 1999-A 01-02-17 9.000 BBB- 25 25,440 Avon Energy Partners Holdings, Sr Note (United Kingdom) 12-11-02 (R) (Y) 6.730 BBB+ 40 40,201 Beaver Valley Funding Corp., Deb 06-01-07 8.625 BB- 60 62,098 Sec Lease Oblig Bond 06-01-17 9.000 BB- 23 25,188 BVPS II Funding Corp., Collateralized Lease Bond 06-01-17 8.890 BB- 5 5,521 Calpine Canada Energy Finance ULC, Gtd Sr Note (Canada) 05-01-08 (Y) 8.500 BB+ 75 72,619 Calpine Corp., Sr Note 08-15-05 8.250 BB+ 65 64,215 Sr Note 04-01-08 7.875 BB+ 15 14,550 Sr Note 02-15-11 8.500 BB+ 60 57,625 Cleveland Electric Illuminating Co., 1st Mtg Ser B 05-15-05 9.500 BB+ 45 46,575 Sr Sec Note Ser D 11-01-17 7.880 BB+ 20 19,583 CMS Energy Corp., Sr Note 05-15-02 8.125 BB 60 60,588 Sr Note 10-15-07 9.875 BB 15 15,825 Sr Note 04-15-11 8.500 BB 25 24,262 Sr Note Ser B 01-15-04 6.750 BB 55 52,525 EIP Funding-PNM, Sec Fac Bond 10-01-12 10.250 BBB- 38 41,325 Exelon Generation Co., LLC, Sr Note 06-15-11 (R) 6.950 A- 245 244,811 GG1B Funding Corp., Deb 01-15-11 7.430 BBB- 23 23,149 HQI Transelec Chile SA, Sr Note (Chile) 04-15-11 (R) (Y) 7.875 A- 130 129,499 Hydro-Quebec, Gtd Bond Ser HY (Canada) 01-15-22 (Y) 8.400 A+ 20 23,040 Iberdrola International B.V., Note 10-01-02 7.500 AA- 35 36,136 KeySpan Corp., Sr Note 11-15-30 8.000 A 60 64,295 Long Island Lighting Co., Deb 03-15-23 8.200 A- 40 41,000 Mirant Americas Generation, Inc., Pass Thru Ctf Ser MIR 2001-14 06-15-04 (R) 7.200 BBB- 240 239,282 Sr Note 05-01-11 (R) 8.300 BBB- 100 100,279 Niagara Mohawk Power Corp., Sec Fac Bond 01-01-18 8.770 BBB 43 44,418 Northeast Utilities, Note Ser A 12-01-06 8.580 BBB 6 6,495 NRG Energy, Inc., Sr Note 04-01-11 7.750 BBB- 200 202,766 Pinnacle Partners, Sr Note 08-15-04 (R) 8.830 BBB- 85 86,548 Pinnacle West Capital Corp., Sr Note 04-01-06 6.400 BBB 85 83,815 PNPP II Funding Corp., Deb 05-30-16 9.120 BB- 40 43,142 PSEG Energy Holdings, Inc., Sr Note 02-15-08 (R) 8.625 BBB- 55 55,623 PSEG Power LLC, Sr Note 04-15-31 (R) 8.625 BBB 130 139,766 Sierra Pacific Power Co., 1st Mtg Note 06-01-08 (R) 8.000 BBB+ 330 332,277 Sierra Pacific Resources, Note 05-15-05 8.750 BBB- 45 45,879 TXU Electric Capital V, Gtd Capital Sec 01-30-37 8.175 BBB- 35 34,428 Waterford 3 Funding Corp., Sec Lease Oblig Bond 01-02-17 8.090 BBB- 56 57,528 Xcel Energy, Inc., Sr Note 12-01-10 7.000 BBB+ 70 70,198 -------------- 2,798,664 -------------- Waste Disposal Service & Equip. (0.04%) Waste Management, Inc., Sr Note 08-01-10 7.375 BBB 30 29,935 -------------- TOTAL BONDS (Cost 62,794,573) (92.93%) 62,905,626 --------- -------------- NUMBER OF SHARES OR WARRANTS --------- PREFERRED STOCKS AND WARRANTS CSC Holdings, Inc., 11.125% Ser M, Preferred Stock 1,040 111,020 CSC Holdings, Inc., 11.750%, Ser H, Preferred Stock 1,175 124,550 MetroNet Communications Corp., Warrant (Canada) (R) (Y)* 5 475 -------------- TOTAL PREFERRED STOCKS AND WARRANTS (Cost $234,875) (0.35%) 236,045 --------- -------------- INTEREST PAR VALUE MARKET ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE - ------------------- -------------- -------------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (9.25%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 06-29-01, due 07-02-01 (Secured by U.S. Treasury Bonds, 6.250% thru 10.625%, due 08-15-15 thru 08-15-23 and U.S. Treasury Notes, 5.625%, due 11-30-02) 3.970% $6,265 6,265,000 -------------- -------------- TOTAL SHORT-TERM INVESTMENTS (9.25%) 6,265,000 -------------- -------------- TOTAL INVESTMENTS (102.53%) 69,406,671 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (2.53%) (1,714,810) -------------- -------------- TOTAL NET ASSETS (100.00%) $67,691,861 ============== ============== (A) Cash interest will be paid on this obligation at the stated rate beginning on the stated date. (R) These securities are exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers, in transactions exempt from registration. Rule 144A securities amounted to $6,955,627 or 10.28% of net assets as of June 30, 2001. (Y) Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer; however, security is U. S. dollar denominated. * Non-income producing security. ** Credit ratings are unaudited and rated by Standard & Poor's where available, or Moody's Investor Services or John Hancock Advisers, Inc., where Standard & Poor's ratings are not available. *** A portion of these securities having an aggregate value of $424,471 or 0.63% of the Fund's net assets has been purchased as forward commitments - that is, the Fund has agreed on trade date to take delivery of and to make payment for this security on a delayed basis subsequent to the date of this schedule. The purchase price and interest rate of these securities are fixed at trade date, although the Fund does not earn any interest on these securities until settlement date. The Fund has instructed its Custodian Bank to segregate assets with a current value at least equal to the amount of the forward commitments. Accordingly, the market value of $433,997 of United States Treasury Note, 5.750%, 08-15-03, has been segregated to cover the forward commitments. + A portion of this security having an aggregate value of $59,849 or 0.09% of the Fund's net assets, has been purchased on a when-issued basis. The purchase price and the interest rate of this security is fixed at trade date, although the Fund does not earn any interest on this security until settlement date. The Fund has instructed its Custodian Bank to segregate assets with a current value at least equal to the amount of its when-issued commitment. Accordingly, the market value of $61,706 of United States Treasury Note, 5.750%, 08-15-03, has been segregated to cover the when-issued commitment. # Represents rate in effect on June 30, 2001. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Money Market Fund Schedule of Investments June 30, 2001 (Unaudited) - ----------------------------------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. Money Market Fund on June 30, 2001. INTEREST QUALITY PAR VALUE MARKET ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE - -------------------------- -------- ------ -------------- -------------- COMMERCIAL PAPER Banks - Foreign (7.23%) Abbey National North America Corp., 07-12-01 4.630% Tier 1 $2,500 $2,496,463 Deutsche Bank Financial, 07-09-01 4.635 Tier 1 4,000 3,995,880 UBS Finance, Inc., 08-08-01 5.000 Tier 1 3,900 3,879,417 -------------- 10,371,760 -------------- Banks - United States (3.19%) Wells Fargo, 08-02-01 4.500 Tier 1 4,600 4,581,600 -------------- Beverages (3.81%) Coca Cola Co., 08-17-01 4.110 Tier 1 5,500 5,470,488 -------------- Broker Services (3.42%) Goldman Sachs Group, L.P., 01-07-02 3.720 Tier 1 5,000 4,901,833 -------------- Building (2.77%) Halifax Group Plc, 08-23-01 4.140 Tier 1 4,000 3,975,620 -------------- Chemicals (2.63%) Dow Chemical Co., 07-06-01 4.220 Tier 1 3,778 3,775,786 -------------- Finance (8.32%) CIT Group Holdings, Inc., 09-13-01 3.680 Tier 1 7,000 6,947,049 Household Financial Corp., 07-09-01 4.550 Tier 1 5,000 4,994,945 -------------- 11,941,994 -------------- Insurance (3.48%) American General Corp., 07-16-01 4.630 Tier 1 5,000 4,990,354 -------------- Mortgage Banking (4.86%) Countrywide Home Loans, 07-27-01 3.770 Tier 1 7,000 6,980,941 -------------- TOTAL COMMERCIAL PAPER (Cost $56,990,376) (39.71%) 56,990,376 -------------- -------------- CORPORATE INTEREST-BEARING OBLIGATIONS Banks - United States (2.11%) First Chicago NBD Corp., 11-01-01 6.300 Tier 1 3,000 3,024,748 -------------- Finance (5.20%) Associates Corp. of N. A., 10-15-01 6.450 Tier 1 4,415 4,446,933 General Electric Capital Corp., 09-17-01 6.330 Tier 1 3,000 3,014,754 -------------- 7,461,687 -------------- TOTAL CORPORATE INTEREST-BEARING OBLIGATIONS (Cost $10,486,435) (7.31%) 10,486,435 -------------- -------------- U.S. GOVERNMENT OBLIGATIONS Government - U.S. Agencies (39.56%) Federal Home Loan Bank, 07-18-01 4.650 Tier 1 5,000 4,989,021 08-01-01 4.060 Tier 1 6,400 6,377,625 08-09-01 8.220 Tier 1 1,000 1,002,967 02-01-02 6.750 Tier 1 2,135 2,170,842 Federal Home Loan Mortgage Corp., 07-05-01 4.570 Tier 1 5,000 4,997,461 08-09-01 3.880 Tier 1 6,500 6,472,678 Federal National Mortgage Assn., 07-05-01 4.570 Tier 1 3,000 2,998,477 08-09-01 3.850 Tier 1 13,000 12,945,779 08-16-01 3.860 Tier 1 6,000 5,970,407 11-08-01 3.870 Tier 1 7,000 6,902,175 04-19-02 3.770 Tier 1 2,000 1,938,842 -------------- TOTAL U.S. GOVERNMENT OBLIGATIONS (Cost $56,766,274) (39.56%) 56,766,274 -------------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (13.31%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 06-29-01, due 07-02-01 (Secured by U.S. Treasury Bond, 6.875% due 08-15-25 and U.S. Treasury Note, 5.625% due 11-30-02) 3.970% 19,099 19,099,000 -------------- -------------- TOTAL SHORT-TERM INVESTMENTS (13.31%) 19,099,000 -------------- -------------- TOTAL INVESTMENTS (99.89% 143,342,085 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (0.11%) 152,757 -------------- -------------- TOTAL NET ASSETS (100.00%) $143,494,842 ============== ============== * Quality ratings indicate the categories of eligible securities, as defined by Rule 2a-7 of the Investment Company Act of 1940, owned by the Fund. The percentage shown for each investment category is the total value of that category expressed as a percentage of the net assets of the Fund. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Strategic Income Fund Schedule of Investments June 30, 2001 (Unaudited) - ----------------------------------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. Strategic Income Fund on June 30, 2001. It is divided into four main categories: bonds, common stocks, preferred stocks and warrants, and short-term investments. Bonds are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. INTEREST CREDIT PAR VALUE MARKET ISSUER, DESCRIPTION RATE RATING* (000s OMITTED) VALUE - -------------------------- -------- ------ -------------- -------------- BONDS Advertising (0.19%) Go Outdoor Systems Holding S.A., Sr Sub Note (France) 07-15-09 (E) 10.500% B- $100 $99,099 -------------- Banks - United States (0.39%) Colonial Bank, Sub Note 06-01-11 9.375 BBB- 200 206,560 -------------- Chemicals (0.52%) Huntsman ICI Chemicals LLC, Sr Sub Note 07-01-09 10.125 B 150 147,000 Trikem S.A., Bond (Brazil) 07-24-07 (R) (Y) 10.625 B+ 200 130,000 -------------- 277,000 -------------- Electronics (0.16%) Communications Instruments, Inc., Sr Sub Note Ser B 09-15-04 10.000 B- 100 86,000 -------------- Energy (0.13%) AEI Resources, Inc./AEI Resources Holdings, Inc., Note 12-15-05 (B) (R) 10.500 D 100 70,000 -------------- Finance (0.17%) PTC International Finance II S.A., Sr Sub Note (Luxembourg) 12-01-09 (E) (R) 11.250 B+ 100 88,088 -------------- Food (0.34%) Agrilink Foods, Inc., Sr Sub Note 11-01-08 11.875 B- 200 182,000 -------------- Government - Foreign (24.66%) Arabia, Republic of, Bond (Egypt) 07-11-11 (Y) 8.750 BBB- 300 301,800 Brazil, Federative Republic of, Bond (Brazil) 01-11-06 (Y) 10.250 BB- 300 288,000 Bond (Brazil) 03-06-30 (Y) 12.250 BB- 750 631,500 Deb (Brazil) 04-15-14 (Y) 8.000 BB- 677 501,184 Unsub Note (Brazil) 07-26-07 (Y) 11.250 BB- 100 96,250 Unsub Note (Brazil) 10-15-09 (Y) 14.500 BB- 700 728,000 Bulgaria, Government of, Bond (Variable Rate after 07-01-00) (Bulgaria) 07-28-12 (Y) 3.000 B+ 880 715,000 Canada, Government of, Bond (Canada) 12-01-02 # 6.000 AA+ 275 184,246 Bond (Canada) 12-01-05 # 8.750 AAA 300 221,478 Bond (Canada) 12-01-06 # 7.000 AAA 2,000 1,396,372 Bond (Canada) 06-01-08 # 6.000 AAA 250 167,035 Bond (Canada) 06-01-09 # 5.500 AAA 750 483,344 Bond (Canada) 06-01-10 # 5.500 AA+ 575 368,857 Bond (Canada) 06-01-29 # 5.750 AA+ 75 47,691 Colombia, Republic of, Note (Colombia) 06-13-06 (Y) 10.500 BB 300 309,258 Note (Colombia) 04-09-11 (Y) 9.750 BBB 500 510,000 Mexican, United States Bond (Mexico) 03-12-13 (E) 7.375 BB+ 500 429,268 Note (Mexico) 01-14-11 (Y) 8.375 BB+ 475 477,375 Sr Note (Mexico) 03-12-08 (Y) 8.625 BB+ 250 259,500 New Zealand, Government of, Bond (New Zealand) 04-15-03 # 5.500 AAA 500 199,650 Bond (New Zealand) 11-15-11 # 6.000 AAA 500 190,972 Panama, Republic of, Bond (Panama) 02-08-11 (Y) 9.625 BB+ 1,000 1,010,000 Peru, Republic of, Deb (Variable Rate after 03-07-07) (Peru) 03-07-17 (Y) 4.000 BB- 800 500,000 Russia, Federation of, Unsub Note (Russia) 06-26-07 (Y) 10.000 B- 1,135 1,010,150 Unsub Note (Russia) 07-24-18 (Y) 11.000 B 1,125 973,125 Unsub Note (7.50% 03-31-07) (Russia) 03-31-30 (Y) 5.000 B 650 307,450 Venezuela, Republic of, Floating Rate Bond Ser DL (Venezuela) 12-18-07 (Y) 7.375 B 310 258,449 Bond (Venezuela) 09-15-27 (Y) 9.250 B 675 465,750 -------------- 13,031,704 -------------- Government - U.S. (39.23%) United States Treasury, Bond 08-15-01 13.375 AAA 6,700 6,776,447 Bond 08-15-05 6.500 AAA 400 423,436 Bond 08-15-05 10.750 AAA 400 485,000 Bond 02-15-16 9.250 AAA 615 820,447 Bond 08-15-19 8.125 AAA 1,090 1,357,213 Bond 08-15-23 6.250 AAA 600 624,372 Bond 11-15-28 5.250 AAA 2,000 1,826,880 Note 08-31-02 6.250 AAA 3,870 3,967,369 Note 08-15-04 7.250 AAA 590 633,330 Note 05-15-05 6.500 AAA 1,300 1,374,542 Note 08-15-07 6.125 AAA 940 985,675 Note 02-15-11 5.000 AAA 1,500 1,455,225 -------------- 20,729,936 -------------- Leisure (2.18%) Ameristar Casinos, Inc., Sr Sub Note 02-15-09 (R) 10.750 B- 200 208,500 HMH Properties, Inc., Sr Note Ser B 08-01-08 7.875 BB 100 94,000 Jupiters Ltd., Sr Note (Australia) 03-01-06 (Y) 8.500 BB+ 150 147,750 Penn National Gaming, Inc., Sr Sub Note 03-01-08 (R) 11.125 B- 200 207,000 Station Casinos, Inc., Sr Note 02-15-08 (R) 8.375 BB- 200 201,000 Sun International Hotels Ltd., Sr Sub Note (Bahamas) 12-15-07 (Y) 8.625 B+ 100 100,500 Waterford Gaming LLC, Sr Note 03-15-10 (R) 9.500 B+ 199 195,020 -------------- 1,153,770 -------------- Machinery (0.17%) Columbus McKinnon Corp., Sr Sub Note 04-01-08 8.500 B 100 87,000 -------------- Media (5.25%) Adelphia Communications Corp., Sr Note 06-15-11 10.250 B+ 350 340,375 AMFM Operating, Inc., Sr Sub Deb 10-31-06 12.625 B- 64 71,025 Callahan Nordheim-Westfalen GmbH Sr Note (Germany) 07-15-11 (E) 14.125 B- 500 353,622 Charter Communications Holdings LLC/ Charter Comm. Holdings Capital Corp., Sr Note 01-15-11 11.125 B+ 300 315,000 Sr Note 05-15-11 (R) 10.000 B+ 200 200,000 Diamond Holdings Plc, Bond (United Kingdom) 02-01-08 # 10.000 B- 50 52,826 DIVA Systems Corp., Sr Disc Note Ser B, Step Coupon (12.625%, 03-01-03) 03-01-08 (A) Zero B- 250 35,000 Fox Kids Worldwide, Inc., Sr Disc Note, Step Coupon (10.25% 11-15-02) 11-01-07 (A) Zero B 400 356,000 Garden State Newspapers, Inc., Sr Sub Note 07-01-11 8.625 B+ 200 186,000 Sr Sub Note Ser B 10-01-09 8.750 B+ 200 188,000 Innova S. de R.L., Sr Note (Mexico) 04-01-07 (Y) 12.875 B- 200 178,000 Pegasus Communications Corp., Sr Note Ser B 08-01-07 12.500 CCC+ 400 396,000 STC Broadcasting, Inc., Sr Sub Note 03-15-07 11.000 B- 100 99,500 -------------- 2,771,348 -------------- Medical (0.28%) Select Medical Corp., Sr Sub Note 06-15-09 (R) 9.500 B 150 147,750 -------------- Oil & Gas (2.51%) Chesapeake Energy Corp., Sr Note 04-01-11 (R) 8.125 B+ 300 279,750 Comstock Resources, Inc., Sr Note 05-01-07 11.250 B 100 106,000 Ocean Rig Norway A.S., Sr Sec Note (Norway) 06-01-08 (Y) 10.250 CCC 200 176,000 Parker Drilling Co., Sr Note 11-15-06 9.750 B+ 300 304,500 PEMEX Project Funding Master Trust, Gtd Note 02-15-08 (R) 8.500 BB+ 200 206,000 Pennzoil-Quaker State Co., Note 12-01-02 9.400 BB+ 250 252,410 -------------- 1,324,660 -------------- Paper & Paper Products (1.61%) Corporacion Durango S.A. de C.V., Sr Note (Mexico) 08-01-06 (Y) 13.125 BB- 300 300,000 Grupo Industrial Durango S.A., Note (Mexico) 08-01-03 (Y) 12.625 BB- 200 210,000 Kappa Beheer BV, Sr Sub Note (Netherlands) 07-15-09 (E) (R) 10.625 B 150 135,308 Stone Container Corp., Sr Note 02-01-11 (R) 9.750 B 200 204,000 -------------- 849,308 -------------- Telecommunications (3.73%) American Cellular Corp., Sr Sub Note 10-15-09 (R) 9.500 B 200 188,000 Comunicacion Celular S.A., Sr Def Bond (Colombia) 03-01-05 (R) (Y) 14.125 B 100 91,000 Esprit Telecom Group Plc, Sr Note (United Kingdom) 12-15-07 (B) (Y) 11.500 D 100 2,588 Sr Note (Deutsche Mark) 06-15-08 (B) # 11.000 D 140 1,213 Grupo Iusacell S.A. de C.V., Sr Note (Mexico) 12-01-06 (Y) 14.250 B+ 200 212,000 GT Group Telecom, Inc., Sr Disc Note, Step Coupon (13.25%, 02-01-05) (Canada) 02-01-10 (A) (Y) Zero B- 200 56,000 Intercel, Inc., Unit (Sr Disc. Note & Warrant), 02-01-06 12.000 B 200 206,000 Ionica Plc, Sr Disc Note, Step Coupon (15.00%, 05-01-02) (United Kingdom) 05-01-07 (A) (Y) Zero Ca 200 2,250 McCaw International Ltd., Sr Disc Note, Step Coupon (13.00%, 04-15-02) 04-15-07 (A) Zero B- 500 165,000 MetroNet Communications Corp., Sr Discount Note, Step Coupon (10.75%, 11-01-02) (Canada) 11-01-07 (A) (Y) Zero BBB 200 189,386 Sr Note (Canada) 08-15-07 (Y) 12.000 BBB 50 54,500 Nextel International, Inc., Sr Note 08-01-10 (R) 12.750 B- 100 50,000 NorthEast Optic Network, Inc., Sr Note 08-15-08 12.750 B- 100 28,000 ONO Finance Plc, Sr Sub Note (United Kingdom) 05-01-09 (E) 13.000 CCC+ 100 63,525 Sr Note (United Kingdom) 07-15-10 (E) 14.000 CCC+ 200 132,132 Pronet Inc., Sr Sub Note 06-15-05 11.875 D 280 28,000 TeleCorp PCS, Inc., Sr Sub Disc Note, Step Coupon (11.625%, 04-15-04) 04-15-09 (A) Zero B3 175 106,750 Telewest Communications Plc, Sr Disc Note, Step Coupon (9.25%, 04-15-04) (United Kingdom) 04-15-09 (A) (Y) Zero B+ 100 67,618 Sr Note (United Kingdom) 02-01-10 (R) # 9.875 B+ 100 114,105 Triton PCS, Inc., Sr Sub Note 02-01-11 (R) 9.375 CCC+ 100 96,000 VoiceStream Wireless Corp., Sr Note 09-15-09 11.500 B- 100 115,000 -------------- 1,969,067 -------------- Telecommunications - Services (2.63%) COLT Telecom Group Plc, (United Kingdom) Sr Note (Deutsche Mark) 07-31-08# 7.625 B 300 105,235 Crown Castle International Corp., Sr Disc Note, Step Coupon (10.625%, 11-15-02) 11-15-07 (A) Zero B 150 115,125 Energis Plc, Sr Note (United Kingdom) 06-15-09 (R) # 9.500 B+ 130 164,818 Jazztel Plc, Sr Note (United Kingdom) 12-15-09 (E) 13.250 CCC+ 200 62,678 Nextel Partners, Inc., Sr Disc Note, Step Coupon (14.00%, 02-01-04) 02-01-09 (A) Zero CCC+ 390 218,400 NTL Communications Corp., Sr Note Ser B 10-01-08 11.500 B- 100 67,000 Sr Note Ser B, Step Coupon (12.375%, 10-01-03) 10-01-08 (A) Zero B- 150 63,000 Orion Network Systems, Sr Note 01-15-07 11.250 B+ 100 40,000 Time Warner Telecom, Inc. Sr Note 02-01-11 10.125 B- 200 179,000 Time Warner Telecom LLC, Sr Note 07-15-08 9.750 B 200 177,000 Tritel PCS, Inc., Sr Sub Disc Note Step Coupon (12.75%, 05-15-04) 05-15-09 (A) Zero B3 100 63,000 United Pan-Europe Communicatons N.V., Sr Disc Note, Step Coupon (13.375%, 11-01-04) (Netherlands) 11-01-09 (A) (E) Zero B- 40 10,164 Sr Note (Netherlands) 11-01-07 (E) 10.875 B- 40 19,312 Sr Note (Netherlands) 11-01-09 (E) 11.250 B- 65 31,381 Versatel Telecom International NV, Sr Note (Netherlands) 05-15-08 (Y) 13.250 B- 100 38,000 Sr Note Ser EU (Netherlands) 07-15-09 (E) 11.875 B- 100 33,033 -------------- 1,387,146 -------------- Transportation (0.63%) CHC Helicopter Corp., Sr Sub Note (Canada) 07-15-07 (E) 11.750 B2 200 189,728 Fine Air Services Corp., Sr Note 06-01-08 (B) 9.875 D 105 6,296 North American Van Lines, Inc., Sr Sub Note 12-01-09 (R) 13.375 B- 150 138,000 -------------- 334,024 -------------- Utilities (1.60%) CMS Energy Corp., Sr Note 10-15-07 9.875 BB 200 211,000 Midland Funding Corp. II, Deb Ser A 07-23-05 11.750 BB 200 220,500 Deb Ser B 07-23-06 13.250 BB 150 173,625 Monterrey Power S.A. de C.V., Sr Sec Bond (Mexico) 11-15-09 (R) (Y) 9.625 BB+ 90 93,841 Niagara Mohawk Power Corp., Sec Fac Bond 01-01-18 8.770 BBB 141 145,650 -------------- 844,616 -------------- TOTAL LONG-TERM DEBT (Cost $47,783,506) (86.38%) 45,639,076 -------------- -------------- NUMBER OF SHARES OR WARRANTS -------------- COMMON STOCKS AT&T Canada, Inc., Common Stock (Canada) (Y)** 2,000 60,260 GT Group Telecom, Inc. (Class B), Common Stock (Canada) (Y)** 982 4,439 KLM Royal Dutch Airlines N.V., American Depositary Receipt (ADR) Common Stock (Netherlands) (Y) 397 7,007 Kraft Foods, Inc. (Class A)** 1,540 47,740 Nortek, Inc., Common Stock** 704 21,979 Versatel Telecom International N.V., ADR Common Stock (Netherlands) (Y)** 1,333 3,786 -------------- 145,211 -------------- TOTAL COMMON STOCKS (Cost $164,806) (0.27%) 145,211 -------------- -------------- PREFERRED STOCKS AND WARRANTS Allegiance Telecom, Inc. Warrant** 250 15,000 Comunicacion Celular S.A., Warrant (Colombia) (Y)** 100 0 DIVA Systems Corp. Warrant (R)** 750 938 Loral Space & Communications Ltd. Warrant** 100 175 ONO Finance Plc, Warrant (United Kingdom) (E) (R)** 50 1,271 ONO Finance Plc, Warrant (United Kingdom) (R) (Y)** 50 1,500 XO Communications Inc., 14% Preferred Stock 2,505 75,150 -------------- 94,034 -------------- TOTAL PREFERRED STOCKS AND WARRANTS (Cost $158,153) (0.18%) 94,034 -------------- -------------- INTEREST PAR VALUE MARKET ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE - ------------------- -------------- -------------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (23.19%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 06-29-01, due 07-02-01 (Secured by U.S. Treasury Bonds, 10.625% due 08-15-15 and 6.250% due 08-15-23, U.S. Treasury Note 5.625% due 11-30-02) 3.970% $12,252 $12,252,000 -------------- -------------- TOTAL SHORT-TERM INVESTMENTS (Cost $12,252,000) (23.19%) 12,252,000 -------------- -------------- TOTAL INVESTMENTS (110.02%) 58,130,321 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (10.02%) (5,294,111) -------------- -------------- TOTAL NET ASSETS (100.00%) $52,836,210 ============== ============== * Credit ratings are unaudited and rated by Moody's Investor Service or John Hancock Advisers, Inc. where Standard & Poor's ratings are not available. ** Non-income producing security. *** Represents rate in effect on June 30, 2001. # Par value of foreign bonds is expressed in local currency, as shown parenthetically in security description. (A) Cash interest will be paid on this obligation at the stated rate beginning on the stated date. (B) Non-income producing issuer, filed for protection under Federal Bankruptcy Code or is in default on interest payment. (E) Parenthetical disclosure of a country in the security description represents country of issuer; however, security is euro denominated. (R) These securities are exempt from registration under rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers, in transactions exempt from registration. Rule 144A securities amounted to $3,211,889 or 6.08% of the fund's net assets as of June 30, 2001. (Y) Parenthetical disclosure of a foreign country in the security description represents country of foreign issuer; however, security is U.S. dollar denominated. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. Portfolio Concentration June 30, 2001 (Unaudited) - ------------------------------------------------------------------------- The V.A. Strategic Income Fund invests primarily in securities issued in the United States of America. The performance of this Fund is closely tied to the economic and financial conditions of the countries within which it invests. The concentration of investments by industry category for individual securities held by the Fund is shown in the schedule of investments. In addition, concentration of investments can be aggregated by various countries. The table below shows the percentages of the Fund's investments at June 30, 2001 assigned to country categories. MARKET VALUE AS A % OF COUNTRY DIVERSIFICATION FUND'S NET ASSETS - ----------------------- ----------------- Australia 0.28% Bahamas 0.19 Canada 6.48 Colombia 1.72 Egypt 0.57 France 0.19 Luxembourg 0.17 Mexico 4.09 Netherlands 0.53 Russia 4.34 United Kingdom 1.11 United States 88.97 Venezuela 1.38 ------- TOTAL INVESTMENTS 110.02% ======= Additionally, the concentration of investments can be aggregated by the quality rating for each debt security. MARKET VALUE AS A % OF QUALITY DISTRIBUTION FUND'S NET ASSETS - -------------------- ----------------- AAA 44.27% AA 1.14 BBB 2.99 BB 14.25 B 21.07 CCC 2.46 D 0.20 ------- TOTAL BONDS 86.38% ======= See notes to financial statements. NOTES TO FINANCIAL STATEMENTS John Hancock Funds - Declaration Trust (UNAUDITED) NOTE A -- ACCOUNTING POLICIES John Hancock V.A. Core Equity Fund ("V.A. Core Equity Fund"), John Hancock V.A. Relative Value Fund ("V.A. Relative Value Fund"), John Hancock V.A. Sovereign Investors Fund ("V.A. Sovereign Investors Fund"), John Hancock V.A. Financial Industries Fund ("V.A. Financial Industries Fund"), John Hancock V.A. Technology Fund ("V.A. Technology Fund"), John Hancock V.A. Bond Fund ("V.A. Bond Fund"), John Hancock V.A. Money Market Fund ("V.A. Money Market Fund") and John Hancock V.A. Strategic Income Fund ("V.A. Strategic Income Fund") (each a "Fund," collectively, the "Funds") are separate series of John Hancock Declaration Trust (the "Trust"), an open-end management investment company registered under the Investment Company Act of 1940. The Trust, organized as a Massachusetts business trust in 1995, consists of fifteen different series as of June 30, 2001. The other series of the Trust are reported in a separate shareholders' report. Each Fund currently has one class of shares with equal rights as to voting, redemption, dividends and liquidation within its respective Funds. The Trustees may authorize the creation of additional series from time to time to satisfy various investment objectives. An insurance company issuing a Variable Contract that participates in the Trust will vote shares of the Funds held by the insurance company's separate accounts as required by law. In accordance with current law and interpretations thereof, participating insurance companies are required to request voting instructions from policy owners and must vote shares of the Funds in proportion to the voting instructions received. The investment objective of the V.A. Core Equity Fund is to seek above-average total return, consisting of capital appreciation and income. The investment objective of the V.A. Relative Value Fund is to seek the highest total return (capital appreciation plus current income) that is consistent with reasonable safety of capital. The investment objective of the V.A. Sovereign Investors Fund is to seek long-term growth of capital and income without assuming undue market risks. The investment objective of the V.A. Financial Industries Fund is to seek capital appreciation. The investment objective of the V.A. Technology Fund is to seek long-term growth of capital. The investment objective of the V.A. Bond Fund is to seek a high level of current income consistent with prudent investment risk. The investment objective of the V.A. Money Market Fund is to seek maximum current income consistent with capital preservation and liquidity. The investment objective of the V.A. Strategic Income Fund is to seek a high level of current income. Significant accounting policies of the Funds are as follows: VALUATION OF INVESTMENTS Securities in the Funds' portfolios (except for V.A. Money Market Fund) are valued on the basis of market quotations, valuations provided by independent pricing services or, if quotations are not readily available, or the value has been materially affected by events occurring after the closing of a foreign market, at fair value as determined in good faith in accordance with procedures approved by the Trustees. Short-term debt investments maturing within 60 days are valued at amortized cost, which approximates market value. All portfolio transactions initially expressed in terms of foreign currencies have been translated into U.S. dollars as described in "Foreign Currency Translation" below. The V.A. Money Market Fund's portfolio of securities is valued at amortized cost, in accordance with Rule 2a-7 of the Investment Company Act of 1940, which approximates market value. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between the principal amount due at maturity and the cost of the security to the Fund. Interest income on certain portfolio securities such as negotiable bank certificates of deposit and interest-bearing notes is accrued daily and included in interest receivable. JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Funds, along with other registered investment companies having a management contract with John Hancock Advisers, Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, Inc., may participate in a joint repurchase agreement transaction. Aggregate cash balances are invested in one or more large repurchase agreements, whose underlying securities are obligations of the U.S. government and/or its agencies. The Funds' custodian bank receives delivery of the underlying securities for the joint account on the Funds' behalf. The Adviser is responsible for ensuring that the agreement is fully collateralized at all times. FOREIGN CURRENCY TRANSLATION All assets or liabilities initially expressed in terms of foreign currencies are translated into U.S. dollars based on London currency exchange quotations as of 5:00 p.m., London time, on the date of any determination of the net asset value of the Funds. Transactions affecting statement of operations accounts and net realized gain (loss) on investments are translated at the rates prevailing at the dates of the transactions. The Funds do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Reported net realized foreign exchange gains or losses arise from sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Funds' books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities, other than investments in securities, resulting from changes in the exchange rate. INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of purchase, sale or maturity. Net realized gains and losses on sales of investments are determined on the identified cost basis. Capital gains realized on some foreign securities are subject to foreign taxes, which are accrued, as applicable. Some securities may be purchased on a "when-issued" or "forward delivery" basis, which means that the securities will be delivered to the Funds at a future date, usually beyond customary settlement date. DISCOUNT AND PREMIUM ON SECURITIES The Funds accrete discount and amortize premium from par value on securities from either the date of issue or the date of purchase over the life of the security. EXPENSES The majority of the expenses are directly identifiable to an individual fund. Expenses that are not readily identifiable to a specific fund will be allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative sizes of the funds. ORGANIZATION EXPENSES Expenses incurred in connection with the organization of the Funds have been capitalized and are being charged to the Funds' operations ratably over a five-year period that began with the commencement of the investment operations of the Funds. BANK BORROWINGS The Funds (except for V.A. Money Market Fund) are permitted to have bank borrowings for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Funds have entered into a syndicated line of credit agreement with various banks. This agreement enables the Funds to participate with other funds managed by the Adviser in an unsecured line of credit with banks, which permit borrowings up to $500 million, collectively. Interest is charged to each fund, based on its borrowing. In addition, a commitment fee is charged to each fund based on the average daily unused portion of the line of credit and is allocated among the participating Funds. The Funds had no borrowing activities under the line of credit during the period ended June 30, 2001. SECURITIES LENDING The Funds may lend securities to certain qualified brokers who pay the Funds negotiated lender fees. These fees are included in interest income. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Funds may bear the risk of delay of the loaned securities in recovery or even loss of rights in the collateral, should the borrower of the securities fail financially. At June 30, 2001, the V.A. Relative Value and V.A. Technology Funds loaned securities having a market value of $1,765,629 and $262,760, collateralized by securities in the amount of $1,800,942 and $268,015, respectively. OPTIONS The Funds (except for V.A. Money Market Fund) may enter into option contracts. Listed options will be valued at the last quoted sales price on the exchange on which they are primarily traded. Over-the-counter options are valued at the mean between the last bid and asked prices. Upon the writing of a call or put option, an amount equal to the premium received by a Fund will be included in the Statement of Assets and Liabilities as an asset and corresponding liability. The amount of the liability will be subsequently marked to market to reflect the current market value of the written option. The Funds may use option contracts to manage their exposure to the price volatility of financial instruments. Writing puts and buying calls will tend to increase the Funds' exposure to the underlying instruments and buying puts and writing calls will tend to decrease the Funds' exposure to the underlying instruments, or hedge other Funds' investments. The maximum exposure to loss for any purchased options will be limited to the premium initially paid for the option. In all other cases, the face (or "notional") amount of each contract at value will reflect the maximum exposure of a Fund in these contracts, but the actual exposure will be limited to the change in value of the contract over the period the contract remains open. Risks may also arise if counterparties do not perform under the contracts' terms ("credit risk") or if a Fund is unable to offset a contract with a counterparty on a timely basis ("liquidity risk"). Exchange-traded options have minimal credit risk as the exchanges act as counterparties to each transaction, and only present liquidity risk in highly unusual market conditions. To minimize credit and liquidity risks in over-the-counter option contracts, the Funds will continuously monitor the creditworthiness of all their counterparties. At any particular time, except for purchased options, market or credit risk may involve amounts in excess of those reflected in the Funds' year-end Statements of Assets and Liabilities. The Funds had no written option transactions during the period ended June 30, 2001. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Funds (except for V.A. Core Equity, V.A. Sovereign Investors and V.A. Money Market Funds) may enter into forward foreign currency exchange contracts as a hedge against the effect of fluctuations in currency exchange rates. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date at a set price. The aggregate principal amounts of the contracts are marked to market daily at the applicable foreign currency exchange rates. Any resulting unrealized gains and losses are included in the determination of the Funds' daily net assets. The Funds record realized gains and losses at the time the forward foreign currency exchange contract is closed out or offset by a matching contract. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of the contract and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. These contracts involve market or credit risk in excess of the unrealized gain or loss reflected in the Funds' Statements of Assets and Liabilities. The Funds may also purchase and sell forward contracts to facilitate the settlement of foreign currency denominated portfolio transactions, under which they intend to take delivery of the foreign currency. Such contracts normally involve no market risk if they are offset by the currency amount of the underlying transaction. The Funds had the following open forward foreign currency exchange contracts at June 30, 2001: UNREALIZED PRINCIPAL AMOUNT EXPIRATION APPRECIATION/ CURRENCY COVERED BY CONTRACT MONTH (DEPRECIATION) - -------- ------------------- ---------- ------------ V.A. STRATEGIC INCOME FUND Buys Pound Sterling 255,500 Jul 01 ($7,045) ======= Sells Pound Sterling 523,700 Jul 01 $21,244 Pound Sterling 218,500 Aug 01 5,485 Pound Sterling 196,900 Sep 01 ($3,669) ------- $23,060 ======= FEDERAL INCOME TAXES The Funds qualify as "regulated investment companies" by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income which is distributed to shareholders. Therefore, no federal income tax provision is required. For federal income tax purposes, the following Funds had capital loss carryforwards available to the extent provided by regulators to offset future net realized capital gains: CAPITAL LOSS CARRYFORWARD EXPIRING ------------------------------------- FUND 12/31/2006 12/31/2007 12/31/2008 - ---- ---------- ---------- ---------- V.A. Sovereign Investors Fund $157,877 $101,159 $1,206,695 V.A. Financial Industries Fund -- 2,140,648 1,313,228 V.A. Technology Fund -- -- 14,000 V.A. Bond Fund -- 67,593 215,568 V.A. Strategic Income Fund 4,130 136,493 455,777 Expired capital loss carryforwards are reclassified to capital paid-in, in the year of expiration. DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment securities is recorded on the ex-dividend date or, in the case of some foreign securities, on the date thereafter when the Funds identify the dividends. Interest income on investment securities is recorded on the accrual basis. The Funds may place debt obligations on non-accrual status and reduce related interest income by ceasing current accruals and writing off interest receivables when the collection of interest has become doubtful. Foreign income may be subject to foreign withholding taxes, which are accrued as applicable. The Funds record distributions to shareholders from net investment income and realized gains on the ex-dividend date. Such distributions are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. USE OF ESTIMATES The preparation of these financial statements, in accordance with accounting principles generally accepted in the United States of America, incorporates estimates made by management in determining the reported amount of assets, liabilities, revenues and expenses of the Funds. Actual results could differ from these estimates. NOTE B -- MANAGEMENT FEE AND TRANSACTIONS WITH AFFILIATES AND OTHERS The Funds have an investment management contract with the Adviser. Under the investment management contract, the Funds pay monthly management fees to the Adviser equivalent, on an annual basis, to the following: RATE AS A PERCENTAGE OF FUND AVERAGE DAILY NET ASSETS - ---- ------------------------ V.A. Core Equity Fund 0.70% V.A. Relative Value Fund 0.60 V.A. Sovereign Investors Fund 0.60 V.A. Financial Industries Fund 0.80 V.A. Technology Fund 0.80 V.A. Bond Fund 0.50 V.A. Money Market Fund 0.50 V.A. Strategic Income Fund 0.60 V.A. Core Equity Fund and the Adviser have a subadvisory contract with Independence Investment LLC ("Independence"), formerly Independence Investment Associates, Inc. Independence is a wholly owned indirect subsidiary of John Hancock Life Insurance Company ("JHLICo"). The V.A. Technology Fund and the Adviser have a subadvisory contract with American Fund Advisors, Inc. The Funds are not responsible for payment of subadvisers' fees. The Adviser has agreed to limit each Fund's expenses (excluding the management fee), to 0.25% of each Fund's average daily net assets at least until April 30, 2002. Accordingly, the Adviser reduced the V.A. Technology Fund's expenses by $7,551 for the period ended June 30, 2001. The Adviser reserves the right to terminate this limitation in the future. The Funds have an agreement with the Adviser to perform necessary tax, accounting and legal services for the Funds. The compensation for the period was at an annual rate 0.02% of the average net assets of the Funds. Ms. Maureen R. Ford and Mr. John M. DeCiccio are directors and/or officers of the Adviser and/or its affiliates, as well as Trustees of the Funds. The compensation of unaffiliated Trustees is borne by the Funds. The unaffiliated Trustees may elect to defer for tax purposes their receipt of this compensation under the John Hancock Group of Funds Deferred Compensation Plan. The Funds make investments into other John Hancock Funds, as applicable, to cover their liability for the deferred compensation. Investments to cover the Funds' deferred compensation liability are recorded on the Funds' books as an other asset. The deferred compensation liability and the related other asset are always equal and are marked to market on a periodic basis to reflect any income earned by the investment as well as any unrealized gains or losses. The Deferred Compensation Plan investments had no impact on the operations of the Funds. The Adviser and other subsidiaries of John Hancock Life Insurance Company owned the following shares of beneficial interest of the Funds as of June 30, 2001: FUND SHARES OF BENEFICIAL INTEREST - ---- ----------------------------- V.A. Technology Fund 50,095 V.A. Bond Fund 135,931 V.A. Money Market Fund 123,982 V.A. Strategic Income Fund 557,187 NOTE C -- INVESTMENT TRANSACTIONS Purchases and proceeds from sales of securities for the Funds, other than short-term securities and obligations of the U.S. government, during the period ended June 30, 2001, were as follows: FUND PURCHASES SALES - ---- ----------- ----------- V.A. Core Equity Fund 19,622,904 16,593,115 V.A. Relative Value Fund 23,534,078 15,426,044 V.A. Sovereign Investors Fund 27,892,613 12,218,212 V.A. Financial Industries Fund 50,251,626 36,764,543 V.A. Technology Fund 16,391,057 2,346,666 V.A. Bond Fund 107,129,045 66,899,002 V.A. Strategic Income Fund 33,658,235 16,521,059 The cost of investments owned at June 30, 2001 (including short-term investments) and gross unrealized appreciation and depreciation of investments for federal income tax purposes, were as follows: GROSS GROSS NET UNREALIZED UNREALIZED UNREALIZED APPRECIATION/ FUND COST APPRECIATION DEPRECIATION (DEPRECIATION) - ---- ----------- ------------ ------------ ------------ V.A. Core Equity Fund $36,789,999 $6,623,422 $1,871,339 $4,752,083 V.A. Relative Value Fund 56,604,513 6,392,678 11,617,088 (5,224,410) V.A. Sovereign Investors Fund 63,970,454 8,074,640 3,704,883 4,369,757 V.A. Financial Industries Fund 73,777,334 10,566,411 2,695,772 7,870,639 V.A. Technology Fund 29,303,387 1,187,668 8,454,824 (7,267,156) V.A. Bond Fund 69,426,695 399,880 419,904 (20,024) V.A. Money Market Fund 143,342,085 -- -- -- V.A. Strategic Income Fund 60,832,493 571,358 3,273,530 (2,702,172) NOTE D -- CHANGE IN ACCOUNTING PRINCIPLE Effective January 1, 2001, the Funds adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, and began amortizing premiums on debt securities. Prior to this date, the Funds did not amortize premiums on debt securities. The cumulative effect of this accounting change had no impact on the total net assets of the Funds, but resulted in the following reduction in the cost of the investments and a corresponding increase/decrease in unrealized appreciation/depreciation on investments, based on securities held as of December 31,2000: REDUCTION IN THE COST FUND OF THE INVESTMENTS - ---- --------------------- V.A. Bond Fund $32,713 V.A. Strategic Income Fund 230,438 The effect of this change in the period ended June 30, 2001 was as follows: INCREASE/ DECREASE IN DECREASE REDUCTION IN NET REALIZED IN NET THE COST OF GAIN/LOSS INVESTMENT FUND INVESTMENTS ON INVESTMENTS INCOME - ---- ----------- -------------- ---------- V.A. Bond Fund $26,706 $28,562 $55,268 V.A. Strategic Income Fund 243,590 47,556 291,146 The effect of this change on the per share operating performance and the annualized ratio of net investment income to average net assets in the period ended June 30, 2001 was as follows: INCREASE/ DECREASE IN NET DECREASE DECREASE REALIZED AND IN NET IN NET UNREALIZED INVESTMENT INVESTMENT LOSS/GAIN INCOME TO INCOME ON INVESTMENTS AVERAGE FUND PER SHARE PER SHARE NET ASSETS - ---- --------- -------------- ---------- V.A. Bond Fund $0.02 $0.02 0.27% V.A. Strategic Income Fund 0.06 0.06 1.50 The Statements of Changes in Net Assets and the Financial Highlights for prior periods have not been restated to reflect this change in presentation. [A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner.] John Hancock Funds, Inc. MEMBER NASD 101 Huntington Avenue Boston, MA 02199-7603 1-800-225-5291 1-800-554-6713 TDD 1-800-338-8080 EASI-Line www.jhfunds.com This report is for the information of the shareholders of the John Hancock Declaration Trust. A recycled logo in lower left hand corner with caption "Printed on Recycled Paper." RVASA 6/01 8/01 SEMIANNUAL REPORT Declaration Trust Equity V.A. 500 Index Fund V.A. Large Cap Growth Fund V.A. Mid Cap Growth Fund V.A. Small Cap Growth Fund - ------------------------------------------------------ International V.A. International Fund - ------------------------------------------------------ Sector V.A. Regional Bank Fund - ------------------------------------------------------ Income V.A. High Yield Bond Fund JUNE 30, 2001 [A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower, center middle of page. A tag line below reads "JOHN HANCOCK FUNDS".] Table of Contents 1) CEO Corner 3 2) Portfolio Manager Commentary These commentaries reflect the views of the portfolio managers or portfolio management teams through the end of the period discussed in this report. Of course, the managers' or team's views are subject to change as market and other conditions warrant. Equity V.A. 500 Index Fund 4 V.A. Large Cap Growth Fund 7 V.A. Mid Cap Growth Fund 10 V.A. Small Cap Growth Fund 13 International V.A. International Fund 16 Sector V.A. Regional Bank Fund 19 Income V.A. High Yield Bond Fund 22 3) Financial Statements 25 4) Notes to Financial Statements 57 TRUSTEES Dennis S. Aronowitz* Richard P. Chapman, Jr. William J. Cosgrove* John M. DeCiccio Richard A. Farrell* Maureen R. Ford Gail D. Fosler William F. Glavin Dr. John A. Moore Patti McGill Peterson John W. Pratt* * Members of the Audit Committee OFFICERS Maureen R. Ford Chairman, President and Chief Executive Officer William L. Braman Executive Vice President and Chief Investment Officer Richard A. Brown Senior Vice President and Chief Financial Officer Susan S. Newton Senior Vice President and Secretary William H. King Vice President and Treasurer Thomas H. Connors Vice President and Compliance Officer CUSTODIANS Investors Bank & Trust Company 200 Clarendon Street Boston, Massachusetts 02116 V.A. High Yield Bond Fund V.A. Large Cap Growth Fund V.A. Mid Cap Growth Fund V.A. Regional Bank Fund V.A. Small Cap Growth Fund State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110 V.A. 500 Index Fund V.A. International Fund TRANSFER AGENT John Hancock Annuity Servicing Office 529 Main Street (X-4) Charlestown, Massachusetts 02129 INVESTMENT ADVISER John Hancock Advisers, Inc. 101 Huntington Avenue Boston, Massachusetts 02199-7603 SUB-INVESTMENT ADVISER Nicholas-Applegate Capital Management LP 600 West Broadway San Diego, California 92101 V.A. International Fund ISSUER John Hancock Life Insurance Company John Hancock Variable Life Insurance Company* 200 Clarendon Street Boston, Massachusetts 02117 *Not Licensed in New York PRINCIPAL DISTRIBUTOR John Hancock Funds, Inc. 101 Huntington Avenue Boston, Massachusetts 02199-7603 LEGAL COUNSEL Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109-1803 CEO CORNER [A 1" x 1" photo of Maureen R. Ford, Chairman and Chief Executive Officer, flush right next to first paragraph.] DEAR SHAREHOLDERS: The U.S. stock market has had a rough beginning in 2001, as last year's downward spiral continued due to growing concern over the slowing economy and a parade of disappointing earnings announcements. The Standard & Poor's 500 Index, a leading benchmark of large-cap stocks, fell by 6.69% in the first six months of the year. The Federal Reserve aggressively began to attack the economic slowdown with interest-rate cuts totaling 2.75 percentage points between January and the end of June. By April, investors began to believe the worst might be over, prompting a sharp stock rally that month. Bonds wound up outperforming stocks overall. Even with the spring upturn, the stock market remains indecisive, as investors try to get a clearer sense of the timetable for economic and corporate recovery. More than ever, this is a time to keep a long-term investment perspective and check in with your investment professional to ensure that your portfolio is adequately diversified. In the midst of this year's market disappointments, one significant event occurred that has positive short- and long-term implications for investors. On June 7, President George W. Bush signed into law the most sweeping tax-cut bill in two decades. The bill's first benefit comes this summer in the form of a tax refund, ranging from $300 to $600, to almost everyone who filed a 2000 tax return. Gradual cuts in taxes will follow the rebate checks. For investors, the bill also provides a number of extra incentives for retirement and college savings through changes to IRA and 401(k) plan contributions and enhancements to Education IRAs, among other things. The new tax law has a variety of provisions, many of which are phased in over a number of years. We encourage you to consult with your investment professional to determine how to take the best, and most timely, advantage of the benefits it contains. Sincerely, /S/ MAUREEN R. FORD MAUREEN R. FORD, CHAIRMAN AND CHIEF EXECUTIVE OFFICER BY JAMES D. SCHANTZ, CFA, PORTFOLIO MANAGER John Hancock V.A. 500 Index Fund S&P 500 Index loses ground as economy slows For the stocks that make up the Standard & Poor's 500 Index, the first six months of 2001 can be neatly divided between their poor showing during the first calendar quarter and their rebound in the second quarter. In the first three months of the year, a weakening economy and surprisingly poor corporate earnings reports caused the Index to drop by nearly 12%. But from April through the end of June, stocks rebounded as sentiment shifted, lifting the S&P 500 Index by nearly 6%, thereby cutting the Index's loss back to -6.69% for the first half of the year. "Interestingly, the technology sector provided the Index with some of its best performers, as well as its biggest losers." Despite the continual drumbeat of bad economic news, job cuts and earnings warnings, consumer and investor confidence rose, thanks to hopes that the Federal Reserve Board's aggressive rate-cutting campaign could prevent the economy from free falling into a recession. The Fed lowered rates six times during as many months, with three of the cuts coming in April, May and June. The rate cuts lowered corporate borrowing costs, pumped money into the U.S. economy and fanned hopes that corporate earnings and stocks prices would improve. Even the depressed manufacturing sector exhibited signs that the worst could be behind it. [Table at bottom left hand column entitled "Top Five Stock Holdings." The first listing is General Electric 4.3%, the second is Microsoft 3.5%, the third ExxonMobil 2.7%, the fourth Citigroup 2.3% and the fifth Pfizer 2.2%. A note below the table reads "As a percentage of net assets on June 30, 2001."] Fund performance and strategy explained John Hancock V.A. 500 Index Fund had a total return of -6.88% at net asset value for the six-month period ended June 30, 2001. By comparison, the average variable annuity S&P 500 Index objective fund had a total return of -6.86%, according to Lipper, Inc. Historical performance information can be found on page six. In managing the Fund, our goal is to have our holdings closely track those of the S&P 500 Index, while minimizing the costs associated with buying and selling shares of stocks. Although there are frequent changes in the composition of the Index, we re-balance the Fund's holdings less frequently to minimize transaction costs. When we get additional money into the Fund that cannot immediately be deployed into Index components, we buy S&P 500 futures, which allow us to participate in the Index's performance without incurring the higher transaction costs of buying stocks. [A 1 1/2" x 2" photo at bottom right side of page of John Hancock V.A. 500 Index Fund. Caption below reads "Jim Schantz."] Technology: leaders and laggards Interestingly, the technology sector provided the Index with some of its best performers, as well as its biggest losers. Microsoft, for example, surged more than 68% during the first six months of 2001. In contrast to some other technology suppliers, the company rode the wave of strong demand for corporate software and easily topped reduced expectations for profits and revenues. The company's shares also got a boost in late June when a U.S. appeals court tossed out a lower court's order to split the company. Other computer giants, such as industry titans IBM and Dell Computers, also flourished, posting gains of roughly 33% and 49%, respectively. Investors enthused about the combination of Internet and media companies AOL and Time Warner pushed its combined stock up about 52%. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended June 30, 2001." The chart is scaled in increments of 2% with -8% at the bottom and 0% at the top. The first bar represents the -6.88% total return for John Hancock V.A. 500 Index Fund. The second bar represents the -6.86% total return for Average variable annuity S&P 500 Index objective fund. A note below the chart reads "The total return for John Hancock V.A. 500 Index Fund is at net asset value with all distributions reinvested. The average variable annuity S&P 500 Index objective fund is tracked by Lipper, Inc. See the following page for historical performance information."] In contrast, some well-known technology stocks -- including some of last year's best performers -- proved to be the biggest detractors from the Index's performance. Cisco Systems, the leading provider of data networking products to businesses, slumped more than 52% and was the biggest detractor from the Index's performance on a capitalization-weighted basis. Data storage companies EMC and Nortel Networks also were hit hard, suffering losses of about 55% and 71% respectively. Topping the list of the Index's best performers was Bank of America, which exceeded earnings expectations thanks to improvement in its core custody business (the management of stock certificates and other securities held by clients), growth in asset management fees and rising trading revenues. AT&T gained 27% during the period, driven by its ability to meet scaled-back earnings expectations. Philip Morris returned roughly 17% thanks to improving results in many of its businesses, including tobacco and food. The nation's second-largest home-improvement retailer Lowe's was up more than 63% as the company continued to benefit from the strong housing market and falling interest rates. Health care, telecom hit hard As bad as some of the technology sector's losses were, the health-care sector's declines were worse. An absence of exciting new products either in the research pipeline or recently brought to market, coupled with investors' speedy rotation out of defensive names into higher growth stocks in the spring, took its toll on pharmaceutical companies Bristol-Myers Squibb and Pfizer. Communications equipment companies such as JDS Uniphase and Corning suffered losses of roughly 70% each as telecom providers drastically reduced their plans to build out their systems. "The stock market enters the second half of 2001 under a cloud of uncertainty." Outlook The stock market enters the second half of 2001 under a cloud of uncertainty. For the most part, corporate earnings remain weak and CEOs continue to complain about a lack of "visibility," meaning they have no clear idea of when earnings will improve. Although job cuts continue, consumer confidence has remained strong and has provided a cushion against the declining technology and manufacturing sectors. Whether or not this continues to be the case in the second half is anyone's guess. On the other hand, the six interest-rate cuts delivered in the first half, coupled with tax cuts, may put enough money into the economy to pull it out of its doldrums. But regardless of how the stock market performs, our goal will be to closely track the performance of the S&P 500 Index. The Fund's returns, as always, will be dictated by the performance of that Index. A LOOK AT PERFORMANCE For the period ended June 30, 2001 SINCE SIX ONE INCEPTION MONTHS YEAR (8/29/96) ------- ------- ------- Cumulative Total Returns (6.88%) (15.08%) 89.26% Average Annual Total Returns -- (15.08%) 14.10% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. 500 Index Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. 500 Index Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Standard & Poor's 500 Index and is equal to $20,142 as of June 30, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. 500 Index Fund on August 29, 1996 and is equal to $18,926 as of June 30, 2001. BY WILLIAM L. BRAMAN, ROBERT UEK AND PAUL J. BERLINGUET FOR THE PORTFOLIO MANAGEMENT TEAM John Hancock V.A. Large Cap Growth Fund Corporate profits and economy weaken, stock prices remain erratic Throughout the six months ended June 30, 2001, the stock market continued to provide investors with a steady diet of unease. The year began in the midst of a well-rounded bear market that had depressed stock prices, especially in the technology sector, and greatly diminished investor confidence. The Federal Reserve Board aggressively entered the scene, injecting liquidity into the financial markets with six successive cuts in short-term interest rates amounting to a total of 2.75 percentage points. By June's end, the federal funds rate stood at 3.75%, down from 6.50% in December 2000. [Table at bottom left hand column entitled "Top Five Stock Holdings." The first listing is General Electric 5.9%, the second is Tyco International 5.7%, the third Cisco Systems 4.5%, the fourth AOL Time Warner 4.3% and the fifth Wal-Mart Stores 4.2%. A note below the table reads "As a percentage of net assets on June 30, 2001."] In response to the Fed's initial actions, stock prices rebounded in April and May, lending credence to the widely held view that the worst of the rout may be over. Near period's end, the market's second quarter pre-announcement season was under way. A number of high-profile companies - -- particularly in, but not limited to, the technology sector -- predicted weaker-than-expected profits and some even admitted to dire financial straits. Stock prices came under pressure once again and the broad market, as measured by the Standard & Poor's 500 Index, lost ground in the period, returning -6.69% for the first six months of the year. "As the period progressed, our objective increasingly became broader diversification..." Fund performance For the six months ended June 30, 2001, John Hancock V.A. Large Cap Growth Fund produced a total return of -25.12% at net asset value. This compares with the -14.71% return posted by the average variable annuity large-cap growth fund, according to Lipper, Inc. Historical performance information can be found on page 9. Many technology positions reduced or eliminated The Fund's weighting in technology, which is greater than that of its peers, along with individual stock selection within the telecommunications equipment group during the first calendar quarter, were the primary causes of its relative underperformance. As the second quarter began, however, we shifted the Fund's technology exposure away from a number of telecommunications equipment, networking and fiber-optics-related stocks - -- the technology subsectors that were hit particularly hard by the deterioration in capital equipment spending. We sold such names as Nortel Networks, Ericsson, PMC Sierra, Broadcom, JDS Uniphase and Corning. We also pared or eliminated positions in hardware names such as Sun Microsystems, EMC, Compaq and IBM. By period's end, the Fund's technology weighting was trimmed to roughly 30% of net assets. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended June 30, 2001." The chart is scaled in increments of 6% with -30% at the bottom and 0% at the top. The first bar represents the -25.12% total return for John Hancock V.A. Large Cap Growth Fund. The second bar represents the -14.71% total return for Average variable annuity large-cap growth fund. A note below the chart reads "The total return for John Hancock V.A. Large Cap Growth Fund is at net asset value with all distributions reinvested. The average variable annuity large-cap growth fund is tracked by Lipper, Inc. See the following page for historical performance information."] Redefined tech focus helps in Q2 We redeployed our tech assets into software-related companies as well as semiconductor capital equipment stocks, either adding to existing portfolio holdings or initiating new positions in such names as Microsoft, Amdocs Ltd., Electronic Data Systems, Intel, Applied Materials and Novellus Systems. Many of the software companies we pursued exhibit greater predictability in their future earnings potential than many other technology names right now, while the semiconductor stocks appealed to us because we believe the ones we've chosen are poised to benefit when new order momentum resumes. The portfolio's reconfiguration within the technology arena proved timely, as the stock prices of many networking companies hit new lows after they were eliminated from the portfolio. In fact, the Fund's revised technology exposure helped the portfolio regain some previously lost ground and outperform its Lipper peer group in the second quarter. "...stock prices may continue to take two steps forward and one step back through calendar year end... Broader diversification the best strategy Throughout the period, the market has taken its cues from corporate profit announcements and leading economic indicators and we, in turn, have taken our cues from the market. It now appears the long-awaited turnaround in corporate profitability is not within easy reach as investors had hoped earlier this year. As the period progressed, our objective increasingly became broader diversification in tandem with a focus on companies that demonstrate a clear visibility in their earnings stream. We applied this approach not only to the technology sector but also to health-care, consumer-oriented companies, financial names and those issues with a cyclical bias. Over the period, we bolstered the Fund's stake in health-care stocks. We did so in favor of niche players, those health-care companies with higher growth potential than the traditional pharmaceutical companies, which are currently contending with leaner product pipelines. We also sold health-care equipment companies such as Waters, which is suffering from a manufacturing slump in health-care's research and development area. Newly purchased, or bolstered, positions include Allergan, a specialty eye-care pharmaceutical company; Amgen, an established biotech company; and Stryker, a medical device company benefiting from changing demographics and a new product cycle. We made a small foray into consumer-staple companies such as Anheuser-Busch and Philip Morris and initiated a position in Viacom, a media conglomerate with a broad spectrum of advertising delivery mediums. We purchased American Express and Goldman Sachs, two financial service companies with diversified business models, as well as home-improvement retailer Lowe's. Outlook Going forward, we anticipate a turn for the better in business conditions, based on the Fed's commitment to ease monetary policy to spur economic growth. The critical factor remains timing. Historically, business and investment conditions tend to improve six to 12 months after a concerted effort by the Fed to improve financial liquidity. We are still in the midst of a lengthy campaign, with the possibility of even further rate cuts ahead. Therefore, stock prices may continue to take two steps forward and one step back through calendar year end, as investors struggle to regain confidence in the viability of corporate America's long-term growth potential. A LOOK AT PERFORMANCE For the period ended June 30, 2001 SINCE SIX ONE INCEPTION MONTHS YEAR (8/29/96) ------- ------- ------- Cumulative Total Returns (25.12%) (46.31%) (16.98%) Average Annual Total Returns -- (46.31%) (3.78%) Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Large Cap Growth Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Russell Top 200 Growth Index -- an unmanaged index which measures the performance of the Russell Top 200 companies with higher price-to-book ratios and higher forecasted growth values. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Large Cap Growth Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Russell Top 200 Growth Index and is equal to $18,766 as of June 30, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Large Cap Growth Fund on August 29, 1996 and is equal to $8,302 as of June 30, 2001. BY PAUL J. BERLINGUET AND TIMOTHY N. MANNING FOR THE PORTFOLIO MANAGEMENT TEAM John Hancock V.A. Mid Cap Growth Fund Mid-cap growth stocks tumble as market continues to head south The stock market's progress in the first half of 2001 was a tale best told in two parts. During the first quarter, the market went through a brutal meltdown that rocked nearly all sectors. Leading the decline were technology and telecommunications stocks, which looked overly expensive relative to deteriorating business fundamentals. Safer-haven sectors like finance and energy moved into favor. Early in the second quarter, the market reversed course, thanks to lower interest rates and anecdotal reports that business was stabilizing at some companies. Amid the relief rally that marked the second quarter, however, volatility continued as many companies announced missed earnings. The Standard & Poor's 500 Index closed the six months ended June 30, 2001 with a -6.69% return. By comparison, the Russell Midcap Growth Index returned -12.96% due to its heavier concentrations in technology, telecom and biotechnology names. "We trimmed more volatile names in the telecom, biotech and software sectors..." Disappointing performance John Hancock V.A. Mid Cap Growth Fund had a sizable, but average, stake in technology -- about one-third of assets -- but was dogged by weak stock performance. Higher-than-average investments in telecom and biotech also eroded performance, leaving the Fund with a -23.39% return at net asset value for the first six months of the year. By comparison, the average variable annuity multi-cap growth fund returned -16.18%, according to Lipper, Inc. Historical performance information appears on page 12. [Table at bottom left hand column entitled "Top Five Stock Holdings." The first listing is Shire Pharmaceuticals 2.2%, the second is VeriSign 2.1%, the third USA Education 2.1%, the fourth Mercury Interactive 2.0% and the fifth Dobson Communications 2.0%. A note below the table reads "As a percentage of net assets on June 30, 2001."] Disappointments in telecom and biotech Among the biggest drags on performance were our stakes in competitive local exchange carriers like McLeodUSA and XO Communications, both of which fell sharply amid the downturn in telecom spending. As the outlook for the sector remained uncertain, we decided to cut our losses and sell. Several stocks in the volatile biotech area also cost the Fund dearly, including Waters and Applera Corp. - Applied Biosystems Group, both of which supply analytical equipment to biotech companies, which cut back on spending in 2001. Millennium Pharmaceuticals, a company that provides genetic information to pharmaceutical companies, and Immunex, a biopharmaceutical company that develops drugs to treat autoimmune disorders, also posted steep declines. In the technology area, our investments in Brocade Communications Systems, which make switches for storage systems, and Aeroflex, which makes optical test equipment used in the build-out of fiber-optic networks, tumbled as spending slowed. Gains in retail and finance Tempering these losses were our retail investments, including Abercrombie & Fitch, Bed Bath & Beyond, Coach and Staples, which we had built up early in the year. All rallied nicely as consumers kept spending and investors anticipated an economic recovery, and we took profits. Our finance investments also did quite well. Transaction processors like Concord EFS and Fiserv benefited from their predictable revenue streams, while USA Education (formerly Sallie Mae), a student loan company, attracted interest following a recent acquisition. Other top gainers included Scientific-Atlanta, a leading producer of digital set top boxes for cable television, KLA-Tencor, which provides inspection systems for semiconductor capital equipment, and King Pharmaceuticals, a specialty pharmaceutical company with a new cardiovascular drug that has quickly gained market share. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended June 30, 2001." The chart is scaled in increments of 5% with -25% at the bottom and 0% at the top. The first bar represents the -23.39% total return for John Hancock V.A. Mid Cap Growth Fund. The second bar represents the -16.18% total return for Average variable annuity multi-cap fund. A note below the chart reads "The total return for John Hancock V.A. Mid Cap Growth Fund is at net asset value with all distributions reinvested. The average variable annuity multi-cap fund is tracked by Lipper, Inc. See the following page for historical performance information."] Focus on predictability In the spring, we stepped up the Fund's emphasis on companies with predictable earnings growth and the potential for dominant market share. These businesses have proven they can do well even in a sluggish economy. We trimmed more volatile names in the telecom, biotech and software sectors, buying instead stocks like Amdocs, which provides telecom carriers with outsourcing solutions for customer service and billing. This is a company with no competition and more than 75% of its revenues for next year guaranteed by long-term contracts. We also increased our stake in VeriSign, a software company that is a leader in Internet domain registration, and Dobson Communications, a wireless company that has longer-term contracts with major carriers and little direct competition in the rural markets it serves. Buying opportunities Much of our buying was in the medical area (about 22% of net assets), where we focused on companies with predictable earnings, including health-care service companies like WellPoint Health Networks and specialty pharmaceuticals like Shire Pharmaceuticals. We also increased our investment in media stocks, which we expect to benefit as the economy recovers and ad spending increases. Among our additions were USA Networks, a company with great management and media assets, and Charter Communications, a cable company that is adding subscribers at the same time that its build-out expenditures are coming to an end. In the technology sector, we increased our investment in Mercury Interactive, a software testing company that has strong growth prospects. "By the fourth quarter, the market should benefit from easier year-over-year earnings comparisons as well as improved corporate revenues." A look ahead The Federal Reserve cut interest rates six times between January and June. Typically, interest-rate moves take six to 12 months before they work their way through the economy. This means we could be looking at a recovery by late in the year. Fortunately, inflation and unemployment have both remained pretty low and tax refunds should give a boost to consumer confidence and spending. Given an improved economic outlook, we expect stock prices to climb in the second half of the year. The third quarter, however, could be rocky as investors digest recent earnings disappointments. By the fourth quarter, the market should benefit from easier year-over-year earnings comparisons as well as improved corporate revenues. We are especially optimistic about the outlook for mid-cap stocks, which have historically beaten larger-cap stocks on the way out of a downturn, and remain at reasonable valuations. A LOOK AT PERFORMANCE For the period ended June 30, 2001 SINCE SIX ONE INCEPTION MONTHS YEAR (1/7/98) ------- ------- ------- Cumulative Total Returns (23.39%) (36.99%) 16.54% Average Annual Total Returns -- (36.99%) 4.50% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Mid Cap Growth Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in both the Standard & Poor's 500 Index and the Russell Midcap Growth Index. The Standard & Poor's 500 Index is an unmanaged index that includes 500 widely traded common stocks and is a commonly used measure of stock market performance. The Russell Midcap Growth Index is an unmanaged index that contains those securities from the Russell Midcap Index with a greater-than-average growth orientation. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Mid Cap Growth Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are three lines. The first line represents the Russell Midcap Growth Index and is equal to $13,697 as of June 30, 2001. The second line represents the Standard & Poor's 500 Index and is equal to $13,201 as of June 30, 2001. The third line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Mid Cap Growth Fund on January 7, 1998 and is equal to $11,654 as of June 30, 2001. BY BERNICE S. BEHAR, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND ANURAG PANDIT, CFA, PORTFOLIO MANAGER John Hancock V.A. Small Cap Growth Fund Slowing economy, deteriorating corporate profits hold stocks back The stock market remained in turmoil during the first six months of 2001, as the economy continued to slow and investors reacted to a steady stream of bad corporate earnings news. Fast-growing, high-priced growth stocks -- which started struggling a year ago -- kept sagging, particularly in the technology and telecommunications sectors. With the exception of a three-week surge in January sparked by a surprise interest-rate cut by the Federal Reserve, the first quarter of 2001 was especially difficult for stocks, despite the Fed's aggressive action to prevent a recession. But by April, the Fed had cut rates enough that investors began to hope the worst was over for the economy, and stocks rallied, including technology. The sector remained volatile and under pressure through the end of June, however, as business conditions showed no signs of improving. Small-cap stocks outperformed large caps, but growth stocks continued to trail value stocks by a substantial margin, producing a large variance in performance between the two major indexes that track small-cap stock performance. In the first six months of 2001, the Russell 2000 Value Index gained 12.84%, while the Russell 2000 Growth Index was essentially flat, returning 0.14%. [Table at bottom left hand column entitled "Top Five Stock Holdings." The first listing is Microsemi 1.4%, the second is Corporate Executive Board 1.4%, the third Columbia Sportswear 1.3%, the fourth Accredo Health 1.3% and the fifth Education Management 1.3%. A note below the table reads "As a percentage of net assets on June 30, 2001."] Fund performance For the six months ended June 30, 2001, John Hancock V.A. Small Cap Growth Fund posted a total return of -8.06% at net asset value. That compared with the -4.06% return of the average variable annuity small-cap growth fund, according to Lipper, Inc. Historical performance information can be found on page 15. "Companies having any connection to the telecommunications industry suffered in particular..." [A 1 1/2" x 2" photo at bottom right side of page of John Hancock V.A. Small Cap Growth Fund. Caption below reads "Bernice Behar."] Our relative underperformance stemmed from our emphasis on defensive sectors of the market -- including pharmaceutical stocks and health-care services companies like LifePoint Hospitals. This held us back in the first three weeks of the year, when the Fed's surprise rate cut boosted more aggressive, low-quality tech stocks that we chose not to own. Our defensive stance also caused us to miss much of the gains in the biotechnology sector during the period. We took profits and cut our biotech stake significantly in January, given the sector's strong move in 2000 based on what we believe to be unrealistic expectations. We also had concerns about bottlenecks in the FDA approval process. However, even though the group was volatile during the period, the stocks produced good results and our underweighting worked against us. One of our best performers, however, was Covance, a contract research company that provides product development services to both the biotech and pharmaceutical industries. On the other hand we were disappointed by CV Therapeutics, which served us very well last year, but saw its stock drop precipitously this year after it announced disappointing results from a clinical trial for one of its drugs. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended June 30, 2001." The chart is scaled in increments of 2% with -10% at the bottom and 0% at the top. The first bar represents the -8.06% total return for John Hancock V.A. Small Cap Growth Fund. The second bar represents the -4.06% total return for Average variable annuity small-cap growth fund. A note below the chart reads "The total return for John Hancock V.A. Small Cap Growth Fund is at net asset value with all distributions reinvested. The average variable annuity small-cap growth fund is tracked by Lipper, Inc. See the following page for historical performance information."] "The real question mark is when corporate earnings will make a comeback." Telecom and IT consultants hit hard Companies having any connection to the telecommunications industry suffered in particular during this period, as demand for all types of products and services ground to a halt and companies ran into trouble getting additional financing to finish building out their networks. This impacted anyone along the supply chain, including Fund holding M-Systems Flash Disk Pioneers, a telecom-focused semiconductor company. Our stake in information technology (IT) consulting companies also hurt us as demand for IT services slowed dramatically, even for companies with strong franchises and niche markets like Forrester Research and Management Network Group. While the technology and telecommunications sectors produced negative results as a whole, our stock selection helped us fare better than the tech portion of the Russell 2000 Growth Index, and we did have some outstanding performers. Our biggest contributor to performance was also our top holding, Microsemi, a semiconductor company offering a broad range of products to a wide customer base, which has protected it in this difficult economic environment. Individual standouts We had some standout performances from a range of small companies that fit our investment criteria of producing accelerating and sustainable earnings growth, and having dominant market positions and strong managements. These included Tweeter Home Entertainment, a company we've owned for a while whose strong franchise in consumer electronics is beginning to be recognized, and Columbia Sportswear, a niche apparel company with great brand recognition and tremendous relationships with some of the fast-growing retailers. Our radio stocks also rebounded off their lows. Earnings stability counts In a tough environment for growth stocks, we continued to position ourselves in areas where we believe there is a relative amount of earnings stability. This caused us to maintain a lighter stake in tech and telecom and an increased exposure to health care and energy, a sector that has produced the highest earnings results so far this year. Unfortunately, the market has not rewarded energy stocks on balance in this period, assuming that the level of earnings growth was unsustainable in the midst of the economic slowdown and building inventories. While we believe the long-term outlook is positive, the more near-term economic and inventory issues have caused us to begin paring our energy stake. Outlook After six rate cuts totalling 2.75%, it appears the Fed is getting close to the end of its rate-cutting cycle, and the economy should soon begin to feel its effects. The real question mark is when corporate earnings will make a comeback. While we believe in the strong long-term potential of tech and telecom, we believe it's going to take more time for these sectors to turn around, as excess capacity needs to be absorbed. As a result, we believe more reliable earnings growth lies, for now, in other sectors. A LOOK AT PERFORMANCE For the period ended June 30, 2001 SINCE SIX ONE INCEPTION MONTHS YEAR (8/29/96) ------- ------- ------- Cumulative Total Returns (8.06%) (30.62%) 44.70% Average Annual Total Returns -- (30.62%) 7.94% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Small Cap Growth Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Russell 2000 Index and the Russell 2000 Growth Index. The Russell 2000 Index is an unmanaged small-cap index that is comprised of 2,000 U.S. stocks. The Russell 2000 Growth Index is an unmanaged index that contains Russell 2000 Index stocks with a greater-than-average growth orientation. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Small Cap Growth Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are three lines. The first line represents the Russell 2000 Index and is equal to $16,393 as of June 30, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Small Cap Growth Fund on August 29, 1996 and is equal to $14,470 as of June 30, 2001. The third line represents the Russell 2000 Growth Index and is equal to $13,401 as of June 30, 2001. BY LORETTA MORRIS AND RANDY KAHN FOR THE PORTFOLIO MANAGEMENT TEAM John Hancock V.A. International Fund Overseas markets struggle in first half of 2001 Despite a transition to an easing bias by central banks worldwide, the difficulties experienced by international equities in 2000 persisted in the first half of 2001. As represented by the MSCI All-World Country Free ex-U.S. Index, non-U.S. stocks shed 13.56% of their value during the six-month period ended June 30. "Currently, we are identifying compelling opportunities in the energy, health care, and consumer services sectors." The contagion that began to spread early last year during the sell-off of technology, media and telecommunications (TMT) stocks continued to linger into 2001. Contributing to this weakness was a tightening bias by central banks worldwide in 2000. All told, there were nearly 130 interest-rate hikes in 2000 and the cumulative effect of tighter monetary policy ultimately precipitated a sharp slowdown in global growth. This deceleration in growth prompted a shift toward an easing bias, and through June 30 there had been more than 70 interest-rate reductions by central bankers globally. However, the European Central Bank reduced rates only once as it continued to adhere to its stated mission of battling inflation rather than stimulating growth. As a result, the euro fell to near-record lows against the dollar at the year's halfway mark. [Pie chart at bottom left hand column with heading "Portfolio Diversification." The chart is divided into seven sections (from top to left): Short-term Investments & Other 7%, Latin America 1%, Pacific Rim ex-Japan 7%, Japan 18%, U.K. & Ireland 22%, Continental Europe 39% and Canada 6%. A note below the chart reads "As a percentage of net assets on June 30, 2001."] In eurozone countries, which observers thought would be relatively immune to the stagnation that took hold of the United States in late 2000, economic indicators deteriorated rapidly in the second quarter of this year. In particular, Germany -- the region's largest economy -- suffered higher-than-expected rates of unemployment and inflation, and an erosion of consumer confidence as a result. Japan has also fared poorly in 2001. Early in the year, political uncertainty over the fate of former Prime Minister Yoshiro Mori, the lingering overhang of bad debts, and a reluctance of the country's consumers to spend in a deflationary environment combined to pressure the Japanese stock market. Although the country's main stock index, the Nikkei, rallied briefly in April after the election of popular new Prime Minister Junichiro Koizumi, the market slumped again in May and June as the magnitude of Japan's problems weighed on investor sentiment. Fund performance For the six months ended June 30, 2001, John Hancock V.A. International Fund posted a total return of -19.26% at net asset value. In comparison, the average variable annuity international fund returned -14.34% during the same period. See page 18 for historical performance information. The Fund's relative underperformance stemmed in large part from holdings in the volatile TMT arena, electric utilities and money-center banks. Specifically, Alcatel of France, Colt Telecom of Britain, and British Telecom were among the portfolio's weakest performers in the first half of 2001, as corporate expenditures on telecommunications equipment and services plummeted. On a country basis, stock selection in Japan and the United Kingdom negatively influenced returns during the period. On the positive side, stock selection in Irish and Danish equities helped limit Fund declines, as did holdings in biotechnology, apparel and automotive equipment companies. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended June 30, 2001." The chart is scaled in increments of 4% with -20% at the bottom and 0% at the top. The first bar represents the -19.26% total return for John Hancock V.A. International Fund. The second bar represents the -14.34% total return for Average variable annuity international fund. A note below the chart reads "The total return for John Hancock V.A. International Fund is at net asset value with all distributions reinvested. The average international fund is tracked by Lipper, Inc. See the following page for historical performance information."] Stakes boosted in Japan, U.K. and France During the period, we shifted assets out of Japan early in the year, reducing exposure from 21% of the Fund's holdings at the end of 2000 to 10% as of January 31, 2001. As the situation there seemed to improve with the election of Prime Minister Koizumi, we increased holdings to reach 18% as of June 30. As a result of our bottom-up stock selection process centered on positive, sustainable change, we also identified opportunities in the United Kingdom and France. The percentage of U.K. equities rose from 10% to 19% during the period, while French stocks increased from 6% to 10%. On a sector-by-sector basis, we increased the Fund's energy holdings, as tight supplies and growing demand pushed fuel prices higher. Meanwhile, we significantly reduced exposure to the beleaguered technology sector. As of June 30, 2001, the Fund was overweighted in energy and consumer durable stocks relative to its benchmark MSCI index and underweighted in the financial services and technology sectors. The Fund's country weightings were largely in line with the benchmark. Looking ahead Despite a difficult environment for equity investors spanning more than a year now, we believe that international markets continue to offer compelling investment opportunities. Falling interest rates should begin to fuel a recovery in worldwide equity markets. The case for international investing also remains compelling amid the positive themes of structural changes such as tax and pension reform and deregulation, especially in Europe. The trend toward a rising equity culture in Europe and Japan also bodes well for international equity markets. Finally, non-U.S. equities' share of world market capitalization has increased over the last three decades, rising from 30% in the 1970s to more than 50% today. We believe international markets remain home to many companies with sound fundamentals. "Falling interest rates should begin to fuel a recovery in worldwide equity markets." No matter how difficult the market environment may become, we will never waver from the proven philosophy and process that has served our clients so well over time. We remain committed to our discipline of finding the companies exhibiting the fastest growth in earnings, and we continue to find stocks with sustainable positive change at attractive valuations. Currently, we are identifying compelling opportunities in the energy, health-care and consumer services sectors. The TMT group's fundamentals continue to deteriorate and we expect them to worsen in the short term. However, our dynamic process is designed to turn change into capital appreciation, so we will continue to search for candidates in this fast-moving sector. - ----------------------------------------------------------------------------- International investing involves special risks such as political, economic and currency risks and differences in accounting standards and financial reporting. A LOOK AT PERFORMANCE For the period ended June 30, 2001 SINCE SIX ONE INCEPTION MONTHS YEAR (8/29/96) ------- ------- ------- Cumulative Total Returns (19.26%) (31.56%) 4.08% Average Annual Total Returns -- (31.56%) 0.83% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. International Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Morgan Stanley Capital International (MSCI) All Country World Free Ex-U.S. Index, which measures the performance of a broad range of developed and emerging stock markets. The index represents securities that are freely traded on a variety of equity exchanges around the world. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. International Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the MSCI All Country World Free Ex-U.S. Index and is equal to $11,688 as of June 30, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. International Fund on August 29, 1996 and is equal to $10,408 as of June 30, 2001. BY JAMES K. SCHMIDT, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND THOMAS M. FINUCANE AND THOMAS C. GOGGINS, PORTFOLIO MANAGERS John Hancock V.A. Regional Bank Fund Smaller banks outperform other financial stocks in a difficult six months for the stock market The first six months of 2001 were marked by a dramatically slowing economy, a relentless stream of disappointing corporate profit announcements and a distressed stock market that produced negative results. In response to the sagging economy, the Federal Reserve Board cut short-term interest rates six times for a total of 2.75 percentage points in a bid to avoid a recession. Banks and thrifts with the most sensitivity to falling rates were lifted by the Fed's easing stance, as were the smaller banks that struggled last year. While financial stocks as a group held up better than the broad stock market, those connected to the increasingly dicey stock market, like asset managers and brokerage houses, were hit hard, as were financial companies whose valuations ran up the most by the end of last year. For the six months ended June 30, 2001, the Standard & Poor's Major Regional Bank Index returned -2.59%, while the broad market, as measured by the Standard & Poor's 500 Index, returned - -6.69%. [Table at bottom left hand column entitled "Top Five Stock Holdings." The first listing is Valley National Bancorp 4.0%, the second is Mid-State Bancshares 3.9%, the third Fifth Third Bancorp 3.6%, the fourth Umpqua Holdings 3.6% and the fifth Pacific Capital Bancorp 3.5%. A note below the table reads "As a percentage of net assets on June 30, 2001."] "...financial stocks as a group held up better than the broad stock market..." Fund performance John Hancock V. A. Regional Bank Fund produced a very solid result during the period due to our focus on the outperforming mid-sized regional and smaller banks. For the six months ended June 30, 2001, the Fund posted a total return of 8.10% at net asset value. That compared with the 0.54% return of the average open-end financial services fund and the -14.72% return of the average variable annuity specialty/miscellaneous fund, according to Lipper, Inc. See page 21 for historical performance information. [A 1 1/2" x 2" photo at bottom right side of page of John Hancock V.A. Regional Bank Fund. Caption below reads "Jim Schmidt."] Small and interest-sensitive banks dominate Not surprisingly, the Fund's holdings in banks and thrifts with the greatest sensitivity to falling rates were some of our best performers, including Community First Bankshares, Charter One Financial, SouthTrust and First Financial Holdings. Conversely, the banks with the highest price-to-earnings ratios, which had risen the most last year, like Mellon Financial and Wells Fargo, lost ground. Small capitalization banks whose stock prices had grown very cheap after last year's lag also boosted our performance, including Financial Institutions, Umpqua Holdings, Cascade Bancorp and Independent Bank Corp. Their stocks were also lifted by several other factors, including their potential inclusion in the Russell 2000 Index, the banks' relative underexposure to areas of heightened loan concern (i.e., telecommunications loans) and their improved margin outlooks in the falling-rate environment. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended June 30, 2001." The chart is scaled in increments of 5% with -15% at the bottom and 10% at the top. The first bar represents the 8.10% total return for John Hancock V.A. Regional Bank Fund. The second bar represents the 0.54% total return for Average open-end financial services fund. The third bar represents the -14.72% total return for Average variable annuity specialty/miscellaneous fund. A note below the chart reads "The total return for John Hancock V.A. Regional Bank Fund is at net asset value with all distributions reinvested. The average open-end financial services fund and variable annuity specialty/miscellaneous fund are tracked by Lipper, Inc. See the following page for historical performance information."] "Falling rates and an economy that is growing moderately are usually two good ingredients for bank-stock performance." Banks poised for above-market growth With the economy in a slower mode and interest rates continuing to decline, bank loan growth should be at a slower 5% pace. At the same time, bank margins have stabilized, expenses are under control and banks continue to buy back stock. Even though the level of non-performing assets rose in the period, it is still very low -- at less than one percent of total assets -- and we do not believe it will rise much above one percent. With this backdrop, banks should be able to generate single-digit earnings-per-share growth, which, while modest compared to prior years, still tops the negative profit outlook for the broad market. Slow pace for bank mergers Although merger activity was generally slow during the period, we did have three of our banks involved in takeover offers. The headline transaction was First Union's bid to acquire Wachovia, later complicated by the arrival of Sun Trust as a hostile suitor. We believe many years of consolidation are still ahead in the banking industry, as the extraordinary number of institutions gets whittled down to a more efficient level. Although many valuable bank franchises are trading at very reasonable prices, the pool of banks able to undertake a sizable acquisition has shrunk due to low valuation and uncertain benefits from past deals. Only a handful of the nation's top banks have unblemished records that leave them in a good position to pursue further transactions. It will take time and a greater number of merger success stories before other powerful banks resume acquisition programs. Outlook Although the Fed's aggressive move to stabilize the economy appears to be winding down, its efforts should begin to have a positive effect later this year, and we expect the U.S. economy to avoid a recession and produce modest growth for the rest of 2001. Falling rates and an economy that is growing moderately are usually two good ingredients for bank-stock performance. In this environment, we will keep adding to our stake in higher-quality banks and reducing positions in banks in which we are less certain about their loan portfolios. - ----------------------------------------------------------------------------- Sector investing is subject to greater risks than the market as a whole. A LOOK AT PERFORMANCE For the period ended June 30, 2001 SINCE SIX ONE INCEPTION MONTHS YEAR (5/1/98) ------- ------- ------- Cumulative Total Returns 8.10% 40.65% 13.46% Average Annual Total Returns -- 40.65% 4.07% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Regional Bank Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Regional Bank Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Standard & Poor's 500 Index and is equal to $11,469 as of June 30, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Regional Bank Fund on May 1, 1998 and is equal to $11,282 as of June 30, 2001. BY ARTHUR N. CALAVRITINOS, CFA, PORTFOLIO MANAGEMENT TEAM LEADER; AND JANET L. CLAY, CFA, AND FREDERICK L. CAVANAUGH, JR., PORTFOLIO MANAGERS John Hancock V.A. High Yield Bond Fund High-yield bonds outperform stocks in a difficult environment During the first six months of 2001, high-yield bonds rebounded off last year's lows and outperformed stocks, as market conditions remained choppy. A dramatically slowing economy prompted a slew of earnings disappointments and sent the stock market into a tailspin. Investors fled the once-favored technology and telecommunications sectors and sought safety in more defensive areas like energy, health care and high-quality bonds. These bonds were also boosted by six interest-rate cuts by the Federal Reserve since January that brought short-term rates down from 6.50% at the end of 2000 to 3.75% by the end of June. "Our increased weighting in energy companies served us well as the price of oil and gas spiked..." [Pie chart at bottom left hand column with heading "Portfolio Diversification." The chart is divided into six sections (from top to left): Short-Term Investments & Other 5%, Foreign Government Bonds 1%, Preferred Stock & Warrants 9%, Common Stock 8%, Foreign Corporate Bonds 20% and U.S. Corporate Bonds 57%. A note below the chart reads "As a percentage of net assets on June 30, 2001."] With the rate cuts, investors began seeking higher levels of income in the high-yield, or junk, bond market as the year progressed. But this sector of the bond market still had a rougher road than government and high-quality corporate bonds. Not only do high-yield bonds carry a greater degree of risk because of their below-investment-grade credit ratings, but they also tend to move more in line with the stock market because their fortunes are so closely tied to their underlying credits. With the deteriorating economic conditions, the number of companies defaulting on their debt payments grew and investors turned to higher-quality issues. Except for a brief period in January after the Fed's first rate cut, many start-up telecommunications companies -- which make up the largest component of the high-yield market -- were particularly hard hit, as they increasingly were unable to get funding for the next phases of their business plans. On a technical level, a lack of liquidity, or ease of trading, also continued to stymie the high-yield universe. Despite these challenges, high-yield bonds still outperformed the stock market, returning 3.93% for the six months ended June 30, 2001, as measured by the Lehman Brothers High Yield Index, while the Standard & Poor's 500 Index lost 6.69%. But there was great disparity between better-quality high-yield bonds, rated Ba, which returned 8.27%, and lower-quality junk bonds with higher yields, such as bonds rated B, which returned 1.30%, as measured by Lehman Brothers. [A 1 1/2" x 2" photo at bottom right side of page of John Hancock V.A. High Yield Bond Fund. Caption below reads "Arthur Calavritinos."] Fund performance For the six months ended June 30, 2001, John Hancock V.A. High Yield Bond Fund posted a total return of 2.46% at net asset value, compared with the 1.10% return of the average variable annuity high current yield fund, according to Lipper, Inc. Historical performance information can be found on page 24. [Bar chart at the top of left hand column with heading "Fund Performance." Under the heading is a note that reads "For the six months ended June 30, 2001." The chart is scaled in increments of 1% with 0% at the bottom and 3% at the top. The first bar represents the 2.46% total return for John Hancock V.A. High Yield Bond Fund. The second bar represents the 1.10% total return for Average variable annuity high current yield fund. A note below the chart reads "The total return for John Hancock V.A. High Yield Bond Fund is at net asset value with all distributions reinvested. The average variable annuity high current yield fund is tracked by Lipper, Inc. See the following page for historical performance information."] While we outperformed our peers, our absolute performance was held back by our significant stake in Asia Pulp & Paper (APP), which recently filed for bankruptcy protection and is in the process of restructuring its debt. APP's main mistake was focusing too much on expanding capacity and not enough on paying down debt. But it remains a very low-cost paper producer with world-class assets, and we intend to hold on until a plan is worked out. In contrast, our top holding, Timberwest, a Canadian timber company with good assets and an attractive yield, served us well. Telecommunications cut Our stake in telecommunications company Nextel Communications -- one of our top holdings -- also detracted from performance in the period when, after holding in longer than most, it finally was taken down by the market after lowering its cash-flow estimates. But we still like the company, which, unlike many telecom start-ups, actually has a business that makes money, with a franchise and national brand name recognition for its cell-phone/paging technology. We are more wary about other telecom names, and throughout the year we continued to cut our stake to a significantly underweighted position, down from 14% in December. We continue to believe that the sector still faces challenges until demand catches up to the current oversupply of telecom goods and services. Energy, media emerging markets boosted Our increased weighting in energy companies served us well as the price of oil and gas spiked and exploration and development expanded. We had several companies get taken over, including Gothic Production, a natural gas exploration and production company bought out by Chesapeake. Well-servicing company Key Energy, natural gas producer Grey Wolf, and CHC Helicopter, which provides transportation to offshore oil rigs, were all solid performers. A number of energy companies have been so successful that they have called back their higher-yielding bonds that we owned and reissued lower-yielding bonds. To the extent that our energy bonds get called, we are reducing our stake in the sector in search of higher-yielding bonds. "We will keep underweighted in telecom..." We upped our media exposure by buying the stock and bonds of direct satellite TV company Pegasus Communications, which we believe is undervalued compared with its competitors. We also increased our stake in emerging-market bonds, particularly in Latin America, as this region has bounced back better than others. Outlook We expect pressures to remain on the telecommunications sector, with the potential for more failures ahead. As long as the economy remains weak, we anticipate further action by the Fed, which should help spark an economic rebound, but not until some time next year. We will keep underweighted in telecom, selectively focused on companies we believe have the best chances of survival, and apply our value style toward maintaining a portfolio that provides shareholders with a high level of current income and the potential for price gains. See the prospectus for the risks of investing in high-yield bonds. International investing involves special risks such as political, economic and currency risks and differences in accounting standards and financial reporting. A LOOK AT PERFORMANCE For the period ended June 30, 2001 SINCE SIX ONE INCEPTION MONTHS YEAR (1/6/98) ------- ------- ------- Cumulative Total Returns 2.46% (3.35%) (1.81%) Average Annual Total Returns -- (3.35%) (0.52%) YIELD For the period ended June 30, 2001 SEC 30-DAY YIELD ------- John Hancock V.A. High Yield Bond Fund 12.43% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. Note to Performance The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. These reductions can be terminated in the future. WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. High Yield Bond Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Lehman Brothers High Yield Bond Index -- an unmanaged index of fixed-income securities that are similar, but not identical, to the bonds in the Fund's portfolio. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. High Yield Bond Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Lehman Brothers High Yield Bond Index and is equal to $10,205 as of June 30, 2001. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. High Yield Bond Fund on January 6, 1998 and is equal to $9,819 as of June 30, 2001. FINANCIAL STATEMENTS John Hancock Funds - Declaration Trust Statements of Assets and Liabilities June 30, 2001 (Unaudited) - -------------------------------------------------------------------------------------------------------------------------------- V.A. V.A. V.A. V.A. V.A. V.A. V.A. 500 INDEX LARGE CAP MID CAP SMALL CAP INTERNATIONAL REGIONAL BANK HIGH YIELD FUND GROWTH FUND GROWTH FUND GROWTH FUND FUND FUND BOND FUND ----------- ----------- ----------- ----------- ------------- ------------- ----------- Assets: Investments at value (cost - $12,948,504, $6,081,968, $6,065,678, $11,380,649, $6,273,184, $8,818,705 and $8,523,041, respectively) $17,836,392 $6,328,151 $5,930,239 $13,193,181 $5,944,661 $11,104,314 $5,947,408 Joint repurchase agreements (cost - $911,000, none, $503,000, $111,000, $262,000, $743,000 and $85,000, respectively) 911,000 -- 503,000 111,000 262,000 743,000 85,000 ----------- ----------- ----------- ----------- ------------- ------------- ----------- 18,747,392 6,328,151 6,433,239 13,304,181 6,206,661 11,847,314 6,032,408 Cash 714 -- 436 476 -- 947 934 Foreign currency at value (cost - none, none, none, none, $1,750, none and none, respectively) -- -- -- -- 1,747 -- -- Cash segregated for futures contracts 34,500 -- -- -- -- -- -- Receivable for investments sold 24,953 29,445 51,675 156,578 24,356 34,311 30,528 Receivable for shares sold -- -- 1,045 28,103 -- -- -- Dividends and interest receivable 13,314 2,251 1,333 625 12,090 26,509 221,690 Receivable for futures variation margin 2,350 -- -- -- -- -- -- Receivable for forward foreign currency exchange contracts sold -- -- -- -- 3,314 -- 15,994 Deferred organization expense 360 360 -- 360 360 -- -- Receivable from affiliates 29,130 -- -- -- -- -- -- Other assets 700 279 49 1,039 186 296 129 ----------- ----------- ----------- ----------- ------------- ------------- ----------- Total assets 18,853,413 6,360,486 6,487,777 13,491,362 6,248,714 11,909,377 6,301,683 - --------------------------------------------------------------------------------------------------------------------------------- Liabilities: Due to custodian -- 68,079 -- -- 207 -- -- Payable for investments purchased 389,390 -- 158,629 140,681 167,849 -- -- Payable for shares repurchased -- 185 94 7,664 -- 374 147 Dividends payable -- -- -- -- -- -- 3,869 Payable for securities on loan -- -- -- -- 1,040,206 -- -- Payable for forward foreign currency exchange contracts purchased -- -- -- -- 33 -- 589 Payable to affiliates -- 1,571 2,089 8,369 3,889 7,862 2,592 Accounts payable and accrued expenses 44,530 10,815 11,791 21,633 37,954 12,898 10,126 ----------- ----------- ----------- ----------- ------------- ------------- ----------- Total liabilities 433,920 80,650 172,603 178,347 1,250,138 21,134 17,323 - --------------------------------------------------------------------------------------------------------------------------------- Net Assets: Capital paid-in 12,497,928 11,191,616 8,932,394 15,584,510 6,711,524 11,970,766 9,547,853 Accumulated net realized gain (loss) on investments and foreign currency transactions 1,051,931 (5,135,699) (2,451,411) (4,033,684) (1,334,074) (2,368,502) (649,560) Net unrealized appreciation (depreciation) of investments, futures and translation of assets and liabilities in foreign currencies 4,869,674 246,183 (135,439) 1,812,532 (326,048) 2,285,609 (2,561,856) Undistributed (distributions in excess of) net investment income (accumulated net investment loss) (40) (22,264) (30,370) (50,343) (52,826) 370 (52,077) ----------- ----------- ----------- ----------- ------------- ------------- ----------- Net assets $18,419,493 $6,279,836 $6,315,174 $13,313,015 $4,998,576 $11,888,243 $6,284,360 ================================================================================================================================= Net Asset Value Per Share: (Based on 1,227,183, 816,304, 546,313, 1,005,607, 562,479, 1,120,720, and 974,905 shares, respectively, of beneficial interest outstanding - unlimited number of shares authorized with no par value) $15.01 $7.69 $11.56 $13.24 $8.89 $10.61 $6.45 ================================================================================================================================= The Statement of Assets and Liabilities is each Fund's balance sheet and shows the value of what the Fund owns, is due and owes on June 30, 2001. You'll also find the net asset value per share as of that date. See notes to financial statements. Statements of Operations Six months ended June 30, 2001 (Unaudited) - -------------------------------------------------------------------------------------------------------------------------------- V.A. V.A. V.A. V.A. V.A. V.A. V.A. 500 INDEX LARGE CAP MID CAP SMALL CAP INTERNATIONAL REGIONAL BANK HIGH YIELD FUND GROWTH FUND GROWTH FUND GROWTH FUND FUND FUND BOND FUND ----------- ----------- ----------- ----------- ------------- ------------- ----------- Investment Income: Dividends (net of foreign withholding tax of $592, $288, $11, none, $6,579, none and $1,130, respectively) $119,367 $18,031 $7,239 $7,782 $45,360 $132,955 $32,206 Interest 16,871 1,563 3,426 2,967 8,316 14,565 363,443 Securities lending -- -- -- 14,066 3,924 1,581 -- ----------- ----------- ----------- ----------- ------------- ------------- ----------- Total investment income 136,238 19,594 10,665 24,815 57,600 149,101 395,649 - -------------------------------------------------------------------------------------------------------------------------------- Expenses: Investment management fee 25,568 31,324 30,771 56,311 26,093 48,380 19,741 Custodian fee 80,141 7,713 9,276 22,531 61,690 5,049 6,102 Auditing fee 7,438 5,951 5,951 7,438 5,951 5,917 5,951 Miscellaneous 5,237 388 90 159 73 320 162 Printing 2,187 3,303 1,224 578 2,170 830 778 Accounting and legal services fee 2,001 817 803 1,469 568 1,183 644 Organization expense 1,053 1,053 -- 1,053 1,053 -- -- Trustees' fees 683 352 300 503 190 422 194 Legal fees 110 80 45 88 673 71 675 Registration and filing fees 8 352 8 8 40 9 21 Interest expense -- 1,324 252 673 -- 52 -- ----------- ----------- ----------- ----------- ------------- ------------- ----------- Total expenses 124,426 52,657 48,720 90,811 98,501 62,233 34,268 Less expense reductions (88,630) (10,890) (7,693) (15,729) (65,160) -- (6,302) - -------------------------------------------------------------------------------------------------------------------------------- Net expenses 35,796 41,767 41,027 75,082 33,341 62,233 27,966 - -------------------------------------------------------------------------------------------------------------------------------- Net investment income (loss) 100,442 (22,173) (30,362) (50,267) 24,259 86,868 367,683 - -------------------------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on: Investments 751,294 (3,369,813) (1,746,838) (1,792,517) (497,721) 577,019 (419,180) Futures (66,957) -- -- -- -- -- -- Foreign currency transactions -- -- -- -- (316,985) -- (9,107) Change in unrealized appreciation (depreciation) on: Investments (2,396,941) 638,393 (725,291) 27,433 (533,372) 170,852 180,171 Futures (36,061) -- -- -- -- -- -- Translation of assets and liabilities in foreign currencies -- -- -- -- 4,430 -- 46,517 ----------- ----------- ----------- ----------- ------------- ------------- ----------- Net realized and unrealized gain (loss) (1,748,665) (2,731,420) (2,472,129) (1,765,084) (1,343,648) 747,871 (201,599) - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from operations ($1,648,223) ($2,753,593) ($2,502,491) ($1,815,351) ($1,319,389) $834,739 $166,084 ================================================================================================================================ The Statement of Operations summarizes for each of the Funds the investment income earned and expenses incurred in operating the Fund. It also shows net gains (losses) for the period stated. See notes to financial statements. Statements of Changes in Net Assets - ----------------------------------------------------------------------------------------------------------------------------- V.A. V.A. V.A. 500 INDEX FUND LARGE CAP GROWTH FUND MID CAP GROWTH FUND ------------------------ ------------------------ ------------------------ SIX MONTHS SIX MONTHS SIX MONTHS YEAR ENDED YEAR ENDED YEAR ENDED ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, DECEMBER 31, 2001 DECEMBER 31, 2001 DECEMBER 31, 2001 2000 (UNAUDITED) 2000 (UNAUDITED) 2000 (UNAUDITED) ----------- ----------- ----------- ----------- ----------- ----------- Increase (Decrease) in Net Assets: From Operations: Net investment income (loss) $284,283 $100,442 ($116,390) ($22,173) ($55,546) ($30,362) Net realized gain (loss) 510,070 684,337 (1,715,484) (3,369,813) (691,193) (1,746,838) Change in net unrealized appreciation (depreciation) (3,816,126) (2,433,002) (4,414,002) 638,393 (1,246,996) (725,291) ----------- ----------- ----------- ----------- ----------- ----------- Net decrease in net assets resulting from operations (3,021,773) (1,648,223) (6,245,876) (2,753,593) (1,993,735) (2,502,491) ----------- ----------- ----------- ----------- ----------- ----------- Distributions to Shareholders: * From net investment income (279,659) (105,489) -- -- -- -- From net realized gain (92,786) -- (643,661) -- (78,273) -- ----------- ----------- ----------- ----------- ----------- ----------- Total distributions to shareholders (372,445) (105,489) (643,661) -- (78,273) -- ----------- ----------- ----------- ----------- ----------- ----------- From Fund Share Transactions: Shares sold 2,172,521 473,627 5,563,562 237,611 12,664,811 306,649 Shares issued to shareholders in reinvestment of distributions 372,407 105,489 643,661 -- 78,273 -- Less shares repurchased (12,009,903) (5,499,934) (8,885,412) (3,508,388) (5,552,026) (2,970,834) ----------- ----------- ----------- ----------- ----------- ----------- Net increase (decrease) (9,464,975) (4,920,818) (2,678,189) (3,270,777) 7,191,058 (2,664,185) ----------- ----------- ----------- ----------- ----------- ----------- Net Assets: Beginning of period 37,953,216 25,094,023 21,871,932 12,304,206 6,362,800 11,481,850 ----------- ----------- ----------- ----------- ----------- ----------- End of period (including undistributed net investment income (loss) (distributions in excess of net investment income) of $5,007, ($40), ($91), ($22,264), ($8) and ($30,370), respectively) $25,094,023 $18,419,493 $12,304,206 $6,279,836 $11,481,850 $6,315,174 =========== =========== =========== =========== =========== =========== Distributions to Shareholders: Per share dividends from net investment income $0.1530 $0.0825 -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Per share distributions from net realized gain $0.0585 -- $0.5666 -- $0.1010 -- ----------- ----------- ----------- ----------- ----------- ----------- * Analysis of Fund Share Transactions: Shares sold 123,028 30,367 376,363 27,503 699,219 23,775 Shares issued to shareholders in reinvestment of distributions 21,738 7,183 62,310 -- 5,222 -- Less shares repurchased (694,943) (358,048) (628,273) (408,950) (313,149) (238,537) ----------- ----------- ----------- ----------- ----------- ----------- Net increase (decrease) (550,177) (320,498) (189,600) (381,447) 391,292 (214,762) =========== =========== =========== =========== =========== =========== The Statement of Changes in Net Assets shows how the value of each Fund's net assets has changed since the end of the previous period. The difference reflects earnings less expenses, any investment and foreign currency gains and losses, distributions paid to shareholders, if any, and any increase or decrease in money shareholders invested in each Fund. The footnotes illustrate the number of Fund shares sold, reinvested and repurchased during the last two periods, along with the per share amount of distributions made to shareholders of each Fund for the periods indicated. See notes to financial statements. Statements of Changes in Net Assets (continued) - ----------------------------------------------------------------------------------------------------------------------------- V.A. V.A. V.A. SMALL CAP GROWTH FUND INTERNATIONAL FUND REGIONAL BANK FUND ------------------------ ------------------------ ------------------------ SIX MONTHS SIX MONTHS SIX MONTHS YEAR ENDED YEAR ENDED YEAR ENDED ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, DECEMBER 31, 2001 DECEMBER 31, 2001 DECEMBER 31, 2001 2000 (UNAUDITED) 2000 (UNAUDITED) 2000 (UNAUDITED) ----------- ----------- ----------- ----------- ----------- ----------- Increase (Decrease) in Net Assets: From Operations: Net investment income (loss) ($194,883) ($50,267) $17,595 $24,259 $271,788 $86,868 Net realized gain (loss) (2,221,923) (1,792,517) (451,324) (814,706) (2,865,401) 577,019 Change in net unrealized appreciation (depreciation) (5,140,485) 27,433 (2,179,238) (528,942) 4,087,137 170,852 ----------- ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in net assets resulting from operations (7,557,291) (1,815,351) (2,612,967) (1,319,389) 1,493,524 834,739 ----------- ----------- ----------- ----------- ----------- ----------- Distributions to Shareholders: * From net investment income -- -- (107,471) -- (275,181) (86,394) From net realized gain (1,193,201) -- (238,923) -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Total distributions to shareholders (1,193,201) -- (346,394) -- (275,181) (86,394) ----------- ----------- ----------- ----------- ----------- ----------- From Fund Share Transactions: Shares sold 18,612,044 445,018 1,932,741 85,169 1,198,441 652,155 Shares issued to shareholders in reinvestment of distributions 1,193,201 -- 346,394 -- 275,181 86,394 Less shares repurchased (12,149,701) (5,088,314) (1,364,748) (1,096,843) (9,253,630) (3,332,081) ----------- ----------- ----------- ----------- ----------- ----------- Net increase (decrease) 7,655,544 (4,643,296) 914,387 (1,011,674) (7,780,008) (2,593,532) ----------- ----------- ----------- ----------- ----------- ----------- Net Assets: Beginning of period 20,866,610 19,771,662 9,374,613 7,329,639 20,295,095 13,733,430 ----------- ----------- ----------- ----------- ----------- ----------- End of period (including undistributed net investment income (loss) (distributions in excess of net investment income) of ($76), ($50,343), ($77,085), ($52,826), ($104) and $370, respectively) $19,771,662 $13,313,015 $7,329,639 $4,998,576 $13,733,430 $11,888,243 =========== =========== =========== =========== =========== =========== Distributions to Shareholders: Per share dividends from net investment income -- -- $0.1684 -- $0.1686 $0.0732 ----------- ----------- ----------- ----------- ----------- ----------- Per share distributions from net realized gain $0.9031 -- $0.3744 -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- * Analysis of Fund Share Transactions: Shares sold 888,422 33,471 131,349 8,932 150,452 65,385 Shares issued to shareholders in reinvestment of distributions 86,905 -- 31,955 -- 33,504 8,780 Less shares repurchased (658,355) (400,835) (104,357) (112,301) (1,166,423) (342,613) ----------- ----------- ----------- ----------- ----------- ----------- Net increase (decrease) 316,972 (367,364) 58,947 (103,369) (982,467) (268,448) =========== =========== =========== =========== =========== =========== See notes to financial statements. Statements of Changes in Net Assets (continued) - -------------------------------------------------------------------------- V.A. HIGH YIELD BOND FUND ------------------------ SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, 2001 2000 (UNAUDITED) ----------- ----------- Increase (Decrease) in Net Assets: From Operations: Net investment income $1,037,461 $367,683 Net realized gain (loss) 141,324 (428,287) Change in net unrealized appreciation (depreciation) (1,666,407) 226,688 ----------- ----------- Net increase (decrease) in net assets resulting from operations (487,622) 166,084 ----------- ----------- Distributions to Shareholders: * From net investment income (1,039,972) (391,044) From net realized gain (241,224) -- ----------- ----------- Total distributions to shareholders (1,281,196) (391,044) ----------- ----------- From Fund Share Transactions: Shares sold 858,489 697,429 Shares issued to shareholders in reinvestment of distributions 1,281,195 387,175 Less shares repurchased (2,438,764) (1,793,918) ----------- ----------- Net decrease (299,080) (709,314) ----------- ----------- Net Assets: Beginning of period 9,286,532 7,218,634 ----------- ----------- End of period (including distributions in excess of net investment income of ($4,802) and ($52,077), respectively) $7,218,634 $6,284,360 =========== =========== Distributions to Shareholders: Per share dividends from net investment income $0.9394 $0.3885 ----------- ----------- Per share distributions from net realized gain $0.2290 -- ----------- ----------- * Analysis of Fund Share Transactions: Shares sold 110,078 105,067 Shares issued to shareholders in reinvestment of distributions 172,859 58,318 Less shares repurchased (320,600) (268,727) ----------- ----------- Net decrease (37,663) (105,342) =========== =========== See notes to financial statements. Financial Highlights Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ------------------------------------------------------------------------------------------------------------------------------ V.A. 500 INDEX FUND -------------------------------------------------------------------------------- SIX MONTHS PERIOD ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, -------------------------------------------------- 2001 1996(1) 1997 1998 1999 2000 (UNAUDITED) -------- -------- -------- -------- -------- --------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $10.44 $12.62 $15.23 $18.09 $16.21 -------- -------- -------- -------- -------- -------- Net Investment Income(2) 0.17 0.30 0.20 0.17 0.14 0.07 Net Realized and Unrealized Gain (Loss) on Investments 0.98 2.72 3.37 2.98 (1.81) (1.19) -------- -------- -------- -------- -------- -------- Total from Investment Operations 1.15 3.02 3.57 3.15 (1.67) (1.12) -------- -------- -------- -------- -------- -------- Less Distributions: From Net Investment Income (0.16) (0.30) (0.20) (0.17) (0.15) (0.08) From Net Realized Gain (0.55) (0.54) (0.76) (0.11) (0.06) -- In Excess of Net Realized Gain -- -- -- (0.01) -- -- -------- -------- -------- -------- -------- -------- Total Distributions (0.71) (0.84) (0.96) (0.29) (0.21) (0.08) -------- -------- -------- -------- -------- -------- Net Asset Value, End of Period $10.44 $12.62 $15.23 $18.09 $16.21 $15.01 ======== ======== ======== ======== ======== ======== Total Investment Return(3,4) 11.49%(5) 29.51% 28.44% 20.81% (9.28%) (6.88%)(5) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $4,049 $20,008 $26,457 $37,953 $25,094 $18,419 Ratio of Expenses to Average Net Assets 0.60%(6) 0.36% 0.35% 0.35% 0.35% 0.35%(6) Ratio of Adjusted Expenses to Average Net Assets(7) 1.31%(6) 0.83% 0.92% 0.75% 0.93% 1.22%(6) Ratio of Net Investment Income to Average Net Assets 4.57%(6) 2.45% 1.44% 1.06% 0.86% 0.98%(6) Portfolio Turnover Rate 0% 9% 47% 5% 7% 3% (1) Commenced 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) The total returns would have been lower had certain expenses not been reduced during the periods shown. (5) Not annualized. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ------------------------------------------------------------------------------------------------------------------------------ V.A. LARGE CAP GROWTH FUND -------------------------------------------------------------------------------- SIX MONTHS PERIOD ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, -------------------------------------------------- 2001 1996(1) 1997 1998 1999 2000 (UNAUDITED) -------- -------- -------- -------- -------- --------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $9.39 $10.73 $13.37 $15.77 $10.27 -------- -------- -------- -------- -------- -------- Net Investment Loss(2) (0.01) (0.04) --(3) (0.04) (0.08) (0.02) Net Realized and Unrealized Gain (Loss) on Investments (0.60) 1.38 2.64 2.80 (4.85) (2.56) -------- -------- -------- -------- -------- -------- Total from Investment Operations (0.61) 1.34 2.64 2.76 (4.93) (2.58) -------- -------- -------- -------- -------- -------- Less Distributions: From Net Realized Gain -- -- -- (0.36) (0.57) -- -------- -------- -------- -------- -------- -------- Net Asset Value, End of Period $9.39 $10.73 $13.37 $15.77 $10.27 $7.69 ======== ======== ======== ======== ======== ======== Total Investment Return(4) (6.10%)(5,6) 14.27%(6) 24.60%(6) 20.71%(6) (31.30%) (25.12%)(5,6) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $994 $3,733 $10,372 $21,872 $12,304 $6,280 Ratio of Expenses to Average Net Assets 1.00%(7) 1.00% 1.00% 1.00% 0.96% 1.00%(7) Ratio of Adjusted Expenses to Average Net Assets(8) 4.76%(7) 2.37% 1.33% 1.02% -- 1.26%(7) Ratio of Net Investment Loss to Average Net Assets (0.23%)(7) (0.39%) (0.00%) (0.25%) (0.59%) (0.53%)(7) Portfolio Turnover Rate 68% 136% 176% 172% 170% 38% (1) Commenced 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 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 periods shown. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ---------------------------------------------------------------------------------------------------------------- V.A. MID CAP GROWTH FUND -------------------------------------------------------- SIX MONTHS PERIOD ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, ------------------------ 2001 1998(1) 1999 2000 (UNAUDITED) -------- -------- -------- -------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $11.03 $17.21 $15.09 -------- -------- -------- -------- Net Investment Income (Loss)(2) 0.01 (0.03) (0.08) (0.05) Net Realized and Unrealized Gain (Loss) on Investments 1.03 6.23 (1.94) (3.48) -------- -------- -------- -------- Total from Investment Operations 1.04 6.20 (2.02) (3.53) -------- -------- -------- -------- Less Distributions: From Net Investment Income (0.01) -- -- -- From Net Realized Gain -- (0.02) (0.10) -- Tax Return of Capital --(3) -- -- -- -------- -------- -------- -------- Total Distributions (0.01) (0.02) (0.10) -- -------- -------- -------- -------- Net Asset Value, End of Period $11.03 $17.21 $15.09 $11.56 ======== ======== ======== ======== Total Investment Return(4,5) 10.35%(6) 56.18% (11.73%) (23.39%)(6) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $1,779 $6,363 $11,482 $6,315 Ratio of Expenses to Average Net Assets 1.00%(7) 1.00% 1.00% 1.00%(7) Ratio of Adjusted Expenses to Average Net Assets(8) 4.23%(7) 2.36% 1.10% 1.19%(7) Ratio of Net Investment Income (Loss) to Average Net Assets 0.06%(7) (0.23%) (0.42%) (0.74%)(7) Portfolio Turnover Rate 103% 136% 155% 71% (1) Commenced operations on January 7, 1998. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment. (5) The total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Not annualized. (7) Annualized. (8) Does not take into consideration expense reductions during the periods shown. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ------------------------------------------------------------------------------------------------------------------------------ V.A. SMALL CAP GROWTH FUND -------------------------------------------------------------------------------- SIX MONTHS PERIOD ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, -------------------------------------------------- 2001 1996(1) 1997 1998 1999 2000 (UNAUDITED) -------- -------- -------- -------- -------- --------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $9.32 $10.35 $12.00 $19.76 $14.40 -------- -------- -------- -------- -------- -------- Net Investment Income (Loss)(2) 0.02 (0.02) (0.06) (0.10) (0.13) (0.04) Net Realized and Unrealized Gain (Loss) on Investments (0.68) 1.05 1.71 8.29 (4.33) (1.12) -------- -------- -------- -------- -------- -------- Total from Investment Operations (0.66) 1.03 1.65 8.19 (4.46) (1.16) -------- -------- -------- -------- -------- -------- Less Distributions: From Net Investment Income (0.02) --(3) -- -- -- -- From Net Realized Gain -- -- -- (0.43) (0.90) -- -------- -------- -------- -------- -------- -------- Total Distributions to Shareholders (0.02) -- -- (0.43) (0.90) -- -------- -------- -------- -------- -------- -------- Net Asset Value, End of Period $9.32 $10.35 $12.00 $19.76 $14.40 $13.24 ======== ======== ======== ======== ======== ======== Total Investment Return(4,5) (6.62%)(6) 11.06% 15.94% 68.52% (22.33%) (8.06%)(6) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $975 $3,841 $8,232 $20,867 $19,772 $13,313 Ratio of Expenses to Average Net Assets 1.00%(7) 1.00% 1.00% 1.00% 1.00% 1.00%(7) Ratio of Adjusted Expenses to Average Net Assets(8) 5.19%(7) 2.72% 1.63% 1.38% 1.10% 1.21%(7) Ratio of Net Investment Income (Loss) to Average Net Assets 0.62%(7) (0.16%) (0.59%) (0.76%) (0.68%) (0.67%)(7) Portfolio Turnover Rate 31% 79% 93% 120% 104% 40% (1) Commenced 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) The total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Not annualized. (7) Annualized. (8) Does not take into consideration expense reductions during the periods shown. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ------------------------------------------------------------------------------------------------------------------------------ V.A. INTERNATIONAL FUND -------------------------------------------------------------------------------- SIX MONTHS PERIOD ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, -------------------------------------------------- 2001 1996(1) 1997 1998 1999 2000 (UNAUDITED) -------- -------- -------- -------- -------- --------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $11.23 $10.50 $12.18 $15.45 $11.01 -------- -------- -------- -------- -------- -------- Net Investment Income(2) 0.07 0.05 0.07 0.07 0.03 0.04 Net Realized and Unrealized Gain (Loss) on Investments 1.20 (0.13) 1.69 3.75 (3.93) (2.16) -------- -------- -------- -------- -------- -------- Total from Investment Operations 1.27 (0.08) 1.76 3.82 (3.90) (2.12) -------- -------- -------- -------- -------- -------- Less Distributions: From Net Investment Income (0.04) (0.01) (0.07) (0.08) (0.17) -- In Excess of Net Investment Income -- -- (0.01) (0.02) -- -- From Net Realized Gain -- (0.64) -- (0.45) (0.37) -- -------- -------- -------- -------- -------- -------- Total Distributions (0.04) (0.65) (0.08) (0.55) (0.54) -- -------- -------- -------- -------- -------- -------- Net Asset Value, End of Period $11.23 $10.50 $12.18 $15.45 $11.01 $8.89 ======== ======== ======== ======== ======== ======== Total Investment Return(3,4) 12.75%(5) (0.54%) 16.75% 31.55% (25.17%) (19.26%)(5) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $2,267 $3,792 $7,201 $9,375 $7,330 $4,999 Ratio of Expenses to Average Net Assets 1.15%(6) 1.15% 1.15% 1.15% 1.15% 1.15%(6) Ratio of Adjusted Expenses to Average Net Assets(7) 3.13%(6) 2.04% 3.13% 2.51% 3.24% 3.40%(6) Ratio of Net Investment Income to Average Net Assets 2.03%(6) 0.43% 0.59% 0.52% 0.19% 0.84%(6) Portfolio Turnover Rate 14% 273% 89% 116% 177% 176% (1) Commenced 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) The total returns would have been lower had certain expenses not been reduced during the periods shown. (5) Not annualized. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ---------------------------------------------------------------------------------------------------------------- V.A. REGIONAL BANK FUND -------------------------------------------------------- SIX MONTHS PERIOD ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, ------------------------ 2001 1998(1) 1999 2000 (UNAUDITED) -------- -------- -------- -------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $9.28 $8.56 $9.89 -------- -------- -------- -------- Net Investment Income(2) 0.09 0.12 0.16 0.07 Net Realized and Unrealized Gain (Loss) on Investments (0.74) (0.57) 1.34 0.72 -------- -------- -------- -------- Total from Investment Operations (0.65) (0.45) 1.50 0.79 -------- -------- -------- -------- Less Distributions: From Net Investment Income (0.07) (0.12) (0.17) (0.07) From Net Realized Gain --(3) (0.15) -- -- -------- -------- -------- -------- Total Distributions (0.07) (0.27) (0.17) (0.07) -------- -------- -------- -------- Net Asset Value, End of Period $9.28 $8.56 $9.89 $10.61 ======== ======== ======== ======== Total Investment Return(4) (6.43%)(5,6) (4.86%) 17.91% 8.10%(5) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $20,256 $20,295 $13,733 $11,888 Ratio of Expenses to Average Net Assets 1.05%(7) 1.00% 1.01% 1.03%(7) Ratio of Adjusted Expenses to Average Net Assets(8) 1.14%(7) -- -- -- Ratio of Net Investment Income to Average Net Assets 1.39%(7) 1.30% 1.92% 1.44%(7) Portfolio Turnover Rate 28% 49% 32% 9% (1) Commenced operations on May 1, 1998. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment. (5) 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 See notes to financial statements. Financial Highlights (continued) Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns, key ratios and supplemental data are listed as follows: - ---------------------------------------------------------------------------------------------------------------- V.A. HIGH YIELD BOND FUND -------------------------------------------------------- SIX MONTHS PERIOD ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, ------------------------ 2001 1998(1) 1999 2000 (UNAUDITED) -------- -------- -------- -------- Per Share Operating Performance Net Asset Value, Beginning of Period $10.00 $8.22 $8.31 $6.68 -------- -------- -------- -------- Net Investment Income(2) 0.90 0.88 0.94 0.36 Net Realized and Unrealized Gain (Loss) on Investments (1.82) 0.16 (1.40) (0.20) -------- -------- -------- -------- Total from Investment Operations (0.92) 1.04 (0.46) 0.16 -------- -------- -------- -------- Less Distributions: From Net Investment Income (0.84) (0.88) (0.94) (0.39) From Net Realized Gain -- (0.07) (0.23) -- Tax Return of Capital (0.02) -- -- -- -------- -------- -------- -------- Total Distributions (0.86) (0.95) (1.17) (0.39) -------- -------- -------- -------- Net Asset Value, End of Period $8.22 $8.31 $6.68 $6.45 ======== ======== ======== ======== Total Investment Return(3,4) (9.80%)(5) 13.12% (6.08%) 2.46%(5) Ratios and Supplemental Data Net Assets, End of Period (000s omitted) $8,120 $9,287 $7,219 $6,284 Ratio of Expenses to Average Net Assets 0.85%(6) 0.85% 0.85% 0.85%(6) Ratio of Adjusted Expenses to Average Net Assets(7) 1.15%(6) 1.03% 1.24% 1.04%(6) Ratio of Net Investment Income to Average Net Assets 9.85%(6) 10.56% 12.12% 11.18%(6,8) Portfolio Turnover Rate 102% 122% 56% 33% (1) Commenced 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) The total returns would have been lower had certain expenses not been reduced during the periods shown. (5) Not annualized. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. (8) Had the Fund not amortized premiums on debt securities, the annualized ratio of net investment income to average net assets would have been 11.40% See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. 500 Index Fund Schedule of Investments June 30, 2001 (Unaudited) - ------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. 500 Index Fund on June 30, 2001. It is divided into two main categories: common stocks and short-term investments. Common stocks are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- -------------- -------------- COMMON STOCKS Advertising (0.29%) Interpublic Group of Companies, Inc. (The) 607 $17,815 Omnicom Group, Inc. 300 25,800 TMP Worldwide, Inc.* 172 10,320 -------------- 53,935 -------------- Aerospace (1.18%) Boeing Co. (The) 1,411 78,452 General Dynamics Corp. 325 25,288 Goodrich (B.F.) Co. (The) 167 6,343 Lockheed Martin Corp. 702 26,009 Northrop Grumman Corp. 138 11,054 Raytheon Co. 575 15,266 United Technologies Corp. 761 55,751 -------------- 218,163 -------------- Automobiles/Trucks (0.94%) Cummins Engine Co., Inc. 67 2,593 Dana Corp. 239 5,578 Delphi Automotive Systems Corp. 906 14,433 Eaton Corp. 111 7,781 Ford Motor Co. 2,959 72,643 General Motors Corp. 887 57,078 PACCAR, Inc. 124 6,376 Ryder System, Inc. 98 1,921 Visteon Corp. 212 3,897 -------------- 172,300 -------------- Banks - United States (5.40%) AmSouth Bancorp. 599 11,076 Bank of America Corp. 2,592 155,598 Bank of New York Co., Inc. 1,190 57,120 Bank One Corp. 1,885 67,483 BB&T Corp. 659 24,185 Comerica, Inc. 289 16,646 Fifth Third Bancorp 931 55,907 First Union Corp. 1,587 55,450 FleetBoston Financial Corp. 1,752 69,116 Huntington Bancshares, Inc. 406 6,638 KeyCorp. 687 17,896 Mellon Financial Corp. 772 35,512 National City Corp. 972 29,918 Northern Trust Corp. 360 22,500 PNC Bank Corp. 467 30,724 Regions Financial Corp. 368 11,776 SouthTrust Corp. 550 14,300 State Street Corp. 526 26,032 SunTrust Banks, Inc. 472 30,576 Synovus Financial Corp. 469 14,717 U.S. Bancorp 3,082 70,239 Union Planters Corp. 222 9,679 Wachovia Corp. 340 24,191 Wells Fargo Co. 2,776 128,890 Zions Bancorp. 149 8,791 -------------- 994,960 -------------- Beverages (2.04%) Anheuser-Busch Cos., Inc. 1,452 59,822 Brown-Forman Corp. 111 7,097 Coca-Cola Co. (The) 4,023 181,035 Coca-Cola Enterprises, Inc. 680 11,118 Coors (Adolph) Co. (Class B) 60 3,011 Pepsi Bottling Group, Inc. 233 9,343 PepsiCo, Inc. 2,368 104,666 -------------- 376,092 -------------- Broker Services (1.47%) Bear Stearns Cos., Inc. 170 10,025 Lehman Brothers Holdings, Inc. 399 31,022 Merrill Lynch & Co., Inc. 1,357 80,402 Morgan Stanley Dean Witter & Co. 1,800 115,614 Schwab (Charles) Corp. 2,242 34,303 -------------- 271,366 -------------- Building (0.60%) Black & Decker Corp. 131 5,169 Centex Corp. 96 3,912 Danaher Corp. 231 12,936 Georgia-Pacific Corp. 365 12,355 Kaufman & Broad Home Corp. 72 2,172 Louisiana-Pacific Corp. 169 1,982 Masco Corp. 744 18,570 Pulte Corp. 68 2,899 Sherwin-Williams Co. 253 5,617 Snap-on, Inc. 93 2,247 Stanley Works (The) 138 5,779 Vulcan Materials Co. 163 8,761 Weyerhauser Co. 348 19,130 Willamette Industries, Inc. 177 8,762 -------------- 110,291 -------------- Business Services - Misc. (0.50%) Block, H&R, Inc. 148 9,553 Cendant Corp.* 1,378 26,871 Convergys Corp.* 276 8,349 Equifax, Inc. 232 8,510 Moody's Corp. 255 8,543 Paychex, Inc. 604 24,160 Robert Half International, Inc. 284 7,069 -------------- 93,055 -------------- Chemicals (0.69%) Air Products & Chemicals, Inc. 369 16,882 Dow Chemical Co. 1,452 48,279 Eastman Chemical Co. 125 5,954 Engelhard Corp. 211 5,442 FMC Corp.* 50 3,428 Great Lakes Chemical Corp. 81 2,499 Hercules, Inc. 175 1,978 PPG Industries, Inc. 272 14,299 Praxair, Inc. 260 12,220 Rohm & Haas Co. 356 11,712 Sigma-Aldrich Corp. 122 4,712 -------------- 127,405 -------------- Computers (12.17%) Adobe Systems, Inc. 387 18,189 Apple Computer, Inc.* 564 13,113 Autodesk, Inc. 87 3,245 Automatic Data Processing, Inc. 1,010 50,197 BMC Software, Inc.* 394 8,881 BroadVision, Inc.* 442 2,210 Cabletron Systems, Inc.* 305 6,969 Cisco Systems, Inc.* 11,837 215,433 Citrix Systems, Inc.* 299 10,435 Compaq Computer Corp. 2,732 42,319 Computer Associates International, Inc. 932 33,552 Computer Sciences Corp.* 273 9,446 Compuware Corp.* 595 8,324 Dell Computer Corp.* 4,207 110,013 Electronic Data Systems Corp. 757 47,313 EMC Corp.* 3,569 103,679 First Data Corp. 634 40,735 Fiserv, Inc.* 201 12,860 Gateway 2000, Inc.* 522 8,587 Hewlett-Packard Co. 3,142 89,861 IMS Health, Inc. 477 13,595 International Business Machines Corp. 2,810 317,530 Intuit, Inc.* 337 13,477 Lexmark International Group, Inc. (Class A)* 207 13,921 Mercury Interactive Corp.* 134 8,027 Microsoft Corp.* 8,704 635,392 NCR Corp.* 156 7,332 Network Appliance, Inc.* 526 7,206 Novell, Inc.* 514 2,925 Oracle Corp.* 9,079 172,501 Palm, Inc.* 917 5,566 Parametric Technology Corp.* 427 5,974 PeopleSoft, Inc.* 475 23,384 Sabre Holdings Corp.* 215 10,750 Sapient Corp.* 199 1,940 Siebel Systems, Inc.* 733 34,378 Sun Microsystems, Inc.* 5,267 82,797 Unisys Corp.* 512 7,532 VERITAS Software Corp.* 643 42,779 -------------- 2,242,367 -------------- Consumer Products - Misc. (0.01%) American Greetings Corp. (Class A) 103 1,133 -------------- Containers (0.08%) Ball Corp. 45 2,140 Bemis Co., Inc. 85 3,414 Pactiv Corp.* 257 3,444 Sealed Air Corp.* 135 5,029 -------------- 14,027 -------------- Cosmetics & Personal Care (0.41%) Alberto Culver Co. (Class B) 92 3,868 Avon Products, Inc. 384 17,772 Gillette Co. 1,705 49,428 International Flavors & Fragrances, Inc. 155 3,895 -------------- 74,963 -------------- Diversified Operations (2.57%) Crane Co. 97 3,007 Du Pont (E.I.) De Nemours & Co. 1,687 81,381 Fortune Brands, Inc. 247 9,475 Honeywell International, Inc. 1,309 45,802 Illinois Tool Works, Inc. 492 31,144 ITT Industries, Inc. 142 6,284 Johnson Controls, Inc. 140 10,146 Loews Corp. 319 20,553 Minnesota Mining & Manufacturing Co. 640 73,024 National Service Industries, Inc. 67 1,512 Textron, Inc. 228 12,549 TRW, Inc. 202 8,282 Tyco International Ltd. 3,132 170,694 -------------- 473,853 -------------- Electronics (9.49%) Advanced Micro Devices, Inc.* 556 16,057 Agilent Technologies, Inc.* 739 24,018 Altera Corp.* 625 18,125 American Power Conversion Corp.* 315 4,961 Analog Devices, Inc.* 582 25,172 Applied Materials, Inc.* 1,315 64,567 Applied Micro Circuits Corp.* 486 8,359 Broadcom Corp. (Class A)* 421 18,002 Conexant Systems, Inc.* 400 3,580 Emerson Electric Co. 693 41,927 General Electric Co. 16,065 783,169 Grainger (W.W.), Inc. 154 6,339 Intel Corp. 10,876 318,123 Jabil Circuit, Inc.* 309 9,536 KLA-Tencor Corp.* 300 17,541 Linear Technology Corp. 514 22,729 LSI Logic Corp.* 584 10,979 Maxim Integrated Products, Inc.* 531 23,476 Micron Technology, Inc. 964 39,620 Molex Inc. 316 11,543 Motorola, Inc. 3,552 58,821 National Semiconductor Corp.* 280 8,154 Novellus Systems, Inc.* 230 13,062 Parker-Hannifin Corp. 189 8,021 PerkinElmer, Inc. 163 4,487 Power-One, Inc.* 127 2,113 QLogic Corp.* 149 9,603 Rockwell International Corp. 296 11,284 Sanmina Corp.* 517 12,103 Solectron Corp.* 1,057 19,343 Tektronix, Inc. 152 4,127 Teradyne, Inc.* 282 9,334 Texas Instruments, Inc. 2,808 88,452 Thomas & Betts Corp. 94 2,075 Vitesse Semiconductor Corp.* 297 6,249 Xilinx, Inc.* 538 22,187 -------------- 1,747,234 -------------- Energy (0.20%) Calpine Corp.* 483 18,257 Mirant Corp.* 549 18,886 -------------- 37,143 -------------- Engineering (0.03%) Fluor Corp. 128 5,779 -------------- Fiber Optics (0.14%) JDS Uniphase Corp.* 2,129 26,613 -------------- Finance (5.20%) American Express Co. 2,140 83,032 Capital One Financial Corp. 337 20,220 Charter One Financial, Inc. 334 10,655 Citigroup, Inc. 8,133 429,748 Concord EFS, Inc.* 390 20,284 Franklin Resources, Inc. 428 19,590 Golden West Financial Corp. 257 16,510 Household International, Inc. 750 50,025 J.P. Morgan Chase & Co. 3,211 143,211 MBNA Corp. 1,378 45,405 Price (T. Rowe) Associates, Inc. 199 7,441 Providian Financial Corp. 462 27,350 Stilwell Financial, Inc. 355 11,914 USA Education, Inc. 264 19,272 Washington Mutual, Inc. 1,419 53,283 -------------- 957,940 -------------- Food (1.38%) Archer-Daniels-Midland Co. 1,022 13,286 Campbell Soup Co. 660 16,995 ConAgra, Inc. 869 17,215 General Mills, Inc. 460 20,139 Heinz (H.J.) Co. 564 23,062 Hershey Foods Corp. 221 13,638 Kellogg Co. 656 19,024 Quaker Oats Co. 214 19,528 Ralston Purina Group 501 15,040 Sara Lee Corp. 1,272 24,092 Unilever NV, American Depositary Receipts (ADR) (Netherlands) 924 55,043 Wrigley (WM) Jr. Co. 365 17,100 -------------- 254,162 -------------- Furniture (0.04%) Leggett & Platt, Inc. 317 6,984 -------------- Household (0.13%) Maytag Corp. 123 3,599 Newell Rubbermaid, Inc. 431 10,818 Tupperware Corp. 94 2,202 Whirlpool Corp. 108 6,750 -------------- 23,369 -------------- Instruments - Scientific (0.11%) Applera Corp. - Applied Biosystems Group 341 9,122 Millipore Corp. 76 4,710 Thermo Electron Corp.* 293 6,452 -------------- 20,284 -------------- Insurance (4.22%) Aetna, Inc. 230 5,950 AFLAC, Inc. 850 26,767 Allstate Corp. (The) 1,172 51,556 Ambac Financial Group, Inc. 171 9,952 American General Corp. 807 37,485 American International Group, Inc. 3,770 324,220 Aon Corp. 424 14,840 Chubb Corp. (The) 283 21,913 CIGNA Corp. 242 23,188 Cincinnati Financial Corp. 260 10,270 Conseco, Inc. 546 7,453 Hartford Financial Services Group, Inc. (The) 383 26,197 Jefferson Pilot Corp 246 11,887 John Hancock Financial Services, Inc. 498 20,049 Lincoln National Corp. 304 15,732 Marsh & McLennan Cos., Inc. 446 45,046 MBIA, Inc. 240 13,363 MetLife, Inc. 1,213 37,579 MGIC Investment Corp. 173 12,567 Progressive Corp. 119 16,088 SAFECO Corp. 207 6,107 St. Paul Cos., Inc. (The) 347 17,589 Torchmark Corp. 203 8,163 UnumProvident Corp. 390 12,527 -------------- 776,488 -------------- Internet Services (2.16%) America Online, Inc.* 7,166 379,798 Yahoo! Inc.* 917 18,331 -------------- 398,129 -------------- Leisure (1.28%) Brunswick Corp. 142 3,412 Carnival Corp. (Class A) 946 29,042 Disney (Walt) Co., (The) 3,380 97,648 Eastman Kodak Co. 469 21,893 Harley-Davidson, Inc. 489 23,022 Harrah's Entertainment, Inc.* 190 6,707 Hasbro, Inc. 279 4,032 Hilton Hotels Corp. 597 6,925 Marriott International, Inc. (Class A) 394 18,652 Mattel, Inc. 697 13,187 Starwood Hotels & Resorts Worldwide, Inc. 321 11,967 -------------- 236,487 -------------- Linen Supply & Related (0.07%) Cintas Corp. 273 12,626 -------------- Machinery (0.39%) Caterpiller Tractor, Inc. 555 27,778 Cooper Industries, Inc. 151 5,978 Deere & Co. 380 14,383 Dover Corp. 329 12,387 Ingersoll-Rand Co. 259 10,671 -------------- 71,197 -------------- Media (2.10%) Clear Channel Communications, Inc.* 950 59,565 Comcast Corp. 1,528 66,315 Dow Jones & Co., Inc. 140 8,359 Gannett Co., Inc. 428 28,205 Knight-Ridder, Inc. 118 6,997 McGraw-Hill Cos., Inc. (The) 316 20,903 Meredith Corp. 80 2,865 New York Times Co. (Class A) 258 10,836 Tribune Co. 483 19,325 Univision Communications, Inc. (Class A)* 337 14,417 Viacom, Inc. (Class B)* 2,879 148,988 -------------- 386,775 -------------- Medical (12.26%) Abbott Laboratories 2,505 120,265 Allergan, Inc. 213 18,211 American Home Products Corp. 2,126 124,243 Medical (continued) Amgen, Inc.* 1,687 102,367 Bard (C.R.), Inc. 82 4,670 Bausch & Lomb, Inc. 87 3,153 Baxter International, Inc. 958 46,942 Becton, Dickinson & Co. 417 14,924 Biogen, Inc.* 240 13,046 Biomet, Inc. 289 13,889 Boston Scientific Corp.* 649 11,033 Bristol-Myers Squibb Co. 3,143 164,379 Cardinal Health, Inc. 721 49,749 Chiron Corp.* 307 15,657 Forest Laboratories, Inc.* 285 20,235 Guidant Corp. 497 17,892 HCA - The Healthcare Co. 869 39,270 HEALTHSOUTH Corp.* 630 10,061 Humana, Inc.* 275 2,709 Johnson & Johnson 4,897 244,850 King Pharmaceuticals, Inc.* 277 14,889 Lilly (Eli) & Co. 1,818 134,532 Manor Care, Inc.* 166 5,270 McKesson HBOC, Inc. 461 17,112 MedImmune, Inc.* 344 16,237 Medtronic, Inc. 1,955 89,950 Merck & Co., Inc. 3,708 236,978 Pall Corp. 199 4,682 Pfizer Inc. 10,210 408,910 Pharmacia Corp. 2,104 96,679 Quintiles Transnational Corp.* 189 4,772 Schering-Plough Corp. 2,366 85,744 St. Jude Medical, Inc.* 139 8,340 Stryker Corp. 317 17,387 Tenet Healthcare Corp.* 524 27,033 UnitedHealth Group, Inc. 513 31,678 Watson Pharmaceutical, Inc.* 171 10,540 Wellpoint Health Networks, Inc.* 102 9,612 -------------- 2,257,890 -------------- Metal (0.64%) Alcan Aluminium Ltd. (Canada) 516 21,682 Alcoa Inc. 1,396 55,002 Barrick Gold Corp. (Canada) 640 9,696 Freeport-McMoran Copper & Gold, Inc. (Class B)* 233 2,575 Homestake Mining Co. 426 3,302 Inco, Ltd. (Canada) 294 5,074 Newmont Mining Corp. 316 5,881 Phelps Dodge Corp. 127 5,271 Placer Dome, Inc. (Canada) 530 5,194 Timken Co. (The) 97 1,643 Worthington Industries, Inc. 138 1,877 -------------- 117,197 -------------- Mortgage Banking (1.22%) Countrywide Credit Industries, Inc. 192 8,809 Fannie Mae 1,618 137,773 Freddie Mac 1,120 78,400 -------------- 224,982 -------------- Office (0.22%) Avery Dennison Corp. 178 9,087 Deluxe Corp. 114 3,295 Pitney Bowes, Inc. 399 16,806 Xerox Corp. 1,123 10,747 -------------- 39,935 -------------- Oil & Gas (6.96%) Amerada Hess Corp. 144 11,635 Anadarko Petroleum Corp. 405 21,882 Apache Corp. 203 10,302 Ashland, Inc. 113 4,531 Baker Hughes, Inc. 543 18,190 Burlington Resources, Inc. 342 13,663 Chevron Corp. 1,037 93,848 Conoco, Inc. (Class B) 1,010 29,189 Devon Energy Corp. 209 10,972 El Paso Energy Corp. 823 43,240 Enron Corp. 1,207 59,143 EOG Resources, Inc. 188 6,683 Exxon Mobil Corp. 5,579 487,326 Halliburton Co. 694 24,706 Kerr-McGee Corp. 153 10,139 McDermott International, Inc. 99 1,153 Nabors Industries, Inc.* 238 8,854 Noble Drilling Corp.* 217 7,107 Occidental Petroleum Corp. 599 15,927 Phillips Petroleum Co. 414 23,598 Rowan Cos., Inc.* 153 3,381 Royal Dutch Petroleum Co. (ADR) (Netherlands) 3,468 202,080 Schlumberger Ltd. 927 48,807 Sunoco, Inc. 136 4,982 Texaco, Inc. 891 59,341 Tosco Corp. 250 11,012 Transocean Sedco Forex, Inc. 514 21,202 Unocal Corp. 394 13,455 USX - Marathon Group 499 14,725 -------------- 1,281,073 -------------- Paper & Paper Products (0.51%) Boise Cascade Corp. 93 3,271 International Paper Co. 781 27,882 Kimberly-Clark Corp. 861 48,130 Mead Corp. (The) 160 4,342 Potlatch Corp. 46 1,583 Temple-Inland, Inc. 80 4,263 Westvaco Corp. 163 3,959 -------------- 93,430 -------------- Pollution Control (0.20%) Allied Waste Industries, Inc.* 319 5,959 Waste Management, Inc. 1,012 31,190 -------------- 37,149 -------------- Printing - Commercial (0.03%) Donnelley (R.R.) & Sons 190 5,643 -------------- Retail (6.80%) Albertson's, Inc. 655 19,643 AutoZone, Inc.* 181 6,788 Bed Bath & Beyond, Inc.* 467 14,570 Best Buy Co., Inc.* 339 21,533 Big Lots, Inc.* 183 2,503 Circuit City Stores - Circuit City Group 336 6,048 Costco Wholesale Corp. 728 29,906 CVS Corp. 636 24,550 Darden Restaurants, Inc. 191 5,329 Dillards, Inc. 138 2,107 Dollar General Corp. 535 10,433 Federated Department Stores, Inc.* 320 13,600 Gap, Inc. (The) 1,390 40,310 Genuine Parts Co. 278 8,757 Home Depot, Inc. (The) 3,774 175,680 Kmart Corp.* 792 9,084 Kohl's Corp.* 539 33,811 Kroger Co.* 1,311 32,775 Limited, Inc. (The) 690 11,399 Longs Drug Stores Corp. 61 1,315 Lowe's Cos., Inc. 622 45,126 May Department Stores 483 16,548 McDonald's Corp. 2,092 56,610 Nordstrom, Inc. 216 4,007 Office Depot, Inc.* 481 4,993 Penney (J. C.) Co., Inc. 425 11,203 RadioShack Corp. 300 9,150 Reebok International Ltd.* 95 3,035 Safeway, Inc.* 817 39,216 Sears, Roebuck & Co. 531 22,467 Staples, Inc.* 738 11,801 Starbucks Corp.* 615 14,145 SUPERVALU, Inc. 214 3,756 SYSCO Corp. 1,088 29,539 Target Corp. 1,454 50,308 Tiffany & Co. 236 8,548 TJX Cos., Inc. 453 14,437 Toys R Us, Inc.* 320 7,920 Tricon Global Restaurants, Inc.* 238 10,448 Walgreen Co. 1,646 56,211 Wal-Mart Stores, Inc. 7,231 352,873 Wendy's International, Inc. 184 4,699 Winn-Dixie Stores, Inc. 227 5,932 -------------- 1,253,113 -------------- Rubber - Tires & Misc. (0.05%) Cooper Tire & Rubber Co. 117 1,661 Goodyear Tire & Rubber Co. (The) 257 7,196 -------------- 8,857 -------------- Shoes & Related Apparel (0.10%) Nike, Inc. (Class B) 439 18,434 -------------- Soap & Cleaning Preparations (1.13%) Clorox Co. 383 12,965 Colgate-Palmolive Co. 907 53,504 Ecolab, Inc. 206 8,440 Procter & Gamble Co. (The) 2,095 133,661 -------------- 208,570 -------------- Steel (0.06%) Allegheny Technologies, Inc. 130 2,352 Nucor Corp. 125 6,111 USX-U.S. Steel Group, Inc. 144 2,902 -------------- 11,365 -------------- Telecommunications (4.69%) ADC Telecommunications, Inc.* 1,264 8,342 Andrew Corp.* 132 2,435 AT&T Corp. 5,580 122,760 Avaya, Inc.* 459 6,288 CenturyTel, Inc. 228 6,908 Citizens Communications Co. 461 5,546 Comverse Technology, Inc.* 277 15,817 Corning, Inc.* 1,504 25,132 Global Crossing Ltd.* (Bermuda) 1,434 12,390 Lucent Technologies, Inc. 5,508 34,150 Nextel Communications, Inc. (Class A)* 1,237 21,648 Nortel Networks Corp. (Canada) 5,153 46,841 QUALCOMM, Inc.* 1,225 71,638 Qwest Communications International, Inc.* 2,687 85,635 Scientific-Atlanta, Inc. 263 10,678 Sprint Corp. 1,515 36,587 Sprint PCS* 1,433 30,609 Symbol Technologies, Inc. 366 8,125 Tellabs, Inc.* 662 12,830 Verizon Communications, Inc. 4,374 234,009 WorldCom, Inc.* 4,671 66,328 -------------- 864,696 -------------- Textile (0.06%) Liz Claiborne, Inc. 85 4,288 VF Corp. 181 6,585 -------------- 10,873 -------------- Tobacco (1.02%) Philip Morris Cos., Inc. 3,558 180,569 UST, Inc. 264 7,619 -------------- 188,188 -------------- Transport (0.72%) AMR Corp.* 249 8,996 Burlington Northern Santa Fe Corp. 634 19,128 CSX Corp. 345 12,503 Delta Air Lines, Inc. 199 8,772 FedEx Corp.* 497 19,979 Navistar International Corp.* 96 2,700 Norfolk Southern Corp. 622 12,875 Southwest Airlines Co. 1,232 22,780 Union Pacific Corp. 401 22,019 US Airways Group, Inc.* 109 2,649 -------------- 132,401 -------------- Utilities (4.87%) AES Corp. (The)* 861 37,066 Allegheny Energy, Inc. 202 9,747 ALLTEL Corp. 506 30,998 Ameren Corp. 222 9,479 American Electric Power Co., Inc. 521 24,055 BellSouth Corp. 3,031 122,058 Cinergy Corp. 257 8,982 CMS Energy Corp. 213 5,932 Consolidated Edison, Inc. 343 13,651 Constellation Energy Group, Inc. 265 11,289 Dominion Resources, Inc. 400 24,052 DTE Energy Co. 267 12,399 Duke Energy Corp. 1,248 48,684 Dynegy, Inc. (Class A) 527 24,506 Edison International 527 5,876 Entergy Corp. 357 13,705 Exelon Corp. 519 33,278 FirstEnergy Corp.* 362 11,642 FPL Group, Inc. 284 17,100 GPU, Inc. 193 6,784 KeySpan Corp. 222 8,099 Kinder Morgan, Inc. 185 9,296 Niagara Mohawk Holdings, Inc.* 259 4,582 NICOR, Inc. 73 2,846 NiSource, Inc. 334 9,128 ONEOK, Inc. 96 1,891 Peoples Energy Corp. 57 2,291 PG&E Corp. 626 7,011 Pinnacle West Capital Corp. 137 6,494 PPL Corp. 236 12,980 Progress Energy, Inc. 333 14,958 Public Service Enterprise Group, Inc. 336 16,430 Reliant Energy, Inc. 481 15,493 SBC Communications, Inc. 5,447 218,207 Sempra Energy 333 9,104 Southern Co. 1,108 25,761 TXU Corp. 415 19,999 Williams Cos., Inc. (The) 784 25,833 Xcel Energy, Inc. 555 15,790 -------------- 897,476 -------------- TOTAL COMMON STOCKS (Cost $12,948,504) (96.83%) 17,836,392 -------------- -------------- INTEREST PAR VALUE ISSUER, DESCRIPTION RATE (000s OMITTED) - ------------------- -------------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (4.95%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 6-29-01, due 7-02-01 (Secured by U.S. Treasury Bonds 6.875% and 6.625% due 8-15-25 and 11-30-02) 3.97% $911 911,000 -------------- -------------- TOTAL SHORT-TERM INVESTMENTS (4.95%) 911,000 -------------- -------------- TOTAL INVESTMENTS (101.78%) 18,747,392 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (1.78%) (327,899) -------------- -------------- TOTAL NET ASSETS (100.00%) $18,419,493 ============== ============== * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. Large Cap Growth Fund Schedule of Investments June 30, 2001 (Unaudited) - ------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. Large Cap Growth Fund on June 30, 2001. Common stocks are broken down by industry group. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- -------------- -------------- COMMON STOCKS Banks - United States (1.15%) State Street Corp. 1,464 $72,453 -------------- Beverages (1.12%) Anheuser-Busch Cos., Inc. 1,700 70,040 -------------- Computers (17.97%) BEA Systems, Inc.* 1,000 30,710 Cisco Systems, Inc.* 15,650 284,830 Electronic Data Systems Corp. 2,000 125,000 EMC Corp.* 4,707 136,738 Microsoft Corp.* 3,450 251,850 Sun Microsystems, Inc.* 6,750 106,110 VeriSign, Inc.* 950 57,010 VERITAS Software Corp.* 2,050 136,387 -------------- 1,128,635 -------------- Diversified Operations (11.61%) General Electric Co. 7,627 371,816 Tyco International Ltd. 6,550 356,975 -------------- 728,791 -------------- Electronics (6.94%) Analog Devices, Inc.* 1,315 56,874 Applied Materials, Inc.* 1,500 73,650 Celestica, Inc. (Canada)* 600 30,900 Intel Corp. 5,000 146,250 Micron Technology, Inc.* 1,400 57,540 Novellus Systems, Inc.* 700 39,753 Xilinx, Inc.* 750 30,930 -------------- 435,897 -------------- Fiber Optics (0.97%) CIENA Corp.* 1,600 60,800 -------------- Finance (8.02%) Citigroup, Inc. 4,378 231,334 Goldman Sachs Group, Inc. (The) 750 64,350 MBNA Corp. 3,780 124,551 Morgan Stanley Dean Witter & Co. 1,300 83,499 -------------- 503,734 -------------- Insurance (2.99%) American International Group, Inc. 2,182 187,652 -------------- Media (8.65%) AOL Time Warner, Inc.* 5,110 270,830 Charter Communications, Inc. (Class A)* 3,050 71,217 Clear Channel Communications, Inc.* 2,052 128,660 Viacom, Inc. (Class B)* 1,400 72,450 -------------- 543,157 -------------- Medical (20.74%) Allergan, Inc. 973 83,191 Amgen, Inc.* 2,350 142,598 Cardinal Health, Inc. 3,513 242,397 Express Scripts, Inc.* 800 44,024 Genentech, Inc.* 1,056 58,186 Johnson & Johnson 2,100 105,000 Medtronic, Inc. 2,281 104,949 Pfizer, Inc. 5,928 237,416 Pharmacia Corp. 2,346 107,799 Stryker Corp. 1,400 76,790 UnitedHealth Group, Inc. 550 33,962 Wellpoint Health Networks, Inc.* 700 65,968 -------------- 1,302,280 -------------- Oil & Gas (0.46%) Transocean Sedco Forex, Inc. 700 28,875 -------------- Retail (12.58%) Bed Bath & Beyond, Inc.* 3,350 100,500 Gap, Inc. (The) 2,600 75,400 Home Depot, Inc. (The) 5,512 256,584 Lowe's Cos., Inc. 1,300 94,315 Wal-Mart Stores, Inc. 5,398 263,422 -------------- 790,221 -------------- Telecommunications (5.01%) Amdocs Ltd.* 700 37,695 American Tower Corp. (Class A) 3,159 65,297 Comverse Technology, Inc.* 1,200 68,520 Nokia Corp., American Depositary Receipts (Finland) 3,164 69,735 Scientific-Atlanta, Inc. 1,807 73,364 -------------- 314,611 -------------- Tobacco (1.45%) Philip Morris Cos., Inc. 1,800 91,350 -------------- Utilities (1.11%) AES Corp. (The)* 1,618 69,655 -------------- TOTAL COMMON STOCKS (Cost $6,081,968) (100.77%) 6,328,151 -------------- -------------- TOTAL INVESTMENTS (100.77%) 6,328,151 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (0.77%) (48,315) -------------- -------------- TOTAL NET ASSETS (100.00%) $6,279,836 ============== ============== * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. Schedule of Investments June 30, 2001 (Unaudited) - ------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. Mid Cap Growth Fund on June 30, 2001. It's divided into two main categories: common stocks and short-term investments. Common stocks are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- -------------- -------------- COMMON STOCKS Advertising (1.40%) Lamar Advertising Co.* 850 $37,400 TMP Worldwide, Inc.* 850 51,000 -------------- 88,400 -------------- Banks - United States (1.48%) Northern Trust Corp. 1,500 93,750 -------------- Beverages (0.59%) Coors (Adolph) Co. (Class B) 742 37,234 -------------- Broker Services (2.32%) Legg Mason, Inc. 1,206 60,011 Lehman Brothers Holdings, Inc. 1,113 86,536 -------------- 146,547 -------------- Computers (13.04%) Brocade Communications Systems, Inc.* 2,580 113,494 DST Systems, Inc.* 1,192 62,818 Electronic Arts, Inc.* 600 34,740 Emulex Corp.* 1,350 54,540 Fiserv, Inc.* 1,015 64,940 Mercury Interactive Corp.* 2,070 123,993 Micromuse, Inc.* 2,200 61,578 Parametric Technology Corp.* 8,350 116,817 SunGard Data Systems, Inc.* 1,856 55,699 VeriSign, Inc.* 2,250 135,023 -------------- 823,642 -------------- Electronics (12.22%) Aeroflex, Inc.* 6,694 70,287 ASML Holdings NV* (Netherlands) 1,750 38,937 Atmel Corp.* 5,450 73,520 Capstone Turbine Corp.* 2,950 65,165 Celestica, Inc.* (Canada) 993 51,139 International Rectifier Corp.* 994 33,895 KLA-Tencor Corp.* 500 29,235 Lam Research Corp.* 950 28,168 Micrel, Inc.* 1,200 39,600 National Semiconductor Corp.* 2,364 68,840 Novellus Systems, Inc.* 1,150 65,308 ONI Systems Corp.* 1,950 54,405 PMC-Sierra, Inc.* (Canada) 1,300 40,391 QLogic Corp.* 460 29,647 Tektronix, Inc.* 3,057 82,998 -------------- 771,535 -------------- Energy (0.96%) Calpine Corp.* 1,606 60,707 -------------- Fiber Optics (0.64%) Finisar Corp.* 2,150 40,162 -------------- Finance (6.23%) Affiliated Managers Group, Inc.* 1,346 82,779 Concord EFS, Inc.* 1,840 95,698 Providian Financial Corp. 1,443 85,426 USA Education, Inc. 1,776 129,648 -------------- 393,551 -------------- Instruments - Scientific (0.52%) Millipore Corp. 533 33,035 -------------- Insurance (3.59%) Ace, Ltd. 2,095 81,894 Ambac Financial Group, Inc. 1,148 66,814 Everest Re Group Ltd. (Bermuda) 1,042 77,942 -------------- 226,650 -------------- Media (6.52%) Charter Communications, Inc. (Class A)* 4,650 108,577 Clear Channel Communications, Inc.* 882 55,301 Emmis Communications Corp. (Class A)* 2,150 66,112 Hispanic Broadcasting Corp.* 1,771 50,810 Univision Communications, Inc. (Class A)* 1,516 64,854 USA Networks, Inc.* 2,350 65,800 -------------- 411,454 -------------- Medical (21.68%) Alkermes, Inc.* 1,730 60,723 Allergan, Inc. 870 74,385 AmeriSource Health Corp. (Class A)* 1,387 76,701 Apogent Technologies, Inc.* 1,686 41,476 Express Scripts, Inc.* 1,200 66,036 Forest Laboratories, Inc.* 1,036 73,556 Genzyme Corp.* 900 54,900 Human Genome Sciences, Inc.* 1,070 64,468 ICOS Corp.* 850 54,400 IDEC Pharmaceuticals Corp.* 1,250 84,612 Inhale Therapeutic Systems, Inc.* 3,150 72,450 Invitrogen Corp.* 800 44,512 MedImmune, Inc.* 1,490 70,328 Oxford Health Plans, Inc.* 2,328 66,581 Shire Pharmaceuticals Group Plc, American Depositary Receipts (ADR)* (United Kingdom) 2,502 138,861 Teva Pharmaceutical Industries Ltd. (ADR) (Israel) 1,301 81,052 Trigon Healthcare, Inc.* 603 39,105 Universal Health Services, Inc. (Class B)* 1,417 64,474 Varian Medical Systems, Inc.* 979 69,999 Wellpoint Health Networks, Inc.* 751 70,774 -------------- 1,369,393 -------------- Oil & Gas (4.91%) Baker Hughes, Inc. 1,377 46,129 Cooper Cameron Corp.* 1,164 64,951 Santa Fe International Corp. 2,487 72,123 Transocean Sedco Forex, Inc. 1,391 57,379 Weatherford International, Inc.* 1,452 69,696 -------------- 310,278 -------------- Retail (4.65%) Bed Bath & Beyond, Inc.* 2,200 66,000 BJ's Wholesale Club, Inc.* 1,693 90,169 Talbots, Inc. 1,814 79,363 TJX Cos., Inc. 1,820 58,003 -------------- 293,535 -------------- Telecommunications (10.80%) Amdocs Ltd.* 2,026 109,100 American Tower Corp. (Class A)* 3,243 67,033 Comverse Technology, Inc.* 1,570 89,647 Crown Castle International Corp.* 2,975 48,790 Dobson Communications Corp. (Class A)* 7,230 123,271 Global Crossing Ltd.* (Bermuda) 5,493 47,460 Nextel Communications, Inc. (Class A)* 1,250 21,875 Scientific-Atlanta, Inc. 1,959 79,534 Sonus Networks, Inc.* 1,150 26,864 Western Wireless Corp. (Class A)* 1,590 68,370 -------------- 681,944 -------------- Textile (1.00%) Jones Apparel Group, Inc.* 1,462 63,158 -------------- Utilities (1.35%) Orion Power Holdings, Inc.* 3,581 85,264 -------------- TOTAL COMMON STOCKS (Cost $6,065,678) (93.90%) 5,930,239 -------------- -------------- INTEREST PAR VALUE ISSUER, DESCRIPTION RATE (000s OMITTED) - ------------------- -------------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (7.97%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 06-29-01, due 07-02-01 (Secured by U.S. Treasury Bonds, 10.625% due 08-15-15 and 6.250% due 08-15-23, and U.S. Treasury Note 5.625% due 11-30-02) 3.97% $503 503,000 -------------- -------------- TOTAL SHORT-TERM INVESTMENTS (7.97%) 503,000 -------------- -------------- TOTAL INVESTMENTS (101.87%) 6,433,239 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (1.87%) (118,065) -------------- -------------- TOTAL NET ASSETS (100.00%) $6,315,174 ============== ============== * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. Portfolio Concentration June 30, 2001 (Unaudited) - --------------------------------------------------------------------------- The V.A. Mid Cap Growth Fund invests primarily in common stocks of U.S. and foreign issuers. The performance of the Fund is closely tied to the economic and financial conditions within the countries in which it invests. The concentration of investments by industry category for individual securities held by the Fund is shown in the Schedule of Investments. In addition, concentration of investments can be aggregated by various countries. The table below shows the percentages of the Fund's investments at June 30, 2001 assigned to country categories. MARKET VALUE AS A % COUNTRY DIVERSIFICATION OF FUND NET ASSETS - ----------------------- ------------------- Bermuda 1.98% Canada 1.45 Netherlands 0.62 Israel 1.28 United Kingdom 2.20 United States 94.34 ------ TOTAL INVESTMENTS 101.87% ====== John Hancock Funds - Declaration Trust - V.A. Small Cap Growth Fund Schedule of Investments June 30, 2001 (Unaudited) - ------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. Small Cap Growth Fund on June 30, 2001. It's divided into two main categories: common stocks and short-term investments. Common stocks are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- -------------- -------------- COMMON STOCKS Advertising (1.27%) Getty Images, Inc.* 3,800 $99,788 Ventiv Health, Inc.* 3,350 69,144 -------------- 168,932 -------------- Banks - United States (2.17%) Greater Bay Bancorp. 3,450 86,181 Southwest Bancorp. of Texas, Inc.* 3,000 90,630 Sterling Bancshares, Inc. 5,850 112,203 -------------- 289,014 -------------- Building (0.61%) Ryland Group, Inc. (The) 1,600 80,960 -------------- Business Services - Misc. (3.27%) Corporate Executive Board Co. (The)* 4,450 186,900 Forrester Research, Inc.* 2,800 63,252 On Assignment, Inc.* 5,000 90,000 Profit Recovery Group International, Inc. (The)* 2,800 32,088 Quanta Services, Inc.* 2,879 63,453 -------------- 435,693 -------------- Computers (8.00%) Advent Software, Inc.* 1,850 117,475 Avocent Corp.* 2,500 56,875 Cerner Corp.* 2,800 117,600 Data Return Corp.* 5,900 10,325 Embarcadero Technologies, Inc.* 3,100 69,161 IntraNet Solutions, Inc.* 2,400 91,320 Macromedia, Inc.* 3,750 67,500 M-Systems Flash Disk Pioneers Ltd. (Israel)* 8,700 61,770 National Instruments Corp.* 2,250 73,013 NetRatings, Inc.* 6,500 93,600 ScanSource, Inc.* 1,950 92,469 Secure Computing Corp.* 6,900 108,399 Silicon Storage Technology, Inc.* 7,150 72,430 TeleCommunication Systems, Inc. (Class A)* 10,800 32,400 -------------- 1,064,337 -------------- Electronics (14.81%) Aeroflex, Inc.* 7,000 73,500 Alpha Industries, Inc.* 2,900 85,695 ATMI, Inc.* 3,550 106,500 Brooks Automation, Inc.* 2,050 94,505 CoorsTek, Inc.* 2,300 86,250 Credence Systems Corp.* 3,750 90,900 Cree, Inc.* 2,600 67,977 DDi Corp.* 5,000 100,000 DuPont Photomasks, Inc.* 2,000 96,500 Elantec Semiconductor, Inc.* 2,650 89,543 Electro Scientific Industries, Inc.* 2,650 100,965 LTX Corp.* 4,300 109,908 Microsemi Corp.* 2,650 188,150 Nanometrics, Inc.* 2,650 72,841 Pixelworks, Inc.* 2,600 92,924 Plexus Corp.* 2,000 66,000 PLX Technology, Inc.* 8,500 72,165 PRI Automation, Inc.* 5,400 100,035 Rudolph Technologies, Inc.* 3,050 143,350 Semtech Corp.* 4,450 133,500 -------------- 1,971,208 -------------- Energy (0.56%) Evergreen Solar, Inc.* 3,500 33,600 FuelCell Energy, Inc.* 1,800 41,562 -------------- 75,162 -------------- Finance (2.54%) Actrade Financial Technologies, Ltd.* 1,366 32,292 Affiliated Managers Group, Inc.* 2,500 153,750 eFUNDS Corp.* 3,150 58,590 Metris Cos., Inc. 2,775 93,545 -------------- 338,177 -------------- Food (1.35%) American Italian Pasta Co. (Class A)* 2,450 113,680 Dean Foods Co. 1,650 66,330 -------------- 180,010 -------------- Instruments - Scientific (0.11%) FEI Co.* 350 14,350 -------------- Insurance (3.56%) Fidelity National Financial, Inc. 4,350 106,879 HCC Insurance Holdings, Inc. 4,250 104,125 Philadelphia Consolidated Holding Corp.* 1,750 60,865 RenaissanceRe Holdings Ltd. (Bermuda) 1,550 114,855 StanCorp Financial Group, Inc. 1,850 87,672 -------------- 474,396 -------------- Leisure (0.74%) Expedia, Inc. (Class A)* 1,000 46,600 Extended Stay America, Inc.* 3,450 51,750 -------------- 98,350 -------------- Machinery (1.48%) Global Power Equipment Group, Inc.* 1,350 39,555 Hydril Co.* 4,900 111,573 SureBeam Corp. (Class A)* 2,700 46,224 -------------- 197,352 -------------- Media (6.17%) Entercom Communications Corp.* 2,450 131,344 Insight Communications Co., Inc.* 2,700 67,500 Pegasus Communications Corp.* 3,200 72,000 Radio One, Inc. (Class A)* 3,150 72,450 Radio One, Inc. (Class D)* 5,150 113,558 Regent Communications, Inc.* 14,000 167,860 Scholastic Corp.* 2,700 121,500 Westwood One, Inc.* 2,050 75,543 -------------- 821,755 -------------- Medical (18.77%) Accredo Health, Inc.* 4,550 169,214 Alkermes, Inc.* 3,350 117,585 AmeriSource Health Corp. (Class A)* 2,000 110,600 Apria Healthcare Group, Inc.* 2,150 62,027 Charles River Laboratories International, Inc.* 1,650 57,337 CIMA Labs, Inc.* 1,000 78,500 COR Therapeutics, Inc.* 2,300 70,150 Covance, Inc.* 5,350 121,177 Cytyc Corp.* 5,150 118,707 DaVita, Inc.* 6,400 130,112 Exelixis, Inc.* 2,300 43,631 Gene Logic, Inc.* 1,200 26,160 Inhale Therapeutic Systems, Inc.* 4,300 98,900 Inspire Pharmaceuticals, Inc.* 1,400 19,600 LifePoint Hospitals, Inc.* 3,400 150,552 Lincare Holdings, Inc.* 4,700 141,047 Mid Atlantic Medical Services, Inc.* 4,300 77,099 Noven Pharmaceuticals, Inc.* 2,050 80,360 NPS Pharmaceuticals, Inc.* 3,750 150,750 Pharmaceutical Product Development, Inc.* 800 24,408 Regeneron Pharmaceuticals, Inc.* 1,850 64,103 Renal Care Group, Inc.* 4,850 159,517 Rightchoice Managed Care, Inc.* 1,200 53,280 Salix Pharmaceuticals, Ltd.* 1,300 32,045 Unilab Corp.* 150 3,780 Urologix, Inc.* 4,350 79,649 Visible Genetics, Inc.* (Canada) 4,150 103,128 Wilson Greatbatch Technologies, Inc.* 5,350 155,150 -------------- 2,498,568 -------------- Oil & Gas (8.78%) Dril-Quip, Inc.* 2,750 59,207 Evergreen Resources, Inc.* 1,500 57,000 FMC Technologies, Inc.* 100 2,065 Hanover Compressor Co.* 3,559 117,767 Horizon Offshore, Inc.* 4,450 60,075 Lone Star Technologies, Inc.* 2,700 97,740 Marine Drilling Cos., Inc.* 4,000 76,440 NATCO Group, Inc. (Class A)* 1,800 15,840 Newfield Exploration Co.* 2,750 88,165 Oceaneering International, Inc.* 3,700 76,775 Patterson-UTI Energy, Inc.* 4,000 71,480 Pride International, Inc.* 4,500 85,500 Spinnaker Exploration Co.* 2,700 107,622 Stone Energy Corp.* 2,350 104,105 Torch Offshore, Inc.* 850 8,458 Universal Compression Holdings, Inc.* 3,700 105,080 Veritas DGC, Inc.* 1,300 36,075 -------------- 1,169,394 -------------- Retail (13.63%) 99 Cents Only Stores* 4,435 132,828 Applebee's International, Inc. 750 24,000 bebe stores, inc.* 1,050 30,618 Buca, Inc.* 4,000 87,000 California Pizza Kitchen, Inc.* 3,400 79,050 Columbia Sportswear Co.* 3,375 172,091 Cost Plus, Inc.* 3,250 97,500 Duane Reade, Inc.* 1,100 35,750 Ethan Allen Interiors, Inc. 1,950 63,375 Galyan's Trading Co.* 550 11,220 GoTo.com, Inc.* 4,550 88,497 Hot Topic, Inc.* 3,100 96,410 Krispy Kreme Doughnuts, Inc.* 2,400 96,000 O'Reilly Automotive, Inc.* 1,800 51,660 P.F. Chang's China Bistro, Inc.* 2,800 106,120 Performance Food Group Co.* 4,700 142,081 RARE Hospitality International, Inc.* 3,175 71,755 Skechers U.S.A. (Class A)* 2,350 68,691 Too, Inc.* 3,000 82,200 Tweeter Home Entertainment Group, Inc.* 4,100 144,730 Whole Foods Market, Inc.* 4,900 132,790 -------------- 1,814,366 -------------- Schools/Education (4.26%) Corinthian Colleges, Inc.* 2,750 129,442 Education Management Corp.* 4,200 168,210 SkillSoft Corp.* 1,950 66,788 Strayer Education, Inc. 1,500 73,125 University of Phoenix Online* 3,050 129,625 -------------- 567,190 -------------- Telecommunications (3.46%) AirGate PCS, Inc.* 2,700 140,400 Alamosa Holdings, Inc.* 4,800 78,240 CTC Communications Group, Inc.* 6,650 20,349 Dobson Communications Corp. (Class A)* 2,300 39,215 Metro One Telecommunications, Inc.* 2,050 132,984 SBA Communications Corp.* 1,950 48,263 Tellium, Inc.* 100 1,820 -------------- 461,271 -------------- Textile (0.64%) Nautica Enterprises, Inc.* 700 14,301 Tommy Hilfiger Corp.* 5,050 70,700 -------------- 85,001 -------------- Transport (1.52%) Expeditors International of Washington, Inc. 1,950 116,998 Forward Air Corp.* 2,850 85,357 -------------- 202,355 -------------- Utilities (0.45%) Beacon Power Corp.* 8,600 59,340 -------------- Waste Disposal Service & Equip. (0.95%) Waste Connections, Inc.* 3,500 126,000 -------------- TOTAL COMMON STOCKS (Cost $11,380,649) (99.10%) 13,193,181 -------------- -------------- INTEREST PAR VALUE ISSUER, DESCRIPTION RATE (000s OMITTED) - ------------------- -------------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (0.83%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 06-29-01, due 07-02-01 (Secured by U.S. Treasury Bonds, 10.625% due 08-15-15 and 6.250% due 08-15-23, and U.S. Treasury Note 5.625% due 11-30-02) 3.97% $111 111,000 -------------- -------------- TOTAL SHORT-TERM INVESTMENTS (0.83%) 111,000 -------------- -------------- TOTAL INVESTMENTS (99.93%) 13,304,181 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (0.07%) 8,834 -------------- -------------- TOTAL NET ASSETS (100.00%) $13,313,015 ============== ============== * Non-income producing security. Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. International Fund Schedule of Investments June 30, 2001 (Unaudited) - ------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. International Fund on June 30, 2001. It's divided into two main categories: common stocks and rights, and short-term investments. Common stocks are further broken down by country. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- -------------- -------------- COMMON STOCKS Brazil (0.37%) Tele Norte Leste Participacoes SA American Depositary Receipts (ADR) (Telecommunications) 1,200 $18,312 -------------- Canada (5.89%) Anderson Exploration Ltd.* (Oil & Gas) 2,500 50,491 Magna International, Inc. (Class A) (Automobiles/Trucks) 500 30,716 Manulife Financial Corp. (Insurance) 2,000 55,820 Nortel Networks Corp. (Telecommunications) 2 18 Precision Drilling Corp.* (Oil & Gas) 1,700 53,108 Suncor Energy, Inc. (Oil & Gas) 1,700 43,239 Talisman Energy, Inc. (Oil & Gas) 1,600 60,944 -------------- 294,336 -------------- Denmark (0.89%) Novo Nordisk A/S (Class B) (Medical) 1,000 44,275 -------------- France (10.24%) Alstom (Machinery) 1,800 50,125 Assurances Generales de France (Insurance) 1,000 55,677 Aventis SA (Medical) 600 47,949 Lafarge SA (Building) 400 34,237 PSA Peugeot Citroen SA (Automobiles/Trucks) 100 27,178 Sanofi-Synthelabo SA (Medical) 800 52,542 Schneider Electric SA (Machinery) 1,060 58,659 Societe Television Francaise 1 (Media) 1,000 29,203 Total Fina Elf SA (Oil & Gas) 330 46,256 Vivendi Environnement SA (Utilities) 1,500 63,190 Vivendi Universal SA (Media) 800 46,678 -------------- 511,694 -------------- Germany (7.62%) BASF AG (Chemicals) 1,300 51,338 Bayer AG (Chemicals) 1,400 54,991 Bayerische Motoren Werke AG (Automobiles/Trucks) 1,200 39,762 Deutsche Bank AG (Banks - Foreign) 500 35,864 Deutsche Telekom AG (Telecommunications) 1,500 34,220 E.On AG (Utilities) 1,300 68,238 Muenchener Rueckversicherungs-Gesellschaft AG (Insurance) 147 41,010 SAP AG (Computers) 400 55,562 -------------- 380,985 -------------- Hong Kong (4.24%) Cheung Kong Holdings Ltd. (Real Estate Operations) 5,000 54,489 China Mobile Ltd.* (Telecommunications) 7,000 36,886 Citic Pacific Ltd. (Commercial/Industrial Services) 13,000 40,251 Hutchison Whampoa Ltd. (Commercial/Industrial Services) 5,000 50,482 Johnson Electric Holdings Ltd. (Electronics) 22,000 30,039 -------------- 212,147 -------------- Ireland (2.88%) Allied Irish Banks Plc (Banks - Foreign) 3,100 35,729 Bank of Ireland (Banks - Foreign) 2,600 25,779 Bank of Ireland (Banks - Foreign) 1,600 15,864 CRH Plc (Building) 1,800 30,203 Elan Corp. Plc* (ADR) (Medical) 600 36,600 -------------- 144,175 -------------- Israel (1.50%) Check Point Software Technologies, Ltd.* (Computers) 500 25,285 Teva Pharmaceutical Industries, Ltd. (ADR) (Medical) 800 49,840 -------------- 75,125 -------------- Italy (4.97%) Autostrade SpA (Transport) 5,500 35,750 Banca Fideuram SpA (Finance) 3,100 29,476 Banca Nazionale del Lavoro* (Banks - - Foreign) 16,000 50,169 Edison SpA (Utilities) 3,800 34,876 Riunione Adriatica di Sicurta SpA (Insurance) 5,282 64,995 Telecom Italia SpA (Telecommunications) 3,700 33,237 -------------- 248,503 -------------- Japan (18.28%) Bridgestone Corp. (Rubber - Tires & Misc.) 2,000 20,929 Daikin Industries Ltd. (Building) 3,000 55,569 Fast Retailing Co., Ltd. (Retail) 200 34,801 Fuji Photo Film Co., Ltd. (Leisure) 1,000 43,140 Kyocera Corp. (Electronics) 500 44,102 Marui Co., Ltd. (Retail) 1,000 14,433 Matsushita Electric Industrial Co., Ltd. (Electronics) 2,000 31,305 Mitsui Fudosan Co., Ltd. (Real Estate Operations) 4,000 43,108 Mizuho Holdings, Inc. (Banks - Foreign) 8 37,206 Murata Manufacturing Co., Ltd. (Electronics) 300 19,942 Nintendo Co., Ltd. (Leisure) 100 18,202 Nippon Mitsubishi Oil Corp. (Oil & Gas) 3,000 16,935 Nippon Telegraph & Telephone Corp. (Telecommunications) 4 20,848 Nissan Motor Co., Ltd. (Automobiles/Trucks) 12,000 82,848 Nomura Securities Co., Ltd. (Broker Services) 1,000 19,164 NTT Data Corp. (Telecommunications) 4 21,811 NTT DoCoMo, Inc. (Telecommunications) 3 52,201 Oriental Land Co., Ltd. (Leisure) 400 29,701 Pioneer Corp. (Electronics) 1,000 30,391 Seven-Eleven Japan Co., Ltd. (Retail) 1,000 39,051 Sony Corp. (Electronics) 900 59,177 Takeda Chemical Industries Ltd. (Medical) 1,000 46,508 Tokyo Electron Ltd. (Machinery) 500 30,270 Toray Industries, Inc. (Textile) 8,000 31,946 Yamanouchi Pharmaceutical Co., Ltd. (Medical) 1,000 28,065 Yamato Transport Co., Ltd. (Transport) 2,000 41,937 -------------- 913,590 -------------- Mexico (0.42%) America Movil SA de CV Ser L (ADR) (Telecommunications) 1,000 20,860 -------------- Netherlands (5.65%) Akzo Nobel NV (Chemicals) 1,130 47,881 Heineken NV (Beverages) 1,375 55,501 ING Groep NV (Banks - Foreign) 850 55,610 Koninklijke Ahold NV (Retail) 1,545 48,444 Qiagen NV* (Medical) 1,400 30,847 Unilever Plc (Food) 5,200 43,866 -------------- 282,149 -------------- Portugal (0.91%) Portugal Telecom, SGPS, SA (Telecommunications) 6,500 45,389 -------------- Singapore (1.06%) Singapore Telecommunications Ltd. (Telecommunications) 51,000 53,183 -------------- South Korea (0.66%) Korea Telecom Corp. (ADR) (Telecommunications) 1,500 32,970 -------------- Spain (2.77%) Iberdrola SA (Utilities) 2,500 32,097 Inditex SA* (Retail) 3,200 51,118 Repsol YPF, SA (Oil & Gas) 2,200 36,356 Telefonica SA (Telecommunications) 1,546 19,076 -------------- 138,647 -------------- Sweden (2.08%) Electrolux AB, Ser B (Machinery) 3,800 52,598 Svenska Handelsbanken AB (Banks - Foreign) 3,600 51,485 -------------- 104,083 -------------- Switzerland (3.66%) Nestle SA (Food) 300 63,791 Novartis AG (Medical) 1,009 36,535 Serona SA* (ADR) (Medical) 1,300 32,435 Swiss Re Co. (Insurance) 25 49,986 -------------- 182,747 -------------- Taiwan (1.26%) Taiwan Semiconductor Manufacturing Co., Ltd.* (ADR) (Electronics) 2,100 31,899 United Microelectronics Corp.* (ADR) (Electronics) 3,500 31,150 -------------- 63,049 -------------- United Kingdom (18.71%) Abbey National Plc (Banks - Foreign) 1,500 26,300 AstraZeneca Plc (Medical) 800 37,326 Barclays Plc (Banks - Foreign) 1,600 49,122 BG Group Plc (Oil & Gas) 13,000 51,308 BP Plc (Oil & Gas) 4,600 37,865 British Airways PLC (Transport) 6,700 32,458 British American Tobacco Plc (Tobacco) 5,200 39,545 British Sky Broadcasting Group Plc* (Media) 5,200 50,090 Centrica Plc (Utilities) 15,640 50,054 Compass Group Plc (Consumer Services) 5,500 44,073 Diageo Plc (Beverages) 6,800 74,696 Energis Plc* (Telecommunications) 8,450 22,462 GlaxoSmithKline Plc (Medical) 1,600 45,066 National Grid Group Plc (Utilities) 6,600 48,705 Reckitt Benckiser Plc (Grocery Products) 4,100 59,184 Royal Bank of Scotland Group Plc (Banks - Foreign) 2,300 50,757 Scottish Power Plc (Utilities) 5,800 42,719 Shell Transport & Trading Co. Plc (Oil & Gas) 6,800 56,597 Shire Pharmaceuticals Group Plc* (Medical) 2,400 43,736 Standard Chartered Plc (Banks - Foreign) 2,600 33,357 Vodafone Group Plc (Telecommunications) 17,980 39,881 -------------- 935,301 -------------- United States (4.06%) Amdocs Ltd.* (Telecommunications) 400 21,540 Santa Fe International Corp. (Oil & Gas) 1,500 43,500 Schlumberger Ltd. (Oil & Gas) 900 47,385 Transocean Sedco Forex, Inc. (Oil & Gas) 1,000 41,250 XL Capital Ltd. (Class A) (Insurance) 600 49,260 -------------- 202,935 -------------- TOTAL COMMON STOCKS (Cost $5,232,978) (98.12%) 4,904,455 -------------- -------------- RIGHTS Portugal (0.00%) Portugal Telecom, SGPS, SA* (Telecommunications) 6,500 0 -------------- TOTAL RIGHTS (Cost $0) (0.00%) 0 -------------- -------------- TOTAL COMMON STOCKS AND RIGHTS (Cost $5,232,978) (98.12%) 4,904,455 -------------- -------------- INTEREST PAR VALUE ISSUER, DESCRIPTION RATE (000s OMITTED) - ------------------- -------------- -------------- Joint Repurchase Agreement (5.24%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 06-29-01, due 07-02-01 (Secured by U.S. Treasury Bond, 6.875% due 08-15-25 and U.S. Treasury Note, 5.625% due 11-30-02) 3.97% $262 262,000 -------------- -------------- NUMBER OF SHARES -------------- Cash Equivalents (20.81%) Navigator Securities Lending Prime Portfolio** 1,040,206 1,040,206 -------------- -------------- TOTAL SHORT-TERM INVESTMENTS (26.05%) 1,302,206 -------------- -------------- TOTAL INVESTMENTS (124.17%) 6,206,661 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (24.17%) (1,208,085) -------------- -------------- TOTAL NET ASSETS (100.00%) $4,998,576 ============== ============== * Non-income producing security. ** Represents investment of security lending collateral. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. Industry Diversification (Unaudited) - --------------------------------------------------------------------------- The Fund primarily invests in securities issued by companies of other countries. The performance of the Fund is closely tied to the economic conditions within the countries in which it invests. The concentration of investments by country for individual securities held by the Fund is shown in the schedule of investments. In addition, the concentration of investments can be aggregated by various industry groups. The table below shows the percentages of the Fund's investments at June 30, 2001 assigned to the various investment categories. MARKET VALUE AS A % INVESTMENT CATEGORIES OF FUND NET ASSETS - ---------------------- ------------------- Automobiles/Trucks 3.61% Banks - Foreign 9.35 Beverages 2.60 Broker Services 0.38 Building 2.40 Chemicals 3.09 Commercial/Industrial Services 1.82 Computers 1.62 Consumer Services 0.88 Diversified Operations 2.30 Electronics 4.20 Finance 0.59 Food 2.15 Grocery Products 1.18 Insurance 6.34 Leisure 1.82 Machinery 3.83 Media 1.59 Medical 10.64 Oil & Gas 11.71 Real Estate Operations 1.95 Retail 3.76 Rubber - Tires & Misc. 0.42 Telecommunications 9.46 Textile 0.64 Tobacco 0.79 Transport 2.20 Utilities 6.80 Short-Term Investments 26.05 ------- TOTAL INVESTMENTS 124.17% ======= John Hancock Funds - Declaration Trust - V.A. Regional Bank Fund Schedule of Investments June 30, 2001 (Unaudited) - ------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. Regional Bank Fund on June 30, 2001. It's divided into two main categories: common stocks and short-term investments. Common stocks are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. NUMBER OF MARKET ISSUER, DESCRIPTION SHARES VALUE - ------------------- -------------- -------------- COMMON STOCKS Superregional Banks (7.50%) Bank One Corp. (OH) 3,000 $107,400 Mellon Financial Corp. (PA) 8,500 391,000 U.S. Bancorp (MN) 5,000 113,950 Wells Fargo & Co. (CA) 6,000 278,580 -------------- 890,930 -------------- Banks - Money Center (4.80%) Citigroup, Inc. (NY) 7,000 369,880 J.P. Morgan Chase & Co. (NY) 4,500 200,700 -------------- 570,580 -------------- Banks - United States (71.48%) BancFirst Corp. (OK) 2,500 100,625 BancWest Corp. (HI) 3,000 103,200 BB&T Corp. (NC) 3,000 110,100 Cascade Bancorp (OR) 21,612 302,568 Chittenden Corp. (VT) 5,000 168,250 City National Corp. (CA) 5,000 221,450 Comerica, Inc. (MI) 3,500 201,600 Commerce Bancshares, Inc. (MO) 10,047 370,734 Community First Bankshares, Inc. (ND) 7,500 172,500 Cullen/Frost Bankers., Inc. (TX) 6,500 220,025 Fifth Third Bancorp (OH) 7,092 425,875 Financial Institutions, Inc. (NY) 9,000 201,600 First Midwest Bancorp., Inc. (IL) 5,000 154,250 FirstMerit Corp. (OH) 5,000 132,000 Independent Bank Corp. (MI) 8,000 196,400 M & T Bank Corp. (NY) 4,000 302,000 Mercantile Bankshares Corp. (MD) 9,500 371,735 Mid-State Bancshares (CA) 25,000 456,000 National Commerce Financial Corp. (TN) 9,000 219,330 Northern Trust Corp. (IL) 1,500 93,750 Northrim Bank (AK) 16,695 232,227 Pacific Capital Bancorp. (CA) 13,500 411,075 PNC Financial Services Group (PA) 4,000 263,160 Prosperity Bancshares, Inc. (TX) 14,000 335,020 SJNB Financial Corp. (CA) 8,000 345,920 SouthTrust Corp. (AL) 3,000 78,000 Southwest Bancorp. of Texas, Inc.* (TX) 5,000 151,050 State Street Corp. (MA) 2,000 98,980 Sterling Bancshares, Inc. (TX) 10,000 191,800 Summit Bancshares, Inc. (TX) 12,000 225,840 Texas Regional Bancshares, Inc. (Class A) (TX) 1,750 70,508 Umpqua Holdings Corp. (OR) 33,000 422,730 Valley National Bancorp. (NJ) 16,485 467,350 Whitney Holding Corp. (LA) 5,000 234,500 Yardville National Bancorp. (NJ) 15,000 210,000 Zions Bancorp. (UT) 4,000 236,000 -------------- 8,498,152 -------------- Computers (1.00%) SEI Investments Co. (PA) 2,500 118,500 -------------- Finance (2.41%) American Express Co. (NY) 3,000 116,400 Fannie Mae (DC) 2,000 170,300 -------------- 286,700 -------------- Insurance (2.06%) American General Corp. (TX) 1,000 46,450 Hartford Financial Services Group, Inc. (The) (CT) 2,000 136,800 MetLife, Inc. (NY) 2,000 61,960 -------------- 245,210 -------------- Thrifts (4.16%) Charter One Financial, Inc. (OH) 6,017 191,942 First Financial Holdings, Inc. (SC) 5,300 121,900 Warren Bancorp., Inc. (MA) 20,000 180,400 -------------- 494,242 -------------- TOTAL COMMON STOCK (Cost $8,818,705) (93.41%) 11,104,314 -------------- -------------- INTEREST PAR VALUE ISSUER, DESCRIPTION RATE (000s OMITTED) - ------------------- -------------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (6.25%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 06-29-01, due 07-02-01 (Secured by U.S. Treasury Bonds, 10.625% due 08-15-15, and 6.250% due 08-15-23, U.S. Treasury Note 5.625% due 11-30-02) 3.97% $743 743,000 -------------- -------------- TOTAL SHORT-TERM INVESTMENTS (Cost $743,000) (6.25%) 743,000 -------------- -------------- TOTAL INVESTMENTS (99.66%) 11,847,314 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (0.34%) 40,929 -------------- -------------- TOTAL NET ASSETS (100.00%) $11,888,243 ============== ============== * Non-income producing security. The percentage shown for each investment category is the total value of that category as a percentage of the net assets of the Fund. See notes to financial statements. John Hancock Funds - Declaration Trust - V.A. High Yield Bond Fund Schedule of Investments June 30, 2001 (Unaudited) - ------------------------------------------------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all securities owned by the V.A. High Yield Bond Fund on June 30, 2001. It is divided into four main categories: bonds, common stocks, preferred stocks and warrants, and short-term investments. Bonds are further broken down by industry group. Short-term investments, which represent the Fund's "cash" position, are listed last. INTEREST CREDIT PAR VALUE MARKET ISSUER, DESCRIPTION RATE RATING** (000s OMITTED) VALUE - ------------------- -------- ------ ------------ ------------- BONDS Aerospace (0.06%) Compass Aerospace Corp., Gtd Sr Sub Note Ser D 04-15-05 (B) 10.125% C $25 $4,000 -------------- Agricultural Operations (0.05%) Iowa Select Farms L.P./ISF Finance, Inc., Jr Sec Note 12-01-06 (R) 10.750 Ca 6 3,000 -------------- Automobiles/Trucks (1.10%) AM General Corp., Sr Note Ser B 05-01-02 12.875 B 50 48,500 J.B. Poindexter & Co., Inc., Sr Note 05-15-04 12.500 B 25 20,750 -------------- 69,250 -------------- Banks - United States (0.82%) Colonial Bank, Sub Note 06-01-11 9.375 BB- 50 51,640 -------------- Building (1.15%) Amatek Industries Property Ltd., Sr Sub Note (Australia) 02-15-08 (Y) 12.000 B 25 19,500 WCI Communities, Inc., Sr Sub Note 02-15-11 (R) 10.625 B 50 52,500 -------------- 72,000 -------------- Business Services - Misc. (0.22%) AP Holdings, Inc., Sr Disc Note, Step Coupon (11.25%, 03-15-03) 03-15-08 (A) Zero CCC+ 200 14,000 -------------- Chemicals (4.91%) American Pacific Corp., Sr Note 03-01-05 9.250 BB- 30 30,150 Applied Extrusion Technologies, Inc., Sr Note 07-01-11 (R) 10.750 B 50 50,625 Sr Note Ser B 04-01-02 11.500 B 25 25,031 Huntsman ICI Chemicals LLC, Sr Sub Note 07-01-09 10.125 B 100 98,000 Huntsman ICI Holdings LLC, Sr Disc Note 12-31-09 Zero B+ 75 23,250 Trikem S.A., Bond (Brazil) 07-24-07 (R) (Y) 10.625 B+ 125 81,250 -------------- 308,306 -------------- Consumer Products Misc. (0.37%) Diamond Brands Operating Corp., Sr Sub Note 04-15-08 (B) 10.125 D 100 14,000 Indesco International, Inc., Sr Sub Note 04-15-08 (B) 9.750 D 100 9,000 -------------- 23,000 -------------- Containers (3.97%) Gaylord Container Corp., Sr Note Ser B 06-15-07 9.375 B- 15 9,600 Sr Sub Note Ser B 02-15-08 9.875 CCC+ 100 29,000 Kappa Beheer B.V., Sr Sub Bond (Netherlands) 07-15-09 (Y) 10.625 B 75 78,750 Sr Sub Bond, Step Coupon (12.50%, 07-15-04) (Netherlands) 07-15-09 (A) (E) Zero B 100 64,796 Riverwood International Corp., Gtd Sr Sub Note 04-01-08 10.875 CCC+ 70 67,550 -------------- 249,696 -------------- Cosmetics & Personal Care (0.12%) Global Health Sciences, Inc., Gtd Sr Note 05-01-08 (B) 11.000 D 75 7,500 -------------- Diversified Operations (0.84%) Diamond Holdings Plc, Bond (United Kingdom) 02-01-08 # 10.000 B- 50 52,826 -------------- Energy (3.00%) AEI Resources, Inc./AEI Resources Holdings, Inc., Gtd Note 12-15-05 (B) (R) 10.500 Ca 75 52,500 P&L Coal Holdings Corp., Sr Sub Note Ser B 05-15-08 9.625 B 81 84,848 Port Arthur Finance Corp., Gtd Sr Sec Note 01-15-09 12.500 BB 50 51,000 -------------- 188,348 -------------- Finance (1.57%) Finova Capital Corp., Floating Rate Sr Note 06-18-03 4.128*** D 50 47,000 Takefuji Corp., Sr Note (Japan) 04-15-11 (R) (Y) 9.200 A- 50 51,591 -------------- 98,591 -------------- Food (4.05%) Agrilink Foods, Inc., Sr Sub Note 11-01-08 11.875 B- 125 113,750 Mastellone Hermanos S.A., Sr Note (Argentina) 04-01-08 (Y) 11.750 B+ 125 68,750 RAB Holdings, Inc., Sr Note 05-01-08 (R) 13.000 Caa2 120 72,000 -------------- 254,500 -------------- Government - Foreign (0.80%) Panama, Republic of, Bond (Panama) 02-08-11 (Y) 9.625 BB+ 50 50,500 -------------- Insurance (0.81%) Willis Corroon Corp., Gtd Sr Sub Note 02-01-09 9.000 B+ 50 50,875 -------------- Leisure (3.05%) Ameristar Casinos, Inc., Sr Sub Note 02-15-09 (R) 10.750 B- 50 52,125 Claridge Hotel & Casino Corp., 1st Mtg Note 02-01-02 (B) 11.750 Ca 50 1,500 Fitzgeralds Gaming Corp., Gtd Sr Sec Note Ser B 12-15-04 (B) 12.250 Caa1 50 30,000 Penn National Gaming, Inc., Sr Sub Note 03-01-08 (R) 11.125 B- 25 25,875 SC International Services, Inc., Sr Sub Note Ser B 09-01-07 9.250 B 30 32,100 Trump Atlantic City Associates, 1st Mtg Note 05-01-06 11.250 B- 75 50,250 -------------- 191,850 -------------- Machinery (0.25%) Glasstech, Inc., Sr Note Ser B 07-01-04 12.750 B3 25 15,500 -------------- Manufacturing (0.32%) ICON Health & Fitness, Inc., Gtd Note 09-27-05 12.000 B 22 19,980 -------------- Media (6.93%) Antenna TV S.A., Sr Note (Germany) 07-01-08 (E) 9.750 BB 50 41,927 Callahan Nordheim-Westfalen GmbH, Sr Note (Germany) 7-15-11 (E) 14.125 B- 50 35,362 DIVA Systems Corp., Sr Disc Note Ser B, Step Coupon (12.625%, 03-01-03) 03-01-08 (A) Zero B- 50 7,000 Fox Family Worldwide, Inc., Sr Disc Note, Step Coupon (10.25%, 11-01-02) 11-01-07 (A) Zero B 80 71,200 ONO Finance Plc, Sr Sub Note (United Kingdom) 07-15-10 (E) 14.000 CCC+ 50 33,033 Pegasus Communications Corp., Sr Note Ser B 08-01-07 12.500 CCC+ 35 34,650 Pegasus Satellite Communications, Inc., Sr Disc Note, Step Coupon (13.50%, 03-01-04) 03-01-07 (A) Zero CCC+ 60 36,600 Regional Independent Media Group Plc, Sr Disc Note, Step Coupon (12.875%, 07-01-03) (United Kingdom) 07-01-08 (A) # Zero B- 20 22,539 Sr Note (United Kingdom) 07-01-08 (Y) 10.500 B- 5 5,050 Sirius Satellite Radio, Inc., Sr Disc Note, Step Coupon (15.00%, 12-01-02) 12-01-07 (A) Zero CCC+ 110 36,300 United International Holdings, Inc., Sr Disc Note, Step Coupon (10.75%, 02-15-03) 02-15-08 (A) Zero B- 75 23,250 XM Satellite Radio, Inc., Sr Sec Note 03-15-10 14.000 CCC+ 150 88,500 -------------- 435,411 -------------- Medical (1.89%) Magellan Health Services, Inc., Sr Sub Note 02-15-08 9.000 B- 100 94,250 Select Medical Corp., Sr Sub Note 06-15-09 (R) 9.500 B 25 24,625 -------------- 118,875 -------------- Metal (3.47%) Doe Run Resources Corp., Gtd Sr Note Ser B 03-15-03 11.181*** CCC+ 25 8,500 Gtd Sr Note Ser B 03-15-05 11.250 CCC+ 10 3,400 Freeport-McMoRan Copper & Gold, Inc., Sr Note 11-15-06 7.500 CCC 75 50,250 Golden Northwest Aluminum, Inc., 1st Mtg Note 12-15-06 12.000 B+ 25 13,000 Great Lakes Acquisition Corp., Sr Disc Deb, Step Coupon (13.125%, 05-15-03) 05-15-09 (A) Zero B- 200 80,000 TVX Gold, Inc., Conv Sub Note (Canada) 03-28-02 (Y) 5.000 B- 100 63,000 -------------- 218,150 -------------- Miscellaneous (0.65%) Sotheby's Holdings, Inc., Note 02-01-09 6.875 BBB 50 41,000 -------------- Oil & Gas (11.09%) Comstock Resources, Inc., Gtd Sr Note 05-01-07 11.250 B 75 79,500 Frontier Oil Corp., Sr Sub Note 11-15-09 11.750 B 50 53,500 Giant Industries, Inc., Gtd Sr Sub Note 09-01-07 9.000 B+ 50 48,500 Sr Sub Note 11-15-03 9.750 B+ 25 24,563 Great Lakes Carbon Corp., Gtd Sr Sub Note Ser B 05-15-08 10.250 B- 50 29,500 Key Energy Services, Inc., Conv Sub Note 09-15-04 (R) 5.000 B2 80 74,000 Conv Sub Note 09-15-04 5.000 B2 143 132,275 Sr Sub Note Ser B 01-15-09 14.000 B 93 106,950 Mariner Energy, Inc., Sr Sub Note Ser B 08-01-06 10.500 B- 10 9,875 Ocean Rig Norway A.S., Gtd Sr Sec Note (Norway) 06-01-08 (Y) 10.250 B- 55 48,400 Universal Compression, Inc., Sr Disc Note, Step Coupon (9.875%, 02-15-03) 02-15-08 (A) Zero B+ 100 90,000 -------------- 697,063 -------------- Paper & Paper Products (4.84%) APP China Group Ltd., Unit (Sr Disc Note & Warrant) (Indonesia) 03-15-10 (B) (R) (Y) 14.000 D 250 37,500 APP Finance (VII) Mauritius Ltd., Gtd Note (Indonesia) 04-30-03 (B) (R) (Y) 3.500 D 10 400 Corporacion Durango S.A. de C.V., Sr Note (Mexico) 08-01-06 (Y) 13.125 BB- 125 125,000 Grupo Industrial Durango S.A., Note (Mexico) 08-01-03 (Y) 12.625 BB- 125 131,250 Sappi BVI Finance Ltd., Gtd Conv Bond (South Africa) 08-01-02 (R) (Y) 7.500 BB- 10 9,950 -------------- 304,100 -------------- Real Estate Operations (0.02%) Signature Resorts, Inc., Conv Sub Note 01-15-07 (B) 5.750 Caa1 35 1,050 -------------- Retail (0.92%) Imperial Home Decor Group, Inc, Gtd Sr Sub Note 03-15-08 (B) 11.000 C 125 625 SpinCycle, Inc., Sr Disc Note, Step Coupon (12.75%, 05-01-01) 05-01-05 (A) Zero CCC+ 25 7,250 St. John Knits International, Inc., Sr Sub Note 07-01-09 12.500 B- 50 50,000 -------------- 57,875 -------------- Steel (1.54%) Gulf States Steel, Inc. of Alabama, 1st Mtg Bond 04-15-03 (B) 13.500 Caa3 100 250 LTV Corp. (The), Gtd Sr Sub Note 11-15-09 (B) 11.750 Ca 50 3,500 Metallurg Holdings, Inc., Sr Disc Note, Step Coupon (12.75%, 07-15-03) 07-15-08 (A) Zero CCC+ 50 23,000 Metallurg, Inc., Gtd Sr Note Ser B 12-01-07 11.000 B- 30 27,000 NSM Steel, Inc./NSM Steel Ltd., Gtd Sr Sub Mtg Note Ser B 02-01-08 (B) (R) 12.250 D 75 750 Oregon Steel CF&I, Note 03-31-03 (r) 9.500 B 46 42,321 -------------- 96,821 -------------- Telecommunications (6.14%) CTI Holdings S.A., Sr Note, Step Coupon (11.25%, 04-15-03) (Argentina) 04-15-08 (A) (Y) Zero B2 75 29,250 Esprit Telecom Group Plc, Sr Note (Germany) 06-15-08 (B) # 11.000 D 40 346 Grupo Iusacell S.A. de C.V., Sr Note (Mexico) 12-01-06 (Y) 14.250 B+ 100 106,000 GT Group Telecom, Inc., Unit (Sr Disc Note & Warrant), Step Coupon (13.125%, 02-01-05) 02-01-10 (A) 1.000 B- 100 28,000 Jazztel Plc, Sr Note (United Kingdom) 12-15-09 (E) 13.250 CCC+ 50 15,669 Nextel Partners, Inc., Sr Disc Note, Step Coupon (14.00%, 02-01-04) 02-01-09 (A) Zero CCC+ 15 8,400 NTL Communications Corp., Sr Note Ser B 10-01-08 11.500 B 50 33,500 Sr Note Ser B, Step Coupon (12.375%, 10-01-03) 10-01-08 (A) Zero B 100 42,000 PTC International Finance II S.A., Gtd Sr Sub Note (Luxembourg) 12-01-09 (E) 11.250 B+ 25 22,022 Telewest Communications Plc, Sr Disc Note, Step Coupon (9.875%, 04-15-04) (United Kingdom) 04-15-09 (A) # Zero B+ 25 16,904 United Pan-Europe Communications N.V., Sr Note (Netherlands) 11-01-07 (E) 10.875 B 50 24,139 Sr Note (Netherlands) 11-01-09 (E) 11.250 Caa1 25 12,070 Versatel Telecom International N.V., Sr Note (Netherlands) 05-15-08 (Y) 13.250 B- 125 47,500 -------------- 385,800 -------------- Textile (1.51%) Coyne International Enterprises Corp., Sr Sub Note 06-01-08 11.250 CCC 75 31,500 Steel Heddle Group, Inc., Sr Disc Deb, Step Coupon (13.75%, 06-01-03) 06-01-09 (A) Zero Caa2 200 10,000 Steel Heddle Manufacturing Co., Gtd Sr Sub Note Ser B 06-01-08 (B) 10.625 Caa1 50 7,500 Tropical Sportswear International Corp., Sr Sub Note Ser A 06-15-08 11.000 B- 50 46,000 -------------- 95,000 -------------- Transport (7.68%) Amtran, Inc., Sr Note 08-01-04 10.500 B+ 50 44,000 Cenargo International Plc, 1st Mtg Note (United Kingdom) 06-15-08 (Y) 9.750 B+ 20 15,200 CHC Helicopter Corp., Sr Sub Note (Canada) 07-15-07 (E) 11.750 B2 100 94,864 Fine Air Services, Inc., Sr Note 06-01-08 (B) 9.875 Caa1 105 6,296 North American Van Lines, Inc., Sr Sub Note 12-01-09 (R) 13.375 B- 100 92,000 Northwest Airlines Corp., Gtd Note 03-15-07 8.700 BB 100 96,939 Pacer International, Inc., Sr Sub Note 06-01-07 11.750 B- 50 49,000 Pacific & Atlantic Holdings, Inc., Sr Sec Note 12-31-07 (R) 10.500 CC 21 10,716 US Airways, Inc., Pass Thru Ctf Ser 1993-A3 03-01-13 10.375 B- 75 73,500 -------------- 482,515 -------------- Utilities (1.54%) CMS Energy Corp., Sr Note 10-15-07 9.875 BB 25 26,375 Monterrey Power S.A. de C.V., Sr Sec Bond (Mexico) 11-15-09 (R) (Y) 9.625 BB+ 68 70,381 -------------- 96,756 -------------- Waste Disposal Service & Equip. (2.09%) Allied Waste North America, Inc., Sr Sub Note Ser B 08-01-09 10.000 B+ 125 128,438 Waste Systems International, Inc., Gtd Sr Note 01-15-06 (B) 11.500 C 15 3,000 -------------- 131,438 -------------- TOTAL BONDS (Cost $7,053,690) (77.77%) 4,887,216 -------------- -------------- NUMBER OF SHARES OR WARRANTS -------------- COMMON STOCKS American Pacific Corp.** 5,000 $32,200 AMR Corp.** 2,000 72,260 Chesapeake Energy Corp.** 1,872 12,318 Gaylord Container Corp. (Class A)** 6,500 6,825 Grey Wolf, Inc.** 28,850 115,400 International Wireless Communications Holdings, Inc. 2,417 1,329 KLM Royal Dutch Airlines N.V. (Netherlands) (Y) 78 1,377 Kraft Foods, Inc. (Class A)** 255 7,905 Nortek, Inc.** 563 17,577 Northwest Airlines Corp.** 6,500 164,125 Pathmark Stores, Inc.** 1,046 25,731 Star Gas Partners, L.P. 3,300 68,805 Waste Systems International, Inc. (B)** 8,715 0 -------------- -------------- TOTAL COMMON STOCKS (Cost $732,116) (8.37%) 525,852 -------------- -------------- PREFERRED STOCKS AND WARRANTS Asia Pulp & Paper Co. Ltd., Warrant (R)** 250 3 DIVA Systems Corp., Warrant (R)** 150 188 Gothic Energy Corp., Warrant** 79 31 HF Holdings, Inc., Warrant** 212 106 Hills Stores Co., Warrant** 35,000 0 Nakornthai Strip Mill Plc, Warrant (Thailand) (R) (Y)** 63,309 63 Nextel Communications, Inc., 11.125%, Payment-In-Kind, Ser E, Preferred Stock 208 131,040 ONO Finance Plc, Warrant (United Kingdom) (R) (Y)** 50 1,500 Pacific & Atlantic Holdings, Inc., 7.50%, Preferred Stock 1,172 5,860 Pathmark Stores, Inc., Warrant** 740 6,497 Smurfit-Stone Container Corp., 7.00%, Ser A, Preferred Stock 4,100 79,950 SpinCycle, Inc., Warrant (R)** 25 0 TimberWest Forest Corp., Unit (Common & Preferred Shares) (Canada) # 38,000 305,490 Waste Systems International, Inc., 8.00%, Ser E, Preferred Stock (B)** 160 160 Waste Systems International, Inc., Warrant (B) (R)** 225 2 XM Satellite Radio Holdings, Inc., Warrant (R)** 150 3,450 -------------- TOTAL PREFERRED STOCKS AND WARRANTS (Cost $737,235) (8.50%) 534,340 -------------- -------------- INTEREST PAR VALUE ISSUER, DESCRIPTION RATE (000s OMITTED) - ------------------- -------------- -------------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (1.35%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 06-29-01, due 07-02-01 (Secured by U.S. Treasury Bonds, 10.625% due 08-15-15 and 6.250% due 08-15-23, U.S. Treasury Note 5.625% due 11-30-02) 3.970% $85 85,000 -------------- -------------- TOTAL SHORT-TERM INVESTMENTS (1.35%) 85,000 -------------- -------------- TOTAL INVESTMENTS (95.99%) 6,032,408 -------------- -------------- OTHER ASSETS AND LIABILITIES, NET (4.01%) 251,952 -------------- -------------- TOTAL NET ASSETS (100.00%) $6,284,360 ============== ============== * Credit ratings are unaudited and rated by Moody's Investors Service or John Hancock Advisers, Inc. where Standard and Poor's ratings are not available. ** Non-income producing security. *** Represents rate in effect on June 30, 2001. # Par value of foreign bonds and common stocks is expressed in local currency, as shown parenthetically in security description. (A) Cash interest will be paid on this obligation at the stated rate beginning on the stated date. (B) Non-income producing issuer filed for protection under Federal Bankruptcy Code or is in default of interest payment. (E) Parenthetical disclosure of a country in the security description represents country of issuer; however, security is euro denominated. (R) These securities are exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers, in transactions exempt from registration. Rule 144A securities amounted to $766,994, or 12.20% of net assets as of June 30, 2001. (Y) Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer; however, security is U.S. dollar denominated. (r) Direct placement securities are restricted as to resale. They have been valued in accordance with procedures approved by the Trustees after consideration of restrictions as to resale, financial condition and prospects of the issuer, general market conditions and pertinent information, in accordance with the Fund's By- Laws and the Investment Company Act of 1940, as amended. The Fund has limited rights to registration under the Securities Act of 1933 with respect to these restricted securities. Additional information on these securities is as follows: MARKET MARKET VALUE AS A VALUE AT ACQUISITION ACQUISITION % OF FUND JUNE 30, ISSUER, DESCRIPTION DATE COST NET ASSETS 2000 - ------------------- ---- ---- ---------- ---- Oregon Steel CF&I 05-14-98 $44,207 0.67% $42,321 The percentage shown for each investment category is the total value of that category expressed as a percentage of the net assets of the Fund. See notes to financial statements. Portfolio Concentration June 30, 2001 (Unaudited) - --------------------------------------------------------------------------- The V.A. High Yield Bond Fund invests primarily in securities issued in the United States of America. The performance of this Fund is closely tied to the economic and financial conditions of the countries within which it invests. The concentration of investments by industry category for individual securities held by the Fund is shown in the Schedule of Investments. In addition, concentration of investments can be aggregated by various countries. The table below shows the percentages of the Fund's investments at June 30, 2001 assigned to country categories. MARKET VALUE AS A % COUNTRY DIVERSIFICATION OF FUND NET ASSETS - ----------------------- ------------------- Argentina 1.56% Australia 0.31 Brazil 1.29 Canada 7.37 Germany 1.24 Indonesia 0.60 Japan 0.82 Luxembourg 0.35 Mexico 6.88 Netherlands 3.64 Norway 0.77 Panama 0.80 South Africa 0.16 United Kingdom 2.59 United States 67.61 ------ TOTAL INVESTMENTS 95.99% ====== Additionally, the concentration of investments can be aggregated by the quality rating for each debt security. QUALITY DISTRIBUTION - -------------------- A 0.82% BBB 1.48 BB 11.25 B 51.14 CCC 9.97 CC 1.13 C 0.12 D 1.86 ------ TOTAL BONDS 77.77% ====== See notes to financial statements. NOTES TO FINANCIAL STATEMENTS John Hancock Funds - Declaration Trust (UNAUDITED) NOTE A -- ACCOUNTING POLICIES John Hancock V.A. 500 Index Fund ("V.A. 500 Index Fund"), John Hancock V.A. Large Cap Growth Fund ("V.A. Large Cap Growth Fund"), John Hancock V.A. Mid Cap Growth Fund ("V.A. Mid Cap Growth Fund"), John Hancock V.A. Small Cap Growth Fund ("V.A. Small Cap Growth Fund"), John Hancock V.A. International Fund ("V.A. International Fund"), John Hancock V.A. Regional Bank Fund ("V.A. Regional Bank Fund") and John Hancock V.A. High Yield Bond Fund ("V.A. High Yield Bond Fund") (each a "Fund," collectively, the "Funds") are separate series of John Hancock Declaration Trust (the "Trust"), an open-end management investment company registered under the Investment Company Act of 1940. The Trust, organized as a Massachusetts business trust in 1995, consists of fifteen different series as of June 30, 2001. The other series of the Trust are reported in a separate shareholders' report. Each Fund currently has one class of shares with equal rights as to voting, redemption, dividends and liquidation within its respective Funds. The Trustees may authorize the creation of additional series from time to time to satisfy various investment objectives. An insurance company issuing a Variable Contract that participates in the Trust will vote shares of the Funds held by the insurance company's separate accounts as required by law. In accordance with current law and interpretations thereof, participating insurance companies are required to request voting instructions from policy owners and must vote shares of the Funds in proportion to the voting instructions received. The investment objective of the V.A. 500 Index Fund is to provide investment results that correspond with the total return performance of the Standard & Poor's 500 Stock Price Index (the "S&P 500 Index"). The investment objective of the V.A. Large Cap Growth Fund is to seek long-term capital appreciation. The investment objective of the V.A. Mid Cap Growth Fund is to seek long-term capital appreciation. The investment objective of the V.A. Small Cap Growth Fund is to seek long-term capital appreciation. The investment objective of the V.A. International Fund is to seek long-term growth of capital. The investment objective of the V.A. Regional Bank Fund is to seek long-term capital appreciation. The investment objective of the V.A. High Yield Bond Fund is to seek maximum current income without assuming undue risk. Significant accounting policies of the Funds are as follows: VALUATION OF INVESTMENTS Securities in the Funds' portfolios are valued on the basis of market quotations, valuations provided by independent pricing services or, if quotations are not readily available, or the value has been materially affected by events occurring after the closing of a foreign market, at fair value as determined in good faith in accordance with procedures approved by the Trustees. Short-term debt investments maturing within 60 days are valued at amortized cost, which approximates market value. All portfolio transactions initially expressed in terms of foreign currencies have been translated into U.S. dollars as described in "Foreign Currency Translation" below. JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Funds, along with other registered investment companies having a management contract with John Hancock Advisers, Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group, Inc., may participate in a joint repurchase agreement transaction. Aggregate cash balances are invested in one or more large repurchase agreements, whose underlying securities are obligations of the U.S. government and/or its agencies. The Funds' respective custodian banks receive delivery of the underlying securities for the joint account on the Funds' behalf. The Adviser is responsible for ensuring that the agreement is fully collateralized at all times. FOREIGN CURRENCY TRANSLATION All assets or liabilities initially expressed in terms of foreign currencies are translated into U.S. dollars based on London currency exchange quotations as of 5:00 p.m., London time, on the date of any determination of the net asset value of the Funds. Transactions affecting statement of operations accounts and net realized gain (loss) on investments are translated at the rates prevailing at the dates of the transactions. The Funds do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Reported net realized foreign exchange gains or losses arise from sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Funds' books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities, other than investments in securities, resulting from changes in the exchange rate. INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of purchase, sale or maturity. Net realized gains and losses on sales of investments are determined on the identified cost basis. Capital gains realized on some foreign securities are subject to foreign taxes, which are accrued, as applicable. DISCOUNT AND PREMIUM ON SECURITIES The Funds accrete discount and amortize premium from par value on securities from either the date of issue or the date of purchase over the life of the security. EXPENSES The majority of the expenses are directly identifiable to an individual fund. Expenses that are not readily identifiable to a specific fund will be allocated in such a manner as deemed equitable, taking into consideration, among other things, the nature and type of expense and the relative sizes of the funds. ORGANIZATION EXPENSES Expenses incurred in connection with the organization of the Funds have been capitalized and are being charged to the Funds' operations ratably over a five-year period that began with the commencement of the investment operations of the Funds. BANK BORROWINGS The Funds are permitted to have bank borrowings for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Funds have entered into a syndicated line of credit agreement with various banks. This agreement enables the Funds to participate with other funds managed by the Adviser in an unsecured line of credit with banks, which permit borrowings up to $500 million, collectively. Interest is charged to each fund, based on its borrowing. In addition, a commitment fee is charged to each fund based on the average daily unused portion of the line of credit and is allocated among the participating Funds. The Funds had no borrowing activities under the line of credit during the period ended June 30, 2001. SECURITIES LENDING The Funds may lend securities to certain qualified brokers who pay the Funds negotiated lender fees. These fees are included in interest income. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Funds may bear the risk of delay of the loaned securities in recovery or even loss of rights in the collateral, should the borrower of the securities fail financially. At June 30, 2001, the V.A. International Fund loaned securities having a market value of $1,034,602, collateralized by cash in the amount of $1,040,206 and securities with market value of $35,900. The cash collateral was invested in a short-term instrument. FINANCIAL FUTURES CONTRACTS The Funds may buy and sell financial futures contracts. Buying futures tends to increase the Funds' exposure to the underlying instruments. Selling futures tends to decrease the Funds' exposure to the underlying instruments or hedge other Funds' instruments. At the time the Funds enter into financial futures contracts, they are required to deposit with their custodians specified amounts of cash or U.S. government securities, known as "initial margin," equal to a certain percentage of the value of the financial futures contracts being traded. Each day, the futures contracts are valued at the official settlement price of the board of trade or U.S. commodities exchange on which they trade. Subsequent payments to and from the broker, known as "variation margin," are made on a daily basis as the market price of the financial futures contract fluctuates. Daily variation margin adjustments, arising from this "mark to market," are recorded by the Funds as unrealized gains or losses. When the contracts are closed, the Funds recognize a gain or loss. Risks of entering into futures contracts include the possibility that there may be an illiquid market and/or that a change in the value of the contracts may not correlate with changes in the value of the underlying securities. In addition, the Funds could be prevented from opening or realizing the benefits of closing out futures positions because of position limits or limits on daily price fluctuation imposed by an exchange. For federal income tax purposes, the amount, character and timing of the Funds' gains and/or losses can be affected as a result of futures contracts. The Funds had the following open financial futures contracts at June 30, 2001: OPEN UNREALIZED EXPIRATION CONTRACTS POSITION DEPRECIATION - -------- --------- -------- ------------ V.A. 500 INDEX FUND SEPT 01 2 S&P 500 Long ($18,214) ======= At June 30, 2001, the V.A. 500 Index Fund had deposited $34,500 in a segregated account to cover margin requirements on open futures contracts. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Funds (except for V.A. 500 Index Fund) may enter into forward foreign currency exchange contracts as a hedge against the effect of fluctuations in currency exchange rates. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date at a set price. The aggregate principal amounts of the contracts are marked to market daily at the applicable foreign currency exchange rates. Any resulting unrealized gains and losses are included in the determination of the Funds' daily net assets. The Funds record realized gains and losses at the time the forward foreign currency exchange contract is closed out or offset by a matching contract. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of the contract and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. These contracts involve market or credit risk in excess of the unrealized gain or loss reflected in the Funds' Statements of Assets and Liabilities. The Funds may also purchase and sell forward contracts to facilitate the settlement of foreign currency denominated portfolio transactions, under which they intend to take delivery of the foreign currency. Such contracts normally involve no market risk if they are offset by the currency amount of the underlying transaction. The Funds had the following open forward foreign currency exchange contracts at June 30, 2001: UNREALIZED PRINCIPAL AMOUNT EXPIRATION APPRECIATION/ CURRENCY COVERED BY CONTRACT MONTH (DEPRECIATION) - -------- ------------------- ---------- ------------ V.A. INTERNATIONAL FUND Buys Euro 4,716 Jul 01 ($33) ======= Sells Japanese Yen 32,214,883 Sep 01 $3,314 ======= V.A. HIGH YIELD BOND FUND Buys Euro 13,000 Jul 01 ($589) ======= Sells Euro 246,000 Jul 01 $11,283 Euro 59,000 Aug 01 2,491 Euro 54,400 Sep 01 413 Euro 103,200 Oct 01 38 Pound Sterling 13,750 Jul 01 398 Pound Sterling 54,600 Aug 01 1,371 ------- $15,994 ======= FEDERAL INCOME TAXES The Funds qualify as "regulated investment companies" by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income which is distributed to shareholders. Therefore, no federal income tax provision is required. For federal income tax purposes, the following Funds had capital loss carryforwards available to the extent provided by regulators to offset future net realized capital gains: CAPITAL LOSS CARRYFORWARD EXPIRING FUND 12/31/2008 - ---- ---------- V.A. Large Cap Growth Fund 1,306,804 V.A. Mid Cap Growth Fund 633,415 V.A. Small Cap Growth Fund 2,089,105 V.A. International Fund 265,560 V.A. Regional Bank Fund 2,212,041 Expired capital loss carryforwards are reclassified to capital paid-in, in the year of expiration. DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment securities is recorded on the ex-dividend date or, in the case of some foreign securities, on the date thereafter when the Funds identify the dividend. Interest income on investment securities is recorded on the accrual basis. The Funds may place debt obligations on non-accrual status and reduce related interest income by ceasing current accruals and writing off interest receivables when the collection of interest has become doubtful. Foreign income may be subject to foreign withholding taxes, which are accrued as applicable. The Funds record distributions to shareholders from net investment income and realized gains on the ex-dividend date. Such distributions are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. USE OF ESTIMATES The preparation of these financial statements, in accordance with accounting principles generally accepted in the United States of America, incorporates estimates made by management in determining the reported amount of assets, liabilities, revenues and expenses of the Funds. Actual results could differ from these estimates. NOTE B -- MANAGEMENT FEE AND TRANSACTIONS WITH AFFILIATES AND OTHERS The Funds have an investment management contract with the Adviser. Under the investment management contract, the Funds pay monthly management fees to the Adviser equivalent, on an annual basis, to the following: RATE AS A PERCENTAGE OF FUND AVERAGE DAILY NET ASSETS - ---- ------------------------ V.A. 500 Index Fund 0.35% V.A. Large Cap Growth Fund 0.75 V.A. Mid Cap Growth Fund 0.75 V.A. Small Cap Growth Fund 0.75 V.A. International Fund 0.90 V.A. Regional Bank Fund 0.80 V.A. High Yield Bond Fund 0.60 V.A. International Fund and the Adviser have a subadvisory contract with Nicholas-Applegate Capital Management LP. The Fund is not responsible for payment of subadviser's fees. The Adviser has agreed to limit the management fee on the V.A. 500 Index Fund to 0.10% of the Fund's average daily net assets, at least until April 30, 2002. Accordingly, the management fee reduction amounted to $15,341 during the period ended June 30, 2001. The Adviser reserves the right to terminate this limitation in the future. The Adviser has agreed to limit each Fund's expenses (excluding the management fee), to 0.25% of each Fund's average daily net assets at least until April 30, 2002. Accordingly, the reductions in the Funds' expenses for the period ended June 30, 2001 amounted to as follows: FUND FEE REDUCTION - ---- ------------- V.A. 500 Index Fund $73,289 V.A. Large Cap Growth Fund 10,890 V.A. Mid Cap Growth Fund 7,693 V.A. Small Cap Growth Fund 15,729 V.A. International Fund 65,160 V.A. High Yield Bond Fund 6,302 The Adviser reserves the right to terminate this limitation in the future. The Funds have an agreement with the Adviser to perform necessary tax, accounting and legal services for the Funds. The compensation for the period was at an annual rate 0.02% of the average net assets of the Funds. The V.A. 500 Index Fund has an agreement with Standard & Poor's ("S&P") to license certain trademarks and trade names of S&P and of the S&P 500 Index, which is determined, composed and calculated by S&P without regard to the Adviser or the V.A. 500 Index Fund. (Requisite disclosure regarding the use of the Standard & Poor's name is included in the Fund's prospectus.) Ms. Maureen R. Ford and Mr. John M. DeCiccio are directors and/or officers of the Adviser and/or its affiliates, as well as Trustees of the Funds. The compensation of unaffiliated Trustees is borne by the Funds. The unaffiliated Trustees may elect to defer for tax purposes their receipt of this compensation under the John Hancock Group of Funds Deferred Compensation Plan. The Funds make investments into other John Hancock Funds, as applicable, to cover their liability for the deferred compensation. Investments to cover the Funds' deferred compensation liability are recorded on the Funds' books as an other asset. The deferred compensation liability and the related other asset are always equal and are marked to market on a periodic basis to reflect any income earned by the investment as well as any unrealized gains or losses. The Deferred Compensation Plan investments had no impact on the operations of the Funds. The Adviser and other subsidiaries of John Hancock Life Insurance Company owned the following shares of beneficial interest of the Funds as of June 30, 2001: FUND SHARES OF BENEFICIAL INTEREST - ---- ----------------------------- V.A. International Fund 234,153 V.A. Regional Bank Fund 53,285 V.A. High Yield Bond Fund 303,397 NOTE C - INVESTMENT TRANSACTIONS Purchases and proceeds from sales of securities for the Funds, other than short-term securities and obligations of the U.S. government, during the period ended June 30, 2001, were as follows: FUND PURCHASES SALES - ---- ----------- ----------- V.A. 500 Index Fund $601,875 $5,080,671 V.A. Large Cap Growth Fund 3,198,286 6,750,088 V.A. Mid Cap Growth Fund 5,746,356 8,760,588 V.A. Small Cap Growth Fund 6,054,793 10,810,755 V.A. International Fund 10,407,135 9,595,174 V.A. Regional Bank Fund 1,100,972 3,794,866 V.A. High Yield Bond Fund 2,295,915 2,023,988 The cost of investments owned at June 30, 2001 (including short-term investments) and gross unrealized appreciation and depreciation of investments for federal income tax purposes, were as follows: GROSS GROSS NET UNREALIZED UNREALIZED UNREALIZED APPRECIATION/ FUND COST APPRECIATION DEPRECIATION (DEPRECIATION) - ---- ----------- ------------ ------------ ------------ V.A. 500 Index Fund $13,903,431 $6,188,493 $1,344,532 $4,843,961 V.A. Large Cap Growth Fund 6,085,183 1,056,859 813,891 242,968 V.A. Mid Cap Growth Fund 6,572,548 629,200 768,509 (139,309) V.A. Small Cap Growth Fund 11,552,758 3,156,020 1,404,597 1,751,423 V.A. International Fund 6,537,946 171,218 502,503 (331,285) V.A. Regional Bank Fund $9,630,558 $2,357,634 $140,878 $2,216,756 V.A. High Yield Bond Fund 8,639,726 299,155 2,906,473 (2,607,318) NOTE D - CHANGE IN ACCOUNTING PRINCIPLE Effective January 1, 2001, the Funds adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, and began amortizing premiums on debt securities. Prior to this date, the Funds did not amortize premiums on debt securities. The cumulative effect of this accounting change had no impact on the total net assets of the Funds, but for the V.A. High Yield Bond Fund resulted in a $23,914 reduction in the cost of the investments and a corresponding decrease in unrealized depreciation on investments, based on securities held as of December 31, 2000. For the V.A. High Yield Bond Fund, the effect of this change in the period ended June 30, 2001 was to decrease net investment income by $7,389, decrease unrealized depreciation on investments by $3,483 and decrease net realized loss on investments by $3,906. The effect of this change on the per share operating performance and the annualized ratio of net investment income to average net assets for the period ended June 30, 2001 was as follows: decrease in net investment income by $0.01 per share, decrease in net realized and unrealized loss on investments by $0.01 per share and decrease in the ratio of net investment income to average net assets by 0.22%. The Statements of Changes in Net Assets and Financial Highlights for prior periods have not been restated to reflect this change in presentation. NOTE E - SHAREHOLDER MEETING On April 25, 2001 shareholders of V.A. International Fund approved a new subadvisory management contract among the V.A. International Fund, Adviser and Nicholas-Applegate Capital Management LP (562,916 FOR; 17,927 AGAINST; and 41,896 ABSTAINING). [A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner.] John Hancock Funds, Inc. MEMBER NASD 101 Huntington Avenue Boston, MA 02199-7603 1-800-225-5291 1-800-554-6713 TDD 1-800-338-8080 EASI-Line www.jhfunds.com This report is for the information of the shareholders of the John Hancock Declaration Trust. A recycled logo in lower left hand corner with caption "Printed on Recycled Paper." DVASA 6/01 8/01 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY JOHN HANCOCK LIFE INSURANCE COMPANY VOTE THIS CARD TODAY! A PROMPT RESPONSE WILL SAVE THE FUND THE EXPENSE OF ADDITIONAL MAILINGS John Hancock V.A. High Yield Bond Fund Special Meeting of Shareholders to Be Held on December 5, 2001 Indicate your voting instructions below by filling in the appropriate boxes using blue or black ink or dark pencil. This voting instruction card, if properly executed, will be voted in the manner directed by the contract owner. If this voting instruction is executed and no direction is made, this voting instruction will be voted for all proposals and in the discretion of the insurance company upon such other business as may properly come before the meeting. Proposal 1. To approve an Agreement and Plan of Reorganization between John Hancock V.A. High Yield Bond Fund and John Hancock V.A. Strategic Income Fund ("V.A. Strategic Income Fund"). Under this Agreement, V.A. High Yield Bond Fund would transfer all of its assets to V.A. Strategic Income Fund in exchange for shares of V.A. Strategic Income Fund. These shares would be distributed proportionately to the shareholders of V.A. High Yield Bond Fund. V.A. Strategic Income Fund would also assume V.A. High Yield Bond Fund's liabilities. FOR [ ] AGAINST [ ] ABSTAIN [ ] PLEASE DO NOT FORGET TO SIGN THE REVERSE SIDE OF THIS CARD. JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY JOHN HANCOCK LIFE INSURANCE COMPANY VOTE THIS CARD TODAY! A PROMPT RESPONSE WILL SAVE THE FUND THE EXPENSE OF ADDITIONAL MAILINGS JOHN HANCOCK V.A. HIGH YIELD BOND FUND A series of John Hancock Declaration Trust These voting instructions will be used by the insurance companies in connection with a solicitation of proxies by the trustees of the Fund. The undersigned, revoking previous instructions, hereby instructs the above-referenced insurance companies to vote all the shares of beneficial interest of John Hancock V.A. High Yield Bond Fund ("V.A. High Yield Bond Fund") attributable to the undersigned's variable annuity contract at the Special Meeting of Shareholders (the "Meeting") of V.A. High Yield Bond Fund to be held at 101 Huntington Avenue, Boston, Massachusetts, on Wednesday, December 5, 2001 at 9:00 a.m., Eastern time, and at any adjournment(s) of the Meeting. Receipt of the Proxy Statement dated November 1, 2001 is hereby acknowledged. If not revoked, this card shall be voted for the proposal. Kathleen F. Driscoll and Michele G. Van Leer, and each of them, with power of substitution in each, are hereby instructed to vote the shares held in the fund portfolio attributable to the undersigned at the special meeting of shareholders and at any adjornment thereof, as specified on the reverse side. PLEASE SIGN, DATE AND RETURN PROMPTLY IN ENCLOSED ENVELOPE Date , 2001 NOTE: Signature(s) should agree with the name(s) printed herein. When signing as attorney, executor, administrator, trustee or guardian, please give your full name as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized person. -------------------------------------------- -------------------------------------------- Signature(s) JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY JOHN HANCOCK LIFE INSURANCE COMPANY VOTE THIS CARD TODAY! A PROMPT RESPONSE WILL SAVE THE FUND THE EXPENSE OF ADDITIONAL MAILINGS John Hancock V.A. Regional Bank Fund Special Meeting of Shareholders to Be Held on December 5, 2001 Indicate your voting instructions below by filling in the appropriate boxes using blue or black ink or dark pencil. This voting instruction card, if properly executed, will be voted in the manner directed by the contract owner. If this voting instruction is executed and no direction is made, this voting instruction will be voted for all proposals and in the discretion of the insurance company upon such other business as may properly come before the meeting. Proposal 1. To approve an Agreement and Plan of Reorganization between John Hancock V.A. Regional Bank Fund and John Hancock V.A. Financial Industries Fund ("V.A. Financial Industries Fund"). Under this Agreement, V.A. Regional Bank Fund would transfer all of its assets to V.A. Financial Industries Fund in exchange for shares of V.A. Financial Industries Fund. These shares would be distributed proportionately to the shareholders of V.A. Regional Bank Fund. V.A. Financial Industries Fund would also assume V.A. Regional Bank Fund's liabilities. FOR [ ] AGAINST [ ] ABSTAIN [ ] PLEASE DO NOT FORGET TO SIGN THE REVERSE SIDE OF THIS CARD. JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY JOHN HANCOCK LIFE INSURANCE COMPANY VOTE THIS CARD TODAY! A PROMPT RESPONSE WILL SAVE THE FUND THE EXPENSE OF ADDITIONAL MAILINGS JOHN HANCOCK V.A. REGIONAL BANK FUND A series of John Hancock Declaration Trust These voting instructions will be used by the insurance companies in connection with a solicitation of proxies by the trustees of the Fund. The undersigned, revoking previous instructions, hereby instructs the above-referenced insurance companies to vote all the shares of beneficial interest of John Hancock V.A. Regional Bank Fund ("V.A. Regional Bank Fund") attributable to the undersigned's variable annuity contract at the Special Meeting of Shareholders (the "Meeting") of V.A. Regional Bank Fund to be held at 101 Huntington Avenue, Boston, Massachusetts, on Wednesday, December 5, 2001 at 9:00 a.m., Eastern time, and at any adjournment(s) of the Meeting. Receipt of the Proxy Statement dated November 1, 2001 is hereby acknowledged. If not revoked, this card shall be voted for the proposal. Kathleen F. Driscoll and Michele G. Van Leer, and each of them, with power of substitution in each, are hereby instructed to vote the shares held in the fund portfolio attributable to the undersigned at the special meeting of shareholders and at any adjornment thereof, as specified on the reverse side. PLEASE SIGN, DATE AND RETURN PROMPTLY IN ENCLOSED ENVELOPE Date , 2001 NOTE: Signature(s) should agree with the name(s) printed herein. When signing as attorney, executor, administrator, trustee or guardian, please give your full name as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized person. -------------------------------------------- -------------------------------------------- Signature(s) S:/corpsec/proxy/v.a.votcard Part B Statement of Additional Information JOHN HANCOCK V.A. STRATEGIC INCOME FUND (a series of John Hancock Declaration Trust) November 1, 2001 This Statement of Additional Information provides information and is not a prospectus. It should be read in conjunction with the related proxy statement and prospectus that is also dated November 1, 2001. This Statement of Additional Information provides additional information about John Hancock V.A. Strategic Income Fund and the Fund that it is acquiring, John Hancock V.A. High Yield Bond Fund. Please retain this Statement of Additional Information for future reference. A copy of the proxy statement and prospectus can be obtained free of charge by calling John Hancock Annuity Servicing Office, at 1-800-824-0335. Table Of Contents Page Introduction 3 Additional Information about V.A. Strategic Income Fund 3 General Information and History 3 Investment Objective and Policies 3 Management of Strategic Income Fund 3 Control Persons and Principal Holders of Shares 3 Investment Advisory and Other Services 3 Brokerage Allocation 3 Capital Stock and Other Securities 3 Purchase, Redemption and Pricing of V.A. Strategic Income Fund Shares 3 Tax Status 4 Underwriters 4 Calculation of Performance Data 4 Financial Statements 4 Additional Information about V.A High Yield Bond Fund 4 General Information and History 4 Investment Objective and Policies 4 Management of V.A. High Yield Bond Fund 4 Investment Advisory and Other Services 4 Brokerage Allocation 4 Capital Stock and Other Securities 4 Purchase, Redemption and Pricing of V.A. High Yield Bond Fund 4 Tax Status 5 Underwriters 5 Calculation of Performance Data 5 Financial Statements 5 Exhibits - -------- A - Statement of Additional Information, dated May 1, 2001, of John Hancock V.A. Strategic Income Fund including unaudited financial statements as of June 30, 2001 and audited financial statements as of December 31, 2000. B - Statement of Additional Information, dated May 1, 2001, of John Hancock V.A. High Yield Bond Fund including unaudited financial statements as of June 30, 2001 and audited financial statements as of December 31, 2000. C - Pro forma combined financial statements as of June 30, 2001, assuming the reorganization of John Hancock V.A. High Yield Bond Fund into John Hancock V.A. Strategic Income occurred on that date. 2 INTRODUCTION This Statement of Additional Information is intended to supplement the information provided in a proxy statement and prospectus dated November 1, 2001. The proxy statement and prospectus has been sent to the shareholders of V.A. High Yield Bond Fund in connection with the solicitation by the Trustees of V.A. High Yield Bond Fund of proxies to be voted at the special meeting of shareholders of V.A. High Yield Bond Fund to be held on December 5, 2001. This Statement of Additional Information incorporates by reference the Statement of Additional Information of V.A. Strategic Income Fund, dated May 1, 2001, and the Statement of Additional Information of V.A. High Yield Bond Fund, dated May 1, 2001. The V.A. Strategic Income Fund SAI and the V.A. High Yield Bond Fund SAI are included with this Statement of Additional Information. Additional Information About V.A. Strategic Income Fund ------------------------------------------------------- General Information and History - ------------------------------- For additional information about V.A. Strategic Income Fund generally and its history, see "Organization of the Trust" in the V.A. Strategic Income Fund SAI. Investment Objective and Policies - --------------------------------- For additional information about Strategic Income Fund's investment objective, policies and restrictions, see "Investment Policies and Strategies", "Risk Factors, Investments and Techniques" and "Investment Restrictions" in the V.A. Strategic Income Fund SAI. Management of V.A. Strategic Income Fund - ---------------------------------------- For additional information about the V.A. Strategic Income Fund's Board of Trustees, officers and management personnel, see "Those Responsible for Management" in the V.A. Strategic Income Fund SAI. Control Persons and Principal Holders of Shares - ----------------------------------------------- For additional information about control persons of V.A. Strategic Income Fund and principal holders of shares of V.A. Strategic Income Fund, see "Those Responsible for Management" in the V.A. Strategic Income Fund SAI. Investment Advisory and Other Services - -------------------------------------- For additional information about V.A. Strategic Income Fund's investment adviser, custodian, transfer agent and independent accountants, see "Investment Advisory and Other Services", "Distribution Contracts", "Shareholder Servicing Agent", "Custody of Portfolio" and "Independent Auditors" in the V.A. Strategic Income Fund SAI. Brokerage Allocation and Other Practices - ---------------------------------------- For additional information about V.A. Strategic Income Fund's brokerage allocation practices, see "Brokerage Allocation" in the V.A. Strategic Income Fund SAI. Capital Stock and Other Securities - ---------------------------------- For additional information about the voting rights and other characteristics of V.A. Strategic Income Fund's shares of beneficial interest, see "Description of the Trust's Shares" and "Dividends" in the V.A. Strategic Income Fund SAI. Purchase, Redemption and Pricing of V.A. Strategic Income Fund Shares - --------------------------------------------------------------------- For additional information about the purchase, redemption and pricing of the Fund's shares, see "Net Asset Value", "Special Redemptions" and "Eligible Investors" in the V.A. Strategic Income Fund SAI. 3 Tax Status - ---------- For additional information about the tax status of V.A. Strategic Income Fund, see "Tax Status" in the V.A. Strategic Income Fund SAI. Underwriters - ------------ For additional information about V.A. Strategic Income Fund's principal underwriter and the distribution contract between the principal underwriter and V.A. Strategic Income Fund, see "Distribution Contracts" in the V.A. Strategic Income Fund SAI. Calculation of Performance Data - ------------------------------- For additional information about the investment performance of V.A. Strategic Income Fund, see "Calculation of Performance" in the V.A. Strategic Income Fund SAI. Financial Statements - -------------------- Audited annual financial statements of V.A. Strategic Income Fund at December 31, 2000 and unaudited semi-annual financial statements as of June 30, 2001 are attached to the V.A. Strategic Income Fund SAI. Pro forma combined financial statements as of June 30, 2001 are also attached hereto. Additional Information About V.A. High Yield Bond Fund ------------------------------------------------------ General Information and History - ------------------------------- For additional information about V.A. High Yield Bond Fund generally and its history, see "Organization of the Trust" in the V.A. High Yield Bond Fund SAI. Investment Objective and Policies - --------------------------------- For additional information about V.A. High Yield Bond Fund's investment objective, policies and restrictions, see "Investment Policies and Strategies", "Risk Factors, Investments and Techniques" and "Investment Restrictions" in the V.A. High Yield Bond Fund SAI. Management of V.A. High Yield Bond Fund - --------------------------------------- For additional information about the V.A. High Yield Bond Fund's Board of Trustees, officers and management personnel, see "Those Responsible for Management" in the V.A. High Yield Bond Fund SAI. Investment Advisory and Other Services - -------------------------------------- For additional information about V.A. High Yield Bond Fund's investment adviser, custodian, transfer agent and independent accountants, see "Investment Advisory and Other Services", "Distribution Contracts", "Shareholder Servicing Agent", "Custody of Portfolio" and "Independent Auditors" in the V.A. High Yield Bond Fund SAI. Brokerage Allocation and Other Practices - ---------------------------------------- For additional information about V.A. High Yield Bond Fund's brokerage allocation practices, see "Brokerage Allocation" in the V.A. High Yield Bond Fund SAI. Capital Stock and Other Securities - ---------------------------------- For additional information about the voting rights and other characteristics of V.A. High Yield Bond Fund's shares of beneficial interest, see "Description of the Trust's Shares" and "Dividends" in the V.A. High Yield Bond Fund SAI. Purchase, Redemption and Pricing of about V.A. High Yield Bond Fund Shares - -------------------------------------------------------------------------- For additional information about the purchase, redemption and pricing, see "Net Asset Value"; Special Redemptions" and "Eligible Investors" in the V.A. High Yield Bond Fund SAI. Tax Status - ---------- For additional information about the tax status of V.A. High Yield Bond Fund, see "Tax Status" in the V.A. High Yield Bond Fund SAI. 4 Underwriters - ------------ For additional information about V.A. High Yield Bond Fund's principal underwriter and the distribution contract between the principal underwriter and V.A. High Yield Bond Fund, see "Distribution Contracts" in the V.A. High Yield Bond Fund SAI. Calculation of Performance Data - ------------------------------- For additional information about the investment performance of V.A. High Yield Bond Fund, see "Calculation of Performance" in the V.A. High Yield Bond Fund SAI. Financial Statements - -------------------- Audited annual financial statements of V.A. High Yield Bond Fund at December 31, 2000 and unaudited semi-annual financial statements as of June 30, 2001 are attached to the V.A. High Yield Bond Fund SAI. 5 Part B Statement of Additional Information JOHN HANCOCK V.A. FINANCIAL INDUSTRIES FUND (a series of John Hancock Declaration Trust) November 1, 2001 This Statement of Additional Information provides information and is not a prospectus. It should be read in conjunction with the related proxy statement and prospectus that is also dated November 1, 2001. This Statement of Additional Information provides additional information about John Hancock V.A. Financial Industries Fund and the Fund that it is acquiring, John Hancock V.A. Regional Bank Fund. Please retain this Statement of Additional Information for future reference. A copy of the proxy statement and prospectus can be obtained free of charge by calling John Hancock Annuity Servicing Office, at 1-800-824-0335. Table Of Contents Page Introduction 3 Additional Information about John Hancock V.A. Financial Industries Fund 3 General Information and History 3 Investment Objective and Policies 3 Management of John Hancock V.A. Financial Industries Fund 3 Control Persons and Principal Holders of Shares 3 Investment Advisory and Other Services 3 Brokerage Allocation 3 Capital Stock and Other Securities 3 Purchase, Redemption and Pricing of John Hancock V.A. Financial Industries Fund Shares 3 Tax Status 4 Underwriters 4 Calculation of Performance Data 4 Financial Statements 4 4 Additional Information about John Hancock V.A. Regional Bank Fund General Information and History 4 Investment Objective and Policies 4 Management of John Hancock V.A. Regional Bank Fund 4 Investment Advisory and Other Services 4 Brokerage Allocation 4 Capital Stock and Other Securities 4 Purchase, Redemption and Pricing of John Hancock V.A. Regional Bank Fund 4 Tax Status 5 Underwriters 5 Calculation of Performance Data 5 Financial Statements 5 Exhibits A - Statement of Additional Information, dated May 1, 2001, of John Hancock V.A. Financial Industries Fund including unaudited financial statements as of June 30, 2001 and audited financial statements as of December 31, 2000. B - Statement of Additional Information, dated May 1, 2001, of John Hancock V.A. Regional Bank Fund including unaudited financial statements as of June 30, 2001 and audited financial statements as of December 31, 2000. C - Pro forma combined financial statements as of June 30, 2001, assuming the reorganization of John Hancock V.A. Regional Bank Fund into John Hancock V.A. Financial Industries Fund occurred on that date. 2 INTRODUCTION This Statement of Additional Information is intended to supplement the information provided in a proxy statement and prospectus dated November 1, 2001. The proxy statement and prospectus has been sent to the shareholders of V.A. Regional Bank Fund in connection with the solicitation by the Trustees of V.A. Regional Bank Fund of proxies to be voted at the special meeting of shareholders of V.A. Regional Bank Fund to be held on December 5, 2001. This Statement of Additional Information incorporates by reference the Statement of Additional Information of V.A. Financial Industries Fund, dated May 1, 2001, and the Statement of Additional Information of V.A. Regional Bank Fund, dated May 1, 2001. The V.A. Financial Industries Fund SAI and the V.A. Regional Bank Fund SAI are included with this Statement of Additional Information. Additional Information About V.A. Financial Industries Fund ----------------------------------------------------------- General Information and History - ------------------------------- For additional information about V.A. Financial Industries Fund generally and its history, see "Organization of the Trust" in the V.A. Financial Industries Fund SAI. Investment Objective and Policies - --------------------------------- For additional information about V.A. Financial Industries Fund's investment objective, policies and restrictions, see "Investment Policies and Strategies", Risk Factors, Investments and Techniques" and "Investment Restrictions" in the V.A. Financial Industries Fund SAI. Management of V.A. Financial Industries Fund - -------------------------------------------- For additional information about the V.A. Financial Industries Fund's Board of Trustees, officers and management personnel, see "Those Responsible for Management" in the V.A. Financial Industries Fund SAI. Control Persons and Principal Holders of Shares - ----------------------------------------------- For additional information about control persons of V.A. Financial Industries Fund and principal holders of shares of V.A. Financial Industries Fund, see "Those Responsible for Management" in the V.A. Financial Industries Fund SAI. Investment Advisory and Other Services - -------------------------------------- For additional information about V.A. Financial Industries Fund's investment adviser, custodian, transfer agent and independent accountants, see "Investment Advisory and Other Services", "Distribution Contracts", "Shareholder Servicing Agent", "Custody of Portfolio" and "Independent Auditors" in the V.A. Financial Industries Fund SAI. Brokerage Allocation and Other Practices - ---------------------------------------- For additional information about V.A. Financial Industries Fund's brokerage allocation practices, see "Brokerage Allocation" in the V.A. Financial Industries Fund SAI. Capital Stock and Other Securities - ---------------------------------- For additional information about the voting rights and other characteristics of V.A. Financial Industries Fund's shares of beneficial interest, see "Description of the Trust's Shares" and "Dividends" in the V.A. Financial Industries Fund SAI. Purchase, Redemption and Pricing of V.A. Financial Industries Fund Shares - ------------------------------------------------------------------------- For additional information about the purchase, redemption and pricing of the Fund's shares, see "Net Asset Value", "Special Redemptions" and "Eligible Investors" in the V.A. Financial Industries Fund SAI. 3 Tax Status - ---------- For additional information about the tax status of V.A. Financial Industries Fund, see "Tax Status" in the V.A. Financial Industries Fund SAI. Underwriters - ------------ For additional information about V.A. Financial Industries Fund's principal underwriter and the distribution contract between the principal underwriter and V.A. Financial Industries Fund, see "Distribution Contracts" in the V.A. Financial Industries Fund SAI. Calculation of Performance Data - ------------------------------- For additional information about the investment performance of V.A. Financial Industries Fund, see "Calculation of Performance" in the V.A. Financial Industries Fund SAI. Financial Statements - -------------------- Audited annual financial statements of V.A. Financial Industries Fund at December 31, 2000 and unaudited semi-annual financial statements as of June 30, 2001 are attached to the V.A. Financial Industries Fund SAI. Pro forma combined financial statements as of June 30, 2001 are also attached hereto. Additional Information About V.A. Regional Bank Fund. ----------------------------------------------------- General Information and History - ------------------------------- For additional information about V.A. Regional Bank Fund generally and its history, see "Organization of the Trust" in the V.A. Regional Bank Fund SAI. Investment Objective and Policies - --------------------------------- For additional information about V.A. Regional Bank Fund's investment objective, policies and restrictions, see "Investment Policies and Strategies", "Risk Factors, Investments and Techniques" and "Investment Restrictions" in the V.A. Regional Bank Fund SAI. Management of V.A. Regional Bank Fund - ------------------------------------- For additional information about the V.A. Regional Bank Fund's Board of Trustees, officers and management personnel, see "Those Responsible for Management" in the V.A. Regional Bank Fund SAI. Investment Advisory and Other Services - -------------------------------------- For additional information about V.A. Regional Bank Fund's investment adviser, custodian, transfer agent and independent accountants, see "Investment Advisory and Other Services", "Distribution Contracts", "Shareholders Servicing Agent", "Custody of Portfolio" and "Independent Auditors" in the V.A. Regional Bank Fund SAI. Brokerage Allocation and Other Practices - ---------------------------------------- For additional information about V.A. Regional Bank Fund's brokerage allocation practices, see "Brokerage Allocation" in the V.A. Regional Bank Fund SAI. Capital Stock and Other Securities - ---------------------------------- For additional information about the voting rights and other characteristics of V.A. Regional Bank Fund's shares of beneficial interest, see "Description of the Trust's Shares" and "Dividends" in the V.A. Regional Bank Fund SAI. Purchase, Redemption and Pricing of about V.A. Regional Bank Fund Shares - ------------------------------------------------------------------------ For additional information about the purchase, redemption and pricing of the Fund's shares, see "Net Asset Value", Special Redemptions" and "Eligible Investors" in the V.A. Regional Bank Fund SAI. 4 Tax Status - ---------- For additional information about the tax status of V.A. Regional Bank Fund, see "Tax Status" in the V.A. Regional Bank Fund SAI. Underwriters - ------------ For additional information about V.A. Regional Bank Fund's principal underwriter and the distribution contract between the principal underwriter and V.A. Regional Bank Fund, see "Distribution Contracts" in the V.A. Regional Bank Fund SAI. Calculation of Performance Data - ------------------------------- For additional information about the investment performance of V.A. Regional Bank Fund, see "Calculation of Performance" in the V.A. Regional Bank Fund SAI. Financial Statements - -------------------- Audited annual financial statements of V.A. Regional Bank Fund at December 31, 2000 and unaudited semi-annual financial statements as of June 30, 2001 are attached to the V.A. Regional Bank Fund SAI. 5 JOHN HANCOCK DECLARATION TRUST Statement of Additional Information May 1, 2001 John Hancock V.A. Core Equity Fund John Hancock V.A. 500 Index Fund John Hancock V.A. Large Cap Growth Fund John Hancock V.A. Mid Cap Growth Fund John Hancock V.A. Relative Value Fund John Hancock V.A. Small Cap Growth Fund John Hancock V.A. Sovereign Investors Fund John Hancock V.A. International Fund John Hancock V.A. Financial Industries Fund John Hancock V.A. Regional Bank Fund John Hancock V.A. Technology Fund John Hancock V.A. Bond Fund John Hancock V.A. High Yield Bond Fund John Hancock V.A. Money Market Fund John Hancock V.A. Strategic Income Fund (each, a "Fund" and collectively, the "Funds") This Statement of Additional Information provides information about John Hancock Declaration Trust (the "Trust") and the Funds, in addition to the information that is contained in the Funds' current Prospectuses. (the "Prospectuses"). This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Prospectuses, a copy of which can be obtained free of charge by writing or telephoning: John Hancock Annuity Servicing Office 529 Main Street (X-4) Charlestown, Massachusetts 02129 1-800-824-0335 Table of Contents Page Organization of the Trust................................................ 3 Eligible Investors....................................................... 3 Investment Policies and Strategies....................................... 4 Equity................................................................... 4 International............................................................ 7 Sector................................................................... 8 Income................................................................... 10 Risk Factors Investments and Techniques.................................. 12 Investment Restrictions.................................................. 33 Those Responsible for Management......................................... 37 Investment Advisory and Other Services................................... 42 Distribution Contracts................................................... 47 Net Asset Value.......................................................... 47 Special Redemptions...................................................... 48 Description of the Trust's Shares........................................ 48 Dividends................................................................ 50 Tax Status............................................................... 50 Calculation of Performance............................................... 53 Brokerage Allocation..................................................... 56 Shareholder Servicing Agent.............................................. 58 Custody of Portfolio..................................................... 59 Independent Auditors .................................................... 59 Appendix - Description of Bond Ratings................................... A-1 Financial Statements..................................................... F-1 2 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 fifteen series of shares designated as: John Hancock V.A. International Fund ("International Fund"); John Hancock V.A. Regional Bank Fund ("Regional Bank Fund"); John Hancock V.A. Financial Industries Fund ("Financial Industries Fund"); John Hancock V.A. Technology Fund ("Technology Fund"); John Hancock V.A. Small Cap Growth Fund ("Small Cap Growth Fund") (formerly John Hancock V.A. Emerging Growth Fund); John Hancock Mid Cap Growth Fund ("Mid Cap Growth Fund") (formerly John Hancock V.A. Special Opportunities Fund); John Hancock V.A. Large Cap Growth Fund ("Large Cap Growth Fund") (formerly John Hancock V.A. Growth Fund); John Hancock V.A. Relative Value Fund ("Relative Value Fund") (formerly John Hancock V.A. Large Cap Value Fund and before that, John Hancock V.A. Growth and Income Fund); John Hancock V.A. Core Equity Fund ("Core Equity Fund") (formerly John Hancock V.A. Independence Equity Fund); John Hancock V.A. Sovereign Investors Fund ("Sovereign Investors Fund"); John Hancock V.A. 500 Index Fund ("500 Index Fund"); John Hancock V.A. Bond Fund ("Bond Fund") (formerly John Hancock V.A. Sovereign Bond Fund); John Hancock V.A. Strategic Income Fund ("Strategic Income Fund"); John Hancock V.A. High Yield Bond Fund ("High Yield Bond Fund"); and John Hancock V.A. Money Market Fund ("Money Market Fund"). The investment adviser of each Fund is John Hancock Advisers, Inc. (the "Adviser"). The Adviser is an indirect wholly-owned subsidiary of John Hancock Life Insurance Company (formerly John Hancock Mutual Life Insurance Company); (the "Life Company"), a Massachusetts life insurance company chartered in 1862, with national headquarters at John Hancock Place, Boston, Massachusetts. The Life Company is wholly owned by John Hancock Financial Services, Inc., a Delaware Corporation, organized in February, 2000. The International Fund's Sub-adviser is Nicholas-Applegate Capital Management ("Nicholas-Applegate"). The investment Sub-adviser of Core Equity Fund is Independence Investment LLC ("Independence"). The Technology Fund's Sub-adviser is American Fund Advisors, Inc. ("AFA"). Together AFA, Independence and Nicholas-Applegate are sometimes referred to herein collectively as the "Sub-advisers" or, individually, as the "Sub-adviser." The Sub-advisers are responsible for providing investment advice to their respective Funds, subject to the review of the trustees and overall supervision of the Adviser. Independence is a wholly owned indirect subsidiary of the Life Company. ELIGIBLE INVESTORS The following information supplements the discussion of each Fund's investment objective and policies discussed in the Prospectuses. The Funds are designed to serve as investment vehicles for variable annuity and variable life insurance contracts (the "Variable Contracts") offered by the separate accounts of various insurance companies. Participating insurance companies are the owners of shares of beneficial interest in each Fund of the Trust. In accordance with any limitations set forth in their Variable Contracts, contract holders may direct, through their participating insurance companies, the allocation of amounts available for investment among the Funds. Instructions for any such allocation, or for the purchase or redemption of shares of a Fund, must be made by the investor's participating insurance company's separate account as the owner of the Fund's shares. The rights of participating insurance companies as owners of shares of a Fund are different from the rights of contract holders under their Variable Contracts. The term "shareholder" in this Statement of Additional Information refers only to participating insurance companies, and not to contract holders. 3 INVESTMENT POLICIES AND STRATEGIES Each Fund has its own distinct investment objective and policies. In striving to meet its objective, each Fund will face the challenges of changing business, economic and market conditions. There is no assurance that the Funds will achieve their investment objectives. The following information supplements the discussion of each Fund's investment objective and policies as discussed in the prospectuses. Each Fund has adopted investment restrictions detailed in the "Investment Restrictions" section of this Statement of Additional Information. Some of these restrictions may help to reduce investment risk. Those restrictions designated as fundamental may not be changed without shareholder approval. Each Fund's investment objective, investment policies and non-fundamental restrictions, however, may be changed by a vote of the Trustees without shareholder approval. If there is a change in a Fund's investment objective, investors should consider whether the Fund remains an appropriate investment in light of their current financial position and needs. EQUITY Core Equity Fund The CORE EQUITY FUND seeks above-average total return (capital appreciation plus income). To pursue this goal, the Fund normally invests at least 65% of assets in a diversified portfolio of primarily large capitalization stocks. The portfolio's risk profile is similar to that of the Standard & Poor's 500 Stock Index. Consequently, the Fund invests in a number of industry groups without concentrating in any particular industry. The managers select from a menu of stocks of approximately 550 companies that evolves over time. Approximately 70% to 80% of these companies also are included in the S&P 500 Index. The Sub-adviser's investment research team is organized by industry and tracks these companies to develop earnings estimates and five-year projections for growth. A series of proprietary computer models use this in-house research to rank the stocks according to their combination of: (1) value, meaning they appear to be underpriced; and (2) improving fundamentals, meaning they show potential for strong growth. The Fund may invest in certain other types of equity and debt securities, including securities of foreign issuers which are U.S. dollar denominated and traded on a U.S. exchange in the form of common stocks or American Depositary Receipts. The fixed income securities of the Fund will be rated "investment grade" (i.e., rated BBB or better by Standard & Poor's Ratings Group ("S&P") or Baa or better by Moody's Investors Service, Inc. ("Moody's")) or, if unrated, determined to be of investment grade quality by the Adviser or Sub-adviser. 500 Index Fund The 500 INDEX FUND seeks to provide investment results that correspond to the total return performance of the Standard & Poor's 500 Stock Price Index ("S&P 500 Index"). To pursue this goal, the Fund normally invests at least 80% of its total assets in common stocks of the companies that comprise the S&P 500 Index. The Fund tries to allocate the stocks held in its portfolio in approximately the same proportions as they are represented in the S&P 500 Index, in an attempt to minimize the degree to which the Fund's investment results (before Fund expenses) differ from those of the Index ("tracking error"). This "indexing" technique is a passive approach to investing and is designed for long-term investors seeking a diversified portfolio of common stocks. Unlike other equity 4 funds which seek to "beat" stock market averages, the Fund attempts to "match" the total return performance of the S&P 500 Index and thus provide a predictable return relative to the benchmark. The degree to which the Fund's performance correlates with that of the S&P 500 Index will depend upon the size and cash flows of the Fund, the liquidity of the securities represented in the Index and the Fund's expenses, among other factors. There is no fixed number of component stocks in which the Fund will invest, and there can be no assurance that the Fund's total return will match that of the S&P 500 Index. For a description of the investment characteristics of the S&P 500 Index, see "The S&P 500 Index." If John Hancock Financial Services, Inc. or any other affiliated company of John Hancock Advisers, Inc. (each an "Affiliated Company") is included in the S&P 500 Index, the Fund may purchase the Affiliated Company's stock and maintain its position in that stock in the approximate percentage that the Affiliated Company is represented on the S&P 500 Index. The Fund's purchase of an Affiliated Company's stock must also be in compliance with Rule 12d3-1(a) and (b). If extraordinary circumstances warrant, the Fund may exclude a stock held in the S&P 500 Index and include a similar stock in its place if doing so will help the Fund achieve its objective. Additionally, the Fund may invest in certain short-term fixed income securities such as cash equivalents, although cash and cash equivalents are normally expected to represent less than 1% of the Fund's assets (excluding cash and cash equivalents segregated in relation to futures contracts). The Fund may also enter into futures contracts and options in order to invest uncommitted cash balances, to maintain liquidity to meet shareholder redemptions, or to minimize trading costs. The Fund will not invest in cash equivalents, futures contracts or options as part of a temporary defensive strategy. Large Cap Growth Fund The LARGE CAP GROWTH FUND seeks long-term capital appreciation. To pursue this goal, the Fund normally invests at least 65% of assets in stocks of large-capitalization companies (companies in the capitalization range of the Russell Top 200 Growth Index, which was $0.88 billion to $415.79 billion as of March 31, 2001). In choosing individual securities, the managers use fundamental financial analysis to identify companies with: (1) strong cash flows; (2) secure market franchises; and (3) sales growth that outpaces their industries. When management believes that current market or economic conditions warrant, the Fund may retain cash or invest in preferred stocks and other types of equity and debt securities. Fixed income securities held by the Fund may be rated as low as C by S&P or Moody's. No more than 5% of the Fund's assets will be invested in fixed income securities rated lower than BBB by S&P or Baa by Moody's or, if unrated, determined to be of comparable quality by the Adviser. The Fund may invest up to 15% of assets in foreign securities. Mid Cap Growth Fund The MID CAP GROWTH FUND seeks long-term capital appreciation. To pursue this goal, the Fund normally invests at least 80% of assets in stocks of medium capitalization companies (companies in the capitalization range of the Russell MidCap Growth Index, which was $0.02 billion to $19.37 billion as of March 31, 2001.) In choosing individual securities, the manager looks for companies with growth stemming from a combination of gains in market share and increased operating efficiency. The manager considers broad economic trends, demographic factors, technological changes, consolidation trends and legislative initiatives. 5 The Fund may invest up to 10% of total assets in the securities of foreign issuers, including, but not limited to, common stocks, sponsored or unsponsored American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), and Global Depositary Receipts ("GDRs"), convertible preferred stocks, preferred stocks and warrants. Under normal conditions, the Fund may not invest more than 10% of assets in cash and/or cash equivalents (except cash segregated in relation to futures, forward and option contracts). In addition, under normal conditions, the Fund will not invest in any fixed income securities. However, in abnormal conditions, the fund may temporarily invest in U.S. government securities with maturities of up to three years, and may also invest more than 10% of total assets in cash and/or cash equivalents (including U.S. government securities maturing in 90 days or less). The Fund may not invest more than 5% of assets at the time of purchase in any one security (other than U.S. government securities). Relative Value Fund The RELATIVE VALUE FUND seeks the highest total return (capital appreciation plus current income) that is consistent with reasonable safety of capital. To pursue this goal, the Fund invests in a diversified portfolio of stocks, bonds and money market securities. Although the Fund may concentrate in any of these asset classes, under normal circumstances it invests primarily in stocks. In selecting equity securities for the Fund, the portfolio manager emphasizes issuers whose equity securities trade at valuation ratios lower than comparable issuers. Some of the valuation tools used include price to earnings, price to cash flow and price to sales ratios and earnings discount models. The Fund's portfolio will also include securities that the manager considers to have the potential for capital appreciation, due to potential recognition of earnings power or asset value which is not fully reflected in the securities' current market value. The manager attempts to identify investments which possess characteristics such as high relative value, intrinsic value, going concern value, net asset value and replacement book value. The manager also considers an issuer's financial strength, competitive position, projected future earnings and dividends and other investment criteria. The Fund may invest in U.S. Government securities and corporate bonds, notes and other debt securities of any maturity. The Fund may invest up to 15% of its net assets in junk bonds, including convertible securities, that may be rated as low as CC by S&P, Ca by Moody's or their unrated equivalents. The Fund may also invest up to 25% of its total assets in foreign securities (35% during adverse U.S. market conditions). The Fund is managed by Timothy E. Quinlisk, CFA. Mr. Quinlisk is a Senior Vice President of the Adviser and has managed the Fund since 1998 except between January and March 2000. Small Cap Growth Fund The SMALL CAP GROWTH FUND seeks long-term capital appreciation. To pursue this goal, the Fund normally invests at least 80% of total assets in stocks of small capitalization companies (companies in the capitalization range of the Russell 2000 Growth Index, which was $10 million to $4.20 billion on March 31, 2001.) The managers look for companies in the emerging growth phase of development that are not yet widely recognized. The Fund also may invest in established companies that, because of new management, products or opportunities, offer the possibility of accelerated earnings. For a description of some of the investment characteristics of smaller capitalization companies, see "Smaller Capitalization Companies." The Fund may invest up to 10% of total assets in the securities of foreign issuers, including, but not limited to, common stocks, sponsored or unsponsored American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs"), convertible preferred stocks, preferred stocks and warrants. Under normal conditions, the Fund may not invest more than 6 10% of assets in cash or cash equivalents (except cash segregated in relation to futures, forward and option contracts). In addition, under normal conditions, the Fund will not invest in any fixed income securities. However, in abnormal conditions, the fund may temporarily invest in U.S. government securities and U.S. government agency securities with maturities of up to three years, and may also invest more than 10% of total assets in cash and/or cash equivalents (including U.S. government securities maturing in 90 days or less). The Fund may not invest more than 5% of total assets at time of purchase in any one security (other than U.S. government securities). Sovereign Investors Fund The SOVEREIGN INVESTORS FUND seeks long-term growth of capital and income without assuming undue market risks. To pursue these goals, the Fund typically invests most of its assets in a diversified portfolio of stocks. Under normal conditions, 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, 2001, that range was $0.67 million to $415.79 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). Fixed income securities held by the Fund may be rated as low as C by S&P or Moody's. No more than 5% of the Fund's assets will be invested in fixed income securities rated lower than BBB by S&P or Baa by Moody's or, if unrated, determined to be of comparable quality by the Adviser. If any security in Sovereign Investors Fund's portfolio falls below the Fund's minimum credit quality standards, as a result of a rating downgrade or the Adviser's determination, the Fund will dispose of the security as promptly as possible while attempting to minimize any loss. INTERNATIONAL International Fund The INTERNATIONAL FUND seeks long-term growth of capital. To pursue this goal, the Fund normally invests at least 80% of total assets in stocks of foreign companies. The Fund may invest up to 30% of total assets in emerging markets as classified by Morgan Stanley Capital International (MSCI). For a description of some of the investment characteristics of foreign securities, see "Foreign Securities and Emerging Countries." Generally, the Fund's portfolio contains securities of issuers from at least three countries other than the United States. 7 In managing the portfolio, the managers focus on a "bottom-up" analysis on the financial conditions and competitiveness of individual foreign companies. In analyzing specific companies for possible investment, the managers ordinarily look for several of the following characteristics: above-average per share earnings growth; high return on invested capital; a healthy balance sheet; sound financial and accounting policies and overall financial strength; strong competitive advantages; effective research, product development and marketing; and general operating characteristics that will enable the companies to compete successfully in their respective markets. The managers consider whether to sell a particular security when any of those factors materially changes. The managers allocate the Fund's assets among securities of countries that are expected to provide the best opportunities for meeting the Fund's investment objective. The Fund's foreign equities may include, but are not limited to, common stocks, convertible preferred stocks, preferred stocks, warrants, American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"). The Fund may not invest more than 5% of total assets at time of purchase in any one security (other than U.S. government securities). SECTOR Financial Industries Fund The FINANCIAL INDUSTRIES FUND seeks capital appreciation. To pursue this goal, the Fund normally invests at least 65% of its total assets in equity securities of U.S. and foreign financial services companies. A financial services company is a firm that in its most recent fiscal year either (i) derived at least 50% of its revenues or earnings from financial services activities, or (ii) devoted at least 50% of its assets to such activities. Financial services companies provide financial services to consumers and businesses and include the following types of U.S. and foreign firms: commercial banks, thrift institutions and their holding companies; consumer and industrial finance companies; diversified financial services companies; investment banks; securities brokerage and investment advisory firms; financial holding companies; financial technology companies; real estate-related firms; leasing firms; insurance brokerages; and various firms in all segments of the insurance industry such as multi-line, property and casualty, and life insurance companies and insurance holding companies. In managing the portfolio, the managers focus primarily on stock selection rather than industry allocation. The managers use a strategy of investing in financial services companies that are currently undervalued, appear to be positioned for a merger, or are in a position to benefit from regulatory changes. This strategy can be changed at any time. For a description of the investment characteristics of the Financial Industries, see "Financial Industries." To avoid the need to sell equity securities to meet redemption requests, and to provide flexibility to take advantage of investment opportunities, the Fund may invest up to 15% of its net assets in investment grade short-term securities. The Fund may invest in debt securities of financial services companies and in debt and equity securities of companies outside of the financial services sector. The Fund may invest up to 5% of its net assets in below-investment grade debt securities, rated as low as CCC by S&P or Caa by Moody's or, if unrated, determined to be of comparable quality by the Adviser. 8 Regional Bank Fund The REGIONAL BANK FUND seeks long-term capital appreciation. To pursue this goal, the Fund normally invests at least 65% of total assets in stocks of regional banks and lending companies, including commercial and industrial banks, savings and loan associations and bank holding companies that receive a substantial portion of their income from banks. A regional bank is one that provides full service banking (i.e., savings accounts, checking accounts, commercial lending and real estate lending), whose assets are primarily of domestic origin, and which typically has a principal office outside of New York City and Chicago. The Fund may invest in banks that are not Federal Deposit Insurance Corporation insured (including any state or federally chartered savings and loan association). Although the managers will primarily seek opportunities for capital appreciation, many of the regional banks in which the Fund may invest pay regular dividends. Accordingly, the Fund also expects to receive moderate income. The Fund may also invest in other financial services companies, including companies with significant lending operations and "money center" banks. A "money center" bank is one with a strong international banking business and a significant percentage of international assets, which is typically located in New York or Chicago. In seeking growth opportunities, the Fund's management team may target banks with some or all of the following characteristics: (1) strong market position in a region with a healthy economy; (2) undiscovered fundamental strength evidenced by a low stock price relative earnings; (3) the potential to benefit from a merger or acquisition. For a description of the investment characteristics of the Banking Industry, see the "Banking Industry." To avoid the need to sell equity securities to meet redemption requests, and to provide flexibility to take advantage of investment opportunities, the Fund may invest up to 15% of its net assets in investment grade short-term securities. The Fund may invest up to 5% of its net assets in below-investment grade debt securities of Banks rated as low as CCC by S&P or Caa by Moody's or, if unrated, determined to be of comparable quality by the Adviser. Technology Fund The TECHNOLOGY FUND seeks long-term growth of capital. To pursue this goal, the Fund invests principally in equity securities of companies that rely extensively on technology in their product development or operations. Under normal market conditions, at least 65% of the Fund's total assets are invested in securities of the technology companies noted above. The Fund's portfolio is primarily comprised of U.S. and foreign common stocks and securities convertible into common stocks, including convertible bonds, convertible preferred stocks and warrants. Investments in U.S. and foreign companies that rely extensively on technology in product development or operations may be expected to benefit from scientific developments and the application of technical advances resulting from improving technology in many different fields, such as computer software and hardware (including internet-related technology), semiconductors, telecommunications, defense and commercial electronics, data storage and retrieval, biotechnology and others. Generally, investments will be made in securities of a company that relies extensively on technology in product development or operations only if a significant part of its assets are invested in, or a significant part of its total revenue or net income is derived from, technology. For a description of the investment characteristics of the technology industry, see "Technology-Intensive Companies." 9 The Fund may invest up to 10% of its net assets in fixed income securities that, at the time of investment, are rated CC or higher by Standard & Poor's Ratings Group ("Standard & Poor's") or Ca or higher be Moody's Investors Service, Inc. ("Moody's") or their equivalent, and unrated fixed income securities of comparable quality as determined by the Adviser. When market conditions suggest a need for a defensive investment strategy, the Fund may temporarily invest in short-term obligations of or securities guaranteed by the U.S. Government or its agencies or instrumentalities, high quality bank certificates of deposit and commercial paper. This temporary investment strategy is not designed to achieve the Fund's primary investment objective. INCOME Bond Fund The BOND FUND seeks to generate a high level of current income consistent with prudent investment risk. To pursue this goal, the Fund normally invests at least 65% of total assets in a diversified portfolio of debt securities. These include corporate bonds and debentures, as well as U.S. government and agency securities. In addition, the Fund contemplates at least 75% of the value of its total assets will be in (1) debt securities that have, at the time of purchase, a rating within the four highest grades as determined by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A or Baa) or Standard & Poor's ("S&P") (AAA, AA, A, or BBB); (2) debt securities of banks, the U.S. Government and its agencies or instrumentalities and other issuers which, although not rated as a matter of policy by either Moody's or S&P, are considered by the Fund to have investment quality comparable to securities receiving ratings within the four highest grades; and (3) cash and cash equivalents. Under normal conditions, the Fund may not invest more than 10% of total assets in cash and/or cash equivalents (except cash segregated in relation to futures, forward and options contracts). The Fund may also invest up to 25% of its total assets in fixed income securities rated below BBB by S&P or below Baa by Moody's or their respective equivalent ratings or in securities which are unrated. The Fund may invest in securities rated as low as CC or Ca and unrated securities of comparable credit quality as determined by the Adviser. These ratings indicate obligations that are highly speculative and often in default. Securities rated lower than Baa or BBB are high risk securities generally referred to as "junk bonds." See "High Yield/High Risk Debt Obligations." for a description of the risks and characteristics of the various ratings categories. The Fund may acquire individual securities of any maturity and is not subject to any limits as to the average maturity of its overall portfolio. The Fund may invest in securities of United States and foreign issuers. It is anticipated that under normal conditions, the Fund will not invest more than 25% of its total assets in foreign securities (excluding U.S. dollar-denominated Canadian securities). High Yield Bond Fund The HIGH YIELD BOND FUND seeks to maximize current income without assuming undue risk. Capital appreciation is a secondary goal. In pursuing these goals, the Fund normally invests at least 65% of its total assets in U.S. and foreign bonds rated Baa or lower by Moody's or BBB or lower by S&P or in unrated securities of comparable quality as determined by the Adviser. Up to 30% of the Fund's total assets may be invested in junk bonds rated Ca by Moody's or CC by S&P or in unrated securities of comparable quality as determined by the adviser. See "Lower Rated High Yield / High Risk Debt Obligations." for a description of the risks and characteristics of the various ratings categories. Up to 40% of the Fund's total assets may be invested in the securities of issuers in the electric utility and telecommunications industries. For all other industries, the limitation is 25% of assets. The Fund may also invest up to 20% of its net assets in U.S. or foreign equities. 10 The types of debt securities in which the Fund may invest include, but are not limited to, domestic and foreign corporate bonds, debentures, notes, convertible securities, preferred stocks, municipal obligations and government obligations. For liquidity and flexibility, the Fund may place up to 35% of its total assets in investment-grade short-term securities. In abnormal market conditions, it may invest more assets in these securities as a defensive tactic. The Fund also may invest in certain higher-risk investments, including options, futures and restricted securities. See "RISK FACTORS, INVESTMENTS AND TECHNIQUES." Money Market Fund The MONEY MARKET FUND seeks the maximum current income that is consistent with maintaining liquidity and preserving capital. The Fund invests in high-quality money market instruments including, but not limited to, U.S. Government, municipal and foreign government securities; obligations of supranational organizations (e.g., the World Bank and the International Monetary Fund); obligations of U.S. and foreign banks and other lending institutions; corporate obligations; repurchase agreements and reverse repurchase agreements. All of the Fund's investments are denominated in U.S. dollars. At the time the Money Market Fund acquires its investments, they will be rated (or issued by an issuer that is rated with respect to a comparable class of short-term debt obligations) in one of the two highest rating categories for short-term debt obligations assigned by at least two nationally recognized rating organizations (or one rating organization if the obligation was rated by only one such organization). These high quality securities are divided into "first tier" and "second tier" securities. First tier securities have received the highest rating from at least two rating organizations while second tier securities have received ratings within the two highest categories from at least two rating agencies, but do not qualify as first tier securities. The Fund may also purchase obligations that are not rated, but are determined by the Adviser, based on procedures adopted by the Trust's Board of Trustees, to be of comparable quality to rated first or second tier securities. The Fund may not purchase any second tier security if, as a result of its purchase (a) more than 5% of its total assets would be invested in second tier securities or (b) more than 1% of its total assets or $1 million (whichever is greater) would be invested in the second tier securities of a single issuer. The Fund seeks to maintain a constant $1.00 share price although there can be no assurance it will do so. All of the Fund's investments will mature in 397 days or less. The Fund will maintain an average dollar-weighted portfolio maturity of 90 days or less. Strategic Income Fund The STRATEGIC INCOME FUND seeks a high level of current income. In pursuing this goal, the Fund invests primarily in the following categories of securities: foreign government and foreign corporate securities from developed and emerging countries, U.S. Government and agency securities and lower-rated high yield, high risk, fixed income securities of U.S. issuers. Under normal circumstances, the Fund's assets are invested in each of the foregoing three categories. However, from time to time the Fund may invest up to 100% of its total assets in any one category. The Fund may invest up to 10% of its net assets in common stocks and similar equity securities of U.S. and foreign companies. No more than 25% of the Fund's total assets, at the time of purchase, will be invested in government securities of any one foreign country. The fixed income securities in 11 which the Fund may invest include bonds, debentures, notes (including variable and floating rate instruments), preferred and preference stock, zero coupon bonds, payment-in-kind securities, increasing rate note securities, participation interests, multiple class passthrough securities, collateralized mortgage obligations, stripped debt securities, other mortgage-backed securities, asset-backed securities and other derivative debt securities. Variable and floating rate instruments, mortgage-backed securities and asset-backed securities are derivative instruments that derive their value from an underlying security. Derivative securities are subject to additional risks. See "Risks Associated With Specific Types of Derivative Debt Securities." The Fund generally intends to keep its average credit quality in the investment grade range. However, the Fund may invest up to 100% of total assets in fixed income securities rated below Baa by Moody's or below BBB by S&P, or in securities which are unrated. The Fund may invest in securities rated as low as Ca or CC, which may indicate that the obligations are highly speculative and in default. Fixed income securities rated below Baa or BBB are commonly called "junk bonds." See "Lower Rated High Yield / High Risk Debt Obligations." for a description of the risks and characteristics of the various ratings categories. RISK FACTORS, INVESTMENTS AND TECHNIQUES Banking Industry. Since the Regional Bank Fund's investments will be concentrated in the banking industry, it will be subject to risks in addition to those that apply to the general equity market. Events may occur which significantly affect the entire banking industry. Thus, the Fund's share value may at times increase or decrease at a faster rate than the share value of a mutual fund with investments in many industries. In addition, despite some measure of deregulation, banks and other lending institutions are still subject to extensive governmental regulation which limits their activities. The availability and cost of funds to these entities is crucial to their profitability. Consequently, volatile interest rates and general economic conditions can adversely affect their financial performance and condition. The Fund is not a complete investment program. Because the Fund's investments are concentrated in the banking industry, an investment in the Fund may be subject to greater market fluctuations than a fund that does not concentrate in a particular industry. Thus, it is recommended that an investment in the Fund be considered only one portion of your overall investment portfolio. Banks, finance companies and other financial services organizations are subject to extensive governmental regulations which may limit both the amounts and types of loans and other financial commitments which may be made and the interest rates and fees which may be charged. The profitability of these concerns is largely dependent upon the availability and cost of capital funds, and has shown significant recent fluctuation as a result of volatile interest rate levels. Volatile interest rates will also affect the market value of debt securities held by the Fund. In addition, general economic conditions are important to the operations of these concerns, with exposure to credit losses resulting from possible financial difficulties of borrowers potentially having an adverse effect. Financial Industries. Since the Financial Industries Fund's investments will be concentrated in the financial services sector, it will be subject to risks in addition to those that apply to the general equity and debt markets. Events may occur which significantly affect the sector as a whole or a particular segment in which the Fund invests. Accordingly, the Fund may be subject to greater market volatility than a fund that does not concentrate in a particular economic sector or industry. Thus, it is recommended that an investment in the Fund be only a portion of your overall investment portfolio. In addition, most financial services companies are subject to extensive governmental regulation which limits their activities and may (as with insurance rate regulation) affect the ability to earn a profit from a given line of business. Certain financial services businesses are subject to intense competitive pressures, including market share and price competition. The removal of regulatory barriers to participation in certain segments of the financial services sector may also increase competitive pressures on different types of firms. For example, recent legislation removing traditional barriers between banking and investment banking activities will allow large commercial banks to compete for business that previously was the exclusive domain of securities firms. Similarly, the removal of regional barriers in the banking industry has intensified competition within the industry. 12 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. Common Stocks. Common stocks are shares of a corporation or other entity that entitle the holder to a pro rata share of the profits of the corporation, if any, without preference over any other shareholder or class of shareholders, including holders of such entity's preferred stock and other senior equity. Ownership of common stock usually carries with it the right to vote and, frequently, an exclusive right to do so. Each Fund (other than Financial Industries Fund, Regional Bank Fund and Technology Fund) will diversify its investments in common stocks of companies in a number of industry groups. Common stocks have the potential to outperform fixed income securities over the long term. Common stocks provide the most potential for growth, yet are the more volatile of the two asset classes. Fixed Income Securities. Fixed income investments of each Fund may include bonds, notes, preferred stock and convertible fixed income securities issued by U.S. corporations or the U.S. Government and its political subdivisions. Under normal conditions, Mid Cap Growth Fund and Small Cap Growth Fund will not invest in any fixed income securities (other than preferred stock and cash equivalents). 13 Fixed income securities of corporate and governmental issuers are subject to the risk of an issuer's inability to meet principal and interest payments on the obligations (credit risk) and may also be subject to price volatility due to factors such as interest rate sensitivity, market perception of the issuer's creditworthiness and general market liquidity (market risk). Debt securities will be selected based upon credit risk analysis of issuers, the characteristics of the security and interest rate sensitivity of the various debt issues available from a particular issuer as well as analysis of the anticipated volatility and liquidity of the fixed income instruments. The longer a Fund's average portfolio maturity, the more the value of the portfolio and the net asset value of the Fund's shares will fluctuate in response to changes in interest rates. An increase in rates will generally decrease the value of the Fund's securities, while a decline in interest rates will generally increase their value. Preferred Stocks. Each Fund (other than 500 Index Fund and Money Market Fund) may invest in preferred stock. Preferred stock generally has a preference as to dividends and upon liquidation over an issuer's common stock but ranks junior to debt securities in an issuer's capital structure. Preferred stock generally pays dividends in cash (or additional shares of preferred stock) at a defined rate but, unlike interest payments on debt securities, preferred stock dividends are payable only if declared by the issuer's board of directors. Dividends on preferred stock may be cumulative, meaning that, in the event the issuer fails to make one or more dividend payments on the preferred stock, no dividends may be paid on the issuer's common stock until all unpaid preferred stock dividends have been paid. Preferred stock also may be subject to optional or mandatory redemption provisions. Convertible Securities. Each Fund (other than 500 Index Fund and Money Market Fund) may invest in convertible securities, which may include corporate notes or preferred stock but are ordinarily long-term debt obligations of the issuer convertible at a stated exchange rate into common stock of the same or another issuer. The Mid Cap Growth Fund and Small Cap Growth Fund may only invest in convertible preferred stock. As with all debt securities, the market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. The market value of convertible securities can also be heavily dependent upon the changing value of the equity securities into which these securities are convertible depending on whether the market price of the underlying security exceeds the conversion price. Convertible securities generally rank senior to common stocks in an issuer's capital structure and consequently entail less risk than the issuer's common stock. However, the extent of such risk reduction depends upon the degree to which the convertible security sells above its value as a fixed income security. In evaluating a convertible security, the Adviser or relevant Sub-adviser will give primary emphasis to the attractiveness of the underlying common stock. The S&P 500 Index. The S&P 500 Index is a capitalization weighted index comprised of 500 industrial, utility, transportation and financial companies in the United States markets. The S&P 500 Index represents approximately 75% of the total market capitalization of stocks traded in the U.S. equity market. The inclusion of a stock in the S&P 500 Index in no way implies that Standard & Poor's believes the stock to be an attractive investment. Because of the market-value weighting, the 50 largest companies in the S&P 500 Index currently account for approximately 54.80% of the Index. Typically, companies included in the S&P 500 Index are the largest and most dominant firms in their respective industries. As of March 31, 2001, the five largest companies in the Index were: General Electric (3.99%), Microsoft (2.81%), Exxon Mobil (2.71%), Pfizer (2.49%) and Citigroup (2.17%). The largest industry categories were: major pharmaceuticals (5.88%), integrated oil (5.12%), major telecommunications (5.11%), and major banks (4.43%) "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by John Hancock Advisers, Inc. ("the Adviser"). The 500 Index Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's. Standard & Poor's makes no representation or warranty, express or implied, to the purchasers of the Fund or any member of the public regarding the advisability of investing in securities generally or in the 500 Index Fund particularly or the ability of the S&P 500 Index to track general stock market performance. Standard & Poor's only relationship to the Adviser is the licensing of certain trademarks 14 and trade names of Standard & Poor's and of the S&P 500 Index, which is determined, composed and calculated by Standard & Poor's without regard to the Adviser or the 500 Index Fund. Standard & Poor's has no obligation to take the needs of the Adviser or the purchasers of the 500 Index Fund into consideration in determining, composing or calculating the S&P 500 Index. Standard & Poor's is not responsible for and has not participated in the determination of the prices and amount of the 500 Index Fund, the timing of the issuance or sale of the 500 Index Fund or in the determination or calculation of the equation by which the 500 Index Fund is to be converted into cash. Standard & Poor's has no obligation or liability in connection with the administration, marketing or trading of the 500 Index Fund. STANDARD & POOR'S DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND STANDARD & POOR'S SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. STANDARD & POOR'S MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY JOHN HANCOCK ADVISERS, INC., THE TRUST, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. STANDARD & POOR'S MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL STANDARD & POOR'S HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. "SPDRS" AND OTHER INVESTMENT COMPANIES. Subject to the Fund's non-fundamental restriction (d), the Fund may invest in Standard & Poor's Depository Receipts ("SPDRs"), other exchange traded funds and other investment companies that are designed to track the S&P 500 Index. These investments have many of the same risks as direct investments in common stocks. The market value of these investment companies are expected to rise and fall as the S&P 500 Index rises and falls. If the Fund invests in an investment company, it would, in addition to its own expenses, indirectly bear its ratable share of the investment company's expenses. SPDRs represent an ownership interest in the SPDR Trust, which holds a portfolio of common stocks that closely tracks the price performance and dividend yield of the S&P 500 Index. SPDRs trade on the American Stock Exchange like shares of common stock. Foreign Securities and Emerging Countries. Each Fund (other than Core Equity Fund, 500 Index Fund, Sovereign Investors Fund and Money Market Fund) may invest in U.S. Dollar and foreign denominated securities of foreign issuers. The Core Equity Fund, 500 Index Fund, Sovereign Investors Fund and Money Market Fund may only invest in U.S. dollar denominated securities including those of foreign issuers which are traded on a U.S. Exchange. The International Fund, Small Cap Growth Fund, Technology Fund, High Yield Bond Fund and Strategic Income Fund may also invest securities of foreign issuers located in countries with emerging economies or securities markets. Investing in obligations of non-U.S. issuers and foreign banks, particularly securities of issuers located in emerging countries, may entail greater risks than investing in similar securities of U.S. issuers. These risks include (i) social, political and economic instability; (ii) the small current size of the markets for many such securities and the currently low or nonexistent volume of trading, which may result in a lack of liquidity and in greater price volatility; (iii) certain national policies which may restrict a Fund's investment opportunities, including restrictions on investment in issuers or industries deemed sensitive to national interests; (iv) foreign taxation; and (v) the absence of developed structures governing private or foreign investment or allowing for judicial redress for injury to private property. Investing in securities of non-U.S. companies may entail additional risks due to the potential political and economic instability of certain countries and the risks of expropriation, nationalization, confiscation or the imposition of restrictions on foreign investment and on repatriation of capital invested. In the event of such expropriation, nationalization or other confiscation by any country, a Fund could lose its entire investment in any such country. 15 In addition, even though opportunities for investment may exist in foreign countries, and in particular emerging markets, any change in the leadership or policies of the governments of those countries or in the leadership or policies of any other government which exercises a significant influence over those countries, may halt the expansion of or reverse the liberalization of foreign investment policies now occurring and thereby eliminate any investment opportunities which may currently exist. Investors should note that upon the accession to power of authoritarian regimes, the governments of a number of Latin American countries previously expropriated large quantities of real and personal property similar to the property which may be represented by the securities purchased by the Funds. The claims of property owners against those governments were never finally settled. There can be no assurance that any property represented by foreign securities purchased by a Fund will not also be expropriated, nationalized, or otherwise confiscated. If such confiscation were to occur, a Fund could lose a substantial portion of its investments in such countries. A Fund's investments would similarly be adversely affected by exchange control regulations in any of those countries. Certain countries in which the Funds may invest may have vocal minorities that advocate radical religious or revolutionary philosophies or support ethnic independence. Any disturbance on the part of such individuals could carry the potential for widespread destruction or confiscation of property owned by individuals and entities foreign to such country and could cause the loss of a Fund's investment in those countries. Certain countries prohibit or impose substantial restrictions on investments in their capital markets, particularly their equity markets, by foreign entities such as the Funds. As illustrations, certain countries require governmental approval prior to investments by foreign persons, or limit the amount of investment by foreign persons in a particular company, or limit the investment by foreign persons to only a specific class of securities of a company that may have less advantageous terms than securities of the company available for purchase by nationals. Moreover, the national policies of certain countries may restrict investment opportunities in issuers or industries deemed sensitive to national interests. In addition, some countries require governmental approval for the repatriation of investment income, capital or the proceeds of securities sales by foreign investors. A Fund could be adversely affected by delays in, or a refusal to grant, any required governmental approval for repatriation, as well as by the application to it of other restrictions on investments. Foreign companies are subject to accounting, auditing and financial standards and requirements that differ, in some cases significantly, from those applicable to U.S. companies. In particular, the assets, liabilities and profits appearing on the financial statements of such a company may not reflect its financial position or results of operations in the way they would be reflected had such financial statements been prepared in accordance with U.S. generally accepted accounting principles. Most foreign securities held by the Funds will not be registered with the SEC and such issuers thereof will not be subject to the SEC's reporting requirements. Thus, there will be less available information concerning foreign issuers of securities held by the Funds than is available concerning U.S. issuers. In instances where the financial statements of an issuer are not deemed to reflect accurately the financial situation of the issuer, the Adviser or relevant Sub-adviser will take appropriate steps to evaluate the proposed investment, which may include on-site inspection of the issuer, interviews with its management and consultations with accountants, bankers and other specialists. There is substantially less publicly available information about foreign companies than there are reports and ratings published about U.S. companies and the U.S. Government. In addition, where public information is available, it may be less reliable than such information regarding U.S. issuers. Because the Funds (other than Core Equity Fund, 500 Index Fund, Sovereign Investors Fund and Money Market Fund) may invest, and International Fund will (under normal circumstances) invest, a portion of their total assets in securities which are denominated or quoted in foreign currencies, the strength or weakness of the U.S. dollar against such currencies may account for part of the Funds' investment performance. A decline in the value of any particular 16 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 Core Equity Fund, 500 Index Fund, Sovereign Investors Fund and Money Market Fund) may engage in foreign currency transactions. Foreign currency transactions may be conducted on a spot (i.e., cash) basis at the spot rate for purchasing or selling currency prevailing in the foreign exchange market. Each Fund (other than Core Equity Fund, 500 Index Fund, Sovereign Investors Fund, and Money Market Fund) may also enter into forward foreign currency exchange contracts to hedge against fluctuations in currency exchange rates affecting a particular transaction or portfolio position. Forward contracts are agreements to purchase or sell a specified currency at a specified future date and price set at the time of the contract. Transaction hedging is the purchase or sale of forward foreign currency contracts with respect to specific receivables or payables of a Fund accruing in connection with the purchase and sale of its portfolio securities quoted or denominated in the same or related foreign currencies. Portfolio hedging is the use of forward foreign currency contracts to offset portfolio security positions denominated or quoted in the same or related foreign currencies. A Fund may elect to hedge less than all of its foreign portfolio positions as deemed appropriate by the Adviser. The Funds will not engage in speculative forward foreign currency exchange transactions. 17 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% (10% for Money Market Fund) of the Fund's net assets. Reverse Repurchase Agreements. Each Fund may also enter into reverse repurchase agreements which involve the sale of U.S. Government securities held in its portfolio to a bank with an agreement that the Fund will buy back the securities at a fixed future date at a fixed price plus an agreed amount of "interest" which may be reflected in the repurchase price. Reverse repurchase agreements are considered to be borrowings by a Fund. Reverse repurchase agreements involve the risk that the market value of securities purchased by a Fund with proceeds of the transaction may decline below the repurchase price of the securities sold by a Fund which it is obligated to repurchase. A Fund will also continue to be subject to the risk of a decline in the market value of the securities sold under the agreements because it will reacquire those securities upon effecting their repurchase. To minimize various risks associated with reverse repurchase agreements, a Fund will establish and maintain a separate account consisting of highly liquid securities, of any type or maturity, in an amount at least equal to the repurchase prices of the securities (plus any accrued interest thereon) under such agreements. In addition, a Fund will not enter into reverse repurchase agreements and other borrowings exceeding in the aggregate 33 1/3% of the market value of its total assets. A Fund will enter into reverse repurchase agreements only with selected registered broker/dealers or with federally insured banks or savings and loan associations which are approved in advance as being creditworthy by the Trustees. Under procedures established by the Trustees, the Adviser will monitor the creditworthiness of the firms involved. 18 Restricted Securities. Each Fund may purchase securities that are not registered ("restricted securities") under the Securities Act of 1933 ("1933 Act"), including commercial paper issued in reliance on section 4(2) of the 1933 Act and securities offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act. The Fund will not invest more than 15% (10% for Money Market Fund) of its net assets in illiquid investments. If the Trustees determine, based upon a continuing review of the trading markets for specific Section 4(2) paper or Rule 144A securities, that they are liquid, they will not be subject to the 15% limit on illiquid investments. The Trustees have adopted guidelines and delegated to the Adviser the daily function of determining and monitoring the liquidity of restricted securities. The Trustees, however, will retain sufficient oversight and be ultimately responsible for the determinations. The Trustees will carefully monitor the Fund's investments in these securities, focusing on such important factors, among others, as valuation, liquidity and availability of information. This investment practice could have the effect of increasing the level of illiquidity in the Fund if qualified institutional buyers become for a time uninterested in purchasing these restricted securities. Options on Securities, Securities Indices and Currency. Mid Cap Growth Fund, Small Cap Growth Fund and Sovereign Investors Fund may each purchase and write (sell) call and put options on any index based on securities in which it may invest. Each other Fund (except Money Market Fund) may purchase and write (sell) call and put options on any securities in which it may invest, on any securities index based on securities in which it may invest or on any currency in which Fund investments may be denominated. These options may be listed on national domestic securities exchanges or foreign securities exchanges or traded in the over-the-counter market. Each Fund may write covered put and call options and purchase put and call options as a substitute for the purchase or sale of securities or currency, or to protect against declines in the value of portfolio securities and against increases in the cost of securities to be acquired. Each Fund, other than the International Fund, Mid Cap Growth Fund, Small Cap Growth Fund and Sovereign Investors Fund, may also write and purchase options to enhance total return. Writing Covered Options. A call option on securities or currency written by a Fund obligates the Fund to sell specified securities or currency to the holder of the option at a specified price if the option is exercised at any time before the expiration date. A put option on securities or currency written by a Fund obligates the Fund to purchase specified securities or currency from the option holder at a specified price if the option is exercised at any time before the expiration date. Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash settlement payments and does not involve the actual purchase or sale of securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security. Writing covered call options may deprive a Fund of the opportunity to profit from an increase in the market price of the securities or foreign currency assets in its portfolio. Writing covered put options may deprive a Fund of the opportunity to profit from a decrease in the market price of the securities or foreign currency assets to be acquired for its portfolio. All call and put options written by the Funds are covered. A written call option or put option may be covered by (i) maintaining cash or liquid securities, either of which may be quoted or denominated in any currency, in a segregated account maintained by the affected Fund's custodian with a value at least equal to the Fund's obligation under the option, (ii) entering into an offsetting forward commitment and/or (iii) purchasing an offsetting option or any other option which, by virtue of its exercise price or otherwise, reduces the Fund's net exposure on its written option position. A written call option on securities is typically covered by maintaining the securities that are subject to the option in a segregated account. Each Fund may cover call options on a securities index by owning securities whose price changes are expected to be similar to those of the underlying index. Each Fund may terminate its obligations under an exchange traded call or put option by purchasing an option identical to the one it has written. Obligations under over-the-counter options may be terminated only by entering into an offsetting transaction with the counterparty to such option. Such purchases are referred to as "closing purchase transactions." 19 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. 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. 20 A Fund's ability to terminate over-the-counter options is more limited than with exchange-traded options and may involve the risk that broker-dealers participating in such transactions will not fulfill their obligations. The Adviser will determine the liquidity of each over-the-counter option in accordance with guidelines adopted by the Trustees. The writing and purchase of options is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The successful use of options depends in part on the Adviser's ability to predict future price fluctuations and, for hedging transactions, the degree of correlation between the options and securities or currency markets. Futures Contracts and Options on Futures Contracts. Mid Cap Growth Fund, Small Cap Growth Fund and Sovereign Investors Fund may each purchase and sell futures contracts on any index based on securities in which it may invest for hedging or other non-speculative purposes. The International Fund may purchase and sell various types of futures contracts and options on these futures contracts to hedge against changes in interest rates, securities prices, or currency exchange rates or for other non-speculative purposes. To seek to increase total return or hedge against changes in interest rates, securities prices or currency exchange rates, each other Fund except Money Market Fund may purchase and sell various kinds of futures contracts, and purchase and write call and put options on these futures contracts. Each Fund may also enter into closing purchase and sale transactions with respect to any of these contracts and options. The futures contracts may be based on various securities (such as U.S. Government securities), securities indices, foreign currencies and any other financial instruments and indices. All futures contracts entered into by a Fund are traded on U.S. or foreign exchanges or boards of trade that are licensed, regulated or approved by the Commodity Futures Trading Commission ("CFTC"). Futures Contracts. A futures contract may generally be described as an agreement between two parties to buy and sell particular financial instruments or currencies for an agreed price during a designated month (or to deliver the final cash settlement price, in the case of a contract relating to an index or otherwise not calling for physical delivery at the end of trading in the contract). Positions taken in the futures markets are not normally held to maturity but are instead liquidated through offsetting transactions which may result in a profit or a loss. While futures contracts on securities or currency will usually be liquidated in this manner, a Fund may instead make, or take, delivery of the underlying securities or currency whenever it appears economically advantageous to do so. A clearing corporation associated with the exchange on which futures contracts are traded guarantees that, if still open, the sale or purchase will be performed on the settlement date. Hedging and Other Strategies. Hedging is an attempt to establish with more certainty than would otherwise be possible the effective price or rate of return on portfolio securities or securities that a Fund proposes to acquire or the exchange rate of currencies in which portfolio securities are quoted or denominated. When securities prices are falling, a Fund can seek to offset a decline in the value of its current portfolio securities through the sale of futures contracts. When securities prices are rising, a Fund, through the purchase of futures contracts, can attempt to secure better rates or prices than might later be available in the market when it effects anticipated purchases. A Fund may seek to offset anticipated changes in the value of a currency in which its portfolio securities, or securities that it intends to purchase, are quoted or denominated by purchasing and selling futures contracts on such currencies. A Fund may, for example, take a "short" position in the futures market by selling futures contracts in an attempt to hedge against an anticipated decline in market prices or foreign currency rates that would adversely affect the dollar value of the Fund's portfolio securities. Such futures contracts may include contracts for the future delivery of securities held by a Fund or 21 securities with characteristics similar to those of a Fund's portfolio securities. Similarly, a Fund may sell futures contracts on any currencies in which its portfolio securities are quoted or denominated or in one currency to hedge against fluctuations in the value of securities denominated in a different currency if there is an established historical pattern of correlation between the two currencies. If, in the opinion of the Adviser, there is a sufficient degree of correlation between price trends for a Fund's portfolio securities and futures contracts based on other financial instruments, securities indices or other indices, the Fund may also enter into such futures contracts as part of its hedging strategy. Although under some circumstances prices of securities in a Fund's portfolio may be more or less volatile than prices of such futures contracts, the Adviser will attempt to estimate the extent of this volatility difference based on historical patterns and compensate for any differential by having the Fund enter into a greater or lesser number of futures contracts or by attempting to achieve only a partial hedge against price changes affecting the Fund's portfolio securities. When a short hedging position is successful, any depreciation in the value of portfolio securities will be substantially offset by appreciation in the value of the futures position. On the other hand, any unanticipated appreciation in the value of a Fund's portfolio securities would be substantially offset by a decline in the value of the futures position. On other occasions, a Fund may take a "long" position by purchasing futures contracts. This would be done, for example, when a Fund anticipates the subsequent purchase of particular securities when it has the necessary cash, but expects the prices or currency exchange rates then available in the applicable market to be less favorable than prices that are currently available. Subject to the limitations imposed on International Fund, Mid Cap Growth Fund, Small Cap Growth Fund, and Sovereign Investors Fund, as described above, a Fund may also purchase futures contracts as a substitute for transactions in securities or foreign currency, to alter the investment characteristics of or currency exposure associated with portfolio securities or to gain or increase its exposure to a particular securities market or currency. Options on Futures Contracts. Each Fund (other than the Money Market Fund) may purchase and write options on the futures contracts described above for the same purposes as its transactions in futures contracts. The purchase of put and call options on futures contracts will give a Fund the right (but not the obligation) for a specified price to sell or to purchase, respectively, the underlying futures contract at any time during the option period. As the purchaser of an option on a futures contract, a Fund obtains the benefit of the futures position if prices move in a favorable direction but limits its risk of loss in the event of an unfavorable price movement to the loss of the premium and transaction costs. The writing of a call option on a futures contract generates a premium which may partially offset a decline in the value of a Fund's assets. By writing a call option, a Fund becomes obligated, in exchange for the premium (upon exercise of the option) to sell a futures contract if the option is exercised, which may have a value higher than the exercise price. Conversely, the writing of a put option on a futures contract generates a premium which may partially offset an increase in the price of securities that a Fund intends to purchase. However, a Fund becomes obligated (upon exercise of the option) to purchase a futures contract if the option is exercised, which may have a value lower than the exercise price. The loss incurred by each Fund in writing options on futures is potentially unlimited and may exceed the amount of the premium received. The holder or writer of an option on a futures contract may terminate its position by selling or purchasing an offsetting option of the same series. There is no guarantee that such closing transactions can be effected. A Fund's ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid market. 22 Other Considerations. The International Fund, Mid Cap Growth Fund, Small Cap Growth Fund, and Sovereign Investors Fund may each engage in futures and related options transactions for hedging or other non-speculative purposes. Each other Fund (except Money Market Fund) will engage in futures and related options transactions either for bona fide hedging purposes or to seek to increase total return as permitted by the CFTC. To the extent that a Fund is using futures and related options for hedging purposes, futures contracts will be sold to protect against a decline in the price of securities (or the currency in which they are quoted or denominated) that the Fund owns or futures contracts will be purchased to protect the Fund against an increase in the price of securities (or the currency in which they are quoted or denominated) it intends to purchase. Each Fund will determine that the price fluctuations in the futures contracts and options on futures used for hedging purposes are substantially related to price fluctuations in securities held by the Fund or securities or instruments which it expects to purchase. As evidence of its hedging intent, each Fund expects that on 75% or more of the occasions on which it takes a long futures or option position (involving the purchase of futures contracts), the Fund will have purchased, or will be in the process of purchasing, equivalent amounts of related securities (or assets denominated in the related currency) in the cash market at the time when the futures or option position is closed out. However, in particular cases, when it is economically advantageous for the Fund to do so, a long futures position may be terminated or an option may expire without the corresponding purchase of securities or other assets. To the extent that a Fund engages in nonhedging transactions in futures contracts and options on futures, the aggregate initial margin and premiums required to establish these nonhedging positions will not exceed 5% of the net asset value of the Fund's portfolio, after taking into account unrealized profits and losses on any such positions and excluding the amount by which such options were in-the-money at the time of purchase. Transactions in futures contracts and options on futures involve brokerage costs, require margin deposits and, in the case of contracts and options obligating a Fund to purchase securities or currencies, require the Fund to establish with the custodian a segregated account consisting of cash or liquid securities in an amount equal to the underlying value of such contracts and options. While transactions in futures contracts and options on futures may reduce certain risks, these transactions themselves entail certain other risks. For example, unanticipated changes in interest rates, securities prices or currency exchange rates may result in a poorer overall performance for a Fund than if it had not entered into any futures contracts or options transactions. Perfect correlation between a Fund's futures positions and portfolio positions will be impossible to achieve. In the event of an imperfect correlation between a futures position and a portfolio position which is intended to be protected, the desired protection may not be obtained and a Fund may be exposed to risk of loss. In addition, it is not possible to hedge fully or protect against currency fluctuations affecting the value of securities denominated in foreign currencies because the value of such securities is likely to fluctuate as a result of independent factors not related to currency fluctuations. Some futures contracts or options on futures may become illiquid under adverse market conditions. In addition, during periods of market volatility, a commodity exchange may suspend or limit trading in a futures contract or related option, which may make the instrument temporarily illiquid and difficult to price. Commodity exchanges may also establish daily limits on the amount that the price of a futures contract or related option can vary from the previous day's settlement price. Once the daily limit is reached, no trades may be made that day at a price beyond the limit. This may prevent a Fund from closing out positions and limiting its losses. Rights and Warrants. Each Fund may purchase warrants and rights which are securities permitting, but not obligating, their holder to purchase the underlying securities at a predetermined price, subject to the Fund's Investment Restrictions. Generally, warrants and stock purchase rights do not carry with them the right to receive dividends or exercise voting rights with respect to the underlying securities, and they do not represent any rights in the assets of the issuer. As a result, an investment in warrants and rights may be considered 23 to entail greater investment risk than certain other types of investments. In addition, the value of warrants and rights does not necessarily change with the value of the underlying securities, and they cease to have value if they are not exercised on or prior to their expiration date. Investment in warrants and rights increases the potential profit or loss to be realized from the investment of a given amount of Fund's assets as compared with investing the same amount in the underlying stock. Government Securities. Each Fund may invest in government securities. However, under normal conditions, Mid Cap Growth Fund and Small Cap Growth Fund will not invest in any fixed income securities, with the exception of cash equivalents (which include U.S. Government securities maturing in 90 days or less). In abnormal conditions, these funds may temporarily invest in U.S. Government securities and U.S. Government agency securities with maturities of up to three years, and may also invest more than 10% of total assets in cash and/or cash equivalents. Certain U.S. Government securities, including U.S. Treasury bills, notes and bonds, and Government National Mortgage Association certificates ("GNMA"), are supported by the full faith and credit of the United States. Certain other U.S. Government securities, issued or guaranteed by Federal agencies or government sponsored enterprises, are not supported by the full faith and credit of the United States, but may be supported by the right of the issuer to borrow from the U.S. Treasury. These securities include obligations of the Federal Home Loan Mortgage Corporation ("FHLMC"), and obligations supported by the credit of the instrumentality, such as Federal National Mortgage Association Bonds ("FNMA"). No assurance can be given that the U.S. Government will provide financial support to such Federal agencies, authorities, instrumentalities and government sponsored enterprises in the future. Municipal Obligations. The High Yield Bond Fund may invest in a variety of municipal obligations which consist of municipal bonds, municipal notes and municipal commercial paper. Municipal Bonds. Municipal bonds are issued to obtain funds for various public purposes including the construction of a wide range of public facilities such as airports, highways, bridges, schools, hospitals, housing, mass transportation, streets and water and sewer works. Other public purposes for which municipal bonds may be issued include refunding outstanding obligations, obtaining funds for general operating expenses and obtaining funds to lend to other public institutions and facilities. In addition, certain types of industrial development bonds are issued by or on behalf of public authorities to obtain funds for many types of local, privately operated facilities. Such debt instruments are considered municipal obligations if the interest paid on them is exempt from federal income tax. The payment of principal and interest by issuers of certain obligations purchased by the Fund may be guaranteed by a letter of credit, note repurchase agreement, insurance or other credit facility agreement offered by a bank or other financial institution. Such guarantees and the creditworthiness of guarantors will be considered by the Adviser in determining whether a municipal obligation meets the Fund's investment quality requirements. No assurance can be given that a municipality or guarantor will be able to satisfy the payment of principal or interest on a municipal obligation. Municipal Notes. Municipal notes are short-term obligations of municipalities, generally with a maturity ranging from six months to three years. The principal types of such notes include tax, bond and revenue anticipation notes and project notes. Municipal Commercial Paper. Municipal commercial paper is a short-term obligation of a municipality, generally issued at a discount with a maturity of less than one year. Such paper is likely to be issued and meet seasonal working capital needs of a municipality or interim construction financing. Municipal commercial paper is backed in many cases by letters of credit, lending agreements, note repurchase agreements or other credit facility agreements offered by banks and other institutions. 24 Issuers of municipal obligations are subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of creditors, such as the Federal Bankruptcy Act, and laws, if any, which may be enacted by Congress or state legislatures extending the time for payment of principal or interest, or both, or imposing other constraints upon enforcement of such obligations. There is also the possibility that as a result of litigation or other conditions the power of ability of any one or more issuers to pay when due the principal of and interest on their municipal obligations may be affected. The yields of municipal bonds depend upon, among other things, general money market conditions, general conditions of the municipal bond market, size of a particular offering, the maturity of the obligation and rating of the issue. The ratings of S&P, Moody's and Fitch Investors Service ("Fitch") represent their respective opinions on the quality of the municipal bonds they undertake to rate. It should be emphasized, however, that ratings are general and not absolute standards of quality. Consequently, municipal bonds with the same maturity, coupon and rating may have different yields and municipal bonds of the same maturity and coupon with different ratings may have the same yield. Many issuers of securities chose not to have their obligations rated. Although unrated securities eligible for purchase by the Fund must be determined to be comparable in quality to securities having certain specified ratings, the market for unrated securities may not be as broad for rated securities since many investors rely on rating organizations for credit appraisal. Swaps, Caps, Floors and Collars. As one way of managing exposure to different types of investments, Bond Fund, Strategic Income Fund and High Yield Bond Fund may enter into interest rate swaps and other types of swap agreements such as caps, collars and floors. Each of these Funds may also enter into currency swaps. In a typical interest rate swap, one party agrees to make regular payments equal to a floating interest rate times a "notional principal amount," in return for payments equal to a fixed rate times the same amount, for a specified period of time. If a swap agreement provides for payments in different currencies, the parties might agree to exchange the notional principal amount as well. Swaps may also depend on other prices or rates, such as the value of an index or mortgage prepayment rates. In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specified interest rate exceeds an agreed-upon level, while the seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of buying a cap and selling a floor. Swap agreements will tend to shift a Fund's investment exposure from one type of investment to another. For example, if a Fund agrees to exchange payments in dollars for payments in a foreign currency, the swap agreement would tend to decrease the Fund's exposure to U.S. interest rates and increase its exposure to foreign currency and interest rates. Caps and floors have an effect similar to buying or writing options. Depending on how they are used, swap agreements may increase or decrease the overall volatility of a Fund's investments and its share price and yield. Swap agreements are sophisticated hedging instruments that typically involve a small investment of cash relative to the magnitude of risks assumed. As a result, swaps can be highly volatile and may have a considerable impact on a Fund's performance. Swap agreements are subject to the risk of a counterparty's failure to perform, and may decline in value if the counterparty's creditworthiness deteriorates. A Fund may also suffer losses if it is unable to terminate outstanding swap agreements or reduce its exposure through offsetting transactions. A Fund will maintain in a segregated account or liquid debt securities equal to the net amount, if any, of the excess of the Fund's obligations over its entitlements with respect to swap, cap, collar or floor transactions. 25 Participation Interests. The Technology Fund, Bond Fund, High Yield Bond Fund, and Strategic Income Fund may invest in participation interests. Participation interests, which may take the form of interests in or assignments of certain loans, are acquired from banks who have made these loans or are members of a lending syndicate. A Fund's investments in participation interests may be subject to its 15% limitation on investments in illiquid securities. The Technology Fund may purchase only those participation interests that mature in 60 days or less, or, if maturing in more than 60 days, that have a floating rate that is automatically adjusted at least once every 60 days. Pay-In-Kind, Delayed and Zero Coupon Bonds. The Bond Fund, Strategic Income Fund, High Yield Bond Fund and Technology Fund may invest in pay-in-kind, delayed and zero coupon bonds. These are securities issued at a discount from their face value because interest payments are typically postponed until maturity. The amount of the discount rate varies depending on factors including the time remaining until maturity, prevailing interest rates, the security's liquidity and the issuer's credit quality. These securities also may take the form of debt securities that have been stripped of their interest payments. The market prices of pay-in-kind, delayed and zero coupon bonds generally are more volatile than the market prices of interest-bearing securities and are likely to respond to a greater degree to changes in interest rates than interest-bearing securities having similar maturities and credit quality. The Funds' investments in pay-in-kind, delayed and zero coupon bonds may require a Fund to sell certain of its portfolio securities to generate sufficient cash to satisfy certain income distribution requirements. Structured or Hybrid Notes. The Bond Fund, Strategic Income Fund, High Yield Bond Fund, and Technology Fund may invest in "structured" or "hybrid" notes. The distinguishing feature of a structured or hybrid note is that the amount of interest and/or principal payable on the note is based on the performance of a benchmark asset or market other than fixed income securities or interest rates. Examples of these benchmarks include stock prices, currency exchange rates and physical commodity prices. Investing in a structured note allows a Fund to gain exposure to the benchmark market while fixing the maximum loss that the Fund may experience in the event that market does not perform as expected. Depending on the terms of the note, a Fund may forego all or part of the interest and principal that would be payable on a comparable conventional note; a Fund's loss cannot exceed this foregone interest and/or principal. An investment in structured or hybrid notes involves risks similar to those associated with a direct investment in the benchmark asset. Indexed Securities. High Yield Bond Fund may invest in indexed securities, including floating rate securities that are subject to a maximum interest rate ("capped floaters") and leveraged inverse floating rate securities ("inverse floaters") (up to 10% of the Fund's total assets). The interest rate or, in some cases, the principal payable at the maturity of an indexed security may change positively or inversely in relation to one or more interest rates, financial indices or other financial indicators ("reference prices"). An indexed security may be leveraged to the extent that the magnitude of any change in the interest rate or principal payable on an indexed security is a multiple of the change in the reference price. Thus, indexed securities may decline in value due to adverse market changes in interest rates or other reference prices. Custodial Receipts. Each Fund, other than Mid Cap Growth Fund and Small Cap Growth Fund, may acquire custodial receipts with respect to U.S. Government securities. Such custodial receipts evidence ownership of future interest payments, principal payments or both on certain notes or bonds. These custodial receipts are known by various names, including Treasury Receipts, Treasury Investors Growth Receipts ("TIGRs"), and Certificates of Accrual on Treasury Securities ("CATS"). For certain securities law purposes, custodial receipts are not considered U.S. Government securities. Bank and Corporate Obligations. Each of the Funds may invest in commercial paper. Commercial paper represents short-term unsecured promissory notes issued in bearer form by banks or bank holding companies, corporations and finance companies. The commercial paper purchased by the Funds consists of direct U.S. Dollar denominated obligations of domestic or foreign issuers. Bank obligations 26 in which a Fund may invest include certificates of deposit, bankers' acceptances and fixed time deposits. Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank for a definite period of time and earning a specified return. Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are "accepted" by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity. Fixed time deposits are bank obligations payable at a stated maturity date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early withdrawal penalties which vary depending upon market conditions and the remaining maturity of the obligation. There are no contractual restrictions on the right to transfer a beneficial interest in a fixed time deposit to a third party, although there is no market for such deposits. Bank notes and bankers' acceptances rank junior to domestic deposit liabilities of the bank and pari passu with other senior, unsecured obligations of the bank. Bank notes are not insured by the Federal Deposit Insurance Corporation or any other insurer. Deposit notes are insured by the Federal Deposit Insurance Corporation only to the extent of $100,000 per depositor per bank. Mortgage-Backed Securities. Each Fund (other than Mid Cap Growth Fund and Small Cap Growth Fund) may invest in mortgage pass-through certificates and multiple-class pass-through securities, such as real estate mortgage investment conduits ("REMIC") pass-through certificates, collateralized mortgage obligations ("CMOs") and stripped mortgage-backed securities ("SMBS"), and other types of "Mortgage-Backed Securities" that may be available in the future. Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-through securities represent participation interests in pools of residential mortgage loans and are issued by U.S. Governmental or private lenders and guaranteed by the U.S. Government or one of its agencies or instrumentalities, including but not limited to the Government National Mortgage Association ("Ginnie Mae"), the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). Ginnie Mae certificates are guaranteed by the full faith and credit of the U.S. Government for timely payment of principal and interest on the certificates. Fannie Mae certificates are guaranteed by Fannie Mae, a federally chartered and privately owned corporation, for full and timely payment of principal and interest on the certificates. Freddie Mac certificates are guaranteed by Freddie Mac, a corporate instrumentality of the U.S. Government, for timely payment of interest and the ultimate collection of all principal of the related mortgage loans. Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations. CMOs and REMIC pass-through or participation certificates may be issued by, among others, U.S. Government agencies and instrumentalities as well as private issuers. CMOs and REMIC certificates are issued in multiple classes and the principal of and interest on the mortgage assets may be allocated among the several classes of CMOs or REMIC certificates in various ways. Each class of CMOs or REMIC certificates, often referred to as a "tranche," is issued at a specific adjustable or fixed interest rate and must be fully retired no later than its final distribution date. Generally, interest is paid or accrues on all classes of CMOs or REMIC certificates on a monthly basis. Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac certificates but also may be collateralized by other mortgage assets such as whole loans or private mortgage pass- through securities. Debt service on CMOs is provided from payments of principal and interest on collateral of mortgaged assets and any reinvestment income thereon. A REMIC is a CMO that qualifies for special tax treatment under the Internal Revenue Code of 1986, as amended (the "Code"), invests in certain mortgages primarily secured by interests in real property and other permitted investments and issues "regular" and "residual" interests. The Funds do not intend to acquire REMIC residual interests. 27 Stripped Mortgage-Backed Securities. SMBS are derivative multiple-class mortgage-backed securities. SMBS are usually structured with two classes that receive different proportions of interest and principal distributions on a pool of mortgage assets. A typical SMBS will have one class receiving some of the interest and most of the principal, while the other class will receive most of the interest and the remaining principal. In the most extreme case, one class will receive all of the interest (the "interest only" class) while the other class will receive all of the principal (the "principal only" class). The yields and market risk of interest only and principal only SMBS, respectively, may be more volatile than those of other fixed income securities. The staff of the Securities and Exchange Commission ("SEC") considers privately issued SMBS to be illiquid. Risk Factors Associated with Mortgage-Backed Securities. Investing in Mortgage-Backed Securities involves certain risks, including the failure of a counterparty to meet its commitments, adverse interest rate changes and the effects of prepayments on mortgage cash flows. In addition, investing in the lowest tranche of CMOs and REMIC certificates involves risks similar to those associated with investing in equity securities. Further, the yield characteristics of Mortgage-Backed Securities differ from those of traditional fixed income securities. The major differences typically include more frequent interest and principal payments (usually monthly), the adjustability of interest rates, and the possibility that prepayments of principal may be made substantially earlier than their final distribution dates. Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic, social and other factors and cannot be predicted with certainty. Both adjustable rate mortgage loans and fixed rate mortgage loans may be subject to a greater rate of principal prepayments in a declining interest rate environment and to a lesser rate of principal prepayments in an increasing interest rate environment. Under certain interest rate and prepayment rate scenarios, a Fund may fail to recoup fully its investment in Mortgage-Backed Securities notwithstanding any direct or indirect governmental, agency or other guarantee. When a Fund reinvests amounts representing payments and unscheduled prepayments of principal, it may receive a rate of interest that is lower than the rate on existing adjustable rate mortgage pass-through securities. Thus, Mortgage-Backed Securities, and adjustable rate mortgage pass-through securities in particular, may be less effective than other types of U.S. Government securities as a means of "locking in" interest rates. Conversely, in a rising interest rate environment, a declining prepayment rate will extend the average life of many Mortgage-Backed Securities. This possibility is often referred to as extension risk. Extending the average life of a Mortgage-Backed Security increases the risk of depreciation due to future increases in market interest rates. Asset-Backed Securities. The Bond Fund, Strategic Income Fund and High Yield Bond Fund may invest in securities that represent individual interests in pools of consumer loans and trade receivables similar in structure to Mortgage-Backed Securities. The assets are securitized either in a pass-through structure (similar to a mortgage pass-through structure) or in a pay-through structure (similar to a CMO structure). Although the collateral supporting asset-backed securities generally is of a shorter maturity than mortgage loans and historically has been less likely to experience substantial prepayments, no assurance can be given as to the actual maturity of an asset-backed security because prepayments of principal may be made at any time. Payments of principal and interest typically are supported by some form of credit enhancement, such as a letter of credit, surety bond, limited guarantee by another entity or having a priority to certain of the borrower's other securities. The degree of credit enhancement varies, and generally applies to only a fraction of the asset-backed security's par value until exhausted. If the credit enhancement of an asset-backed security held by a Fund has been exhausted, and if any required payments of principal and interest are not made with respect to the underlying loans, a Fund may experience losses or delays in receiving payment. 28 Asset-backed securities are often subject to more rapid repayment than their stated maturity date would indicate as a result of the pass-through of prepayments of principal on the underlying loans. During periods of declining interest rates, prepayment of loans underlying asset-backed securities can be expected to accelerate. Accordingly, a Fund's ability to maintain positions in these securities will be affected by reductions in the principal amount of such securities resulting from prepayments, and its ability to reinvest the returns of principal at comparable yields is subject to generally prevailing interest rates at that time. Credit card receivables are generally unsecured and the debtors on such receivables are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set-off certain amounts owed on the credit cards, thereby reducing the balance due. Automobile receivables generally are secured, but by automobiles rather than residential real property. Most issuers of automobile receivables permit the loan servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the asset-backed securities. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in the underlying automobiles. Therefore, there is the possibility that, in some cases, recoveries on repossessed collateral may not be available to support payments on these securities. 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. 29 Other types of floating rate derivative debt securities present more complex types of interest rate risks. For example, range floaters are subject to the risk that the coupon will be reduced to below market rates if a designated interest rate floats outside of a specified interest rate band or collar. Dual index or yield curve floaters are subject to depreciation in the event of an unfavorable change in the spread between two designated interest rates. X-reset floaters have a coupon that remains fixed for more than one accrual period. Thus, the type of risk involved in these securities depends on the terms of each individual X-reset floater. Brady Bonds. The Bond Fund, High Yield Bond Fund and Strategic Income Fund may invest in Brady Bonds and other sovereign debt securities of countries that have restructured or are in the process of restructuring sovereign debt pursuant to the Brady Plan. Brady Bonds are debt securities described as part of a restructuring plan created by U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their outstanding external indebtedness (generally, commercial bank debt). In restructuring its external debt under the Brady Plan framework, a debtor nation negotiates with its existing bank lenders as well as multilateral institutions such as the World Bank and the International Monetary Fund (the "IMF"). The Brady Plan facilitates the exchange of commercial bank debt for newly issued bonds (known as Brady Bonds). The World Bank and the IMF provide funds pursuant to loan agreements or other arrangements which enable the debtor nation to collateralize the new Brady Bonds or to repurchase outstanding bank debt at a discount. Under these arrangements the IMF debtor nations are required to implement domestic monetary and fiscal reforms. These reforms have included the liberalization of trade and 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. 30 Subsequent to its purchase by a Fund, an issue of securities may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. Neither of these events will require the sale of the securities by the Fund (other than Sovereign Investors Fund), but the Adviser will consider the event in its determination of whether the Fund should continue to hold the securities. If any security in Sovereign Investors Fund's portfolio falls below the Fund's minimum credit quality standards, as a result of a rating downgrade or the Adviser's or Sub-adviser's determination, the Fund will dispose of the security as promptly as possible while attempting to minimize any loss. Lower Rated High Yield/High Risk Debt Obligations. Strategic Income Fund, Regional Bank Fund, Financial Industries Fund, Relative Value Fund, Sovereign Investors Fund, Large Cap Growth Fund, Technology Fund, Bond Fund and High Yield Bond Fund may invest in high yield/high risk, fixed income securities rated below investment grade (e.g., rated below Baa by Moody's or below BBB by S&P). Ratings are based largely on the historical financial condition of the issuer. Consequently, the rating assigned to any particular security is not necessarily a reflection of the issuer's current financial condition, which may be better or worse than the rating would indicate. See the Appendix to this Statement of Additional Information which describes the characteristics of corporate bonds in the various rating categories. These Funds may invest in comparable quality unrated securities which, in the opinion of the Adviser or relevant Sub-adviser, offer comparable yields and risks to those securities which are rated. Debt obligations rated in the lower ratings categories, or which are unrated, involve greater volatility of price and risk of loss of principal and income. In addition, lower ratings reflect a greater possibility of an adverse change in financial condition affecting the ability of the issuer to make payments of interest and principal. The market price and liquidity of lower rated fixed income securities generally respond to short term corporate and market developments to a greater extent than do the price and liquidity of higher rated securities because such developments are perceived to have a more direct relationship to the ability of an issuer of such lower rated securities to meet its ongoing debt obligations. Reduced volume and liquidity in the high yield/high risk bond market or the reduced availability of market quotations will make it more difficult to dispose of the bonds and to value accurately a Fund's assets. The reduced availability of reliable, objective data may increase a Fund's reliance on management's judgment in valuing high yield/high risk bonds. In addition, a Fund's investments in high yield/high risk securities may be susceptible to adverse publicity and investor perceptions, whether or not justified by fundamental factors. In the past, economic downturns and increases in interest rates have caused a higher incidence of default by the issuers of lower-rated securities and may do so in the future, particularly with respect to highly leveraged issuers Each Fund (other than Money Market Fund) may acquire individual securities of any maturity and is not subject to any limits as to the average maturity of its overall portfolio. The longer the Fund's average portfolio maturity, the more the value of the portfolio and the net asset value of the Fund's shares will fluctuate in response to changes in interest rates. An increase in interest rates will generally reduce the value of the Fund's portfolio securities and the Fund's shares, while a decline in interest rates will generally increase their value. Lending of Securities. Each Fund may lend portfolio securities to brokers, dealers, and financial institutions if the loan is collateralized by cash or U.S. Government securities according to applicable regulatory requirements. A Fund may reinvest any cash collateral in short-term securities and money market funds. When a Fund lends portfolio securities, there is a risk that the borrower may fail to return the securities involved in the transaction. As a result, the Fund may incur a loss or, in the event of the borrower's bankruptcy, the Fund may be delayed in or prevented from liquidating the collateral. It is a fundamental policy of the Funds not to lend portfolio securities having a total value exceeding 33 1/3% of its total assets. 31 Short Sales. Large Cap Growth Fund and Financial Industries Fund may engage in short sales in order to profit from an anticipated decline in the value of a security. Each Fund (except for 500 Index Fund, International Fund, Mid Cap Growth Fund, Small Cap Growth Fund, Sovereign Investors Fund, Technology Fund and Money Market Fund) may also engage in short sales to attempt to limit its exposure to a possible market decline in the value of its portfolio securities through short sales of securities which the Adviser believes possess volatility characteristics similar to those being hedged. To effect such a transaction, a Fund must borrow the security sold short to make delivery to the buyer. A Fund then is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. Until the security is replaced, a Fund is required to pay to the lender any accrued interest or dividends and may be required to pay a premium. A Fund will realize a gain if the security declines in price between the date of the short sale and the date on which the Fund replaces the borrowed security. On the other hand, a Fund will incur a loss as a result of the short sale if the price of the security increases between those dates. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium, interest or dividends a Fund may be required to pay in connection with a short sale. The successful use of short selling as a hedging device may be adversely affected by imperfect correlation between movements in the price of the security sold short and the securities being hedged. 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 32 additional cash or securities will be segregated in a separate account to the extent that the total value of the assets in the account declines below the amount of the when-issued commitments. Alternatively, a Fund may enter into offsetting contracts for the forward sale of other securities that it owns. Short-Term Trading and Portfolio Turnover. Short-term trading means the purchase and subsequent sale of a security after it has been held for a relatively brief period of time. The International Fund, Large Cap Growth Fund, Relative Value Fund, Mid Cap Growth Fund, Small Cap Growth Fund, Technology Fund, Bond Fund, Strategic Income Fund and High Yield Bond Fund engage in short-term trading in response to stock market conditions, changes in interest rates or other economic trends and developments, or to take advantage of yield disparities between various fixed income securities in order to realize capital gains or improve income. Short term trading may have the effect of increasing portfolio turnover rate. The remaining Funds do not intend to invest for the purpose of seeking short-term profits. These Funds' particular portfolio securities may be changed, however, without regard to the holding period of these securities when the Adviser or relevant Sub-adviser deems that this action will help achieve the Fund's objective given a change in an issuer's operations or in general market conditions. The portfolio turnover rate for each Fund is shown in the section captioned "Financial Highlights" in the prospectuses. A high rate of portfolio turnover (100% or greater) involves corresponding higher transaction expenses and may make it more difficult for a Fund to qualify as a regulated investment company for Federal income tax purposes. INVESTMENT RESTRICTIONS Fundamental Investment Restrictions. Each Fund has adopted the following fundamental investment restrictions which will not be changed without the approval of a majority of the applicable Fund's outstanding voting securities. Under the Investment Company Act of 1940, as amended (the "1940 Act"), and as used in the Prospectuses and this Statement of Additional Information, a "majority of the outstanding voting securities" means approval by the lesser of (1) the holders of 67% or more of the Fund represented at a meeting if the more than 50% of the Fund's outstanding shares of the Fund are present in person or by proxy or (2) more than 50% of the outstanding shares. Each Fund (other than Money Market Fund) may not: 1. Issue senior securities, except as permitted by paragraphs 2, 5 and 6 below. For purposes of this restriction, the issuance of shares of beneficial interest in multiple classes or series, the deferral of the Trustees' fees and the purchase or sale of options, futures contracts, forward commitments, swaps and repurchase agreements entered into in accordance with the Fund's investment policies within the meaning of paragraph 6 below, are not deemed to be senior securities. 2. Borrow money, except for the following extraordinary or emergency purposes: (i) from banks for temporary or short-term purposes or for the clearance of transactions; (ii) in connection with the redemption of Fund shares or to finance failed settlements of portfolio trades without immediately liquidating portfolio securities or other assets; and (iii) in order to fulfill commitments or plans to purchase additional securities pending the anticipated sale of other portfolio securities or assets, but only if after each such borrowing there is asset coverage of at least 300% as defined in the 1940 Act. For purposes of this investment restriction, the deferral of trustees' fees and short sales, transactions in futures contracts and options on futures contracts, securities or indices and forward commitment transactions shall not constitute borrowing. This restriction does not apply to transactions in reverse repurchase agreements in amounts not to exceed 33 1/3% of the value of the Fund's total assets (including the amount borrowed) taken at market value. 33 3. Act as an underwriter, except to the extent that, in connection with the disposition of portfolio securities, the Fund may be deemed to be an underwriter for purposes of the Securities Act of 1933 (the "1933 Act"). 4. Purchase or sell real estate except that the Fund may (i) acquire or lease office space for its own use, (ii) invest in securities of issuers that invest in real estate or interests therein, (iii) invest in securities that are secured by real estate or interests therein, (iv) purchase and sell mortgage-related securities and (v) hold and sell real estate acquired by the Fund as a result of the ownership of securities. 5. Invest in commodities, except the Fund may purchase and sell options on securities, securities indices and currency, futures contracts on securities, securities indices and currency and options on such futures, forward foreign currency exchange contracts, forward commitments, securities index put or call warrants, interest rate and currency swaps, interest rate caps, floors and collars and repurchase agreements entered into in accordance with the Fund's investment policies. 6. Make loans, except that the Fund (1) may lend portfolio securities in accordance with the Fund's investment policies up to 33 1/3% of the Fund's total assets taken at market value, (2) enter into repurchase agreements, and (3) purchase all or a portion of an issue of debt securities, bank loan participation interests, bank certificates of deposit, bankers' acceptances, debentures or other securities, whether or not the purchase is made upon the original issuance of the securities. 7. Purchase the securities of issuers conducting their principal activity in the same industry if, immediately after such purchase, the value of its investments in such industry would equal or exceed 25% of its total assets taken at market value at the time of such investment, except that the Regional Bank Fund will invest more than 25% of its total assets in the banking industry. The Financial Industries Fund will ordinarily invest more than 25% of its assets in the financial services sector. The Technology Fund will ordinarily invest more than 25% of its total assets in the technology industry. The High Yield Bond Fund may invest up to 40% of the value of its total assets in the securities of issuers in the electric utility and telephone industries. This limitation does not apply to investments in obligations of the U.S. Government or any of its agencies, instrumentalities or authorities. 8. For each Fund, with respect to 75% of total assets [see non-fundamental investment restriction (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. 34 Money Market Fund may not: 1. Issue senior securities. For purposes of this restriction, the issuance of shares of beneficial interest in multiple classes or series, the deferral of the Trustees' fees and transactions in repurchase agreements or reverse repurchase agreements are not deemed to be senior securities. 2. Borrow money, except from banks to meet redemptions in amounts not exceeding 33 1/3% (taken at the lower of cost or current value) of its total assets (including the amount borrowed). The Fund does not intend to borrow money during the coming year, and will do so only as a temporary measure for extraordinary purposes or to facilitate redemptions. The Fund will not purchase securities while any borrowings are outstanding. This restriction does not apply to the purchase of reverse repurchase agreements in amounts not to exceed 33 1/3% of the value of the Fund's total assets (including the amount borrowed) taken at market value. 3. Act as an underwriter, except to the extent that, in connection with the disposition of portfolio securities, the Fund may be deemed to be an underwriter for purposes of the 1933 Act. 4. Write, purchase or otherwise invest in any put, call, straddle or spread option or buy or sell real estate, commodities or commodity futures contracts. 5. Make loans, except that the Fund (1) may lend portfolio securities in accordance with the Fund's investment policies up to 33 1/3% of the Fund's total assets taken at market value, (2) enter into repurchase agreements, and (3) purchase all or a portion of an issue of debt securities, bank loan participation interests, bank certificates of deposit, bankers' acceptances, debentures or other securities, whether or not the purchase is made upon the original issuance of the securities. 6. Purchase the securities of issuers conducting their principal activity in the same industry if, immediately after such purchase, the value of its investments in such industry would equal or exceed 25% of its total assets taken at market value at the time of such investment. This limitation does not apply to investments in obligations of the U.S. Government or any of its agencies, instrumentalities or authorities. 7. With respect to 75% of total assets, purchase securities of an issuer (other than the U.S. Government, its agencies, instrumentalities or authorities), if: (a) such purchase would cause more than 5% of the Fund's total assets taken at market value to be invested in the securities of such issuer; or (b) such purchase would at the time result in more than 10% of the outstanding voting securities of such issuer being held by the Fund. Non-Fundamental Investment Restrictions. The following restrictions are designated as non-fundamental and may be changed by the Trustees without shareholder approval. Each Fund (other than Money Market Fund) may not: (a) 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 35 the value of its securities, (iii) to profit from an anticipated decline in the value of a security, and (iv) for obtaining such short-term credits as may be necessary for the clearance of purchases and sales of securities. The 500 Index Fund, International Fund, Mid Cap Growth Fund, Small Cap Growth Fund Sovereign Investors Fund, and Technology Fund may not make short sales. (b) Purchase a security if, as a result, (i) more than 10% of the Fund's total assets would be invested in the securities of other investment companies, (ii) the Fund would hold more than 3% of the total outstanding voting securities of any one investment company, or (iii) more than 5% of the Fund's total assets would be invested in the securities of any one investment company. These limitations do not apply to (a) the investment of cash collateral, received by the Fund in connection with lending the Fund's portfolio securities, in the securities of open-end investment companies or (b) the purchase of shares of any investment company in connection with a merger, consolidation, reorganization or purchase of substantially all of the assets of another investment company. Subject to the above percentage limitations the Fund may, in connection with the John Hancock Group of Funds Deferred Compensation Plan for Independent Trustees/Directors, purchase securities of other investment companies within the John Hancock Group of Funds. (c) Invest in securities which are illiquid if, as a result, more than 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, Bond Fund, Mid Cap Growth Fund, Small Cap Growth Fund and Sovereign Investors Fund may not invest more than 10% of total assets in cash and/or cash equivalents (except cash segregated in relation to futures, forward and option contracts). (f) International Fund, Mid Cap Growth Fund, Small Cap Growth Fund and Sovereign Investors Fund may not invest more than 5% of total assets at time of purchase in any one security (other than U.S. government securities). (g) Under normal conditions Mid Cap Growth Fund and Small Cap Growth Fund will not invest in any fixed income securities. However, in abnormal conditions, these Funds may temporarily invest in U.S. government securities and U.S. government agency securities with maturities of up to three years, and may also invest more than 10% of total assets in cash and/or cash equivalents (including U.S. government securities maturing in 90 days or less). (h) International Fund normally invests at least 80% of total assets in a diversified portfolio of foreign stocks from both developed and emerging countries. The Fund may invest up to 30% of total assets in emerging markets as classified by Morgan Stanley Capital International (MSCI). Foreign equities include but are not limited to common stocks, convertible preferred stocks, preferred stocks, warrants, ADRs, GDRs and EDRs. 36 (i) Mid Cap Growth Fund and Small Cap Growth Fund may not invest more than 10% of total assets in foreign securities. Money Market Fund may not: (a) Purchase securities on margin or make short sales of securities except for obtaining such short-term credits as may be necessary for the clearance of purchases and sales of securities. (b) Purchase a security if, as a result, (i) more than 10% of the Fund's total assets would be invested in the securities of other investment companies, (ii) the Fund would hold more than 3% of the total outstanding voting securities of any one investment company, or (iii) more than 5% of the Fund's total assets would be invested in the securities of any one investment company. These limitations do not apply to (a) the investment of cash collateral, received by the Fund in connection with lending the Fund's portfolio securities, in the securities of open-end investment companies or (b) the purchase of shares of any investment company in connection with a merger, consolidation, reorganization or purchase of substantially all of the assets of another investment company. Subject to the above percentage limitations the Fund may, in connection with the John Hancock Group of Funds Deferred Compensation Plan for Independent Trustees/Directors, purchase securities of other investment companies within the John Hancock Group of Funds. (c) Invest in securities which are illiquid if, as a result, more than 10% of its net assets would consist of such securities, including repurchase agreements maturing in more than seven days, securities that are not readily marketable, restricted securities not eligible for resale pursuant to Rule 144A under the 1933 Act, purchased OTC options, certain assets used to cover written OTC options, and privately issued stripped mortgage-backed securities. (d) Invest for the purpose of exercising control over or management of any company. If a percentage restriction on investment or utilization of assets as set forth above is adhered to at the time an investment is made, a later change in percentage resulting from changes in the values of a Fund's assets will not be considered a violation of the restriction. If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage resulting from a change in values of portfolio securities or amounts of net assets will not be considered a violation of any of the foregoing restrictions. 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. THOSE RESPONSIBLE FOR MANAGEMENT The business of each Fund is managed by the Trustees of the Trust who elect officers who are responsible for the day-to-day operations of the Funds and who execute policies formulated by the Trustees. Several of the officers and Trustees of the Trust are also officers and directors of the Adviser, one or more of the Sub-advisers and/or the Fund's principal distributor, John Hancock Funds, Inc. ("John Hancock Funds"). 37 Positions Held Principal Occupation(s) Name and Address With the Company During the Past Five Years - ---------------- ---------------- -------------------------- Stephen L. Brown* Trustee and Chairman Chairman and Director, John Hancock John Hancock Place Life Insurance Company (CEO until P.O. Box 111 June 2000), John Hancock Financial Boston, MA 02117 Services, Inc. (CEO until June July 1937 2000); John Hancock Advisers, Inc. (the Adviser), John Hancock Funds, Inc. (John Hancock Funds), The Berkeley Financial Group, Inc. (The Berkeley Group); Director, John Hancock Subsidiaries LLC; John Hancock Signature Services, Inc. (Signature Services) (until January 1997); John Hancock Insurance Agency, Inc.; (Insurance Agency) (until May 1999); Independence Investment LLC, Independence Fixed Income LLC; Insurance Marketplace Standards Association, Committee for Economic Development, Ionics, Inc. (since June 2000), Aspen Technology, Inc. (since June 2000), Jobs for Massachusetts, Federal Reserve Bank of Boston (until March 1999); Financial Institutions Center (until May 1996), Freedom Trail Foundation (until December 1996) Beth Israel Hospital and Corporation (until November 1996); Director and Member (Beth Israel/Deaconess Care Group), Member, Commercial Club of Boston, President (until April 1996); Trustee, Wang Center for the Performing Arts, Alfred P. Sloan Foundation, John Hancock Asset Management (until March 1997); Member, Boston Compact Committee, Mass. Capital Resource Company; Chairman, Boston Coordinating Committee ("The Vault") (until April 1997). Maureen R. Ford * Trustee, Vice Chairman, President, Broker/Dealer 101 Huntington Avenue President and Chief Distributor, John Hancock Life Boston, MA 02199 Executive Officer (1,2) Insurance Company; Vice Chairman, March 1950 Director, President and Chief Executive Officer, the Adviser, The Berkeley Group, John Hancock Funds; Chairman, Director and President, Insurance Agency, Inc.; Chairman, Director and Chief Executive Officer, Sovereign Asset Management Corporation (SAMCorp.); Senior Vice President, MassMutual Insurance Co. (until 1999); Senior Vice President, Connecticut Mutual Insurance Co. (until 1996). - ------------------- * Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940. (1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees. (2) A member of the Investment Committee of the Adviser. 38 Positions Held Principal Occupation(s) Name and Address With the Company During the Past Five Years - ---------------- ---------------- -------------------------- Dennis S. Aronowitz Trustee Professor of Law, Emeritus, Boston 101 Huntington Avenue University School of Law (as of Boston, MA 02199 1996); Director, Brookline June 1931 Bankcorp. Richard P. Chapman, Jr. Trustee (1) Chairman, President, and Chief 101 Huntington Avenue Executive Officer, Brookline Boston, MA 02199 Bankcorp. (lending); Director, February 1935 Lumber Insurance Companies (fire and casualty insurance); Trustee, Northeastern University (education); Director, Depositors Insurance Fund, Inc. (insurance). William J. Cosgrove Trustee Vice President, Senior Banker and 101 Huntington Avenue Senior Credit Officer, Citibank, Boston, MA 02199 N.A. (retired September 1991); January 1933 Executive Vice President, Citadel Group Representatives, Inc.; Trustee, the Hudson City Savings Bank (since 1995). Richard A. Farrell Trustee President of Farrell, Healer & Co., 101 Huntington Avenue (venture capital management firm) Boston, MA 02199 (since 1980); Prior to 1980, headed November 1932 the venture capital group at Bank of Boston Corporation. Gail D. Fosler Trustee Senior Vice President and Chief 101 Huntington Avenue Economist, The Conference Board Boston, MA 02199 (non-profit economic and business December 1947 research); Director, Unisys Corp.; Director, H.B. Fuller Company; and DBS Holdings (Singapore) (Banking and Financial Services); Director, National Bureau of Economic Research (academic). - ------------------- * Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940. (1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees. (2) A member of the Investment Committee of the Adviser. 39 Positions Held Principal Occupation(s) Name and Address With the Company During the Past Five Years - ---------------- ---------------- -------------------------- William F. Glavin Trustee President Emeritus, Babson College 101 Huntington Avenue (as of 1997); Vice Chairman, Xerox Boston, MA 02199101 Corporation (until June 1989); March 1932 Director, Caldor Inc., Reebok, Inc. (since 1994) and Inco Ltd. Dr. John A. Moore Trustee President and Chief Executive 101 Huntington Avenue Officer, Institute for Evaluating Boston, MA 02199 Health Risks, (nonprofit February 1939 institution) (since September 1989). Patti McGill Peterson Trustee Executive Director, Council for 101 Huntington Avenue International Exchange of Scholars Boston, MA 02199 (since January 1998), Vice May 1943 President, Institute of International Education (since January 1998); Senior Fellow, Cornell Institute of Public Affairs, Cornell University (until December 1997); President Emerita of Wells College and St. Lawrence University; Director, Niagara Mohawk Power Corporation (electric utility). John W. Pratt Trustee Professor of Business 101 Huntington Avenue Administration Emeritus, Harvard Boston, MA 02199 University Graduate School of September 1931 Business Administration (as of June 1998). William L. Braman Executive Vice President Executive Vice President and Chief 101 Huntington Avenue and Chief Investment Investment Officer, each of the Boston, MA 02199 Officer(2) John Hancock Funds; Executive Vice December 1953 President and Chief Investment Officer, Barring Asset Management, London UK (until May 2000). - ------------------- * Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940. (1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees. (2) A member of the Investment Committee of the Adviser. 40 Positions Held Principal Occupation(s) Name and Address With the Company During the Past Five Years - ---------------- ---------------- -------------------------- Richard A. Brown Senior Vice President and Senior Vice President , Chief 101 Huntington Avenue Chief Financial Officer (2) Financial Officer and Treasurer of Boston, MA 02199 the Adviser, John Hancock Funds, April 1949 and The Berkeley Group; Second Vice President and Senior Associate Controller, Corporate Tax Department, John Hancock Financial Services, Inc. (until January 2001). Susan S. Newton Senior Vice President, Senior Vice President and Chief 101 Huntington Avenue Secretary and Chief Legal Legal Officer the Adviser; John Boston, MA 02199 Officer Hancock Funds; Vice President Signature Services (until May 2000), The Berkeley Group, NM March 1950 Capital and SAMCorp. James J. Stokowski Vice President, Treasurer and Vice President, the Adviser. 101 Huntington Avenue Chief Accounting Officer Boston, MA 02199 November 1946 Thomas H. Connors Vice President and Compliance Vice President and Compliance 101 Huntington Avenue Officer Officer, the Adviser; Vice Boston, MA 02199 President, John Hancock Funds. September 1959 - ------------------- * Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940. (1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees. (2) A member of the Investment Committee of the Adviser. 41 The following table provides information regarding the compensation paid by the Funds and the other investment companies in the John Hancock Fund Complex to the Independent Trustees for their services. Messrs. Brown and Ms. Ford, each a non-Independent Trustee, and each of the officers of the Funds are interested persons of the Adviser, are compensated by the Adviser and/or its affiliates and receive no compensation from the Funds for their services. Aggregate Total Compensation Compensation from From the Fund and John Independent Trustees the Fund (1) Hancock Fund Complex to Trustees (2) - -------------------- ------------ ------------------------------------ Dennis J. Aronowitz $ 2,165 $ 75,000 Richard P. Chapman* 2,264 78,000 William J. Cosgrove* 2,066 72,000 Leland O. Erdahl + 2,070 72,100 Richard A. Farrell 2,165 75,000 Gail D. Fosler 1,944 68,000 William F. Glavin* 1,815 64,000 Dr. John A. Moore* 2,070 72,100 Patti McGill Peterson 2,014 70,350 John Pratt 2,066 72,000 --------- ---------- Total $20,639 $718,550 (1) Compensation is for the current fiscal year ending December 31, 2000. (2) Total compensation paid by the John Hancock Funds Complex to the Independent Trustees is as of December 31, 2000. As of this date, there were sixty-nine funds in the John Hancock Fund Complex with each of these Independent Trustees serving on thirty-one funds. + As of February 28, 2001, Mr. Erdahl resigned as Trustees of the Complex. *As of December 31, 2000, the value of the aggregate accrued deferred compensation amount from all funds in the John Hancock Funds Complex for Mr. Chapman was $85,948, Mr. Cosgrove was $218,258, Mr. Glavin was $317,363 and for Dr. Moore was $263,160 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, a Sub-adviser or affiliated companies. Some of the Trustees and officers may also be officers, Directors and/or Trustees of one or more of the other funds for which the Adviser serves as investment adviser. As of December 31, 2000, all shares were held by the Life Co. and the Variable Life Co. except the Adviser owns the following: International Fund 30.00%, Regional Bank 3.60%, Small Cap Growth Fund 7.28%, Mid Cap Growth 6.57%, Large Cap Growth Fund 8.35%, Relative Value 1.36%, Bond Fund 4.09%, Strategic Income Fund 10.85%, High Yield Bond Fund 18.51%, Technology Fund 2.61% and Money Market Fund 0.01%. At such date, no other person(s) owned of record or was known by the Trust to beneficially own as much as 5% of the outstanding shares of the Trust or of any of the Funds. INVESTMENT ADVISORY AND OTHER SERVICES The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603, was organized in 1968 and has more than $30 billion in assets under management in its capacity as investment adviser to the Funds and the other funds and publicly traded investment companies in the John Hancock group of funds as well as institutional accounts. The Adviser is an affiliate of the Life Company, one of the most recognized and respected financial institutions in the nation. With 42 total assets under management of more than $100 billion, the Life Company is one of the ten largest life insurance companies in the United States, and carries a high rating from Standard & Poor's and A.M. Best. Founded in 1862, the Life Company has been serving clients for over 130 years. Each Fund has entered into an investment management contract (the "Advisory Agreement") with the Adviser, which was approved by the Funds' shareholders. Pursuant to the Advisory Agreements, the Adviser will: (a) furnish continuously an investment program for the Funds and determine, subject to the overall supervision and review of the Trustees, which investments should be purchased, held, sold or exchanged, and (b) provide supervision over all aspects of the Funds' operations except those which are delegated to a custodian, transfer agent or other agent. The Funds bear all costs of their organization and operation, including but not limited to expenses of preparing, printing and mailing all shareholders' reports, notices, prospectuses, proxy statements and reports to regulatory agencies; expenses relating to the issuance, registration and qualification of shares; government fees; interest charges; expenses of furnishing to shareholders their account statements; taxes; expenses of redeeming shares; brokerage and other expenses connected with the execution of portfolio securities transactions; expenses pursuant to the Funds' plan of distribution; fees and expenses of custodians including those for keeping books and accounts maintaining a committed line of credit and calculating the net asset value of shares; fees and expenses of transfer agents and dividend disbursing agents; legal, accounting, financial, management, tax and auditing fees and expenses of the Funds (including an allocable portion of the cost of the Adviser's employees rendering such services to the Funds); the compensation and expenses of Trustees who are not otherwise affiliated with the Trust, the Adviser or any of their affiliates; expenses of Trustees' and shareholders' meetings; trade association membership; insurance premiums; and any extraordinary expenses. As of December 14, 2000, with respect to International Fund, the Adviser has entered into a sub-investment management contract (the "Sub-advisory agreement") with Nicholas-Applegate under which, subject to the review of the Trustees and the overall supervision of the Adviser, Nicholas-Applegate is responsible for providing the Fund with investment advice. Nicholas-Applegate will also provide the Fund on a continuous basis with economic, financial and political information, research and assistance concerning international markets. Nicholas-Applegate is a California limited partnership, with offices at 600 West Broadway, 30th Floor, San Diego, California 92101. Nicholas-Applegate was organized in August 1984 to manage discretionary accounts investing primarily in publicly traded equity securities and securities convertible into or exercisable for publicly traded equity securities, with the goal of capital appreciation. On January 31, 2001, Nicholas-Applegate was acquired by Allianz of America, Inc. ("AZOA"). Allianz AG, the parent of AZOA, is a German Aktiengesellschaft, a German publicly traded company, which, together with its subsidiaries, comprises the world's largest insurance group (the "Allianz Group"). Allianz Group currently has assets under management of approximately $690 billion, and in its last fiscal year wrote approximately $50 billion in gross insurance premiums. Allianz AG's address is: Koeniginstrasse 28, D-80802, Munich, Germany. Until December 14, 2000, the Sub-adviser to International Fund was Indocam International Investment Services ("IIIS"). IIIS is organized under the laws of France and is a wholly owned subsidiary of Indocam, the asset management affiliate of Credit Agricole, a French banking group. IIIS is located at 90 Boulevard Pasteur, Paris, France 75105. Indocam is an asset management firm maintaining established relationships with institutional, corporate, and individual investors, Credit Agricole is one of the largest banks in the world. The Adviser's Sub-advisory contract with IIIS was terminated effective December 14, 2000. Until March 1, 2000, the International Fund had another Sub-adviser, John Hancock Advisers, International Limited ("JHAI"), located at 6th Floor, Duke's Court, 32-36 Duke Street, St. James's, London, England SW1Y6DF. JHAI was a wholly-owned subsidiary of the Adviser formed in 1987 to provide international investment research and advisory services to U.S. institutional clients. The Adviser's Sub-advisory contract with JHAI was terminated effective March 1, 2000. 43 With respect to Core Equity Fund, the Adviser has entered into a Sub-advisory agreement with Independence Investment LLC ("Independence"). Independence, located at 53 State Street, Boston, Massachusetts 02109, and organized in 1982, is a wholly owned indirect subsidiary of John Hancock Subsidiaries, Inc. With respect to Sovereign Investors Fund, the Adviser's Sub-advisory Agreement with SAMCorp was terminated effective January 1, 1999. With respect to Technology Fund, the Adviser has entered into a Sub-advisory agreement with American Fund Advisors, Inc. ("AFA"). AFA is located at 1415 Kellum Place, Suite 205 Garden City, New York 11530 and was incorporated under the laws of New York in 1978. AFA, subject to the supervision of the Adviser, manages the Technology Fund's investments. AFA also provides investment advisory and management services to individual and institutional clients. Under each respective Sub-advisory agreement, the corresponding Sub-adviser, subject to the review of the Trustees and the overall supervision of the Adviser, is responsible for managing the investment operations of the corresponding Fund and the composition of the Fund's portfolio and furnishing the Fund with advice and recommendations with respect to investments, investment policies and the purchase and sale of securities. As provided by the Advisory Agreements, each Fund pays the Adviser a fee, which is accrued daily and paid monthly in arrears and is equal on an annual basis to a stated percentage of the respective Fund's average daily net asset value. - ------------------------------------------------ --------------------------- Technology Fund 0.80% - ------------------------------------------------ --------------------------- International Fund 0.90% - ------------------------------------------------ --------------------------- Regional Bank Fund 0.80% - ------------------------------------------------ --------------------------- Financial Industries Fund 0.80% - ------------------------------------------------ --------------------------- Small Cap Growth Fund 0.75% - ------------------------------------------------ --------------------------- Mid Cap Growth Fund 0.75% - ------------------------------------------------ --------------------------- Large Cap Growth Fund 0.75% - ------------------------------------------------ --------------------------- Relative Value Fund 0.60% - ------------------------------------------------ --------------------------- Core Equity Fund 0.70% - ------------------------------------------------ --------------------------- Sovereign Investors Fund 0.60% - ------------------------------------------------ --------------------------- 500 Index Fund 0.10%* - ------------------------------------------------ --------------------------- Bond Fund 0.50% - ------------------------------------------------ --------------------------- Strategic Income Fund 0.60% - ------------------------------------------------ --------------------------- High Yield Bond Fund 0.60% - ------------------------------------------------ --------------------------- Money Market Fund 0.50% - ------------------------------------------------ --------------------------- *Reflects the Adviser's Agreement to limit the management fee. Without this limitation the management fee would be 0.35%. The Adviser has agreed to continue this limitation until April 30, 2002. Under each Sub-advisory agreement, the Adviser (not the Fund) pays a portion of its fee to the corresponding Sub-adviser. Until May 10, 2001, with respect to the International Fund, the Adviser pays a Sub-advisory fee to Nicholas-Applegate equal to 55% of the gross management fee received by the Adviser with respect to the International Fund's average daily net assets. Effective May 11, 2001, with respect to the International Fund, the Adviser will 44 pay quarterly a sub-advisory fee to Nicholas-Applegate equal on an annual basis to (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. Until December 14, 2000, with respect to the International Fund, the Adviser paid a sub-advisory fee to IIIS equal to 55% of the gross management fee received by the Adviser with respect to the International Fund's average daily net assets. The Sub-advisory agreement with IIIS was terminated effective December 14, 2000. Prior to March 1, 2000, the Adviser paid JHAI a Sub-advisory fee equal to 70% of the advisory fee payable on the International Fund's average daily net assets. JHAI agreed to waive all but 0.05% of this fee beginning January 1, 2000. The Adviser's Sub-advisory agreement with JHAI was terminated effective March 1, 2000. With respect to the Core Equity Fund, the Adviser pays a sub-advisory fee to Independence equal to 55% of the advisory fee payable on the Fund's average daily net assets. With respect to Technology Fund, the Adviser pays a sub-advisory fee to AFA equal to 0.10% of the Technology Fund's average daily net assets. From time to time, the Adviser may reduce its fee or make other arrangements to limit the Fund's expenses to a specified percentage of average daily net assets. The adviser has voluntarily agreed to limit each Fund's expenses, excluding the management fee, to 0.25% of each Fund's average daily net assets. The Adviser retains the right to reimpose a fee and recover any other payments to the extent that, at the end of any fiscal year, the Fund's annual expenses fall below this limit. Securities held by a Fund may also be held by other funds or investment advisory clients for which the Adviser or any of its affiliates provides investment advice. Because of different investment objectives or other factors, a particular security may be bought for one or more funds or clients when one or more are selling the same security. If opportunities for purchase or sale of securities by the Adviser or Sub-adviser for a Fund or for other funds or clients for which the Adviser or Sub-adviser renders investment advice arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective funds or clients in a manner deemed equitable to all of them. To the extent that transactions on behalf of more than one client of the Adviser or its affiliates may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. Pursuant to each Advisory Agreement, and, where applicable, Sub-advisory agreement, neither the Adviser nor any Sub-adviser is liable for any error of judgment or mistake of law or for any loss suffered by the Funds in connection with the matters to which its respective contract relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Adviser or any Sub-adviser in the performance of its duties or from its reckless disregard of the obligations and duties under the applicable agreement. Under the Advisory Agreements, each Fund may use the name "John Hancock" or any name derived from or similar to it only for as long as the applicable advisory agreement or any extension, renewal or amendment thereof remains in effect. If a Fund's advisory agreement is no longer in effect, the Fund (to the extent that it lawfully can) will cease to use such name or any other name indicating that it is advised by or otherwise connected with the Adviser. In addition, the Adviser or the Life Company may grant the non-exclusive right to use the name John Hancock or any similar name to any other corporation or entity, including but not limited to any investment company of which the Life Company or any subsidiary or affiliate thereof or any successor to the business of any subsidiary or affiliate thereof shall be the investment adviser. 45 For the fiscal years ended December 31, 1998, 1999 and 2000, the Adviser's management fee for each Fund is listed below. Funds 1998 Management fee received by the Adviser ----- ------------------------------------------- International $49,454 Regional Bank 72,908 Financial Industries 324,581 Small Cap Growth 43,238 Mid Cap Growth 7,546 Large Cap Growth 48,603 Relative Value 45,181 Core Equity 112,746 Sovereign Investors 139,125 500 Index 20,232* Bond 35,548 Strategic Income 62,923 High Yield Bond 32,414 Money Market 61,349 1999 Management fee 2000 Management fee Funds received by the Adviser received by the Adviser ----- ----------------------- ----------------------- Technology $ ---- $33,261 International 66,480 81,503 Regional Bank 173,090 113,415 Financial Industries 398,471 434,813 Small Cap Growth 80,965 213,759 Mid Cap Growth 20,806 99,566 Large Cap Growth 121,727 148,433 Relative Value 147,515 257,116 Core Equity 254,281 306,248 Sovereign Investors 248,937 295,467 500 Index 32,613* 33,179 Bond 57,967 80,502 Strategic Income 117,404 165,020 High Yield Bond 54,095 51,368 Money Market 117,918 194,539 *Net of limitation by Adviser. For the fiscal years ended December 31, 1998, 1999 and 2000, the Adviser limited its management fee. Without this limitation, the management fee received by the Adviser would have been $70,811, $114,145 and $116,127, respectively. 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. On December 12, 2000, the Trustees approved the termination of IIIS as Sub-adviser to the International Fund and appointed Nicholas-Applegate as Sub-adviser effective December 14, 2000. On April 25, 2001, the shareholders of the International Fund approved the appointment of Nicholas-Applegate as Sub-adviser to the Fund. 46 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 1998 1999 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Technology $ --- $ ---- $ 810++++ - -------------------------------------------------------------------------------- International 870 1,312 1,697 - -------------------------------------------------------------------------------- Regional Bank 1,353+ 3,822 2,660 - -------------------------------------------------------------------------------- Financial Industries 6,370 8,707 10,269 - -------------------------------------------------------------------------------- Small Cap Growth 915 1,972 5,347 - -------------------------------------------------------------------------------- Mid Cap Growth 158+++ 511 2,504 - -------------------------------------------------------------------------------- Large Cap Growth 1,012 2,952 3,705 - -------------------------------------------------------------------------------- Relative Value 1,136++ 4,476 8,056 - -------------------------------------------------------------------------------- Core Equity 2,523 6,545 8,230 - -------------------------------------------------------------------------------- Sovereign Investors 3,643 7,445 9,273 - -------------------------------------------------------------------------------- 500 Index 3,237 5,834 6,221 - -------------------------------------------------------------------------------- Bond 1,109 2,094 2,048 - -------------------------------------------------------------------------------- Strategic Income 1,645 3,504 5,193 - -------------------------------------------------------------------------------- High Yield Bond 839++ 1,598 1,605 - -------------------------------------------------------------------------------- Money Market 1,914 4,300 7,395 - -------------------------------------------------------------------------------- *From commencement of operations on April 30, 1997. +From commencement of operations on May 1, 1998. ++From commencement of operations on January 6, 1998. +++From commencement of operations on January 7, 1998. ++++From commencement of operations on May 1, 2000. Personnel of the Adviser, Sub-Advisers, and their affiliates may trade securities for their personal accounts. The Funds also may hold, or may be buying or selling, the same securities. To prevent the Funds from being disadvantaged, the Adviser, the Sub-Adviser and their affiliates and the Funds have adopted a code of ethics which restricts the trading activity of those personnel. 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. 47 Short-term debt instruments which have a remaining maturity of 60 days or less are generally valued at amortized cost which approximates market value. If market quotations are not readily available or if in the opinion of the Adviser any quotation or price is not representative of true market value, the fair value of any security may be determined in good faith in accordance with procedures approved by the Trustees. Money Market Fund utilizes the amortized cost valuation method of valuing portfolio instruments in the absence of extraordinary or unusual circumstances. Under the amortized cost method, assets are valued by constantly amortizing over the remaining life of an instrument the difference between the principal amount due at maturity and the cost of the instrument to the Fund. The Trustees will from time to time review the extent of any deviation of the net asset value, as determined on the basis of the amortized cost method, from net asset value as it would be determined on the basis of available market quotations. If any deviation occurs which may result in unfairness either to new investors or existing shareholders, the Trustees will take such actions as they deem appropriate to eliminate or reduce such unfairness to the extent reasonably practicable. These actions may include selling portfolio instruments prior to maturity to realize gains or losses or to shorten the Fund's average portfolio maturity, withholding dividends, splitting, combining or otherwise recapitalizing outstanding shares or utilizing available market quotations to determine net asset value per share. Foreign securities are valued on the basis of quotations from the primary market in which they are traded. Any assets or liabilities expressed in terms of foreign currencies are translated into U.S. dollars by the Funds' custodian based on London currency exchange quotations as of 5:00 p.m., London time (12:00 noon, New York time) on the date of any determination of a Fund's NAV. If quotations are not readily available, or the value has been materially affected by events occurring after the closing of a foreign market, assets are valued by a method that the Trustees believe accurately reflects fair value. The NAV for each Fund is determined each business day at the close of regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern Time) by dividing the Fund's net assets by the number of its shares outstanding. On any day an international market is closed and the New York Stock Exchange is open, any foreign securities will be valued at the prior day's close with the current day's exchange rate. Trading of foreign securities may take place on Saturdays and U.S. business holidays on which a Fund's NAV is not calculated. Consequently, a Fund's portfolio securities may trade and the NAV of that Fund's shares may be significantly affected on days when a shareholder has no access to that Fund. SPECIAL REDEMPTIONS Although the Funds would not normally do so, each Fund has the right to pay the redemption price of shares of the Fund in whole or in part in portfolio securities as prescribed by the Trustees. When the shareholder sells portfolio securities received in this fashion, a brokerage charge would be incurred. Any such securities would be valued for the purpose of making such payment at the same value as used in determining net asset value. Each Fund has elected to be governed by Rule 18f-1 under the 1940 Act. Under that rule, each Fund must redeem its shares solely for cash, except to the extent that redemption payments during any 90-day period for any one account, would exceed the lesser of $250,000 or 1% of the net asset value. 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 48 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. 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. 49 Selling activities for the Fund may not take place outside the U.S., except with U.S. military bases, APO addresses and U.S. diplomats. Brokers of record on Non-U.S. investors' accounts with foreign mailing addresses are required to certify that all sales activities have occurred, and in the future will occur, only in the U.S. A foreign corporation may purchase shares of the Fund only if it has a U.S. mailing address. DIVIDENDS Dividends from net investment income are declared and paid as follows: FUND DECLARED PAID - ---- -------- ---- Technology Fund Annually Annually International Fund Annually Annually Regional Bank Fund Quarterly Quarterly Financial Industries Fund Annually Annually Small Cap Growth Fund Annually Annually Mid Cap Growth Fund Annually Annually Large Growth Fund Annually Annually Relative Value Fund Quarterly Quarterly Core Equity Fund Quarterly Quarterly Sovereign Investors Fund Quarterly Quarterly 500 Index Fund Quarterly Quarterly Bond Fund Daily Monthly Strategic Income Fund Daily Monthly High Yield Bond Fund Daily Monthly Money Market Fund Daily Monthly Capital gains distributions are generally declared annually. Dividends are automatically reinvested in additional shares of the Funds. TAX STATUS Each Fund is treated as a separate entity for accounting and tax purposes, has elected or intends to elect to be treated, as a separate "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and intends to continue to qualify for each taxable year. As such and by complying with the applicable provisions of the Code regarding the sources of its income, the timing of its distributions, and the diversification of its assets, each Fund will not be subject to Federal income tax on taxable income (including net realized capital gains) which is distributed to shareholders in accordance with the timing requirements of the Code. Qualification of a Fund for treatment as a regulated investment company under the Code requires, among other things, that (a) at least 90% of a Fund's annual gross income, without being offset for losses from the sale or other disposition of stock or securities or other transactions, be derived from interest, dividends, payments with respect to securities loans and gains from the sale or other disposition of stock or securities or foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities or currencies; (b) each Fund distributes to its shareholders for each taxable year (in compliance with certain timing requirements) as dividends at least 90% of 50 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 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. 51 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, 2000, the following Funds had capital loss carryforwards: - -------------------------------------------------------------------------------- 2006 2007 2008 - -------------------------------------------------------------------------------- Technology -- -- $ 14,000 - -------------------------------------------------------------------------------- International -- -- 265,560 - -------------------------------------------------------------------------------- Regional Bank -- -- 2,212,041 - -------------------------------------------------------------------------------- Financial Industries -- $2,140,648 1,313,228 - -------------------------------------------------------------------------------- Small Cap Growth -- -- 2,089,105 - -------------------------------------------------------------------------------- Mid Cap Growth -- -- 633,415 - -------------------------------------------------------------------------------- Large Cap Growth -- -- 1,306,804 - -------------------------------------------------------------------------------- Sovereign Investors $157,877 101,159 1,206,695 - -------------------------------------------------------------------------------- Bond -- 67,593 215,568 - -------------------------------------------------------------------------------- Strategic Income 4,130 136,493 455,777 - -------------------------------------------------------------------------------- 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. 52 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, Large Cap Growth Fund, Financial Industries and High Yield Bond Fund. Tax rules are not entirely clear about issues such as when the Funds may cease to accrue interest, original issue discount, or market discount, when and to what extent deductions may be taken for bad debts or worthless securities, how payments received on obligations in default should be allocated between principal and income, and whether exchanges of debt obligations in a workout context are taxable. These and other issues will be addressed by any Fund that may hold such obligations in order to reduce the risk of distributing insufficient income to preserve its status as a regulated investment company and seek to avoid becoming subject to Federal income tax. Limitations imposed by the Code on regulated investment companies like the Funds may restrict a Fund's ability to enter into futures, options and currency forward transactions. Certain options, futures and forward foreign currency transactions undertaken by a Fund may cause such Fund to recognize gains or losses from marking to market even though its securities or other positions have not been sold or terminated and affect the character as long-term or short-term (or, in the case of certain currency forwards, options and futures, as ordinary income or loss) and timing of some capital gains and losses realized by the Fund. Also, certain of a Fund's losses on its transactions involving options, futures and forward foreign currency contracts and/or offsetting or successor portfolio positions may be deferred rather than being taken into account currently in calculating the Fund's taxable income or gains. These transactions may therefore affect the amount, timing and character of a Fund's distributions to shareholders. Certain of the applicable tax rules may be modified if the Fund is eligible and chooses to make one or more of certain tax elections that may be available. The Funds will take into account the special tax rules (including consideration of available elections) applicable to options, futures or forward contracts in order to minimize any potential adverse tax consequences. The tax rules applicable to dollar rolls, currency swaps and interest rate swaps, caps, floors and collars may be unclear in some respects, and the Funds may be required to limit participation in such transactions in order to qualify as regulated investment companies. Additionally, the Fund may be required to recognize gain, but not loss, if a swap or other transaction is treated as a constructive sale of an appreciated financial position in the Fund's portfolio. The Fund may have to sell portfolio securities under disadvantageous circumstances to generate cash, or borrow cash, to satisfy these distribution requirements. 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, 2000, the annualized yield was: Bond Fund 5.84% Strategic Income Fund 7.94% High Yield Bond Fund 14.03% 53 Yield (except for Money Market Fund). The yield of each Fund (except for Money Market Fund) is computed by dividing net investment income per share determined for a 30-day period by the net asset value per share on the last day of the period and annualizing the result. While this is the standard accounting method for calculating yield, it does not reflect the Fund's actual bookkeeping; as a result, the income reported or paid by the Fund may be different. The Fund's yield is computed according to the following standard formula: 6 Yield = 2 ( [ ( a - b ) + 1 ] - 1 ) ------- cd Where: a = dividends and interest earned during the period. b = net expenses accrued during the period. c = the average daily number of fund shares outstanding during the period that would be entitled to receive dividends. d = the net asset value per share on the last day of the period. Money Market Fund Yield. For the purposes of calculating yield for the Money Market Fund, daily income per share consists of interest and discount earned on the Fund's investments less provision for amortization of premiums and applicable expenses, divided by the number of shares outstanding, but does not include realized or unrealized appreciation or depreciation. If the Fund reports its annualized yield, it will also furnish information as to the average portfolio maturities of the Fund. It will also report any material effect of realized gains or losses or unrealized appreciation on dividends which have been excluded from the computation of yield. Yield calculations are based on the value of a hypothetical preexisting account with exactly one share at the beginning of the seven day period. Yield is computed by determining the net change in the value of the account during the base period and dividing the net change by the value of the account at the beginning of the base period to obtain the base period return. Base period is multiplied by 365/7 and the resulting figure is carried to the nearest 100th of a percent. Net change in account value during the base period includes dividends declared on the original share, dividends declared on any shares purchased with dividends of that share and any account or sales charges that would affect an account of average size, but excludes any capital changes. Effective yield is computed by determining the net change, exclusive of capital changes, in the value of a hypothetical preexisting account having a balance of one share at the beginning of the period, subtracting a hypothetical charge reflecting deductions from shareholder accounts, and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then compounding the base period return by adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the result, according to the following formula: EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)365/7]-1 Total Return. Each Fund's total return is computed by finding the average annual compounded rate of return over the indicated period that would equate the initial amount invested to the ending redeemable value according to the following formula The average annual total return for each Fund for the 1 year period ended December 31, 2000 and since, the commencement of operations through December 31, 2000 is as follows: 54 Commencement of 1 year period ended Operations to Funds December 31, 2000 December 31, 2000* - ----- ----------------- ------------------ Technology Fund --% -36.98% International -25.17% 6.02% Financial Industries 27.16% 18.90% Regional Bank 17.91% 4.96% Small Cap Growth -22.33% 11.02% Mid Cap Growth -11.73% 15.12% Large Cap Growth -31.30% 2.41% Relative Value -4.80% 22.01% Core Equity -7.11% 17.11% Sovereign Investors -0.33% 12.73% 500 Index -9.28% 17.75% Bond 11.85% 7.88% High Yield Bond -6.08% -1.41% Strategic Income 1.36% 32.63% * Financial Industries Fund commenced operations on April 30, 1997. Relative Value Fund and High Yield Bond Fund commenced operations on January 6, 1998. Mid Cap Growth Fund commenced operations on January 7, 1998. Regional Bank Fund commenced operations on May 1, 1998. Technology Fund commenced operations on May 2, 2000. Each of the other funds commenced operations on August 29, 1996. n _____ T = \ /ERV/P - 1 P = a hypothetical initial payment of $1,000. T = average annual total return. n = number of years. ERV = ending redeemable value of a hypothetical $1,000 investment made at the beginning of the indicated period. This calculation assumes that all dividends and distributions are reinvested at net asset value on the reinvestment dates during the period. The "distribution rate" is determined by annualizing the result of dividing the declared dividends of a Fund during the period stated by the net asset value at the end of the period. In addition to average annual total returns, a Fund may quote unaveraged or cumulative total returns reflecting the simple change in value of an investment over a stated period. Cumulative total returns may be quoted as a percentage or as a dollar amount, and may be calculated for a single investment, a series of investments, and/or a series of redemptions, over any time period. From time to time, in reports and promotional literature, a Fund's yield and total return will be compared to indices of mutual funds and bank deposit vehicles such as Lipper Analytical Services, Inc.'s "Lipper--Fixed Income Fund Performance Analysis," a monthly publication which tracks net assets, total return, and yield on fixed income mutual funds in the United States. Ibottson and Associates, CDA Weisenberger and F.C. Towers are also used for comparison purposes, as well as the Russell and Wilshire Indices. Performance rankings and ratings reported periodically in, and excerpts from, national financial publications such as MONEY MAGAZINE, FORBES, BUSINESS WEEK, THE WALL STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will also be utilized. A Fund's promotional and sales literature may make reference to the Fund's "beta." Beta reflects the market-related risk of the Fund by showing how responsive the Fund is to the market. 55 The performance of a Fund is not fixed or guaranteed. Performance quotations should not be considered to be representations of performance of a Fund for any period in the future. The performance of a Fund is a function of many factors including its earnings, expenses and number of outstanding shares. Fluctuating market conditions; purchases, sales and maturities of portfolio securities; sales and redemptions of shares of beneficial interest; and changes in operating expenses are all examples of items that can increase or decrease a Fund's performance. BROKERAGE ALLOCATION Decisions concerning the purchase and sale of portfolio securities and the allocation of brokerage commissions are made by the Adviser, any Sub-adviser and the officers of the Trust pursuant to recommendations made by its investment committee, which consists of officers and directors of the Adviser and affiliates and officers and Trustees who are interested persons of the Funds. Orders for purchases and sales of securities are placed in a manner which, in the opinion of the Adviser or Sub-adviser, will offer the best price and market for the execution of each such transaction. Purchases from underwriters of portfolio securities may include a commission or commissions paid by the issuer and transactions with dealers serving as market makers reflect a "spread." Debt securities are generally traded on a net basis through dealers acting for their own account as principals and not as brokers; no brokerage commissions are payable on these transactions. In the U.S. Government securities market, securities are generally traded on a "net" basis with dealers acting as principal for their own account without a stated commission, although the price of the security usually includes a profit to the dealer. On occasion, certain money market instruments and agency securities may be purchased directly from the issuer, in which case no commissions or premiums are paid. In other countries, both debt and equity securities are traded on exchanges at fixed commission rates. Commissions on foreign transactions are generally higher than the negotiated commission rates available in the U.S. There is generally less government supervision and regulation of foreign stock exchanges and broker-dealers than in the U.S. Each Fund's primary policy is to execute all purchases and sales of portfolio instruments at the most favorable prices consistent with best execution, considering all of the costs of the transaction including brokerage commissions. This policy governs the selection of brokers and dealers and the market in which a transaction is executed. Consistent with the foregoing primary policy, the Conduct Rules of the NASDAQ and other policies that the Trustees may determine, the Adviser or Sub-Adviser may consider sales of shares of the Funds as a factor in the selection of broker-dealers to execute a Fund's portfolio transactions. Purchases of securities for Bond Fund, Strategic Income Fund and High Yield Bond Fund are normally principal transactions made directly from the issuer or from an underwriter or market maker for which no brokerage commissions are usually paid. Purchases from underwriters will include a commission or concession paid by the issuer to the underwriter, and purchases and sales from dealers serving as market makers will usually include a mark up or mark down. Purchases and sales of exchange-traded options and futures will be effected through brokers who charge a commission for their services. 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 56 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. - -------------------------------------------------------------------------------- 1998 Broker 1999 Broker 2000 Broker Funds Commissions Commissions Commissions - -------------------------------------------------------------------------------- International $31,688 $44,805 $10,693 - -------------------------------------------------------------------------------- Regional Bank 15,933 13,672 65,029 - -------------------------------------------------------------------------------- Financial Industries 85,961 107,541 16,755 - -------------------------------------------------------------------------------- Small Cap Growth 10,790 15,451 55,411 - -------------------------------------------------------------------------------- Mid Cap Growth 4,603 7,790 23,319 - -------------------------------------------------------------------------------- Large Cap Growth 28,768 55,628 24,172 - -------------------------------------------------------------------------------- Relative Value 67,087 113,466 49,360 - -------------------------------------------------------------------------------- Core Equity 15,467 43,018 152,533 - -------------------------------------------------------------------------------- Sovereign Investors 34,227 38,021 49,746 - -------------------------------------------------------------------------------- 500 Index 8,110 4,016 54,708 - -------------------------------------------------------------------------------- Bond 0 0 0 - -------------------------------------------------------------------------------- Strategic Income 455 12 120 - -------------------------------------------------------------------------------- High Yield Bond 2,778 1,613 3,598 - -------------------------------------------------------------------------------- Technology 0 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, 2000, Core Equity, 500 Index, Financial Industries, Bond, High Yield Bond, International, Sovereign Investors, Strategic Income did not directed commissions in the amounts of to compensate brokers for research services such as industry, economics and company reviews and evaluations of securities. During the fiscal year ended December 31, 2000, Regional Bank, Small Cap Growth, Large Cap Growth, Relative Value, Mid Cap Growth and Technology directed commissions in the amounts of $4,670, $4,369, $29,295, 37,662, $11,649, and $1,391, respectively, to compensate brokers for research services such as industry, economics and company reviews and evaluations of securities. The Adviser's indirect parent, the Life Company, is the indirect sole shareholder of Signator Investors, Inc., a broker-dealer (until January 1, 1999, John Hancock Distributors, Inc.) ("Signator" or "Affiliated Broker"). Credit Agricole, IIIS parent, has several affiliates engaged in the brokerage business in Europe and Asia: Credit Agricole Indosuez Cheuvreux; CPR Action (ex-Schelcher Prince Cheuvreux de Virieu International Ltd, London; Cheuvreux de Virieu, Nordic AB, Stockholm, Cheuvreux de Virieu, Espana, Madrid, Credit Agricole Indosuez Cheuvreux Deutschland GMBH, Frankfourt/ Main; Caboto Sim in Italy; Carr Securities; Carr Futures SNC. (Paris) and Carr Futures PTE, Singapore (all "Affiliated Brokers"). Pursuant to procedures determined by the Trustees and consistent with the above policy of obtaining best net results, the Funds may execute portfolio transactions with or through Affiliated Brokers. During the fiscal years ending December 31, 1998, 1999 and 2000, the Funds did not execute any portfolio transactions with Affiliated Brokers. 57 Affiliated Brokers may act as broker for a Fund on exchange transactions, subject, however, to the general policy of the Funds set forth above and the procedures adopted by the Trustees pursuant to the Investment Company Act. Commissions paid to an Affiliated Broker must be at least as favorable as those which the Trustees believe to be contemporaneously charged by other brokers in connection with comparable transactions involving similar securities being purchased or sold. A transaction would not be placed with an Affiliated Broker if a Fund would have to pay a commission rate less favorable than the Affiliated Broker's contemporaneous charges for comparable transactions for its other most favored, but unaffiliated, customers except for accounts for which the Affiliated Broker acts as clearing broker for another brokerage firm, and any customers of the Affiliated Broker not comparable to a Fund as determined by a majority of the Trustees who are not interested persons (as defined in the Investment Company Act) of the Fund, the Adviser or the Affiliated Broker. Because the Adviser, which is affiliated with the Affiliated Broker, has, as an investment adviser to the Funds, the obligation to provide investment management services, which includes elements of research and related investment skills such research and related skills will not be used by the Affiliated Broker as a basis for negotiating commissions at a rate higher than that determined in accordance with the above criteria. Other investment advisory clients advised by the Adviser may also invest in the same securities as the Funds. When these clients buy or sell the same securities at substantially the same time, the Adviser may average the transactions as to price and allocate the amount of available investments in a manner which the Adviser believes to be equitable to each client, including the Funds. Because of this, client accounts in a particular style may sometimes not sell or acquire securities as quickly or at the same prices as they might if each were managed and traded individually. For purchases of equity securities, when a complete order is not filled, a partial allocation will be made to each account pro rata based on the order size. For high demand issues (for example, initial public offerings), shares will be allocated pro rata by account size as well as on the basis of account objective, account size ( a small account's allocation may be increased to provide it with a meaningful position), and the account's other holdings. In addition, an account's allocation may be increased if that account's portfolio manager was responsible for generating the investment idea or the portfolio manager intends to buy more shares in the secondary market. For fixed income accounts, generally securities will be allocated when appropriate among accounts based on account size, except if the accounts have different objectives or if an account is too small to get a meaningful allocation. For new issues, when a complete order is not filled, a partial allocation will be made to each account pro rata based on the order size. However, if a partial allocation is too small to be meaningful, it may be reallocated based on such factors as account objectives, duration benchmarks and credit and sector exposure. In some instances, this investment procedure may adversely affect the price paid or received by the Fund or the size of the position obtainable for it. On the other hand, to the extent permitted by law, the Adviser or Sub-Adviser may aggregate securities to be sold or purchased for the Fund with those to be sold or purchased for other clients managed by it in order to obtain best execution. 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. 58 CUSTODY OF PORTFOLIO Portfolio securities of the International Fund, Money Market Fund and 500 Index Fund are held pursuant to a custodian agreement between the Trust and State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02205. Portfolio securities of the other Funds are held pursuant to a custodian agreement between the Trust and Investors Bank & Trust Company, 200 Clarendon Street, Boston, MA 02117. Under the custodian agreements, the custodians perform custody, portfolio and fund accounting services. INDEPENDENT AUDITORS Ernst & Young LLP, 200 Clarendon Street Boston, Massachusetts 02116, is the independent auditor of the Trust. The financial statements of the Funds have been audited by Ernst & Young LLP for the periods indicated in their report thereon appearing elsewhere herein, and have been included in reliance on their report given on their authority as experts in accounting and auditing. 59 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 The financial statements listed below are included and incorporated by reference into Part B of the Registration Statement from the 2000 Annual Report to Shareholder's for the year ended December 31, 2000 (filed electronically on March 1, 2001, accession number 0000928816-01-000098, file no. 811-07437 and 33-64465). John Hancock Declaration Trust Statement of Assets and Liabilities as of December 31, 2000. Statement of Operations for the year ended of December 31, 2000. Statement of Changes in Net Assets for each of the two years in the period ended December 31, 2000. Financial Highlights for each of the two years in the period ended December 31, 2000. Schedule of Investments as of December 31, 2000. Notes to Financial Statements. Report of Independent Auditors. F-1 Exhibit C JOHN HANCOCK V.A. STRATEGIC INCOME FUND NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS JUNE 30, 2001 Pro forma information is intended to provide the shareholders of the John Hancock V.A. Strategic Income Fund and the John Hancock V.A. High Yield Bond Fund with information about the impact of the proposed merger by indicating how the merger might have affected information had the merger been consummated as of June 30, 2000. The pro forma combined statement of assets and liabilities and results of operations as of June 30, 2001 have been prepared to reflect the merger of John Hancock V.A. Strategic Income Fund and John Hancock V.A. High Yield Bond Fund after giving effect to pro forma adjustments described in the notes below. (a) Acquisition by John Hancock V.A. Strategic Income Fund of all assets of John Hancock V.A. High Yield Bond Fund and issuance of John Hancock V.A. Strategic Income fund shares in exchange for all the outstanding shares of John Hancock V.A. High Yield Bond Fund. (b) The actual expenses incurred by the John Hancock V.A. Strategic Income Fund and John Hancock V.A. High Yield Bond Fund were reduced to reflect the estimated savings arising from the merger. (c) Represents the Adviser's voluntary agreement to limit the funds' expenses to an annual rate of 0.25% of the funds' average daily net assets. John Hancock V.A. Strategic Income Fund Exhibit C Pro-forma combined statement of assets and liabilities June 30, 2001 (000's omitted) John Hancock John Hancock V.A. Strategic V.A. High Yield Income Bond Pro-Forma Fund Fund Adjustments Combined -------------- --------------- ----------- --------- Assets Investments at value $ 45,878 $ 5,947 $ -- $ 51,825 Joint repurchase agreements 12,252 85 -- 12,337 -------- ------- -------- -------- Total investments 58,130 6,032 -- 64,162 Cash 1 1 -- 2 Receivable for investments sold 578 31 -- 609 Receivable for shares sold 372 -- -- 372 Dividends and interest receivable 1,255 222 -- 1,477 Receivable for forward foreign currency exchange contracts sold 23 16 -- 39 Other assets 2 -- -- 2 -------- ------- -------- -------- Total assets 60,361 6,302 -- 66,663 -------- ------- -------- -------- Liabilities Payable for investments purchased 7,458 -- -- 7,458 Payable for shares repurchased 9 4 -- 13 Dividends payable 24 -- -- 24 Payable for forward foreign currency exchange contracts purchased 7 1 -- 8 Payable to John Hancock Advisers, Inc. and affiliates 25 3 -- 28 Accounts payable and accrued expenses 2 10 -- 12 -------- ------- -------- -------- Total Liabilities 7,525 18 -- 7,543 -------- ------- -------- -------- Net Assets: Capital paid-in 57,331 9,548 -- 66,879 Accumulated net realized loss on investments and foreign currency transactions (1,624) (650) -- (2,274) Net unrealized depreciation of investments, and translation of assets and liabilities in foreign curriencies (2,223) (2,562) -- (4,785) Distributions in excess of net investment income (648) (52) -- (700) -------- ------- -------- -------- Net Assets 52,836 6,284 -- 59,120 -------- ------- -------- -------- Net assets: V.A. Strategic Income 52,836 -- 6,284(a) 59,120 V.A. High Yield Bond -- 6,284 (6,284)(a) -- -------- ------- -------- -------- 52,836 6,284 -- 59,120 ======== ======= ======== ======== Shares outstanding: V.A. Strategic Income 6,055 -- 717(a) 6,772 V.A. High Yield Bond -- 975 (975)(a) -- -------- ------- -------- -------- 6,055 975 (258) 6,772 ======== ======= ======== ======== Net asset value per share: V.A. Strategic Income $ 8.73 -- -- $ 8.73 V.A. High Yield Bond -- $ 6.45 $ (6.45)(a) -- ======== ======= ======== ======== See Notes to Pro-forma Combined Financial Statements John Hancock V.A. Strategic Income Fund Exhibit C Pro-forma combined statement of operations For the year ended June 30, 2001 (000's omitted) John Hancock V.A. John Hancock V.A. Strategic Income High Yield Bond Fund Fund 12 months ended 12 months ended Pro-Forma June 30, 2001 June 30, 2001 Adjustments Combined ----------------- ----------------- ----------- --------- Investement income: Dividends $ 17 $ 92 $ -- $ 109 Interest 3,088 838 -- 3,926 ------- ------- ---- ------- Total investment income 3,105 930 -- 4,035 ------- ------- ---- ------- Expenses: Investment management fee 208 44 -- 252 Custodian fee 18 15 (13)(b) 20 Auditing fee 5 12 (7)(b) 10 Printing 3 -- -- 3 Legal fees -- 11 (9)(b) 2 Accounting and legal services fee 7 2 -- 9 Trustees' fee 1 1 -- 2 Miscellaneous 1 1 (1)(b) 1 Organization expense 2 -- -- 2 ------- ------- ---- ------- Total expenses 245 86 (30) 301 Less expense reductions -- (23) 23(c) -- ------- ------- ---- ------- Net expenses 245 63 (7) 301 ------- ------- ---- ------- Net investment income 2,860 867 7 3,734 ------- ------- ---- ------- REALIZED AND UNREALIZED GAIN (LOSS) Net realized and unrealized gain (loss) on: Investments (1,324) (659) -- (1,983) Foreign currency transactions 164 45 -- 209 Change in unrealized appreciation (depreciation) on: Investments (961) (565) -- (1,526) Translation of assets and liabilities in foreign currencies (22) 19 -- (3) ------- ------- ---- ------- Net realized and unrealized gain (loss) (2,143) (1,160) -- (3,303) ------- ------- ---- ------- Increase (decrease) in net assets resulting from operations $ 717 $ (293) $ 7 $ 431 ======= ======= ==== ======= Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION BONDS Advertising (0.17%) Go Outdoor Systems Holding S.A., Sr Sub Note (France) 07-15-09 (E) 10.500% $ 100 $ 99 -------- Aerospace (0.01%) Compass Aerospace Corp., Gtd Sr Sub Note Ser D 04-15-05 (B) Agricultural Operations (0.01%) Iowa Select Farms L.P./ISF Finance, Inc., Jr Sec Note 12-01-06 (R) Automobile / Trucks (0.12%) AM General Corp., Sr Note Ser B 05-01-02 J.B. Poindexter & Co., Inc., Sr Note 05-15-04 Banks - United States (0.60%) Colonial Bank, Sub Note 06-01-11 9.375 200 207 Triton PCS, Inc., Sr Sub Note 02-01-11 (R) 9.375 100 96 -------- 303 -------- Building (0.12%) Amatek Industries Property Ltd., Sr Sub Note (Australia) 02-15-08 (Y) ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION BONDS Advertising (0.17%) Go Outdoor Systems Holding S.A., Sr Sub Note (France) 07-15-09 (E) 100 $ 99 -------- Aerospace (0.01%) Compass Aerospace Corp., Gtd Sr Sub Note Ser D 04-15-05 (B) 10.125% $ 25 $ 4 25 4 -------- -------- Agricultural Operations (0.01%) Iowa Select Farms L.P./ISF Finance, Inc., Jr Sec Note 12-01-06 (R) 10.750 6 3 6 3 -------- -------- Automobile / Trucks (0.12%) AM General Corp., Sr Note Ser B 05-01-02 12.875 50 49 50 49 J.B. Poindexter & Co., Inc., Sr Note 05-15-04 12.500 25 21 25 21 -------- -------- 70 70 -------- -------- Banks - United States (0.60%) Colonial Bank, Sub Note 06-01-11 9.375 50 52 250 259 Triton PCS, Inc., Sr Sub Note 02-01-11 (R) 100 96 -------- -------- 52 355 -------- -------- Building (0.12%) Amatek Industries Property Ltd., Sr Sub Note (Australia) 02-15-08 (Y) 12.000 25 20 25 20 Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION WCI Communities, Inc., Sr Sub Note 02-15-11 (R) Business Services - Misc. (0.02%) AP Holdings, Inc., Sr Disc Note, Step Coupon (11.25%, 03-15-03) 03-15-08 (A) Chemicals (0.99%) Huntsman ICI Chemicals LLC, Sr Sub Note 07-01-09 10.125% $ 150 $ 147 Trikem S.A., Bond (Brazil) 07-24-07 (R) (Y) 10.625 200 130 American Pacific Corp., Sr Note 03-01-05 Applied Extrusion Technologies, Inc., Sr Note 07-01-11 (R) Sr Note Ser B 04-01-02 Huntsman ICI Holdings LLC, Sr Disc Note 12-31-09 -------- 277 -------- Consumer Products Misc. (0.04%) Diamond Brands Operating Corp., Sr Sub Note 04-15-08 (B) Indesco International, Inc., Sr Sub Note 04-15-08 (B) Containers (0.42%) Gaylord Container Corp., Sr Note Ser B 06-15-07 ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION WCI Communities, Inc., Sr Sub Note 02-15-11 (R) 10.625% $ 50 $ 52 $ 50 $ 52 -------- -------- 72 72 -------- -------- Business Services - Misc. (0.02%) AP Holdings, Inc., Sr Disc Note, Step Coupon (11.25%, 03-15-03) 03-15-08 (A) Zero 200 14 200 14 -------- -------- Chemicals (0.99%) Huntsman ICI Chemicals LLC, Sr Sub Note 07-01-09 10.125 100 98 250 245 Trikem S.A., Bond (Brazil) 07-24-07 (R) (Y) 10.625 125 81 325 211 American Pacific Corp., Sr Note 03-01-05 9.250 30 30 30 30 Applied Extrusion Technologies, Inc., Sr Note 07-01-11 (R) 10.750 50 51 50 51 Sr Note Ser B 04-01-02 11.500 25 25 25 25 Huntsman ICI Holdings LLC, Sr Disc Note 12-31-09 Zero 75 23 75 23 -------- -------- 308 585 -------- -------- Consumer Products Misc. (0.04%) Diamond Brands Operating Corp., Sr Sub Note 04-15-08 (B) 10.125 100 14 100 14 Indesco International, Inc., Sr Sub Note 04-15-08 (B) 9.750 100 9 100 9 -------- -------- 23 23 -------- -------- Containers (0.42%) Gaylord Container Corp., Sr Note Ser B 06-15-07 9.375 15 10 15 10 Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION Sr Sub Note Ser B 02-15-08 Kappa Beheer B.V., Sr Sub Bond (Netherlands) 07-15-09 (Y) Sr Sub Bond, Step Coupon (12.50%, 07-15-04) (Netherlands) 07-15-09 (A) (E) Riverwood International Corp., Gtd Sr Sub Note 04-01-08 Cosmetics & Personal Care (0.01%) Global Health Sciences, Inc., Gtd Sr Note 05-01-08 (B) Diversified Operations (0.09%) Diamond Holdings Plc, Bond (United Kingdom) 02-01-08 # Electronics (0.15%) Communications Instruments, Inc., Sr Sub Note Ser B 09-15-04 10.000% $ 100 $ 86 -------- Energy (0.44%) AEI Resources, Inc./AEI Resources Holdings, Inc., Note 12-15-05 (B) (R) 10.500 100 70 P&L Coal Holdings Corp., Sr Sub Note Ser B 05-15-08 Port Arthur Finance Corp., Gtd Sr Sec Note 01-15-09 -------- 70 -------- ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION Sr Sub Note Ser B 02-15-08 9.875% $ 100 $ 29 $ 100 $ 29 Kappa Beheer B.V., Sr Sub Bond (Netherlands) 07-15-09 (Y) 10.625 75 79 75 79 Sr Sub Bond, Step Coupon (12.50%, 07-15-04) (Netherlands) 07-15-09 (A) (E) Zero 100 65 100 65 Riverwood International Corp., Gtd Sr Sub Note 04-01-08 10.875 70 67 70 67 -------- -------- 250 250 -------- -------- Cosmetics & Personal Care (0.01%) Global Health Sciences, Inc., Gtd Sr Note 05-01-08 (B) 11.000 75 8 75 8 -------- -------- Diversified Operations (0.09%) Diamond Holdings Plc, Bond (United Kingdom) 02-01-08 # 10.000 50 53 50 53 -------- -------- Electronics (0.15%) Communications Instruments, Inc., Sr Sub Note Ser B 09-15-04 100 86 -------- Energy (0.44%) AEI Resources, Inc./AEI Resources Holdings, Inc., Note 12-15-05 (B) (R) 10.500 75 52 175 122 P&L Coal Holdings Corp., Sr Sub Note Ser B 05-15-08 9.625 81 85 81 85 Port Arthur Finance Corp., Gtd Sr Sec Note 01-15-09 12.500 50 51 50 51 -------- -------- 188 258 -------- -------- Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION Finance (0.32%) PTC International Finance II S.A., Sr Sub Note (Luxembourg) 12-01-09 (E) (R) 11.250% $ 100 $ 88 Finova Capital Corp., Floating Rate Sr Note 06-18-03 Takefuji Corp., Sr Note (Japan) 04-15-11 (R) (Y) -------- 88 -------- Food (0.74%) Agrilink Foods, Inc., Sr Sub Note 11-01-08 11.875 200 182 Mastellone Hermanos S.A., Sr Note (Argentina) 04-01-08 (Y) RAB Holdings, Inc., Sr Note 05-01-08 (R) -------- 182 -------- Government - Foreign (22.13%) Arabia, Republic of, Bond (Egypt) 07-11-11 8.750 300 302 Brazil, Federative Republic of, Bond (Brazil) 01-11-06 (Y) 10.250 300 288 Unsub Note (Brazil) 07-26-07 (Y) 11.250 100 96 Unsub Note 10-15-09 (Y) 14.500 700 728 Deb (Brazil) 04-15-14 (Y) 8.000 677 501 Bond (Brazil) 03-06-30 (Y) 12.250 750 632 Bulgaria, Federative Republic of, Deb (Bulgaria) 07-28-12 3.000 880 715 Canada, Government of, Bond (Canada) 12-01-02 # 6.000 275 184 Bond (Canada) 12-01-05 # 8.750 300 221 ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION Finance (0.32%) PTC International Finance II S.A., Sr Sub Note (Luxembourg) 12-01-09 (E) (R) $ 100 $ 88 Finova Capital Corp., Floating Rate Sr Note 06-18-03 4.128% $ 50 $ 47 50 47 Takefuji Corp., Sr Note (Japan) 04-15-11 (R) (Y) 9.200 50 52 50 52 -------- -------- 99 187 -------- -------- Food (0.74%) Agrilink Foods, Inc., Sr Sub Note 11-01-08 11.875 125 114 325 296 Mastellone Hermanos S.A., Sr Note (Argentina) 04-01-08 (Y) 11.750 125 69 125 69 RAB Holdings, Inc., Sr Note 05-01-08 (R) 13.000 120 72 120 72 -------- -------- 255 437 -------- -------- Government - Foreign (22.13%) Arabia, Republic of, Bond (Egypt) 07-11-11 300 302 Brazil, Federative Republic of, Bond (Brazil) 01-11-06 (Y) 300 288 Unsub Note (Brazil) 07-26-07 (Y) 100 96 Unsub Note 10-15-09 (Y) 700 728 Deb (Brazil) 04-15-14 (Y) 677 501 Bond (Brazil) 03-06-30 (Y) 750 632 Bulgaria, Federative Republic of, Deb (Bulgaria) 07-28-12 880 715 Canada, Government of, Bond (Canada) 12-01-02 # 275 184 Bond (Canada) 12-01-05 # 300 221 Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION Bond (Canada) 12-01-06 # 7.000% $ 2,000 $ 1,396 Bond (Canada) 06-01-08 # 6.000 250 167 Bond (Canada) 06-01-09 # 5.500 750 483 Bond (Canada) 06-01-10 # 5.500 575 369 Bond (Canada) 06-01-29 # 5.750 75 48 Colombia, Republic of, Note (Colombia) 06-13-06 (Y) 10.500 300 309 Note (Colombia) 04-09-11 (Y) 9.750 500 510 Mexican, United States Bond (Mexico) 03-12-08 (Y) 7.375 500 429 Sr Note (Mexico) 03-12-08 (Y) 8.625 250 260 Note (Mexico) 01-14-11 (Y) 8.375 475 477 New Zealand, Government of, Bond (New Zealand) 04-15-03 # 5.500 500 200 Bond (New Zealand) 11-15-11 # 6.000 500 191 Panama, Republic of, Bond (Panama) 02-08-11 (Y) 9.625 1,000 1,010 Peru, Republic of, Bond (Peru) 03-07-17 (Y) 4.000 800 500 Russia, Federation of, Unsub Note (Russia) 07-24-18 (Y) 11.000 1,125 973 Unsub Note (Russia) 06-26-07 (Y) 10.000 1,135 1,010 Note, Step Coupon (5.00%, 03-31-07) (Russia) 03-31-30 (Y) 5.000 650 307 Venezuela, Republic of, Floating Rate Bond Ser DL (Venezuela) 12-18-07 (Y) 7.375 310 258 Bond (Venezuela) 09-15-27 (Y) 9.250 675 466 -------- 13,030 -------- Government - U.S. (35.06%) United States Treasury, Bond 08-15-01 13.375 6,700 6,776 Bond 08-15-05 6.500 400 423 ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION Bond (Canada) 12-01-06 # $ 2,000 $ 1,396 Bond (Canada) 06-01-08 # 250 167 Bond (Canada) 06-01-09 # 750 483 Bond (Canada) 06-01-10 # 575 369 Bond (Canada) 06-01-29 # 75 48 Colombia, Republic of, Note (Colombia) 06-13-06 (Y) 300 309 Note (Colombia) 04-09-11 (Y) 500 510 Mexican, United States Bond (Mexico) 03-12-08 (Y) 500 429 Sr Note (Mexico) 03-12-08 (Y) 250 260 Note (Mexico) 01-14-11 (Y) 475 477 New Zealand, Government of, Bond (New Zealand) 04-15-03 # 500 200 Bond (New Zealand) 11-15-11 # 500 191 Panama, Republic of, Bond (Panama) 02-08-11 (Y) 9.625% $ 50 $ 51 1,050 1,061 Peru, Republic of, Bond (Peru) 03-07-17 (Y) 800 500 Russia, Federation of, Unsub Note (Russia) 07-24-18 (Y) 1,125 973 Unsub Note (Russia) 06-26-07 (Y) 1,135 1,010 Note, Step Coupon (5.00%, 03-31-07) (Russia) 03-31-30 (Y) 650 307 Venezuela, Republic of, Floating Rate Bond Ser DL (Venezuela) 12-18-07 (Y) 310 258 Bond (Venezuela) 09-15-27 (Y) 675 466 -------- -------- 51 13,081 -------- -------- Government - U.S. (35.06%) United States Treasury, Bond 08-15-01 6,700 6,776 Bond 08-15-05 400 423 Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION Bond 08-15-05 10.750% $ 400 $ 485 Bond 02-15-16 9.250 615 820 Bond 08-15-19 8.125 1,090 1,357 Bond 08-15-23 6.250 600 624 Bond 11-15-28 5.250 2,000 1,827 Note 08-31-02 6.250 3,870 3,967 Note 08-15-04 7.250 590 633 Note 05-15-05 6.500 1,300 1,375 Note 08-15-07 6.125 940 986 Note 02-15-11 5.000 1,500 1,455 -------- 20,728 -------- Insurance (0.09%) Willis Corroon Corp., Gtd Sr Sub Note 02-01-09 Leisure (2.28%) Ameristar Casinos, Inc., Sr Sub Note 02-15-09 (R) 10.750 200 209 HMH Properties, Inc., Sr Note Ser B 08-01-08 7.875 100 94 Jupiters Ltd., Sr Note (Australia) 03-01-06 (Y) 8.500 150 148 Penn National Gaming, Inc., Sr Sub Note 03-01-08 (R) 11.125 200 207 Station Casinos, Inc., Sr Note 02-15-08 (R) 8.375 200 201 Sun International Hotels Ltd., Sr Sub Note (Bahamas) 12-15-07 (Y) 8.625 100 101 Waterford Gaming LLC, Sr Note 03-15-10 (R) 9.500 199 195 ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION Bond 08-15-05 $ 400 $ 485 Bond 02-15-16 615 820 Bond 08-15-19 1,090 1,357 Bond 08-15-23 600 624 Bond 11-15-28 2,000 1,827 Note 08-31-02 3,870 3,967 Note 08-15-04 590 633 Note 05-15-05 1,300 1,375 Note 08-15-07 940 986 Note 02-15-11 1,500 1,455 -------- 20,728 -------- Insurance (0.09%) Willis Corroon Corp., Gtd Sr Sub Note 02-01-09 9.000% $ 50 $ 51 50 51 -------- -------- Leisure (2.28%) Ameristar Casinos, Inc., Sr Sub Note 02-15-09 (R) 10.750 50 52 250 261 HMH Properties, Inc., Sr Note Ser B 08-01-08 100 94 Jupiters Ltd., Sr Note (Australia) 03-01-06 (Y) 150 148 Penn National Gaming, Inc., Sr Sub Note 03-01-08 (R) 11.125 25 26 225 233 Station Casinos, Inc., Sr Note 02-15-08 (R) 200 201 Sun International Hotels Ltd., Sr Sub Note (Bahamas) 12-15-07 (Y) 100 101 Waterford Gaming LLC, Sr Note 03-15-10 (R) 199 195 Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION Claridge Hotel & Casino Corp., 1st Mtg Note 02-01-02 (B) Fitzgeralds Gaming Corp., Gtd Sr Sec Note Ser B 12-15-04 (B) SC International Services, Inc., Sr Sub Note Ser B 09-01-07 Trump Atlantic City Associates, 1st Mtg Note 05-01-06 $ 1,155 -------- Machinery (0.17%) Columbus McKinnon Corp., Sr Sub Note 04-01-08 8.500% $ 100 87 Glasstech, Inc., Sr Note Ser B 07-01-04 -------- 87 -------- Manufacturing (0.03%) ICON Health & Fitness, Inc., Gtd Note 09-27-05 Media (5.42%) Adelphia Communications Corp., Sr Note 06-15-11 10.250 350 340 AMFM Operating, Inc., Sr Sub Deb 10-31-06 12.625 64 71 Callahan NRH Sr Note (Germany) 07-15-11 (E) # 14.125 500 354 Charter Holdings LLC/Charter Comm. Capital Corp., Sr Note 01-15-11 11.125 300 315 Sr Note 05-15-11 (R) 10.000 200 200 Diamond Holdings Plc, Bond (United Kingdom) 02-01-08 # 10.000 50 53 ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION Claridge Hotel & Casino Corp., 1st Mtg Note 02-01-02 (B) 11.750% $ 50 $ 2 $ 50 $ 2 Fitzgeralds Gaming Corp., Gtd Sr Sec Note Ser B 12-15-04 (B) 12.250 50 30 50 30 SC International Services, Inc., Sr Sub Note Ser B 09-01-07 9.250 30 32 30 32 Trump Atlantic City Associates, 1st Mtg Note 05-01-06 11.250 75 50 75 50 -------- -------- 192 1,347 -------- -------- Machinery (0.17%) Columbus McKinnon Corp., Sr Sub Note 04-01-08 100 87 Glasstech, Inc., Sr Note Ser B 07-01-04 12.750 25 15 25 15 -------- -------- 15 102 -------- -------- Manufacturing (0.03%) ICON Health & Fitness, Inc., Gtd Note 09-27-05 12.000 22 20 22 20 -------- -------- Media (5.42%) Adelphia Communications Corp., Sr Note 06-15-11 350 340 AMFM Operating, Inc., Sr Sub Deb 10-31-06 64 71 Callahan NRH Sr Note (Germany) 07-15-11 (E) # 14.125 50 35 550 389 Charter Holdings LLC/Charter Comm. Capital Corp., Sr Note 01-15-11 300 315 Sr Note 05-15-11 (R) 200 200 Diamond Holdings Plc, Bond (United Kingdom) 02-01-08 # 50 53 Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION DIVA Systems Corp., Sr Disc Note Ser B, Step Coupon (12.625%, 03-01-03) 03-01-08 (A) Zero % $ 250 $ 35 Fox Family Worldwide, Inc., Sr Disc Note, Step Coupon (10.25%, 11-15-02) 11-01-07 Zero 400 356 Garden State Newspapers, Inc., Sr Sub Note 07-01-11 8.625 200 186 Sr Sub Note Ser B 10-01-09 8.750 200 188 Innova S. de R.L., Sr Note (Mexico) 04-01-07 (Y) 12.875 200 178 Pegasus Communications Corp., Sr Note Ser B 08-01-07 12.500 400 396 STC Broadcasting, Inc., Sr Sub Note 03-15-07 11.000 100 100 Antenna TV S.A., Sr Note (Germany) 07-01-08 (E) Callahan Nordhein-Westfalen GmbH, Fox Family Worldwide, Inc., Sr Disc Note, Step Coupon (10.25%, 11-01-02) 11-01-07 (A) ONO Finance Plc, Sr Sub Note (United Kingdom) 07-15-10 (E) Pegasus Communications Corp., Sr Note Ser B 08-01-07 Pegasus Satellite Communications, Inc., Sr Disc Note, Step Coupon (13.50%, 03-01-04) 03-01-07 (A) Regional Independent Media Group Plc, Sr Disc Note, Step Coupon (12.875%, 07-01-03) (United Kingdom) 07-01-08 (A) # Sr Note (United Kingdom) 07-01-08 (Y) Sirius Satellite Radio, Inc., Sr Disc Note, Step Coupon (15.00%, 12-01-02) 12-01-07 (A) United International Holdings, Inc., Sr Disc Note, Step Coupon (10.75%, 02-15-03) 02-15-08 (A) ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION DIVA Systems Corp., Sr Disc Note Ser B, Step Coupon (12.625%, 03-01-03) 03-01-08 (A) Zero % $ 50 $ 7 $ 300 $ 42 Fox Family Worldwide, Inc., Sr Disc Note, Step Coupon (10.25%, 11-15-02) 11-01-07 400 356 Garden State Newspapers, Inc., Sr Sub Note 07-01-11 200 186 Sr Sub Note Ser B 10-01-09 200 188 Innova S. de R.L., Sr Note (Mexico) 04-01-07 (Y) 200 178 Pegasus Communications Corp., Sr Note Ser B 08-01-07 400 396 STC Broadcasting, Inc., Sr Sub Note 03-15-07 100 100 Antenna TV S.A., Sr Note (Germany) 07-01-08 (E) 9.750 50 42 50 42 Callahan Nordhein-Westfalen GmbH, Fox Family Worldwide, Inc., Sr Disc Note, Step Coupon (10.25%, 11-01-02) 11-01-07 (A) Zero 80 71 80 71 ONO Finance Plc, Sr Sub Note (United Kingdom) 07-15-10 (E) 14.000 50 33 50 33 Pegasus Communications Corp., Sr Note Ser B 08-01-07 12.500 35 35 35 35 Pegasus Satellite Communications, Inc., Sr Disc Note, Step Coupon (13.50%, 03-01-04) 03-01-07 (A) Zero 60 37 60 37 Regional Independent Media Group Plc, Sr Disc Note, Step Coupon (12.875%, 07-01-03) (United Kingdom) 07-01-08 (A) # Zero 20 23 20 23 Sr Note (United Kingdom) 07-01-08 (Y) 10.500 5 5 5 5 Sirius Satellite Radio, Inc., Sr Disc Note, Step Coupon (15.00%, 12-01-02) 12-01-07 (A) Zero 110 36 110 36 United International Holdings, Inc., Sr Disc Note, Step Coupon (10.75%, 02-15-03) 02-15-08 (A) Zero 75 23 75 23 Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION XM Satellite Radio, Inc., Sr Sec Note 03-15-10 -------- $ 2,772 -------- Medical (0.45%) Select Medical Corp., Sr Sub Note 06-15-09 9.500% $ 150 148 Magellan Health Services, Inc., Sr Sub Note 02-15-08 -------- 148 -------- Metal (0.37%) Doe Run Resources Corp., Gtd Sr Note Ser B 03-15-03 Gtd Sr Note Ser B 03-15-05 Freeport-McMoRan Copper & Gold, Inc., Sr Note 11-15-06 Golden Northwest Aluminum, Inc., 1st Mtg Note 12-15-06 Great Lakes Acquisition Corp., Sr Disc Deb, Step Coupon (13.125%, 05-15-03) 05-15-09 (A) TVX Gold, Inc., Conv Sub Note (Canada) 03-28-02 (Y) Miscellaneous (0.07%) Sotheby's Holdings, Inc., Note 02-01-09 ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION XM Satellite Radio, Inc., Sr Sec Note 03-15-10 14.000% $ 150 $ 88 $ 150 $ 88 -------- -------- 435 3,207 -------- -------- Medical (0.45%) Select Medical Corp., Sr Sub Note 06-15-09 9.500 25 25 175 172 Magellan Health Services, Inc., Sr Sub Note 02-15-08 9.000 100 94 100 94 -------- -------- 119 267 -------- -------- Metal (0.37%) Doe Run Resources Corp., Gtd Sr Note Ser B 03-15-03 11.181 25 9 25 9 Gtd Sr Note Ser B 03-15-05 11.250 10 3 10 3 Freeport-McMoRan Copper & Gold, Inc., Sr Note 11-15-06 7.500 75 50 75 50 Golden Northwest Aluminum, Inc., 1st Mtg Note 12-15-06 12.000 25 13 25 13 Great Lakes Acquisition Corp., Sr Disc Deb, Step Coupon (13.125%, 05-15-03) 05-15-09 (A) Zero 200 80 200 80 TVX Gold, Inc., Conv Sub Note (Canada) 03-28-02 (Y) 5.000 100 63 100 63 -------- -------- 218 218 -------- -------- Miscellaneous (0.07%) Sotheby's Holdings, Inc., Note 02-01-09 6.875 50 41 50 41 -------- -------- Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION Oil & Gas (3.42%) Chesapeake Energy Corp., Sr Note 04-01-11 (R) 8.125% $ 300 $ 280 Comstock Resources, Inc., Sr Note 05-01-07 11.250 100 106 Ocean Rig Norway A.S., Sr Sec Note (Norway) 06-01-08 (Y) 10.250 200 176 Parker Drilling Co., Sr Note 11-15-06 9.750 300 305 PEMEX Project Funding Master Trust, Gtd Note 02-15-08 (R) 8.500 200 206 Pennzoil-Quaker State Co., Note 12-01-02 9.400 250 252 Frontier Oil Corp., Sr Sub Note 11-15-09 Giant Industries, Inc., Gtd Sr Sub Note 09-01-07 Sr Sub Note 11-15-03 Great Lakes Carbon Corp., Gtd Sr Sub Note Ser B 05-15-08 Key Energy Services, Inc., Conv Sub Note 09-15-04 (R) Conv Sub Note 09-15-04 Sr Sub Note Ser B 01-15-09 Mariner Energy, Inc., Sr Sub Note Ser B 08-01-06 Universal Compression, Inc., Sr Disc Note, Step Coupon (9.875%, 02-15-03) 02-15-08 (A) -------- 1,325 -------- ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION Oil & Gas (3.42%) Chesapeake Energy Corp., Sr Note 04-01-11 (R) $ 300 $ 280 Comstock Resources, Inc., Sr Note 05-01-07 11.250% $ 75 $ 80 175 186 Ocean Rig Norway A.S., Sr Sec Note (Norway) 06-01-08 (Y) 10.250 55 48 255 224 Parker Drilling Co., Sr Note 11-15-06 300 305 PEMEX Project Funding Master Trust, Gtd Note 02-15-08 (R) 200 206 Pennzoil-Quaker State Co., Note 12-01-02 250 252 Frontier Oil Corp., Sr Sub Note 11-15-09 11.750 50 53 50 53 Giant Industries, Inc., Gtd Sr Sub Note 09-01-07 9.000 50 48 50 48 Sr Sub Note 11-15-03 9.750 25 25 25 25 Great Lakes Carbon Corp., Gtd Sr Sub Note Ser B 05-15-08 10.250 50 30 50 30 Key Energy Services, Inc., Conv Sub Note 09-15-04 (R) 5.000 80 74 80 74 Conv Sub Note 09-15-04 5.000 143 132 143 132 Sr Sub Note Ser B 01-15-09 14.000 93 107 93 107 Mariner Energy, Inc., Sr Sub Note Ser B 08-01-06 10.500 10 10 10 10 Universal Compression, Inc., Sr Disc Note, Step Coupon (9.875%, 02-15-03) 02-15-08 (A) Zero 100 90 100 90 -------- -------- 697 2,022 -------- -------- Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION Paper & Paper Products (1.95%) Corporacion Durango S.A. de C.V., Sr Note (Mexico) 08-01-06 (Y) 13.125% $ 300 $ 300 Grupo Industrial Durango S.A., Note (Mexico) 08-01-03 (Y) 12.625 200 210 Kappa Beheer BV, Sr Sub Note (Netherlands) 07-15-09 (E) (R) 10.625 150 135 Stone Container Corp., Sr Note 02-01-11 (R) 9.750 200 204 APP China Group Ltd., Unit (Sr Disc Note & Warrant) (Indonesia) 03-15-10 (B) (R) (Y) APP Finance (VII) Mauritius Ltd., Gtd Note (Indonesia) 04-30-03 (B) (R) (Y) Sappi BVI Finance Ltd., Gtd Conv Bond (South Africa) 08-01-02 (R) (Y) -------- 849 -------- Real Estate Operations (0.00%) Signature Resorts, Inc., Conv Sub Note 01-15-07 (B) Retail (0.10%) Imperial Home Decor Group, Inc, Gtd Sr Sub Note 03-15-08 (B) SpinCycle, Inc., Sr Disc Note, Step Coupon (12.75%, 05-01-01) 05-01-05 (A) St. John Knits International, Inc., Sr Sub Note 07-01-09 ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION Paper & Paper Products (1.95%) Corporacion Durango S.A. de C.V., Sr Note (Mexico) 08-01-06 (Y) 13.125% $ 125 $ 125 $ 425 $ 425 Grupo Industrial Durango S.A., Note (Mexico) 08-01-03 (Y) 12.625 125 131 325 341 Kappa Beheer BV, Sr Sub Note (Netherlands) 07-15-09 (E) (R) 150 135 Stone Container Corp., Sr Note 02-01-11 (R) 200 204 APP China Group Ltd., Unit (Sr Disc Note & Warrant) (Indonesia) 03-15-10 (B) (R) (Y) 14.000 250 38 250 38 APP Finance (VII) Mauritius Ltd., Gtd Note (Indonesia) 04-30-03 (B) (R) (Y) 3.500 10 0 10 0 Sappi BVI Finance Ltd., Gtd Conv Bond (South Africa) 08-01-02 (R) (Y) 7.500 10 10 10 10 -------- -------- 304 1,153 -------- -------- Real Estate Operations (0.00%) Signature Resorts, Inc., Conv Sub Note 01-15-07 (B) 5.750 35 1 35 1 -------- -------- Retail (0.10%) Imperial Home Decor Group, Inc, Gtd Sr Sub Note 03-15-08 (B) 11.000 125 1 125 1 SpinCycle, Inc., Sr Disc Note, Step Coupon (12.75%, 05-01-01) 05-01-05 (A) Zero 25 7 25 7 St. John Knits International, Inc., Sr Sub Note 07-01-09 12.500 50 50 50 50 -------- -------- 58 58 -------- -------- Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION Steel (0.16%) Gulf States Steel, Inc. of Alabama, 1st Mtg Bond 04-15-03 (B) LTV Corp. (The), Gtd Sr Sub Note 11-15-09 (B) Metallurg Holdings, Inc., Sr Disc Note, Step Coupon (12.75%, 07-15-03) 07-15-08 (A) Metallurg, Inc., Gtd Sr Note Ser B 12-01-07 NSM Steel, Inc./NSM Steel Ltd., Gtd Sr Sub Mtg Note Ser B 02-01-08 (B) (R) Oregon Steel CF&I, Note 03-31-03 (r) Telecommunications (3.51%) American Cellular Corp., Sr Sub Note 10-15-09 9.500% $ 200 $ 188 Comunicacion Celular S.A., Sr Def Bond (Colombia) 03-01-05 (R) (Y) Zero 100 91 Esprit Telecom Group Plc, Sr Note (United Kingdom) 12-15-07 (Y) 11.500 100 3 Sr Note (Deutsche Mark) 06-15-08# 11.000 140 1 Grupo Iusacell S.A. de C.V., Sr Note (Mexico) 12-01-06 (Y) 14.250 200 212 GT Group Telecom, Inc., Sr Disc Note, Step Coupon (13.25%, 02-01-05) (Canada) 02-01-10 (A) Zero 200 56 Intercel, Inc., Unit (Sr Note & Warrant), Step Coupon (12.00%, 02-01-01) 02-01-06 (A) Zero 200 206 Ionica PLC, Sr Disc Note, Step Coupon (15.00%, 05-01-02) (United Kingdom) 05-01-07 (A) (Y) Zero 200 2 McCaw International Ltd., Sr Disc Note, Step Coupon (13.00%, 04-15-02) 04-15-07 (A) Zero 500 165 ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION Steel (0.16%) Gulf States Steel, Inc. of Alabama, 1st Mtg Bond 04-15-03 (B) 13.500% $ 100 $ 0 $ 100 $ 0 LTV Corp. (The), Gtd Sr Sub Note 11-15-09 (B) 11.750 50 4 50 4 Metallurg Holdings, Inc., Sr Disc Note, Step Coupon (12.75%, 07-15-03) 07-15-08 (A) Zero 50 23 50 23 Metallurg, Inc., Gtd Sr Note Ser B 12-01-07 11.000 30 27 30 27 NSM Steel, Inc./NSM Steel Ltd., Gtd Sr Sub Mtg Note Ser B 02-01-08 (B) (R) 12.250 75 1 75 1 Oregon Steel CF&I, Note 03-31-03 (r) 9.500 46 42 46 42 -------- -------- 97 97 -------- -------- Telecommunications (3.51%) American Cellular Corp., Sr Sub Note 10-15-09 200 188 Comunicacion Celular S.A., Sr Def Bond (Colombia) 03-01-05 (R) (Y) 100 91 Esprit Telecom Group Plc, Sr Note (United Kingdom) 12-15-07 (Y) 100 3 Sr Note (Deutsche Mark) 06-15-08# 140 1 Grupo Iusacell S.A. de C.V., Sr Note (Mexico) 12-01-06 (Y) 14.250 100 106 300 318 GT Group Telecom, Inc., Sr Disc Note, Step Coupon (13.25%, 02-01-05) (Canada) 02-01-10 (A) 200 56 Intercel, Inc., Unit (Sr Note & Warrant), Step Coupon (12.00%, 02-01-01) 02-01-06 (A) 200 206 Ionica PLC, Sr Disc Note, Step Coupon (15.00%, 05-01-02) (United Kingdom) 05-01-07 (A) (Y) 200 2 McCaw International Ltd., Sr Disc Note, Step Coupon (13.00%, 04-15-02) 04-15-07 (A) 500 165 Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION MetroNet Communications Corp., Sr Discount Note, Step Coupon (10.75%, 11-01-02) (Canada) 11-01-07 (A) (Y) Zero % $ 200 $ 189 Sr Note (Canada) 08-15-07 (Y) 12.000 50 55 Nextel International, Inc., Sr Note 08-01-10 (R) 12.750 100 50 NorthEast Optic Network, Inc., Sr Note 08-15-08 12.750 100 28 ONO Finance Plc, Sr Sub Note (United Kingdom) 05-01-09 (E) 13.000 100 64 Sr Note (United Kingdom) 07-15-10 (E) 14.000 200 132 Pronet Inc., Sr Sub Note 06-15-05 11.875 280 28 TeleCorp PCS, Inc., Sr Sub Disc Note, Step Coupon (11.625%, 04-15-04) 04-15-09 (A) Zero 175 107 Telewest Communications Plc, Sr Disc Note, Step Coupon (9.875%, 04-15-04) (British Pound Sterling) 04-15-09 (A) (Y) Zero 100 68 Sr Note 02-01-10 (R) # 9.875 100 114 VoiceStream Wireless Corp., Sr Note 09-15-09 11.500 100 115 CTI Holdings S.A., Sr Note, Step Coupon (11.25%, 04-15-03) (Argentina) 04-15-08 (A) (Y) Esprit Telecom Group Plc, Sr Note (Germany) 06-15-08 (B) # GT Group Telecom, Inc., Unit (Sr Disc Note & Warrant), Step Coupon (13.125%, 02-01-05) 02-01-10 (A) PTC International Finance II S.A., Gtd Sr Sub Note (Luxembourg) 12-01-09 (E) Telewest Communications Plc, Sr Disc Note, Step Coupon (9.875%, 04-15-04) (United Kingdom) 04-15-09 (A) # -------- 1,874 -------- ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION MetroNet Communications Corp., Sr Discount Note, Step Coupon (10.75%, 11-01-02) (Canada) 11-01-07 (A) (Y) $ 200 $ 189 Sr Note (Canada) 08-15-07 (Y) 50 55 Nextel International, Inc., Sr Note 08-01-10 (R) 100 50 NorthEast Optic Network, Inc., Sr Note 08-15-08 100 28 ONO Finance Plc, Sr Sub Note (United Kingdom) 05-01-09 (E) 100 64 Sr Note (United Kingdom) 07-15-10 (E) 200 132 Pronet Inc., Sr Sub Note 06-15-05 280 28 TeleCorp PCS, Inc., Sr Sub Disc Note, Step Coupon (11.625%, 04-15-04) 04-15-09 (A) 175 107 Telewest Communications Plc, Sr Disc Note, Step Coupon (9.875%, 04-15-04) (British Pound Sterling) 04-15-09 (A) (Y) 100 68 Sr Note 02-01-10 (R) # 100 114 VoiceStream Wireless Corp., Sr Note 09-15-09 100 115 CTI Holdings S.A., Sr Note, Step Coupon (11.25%, 04-15-03) (Argentina) 04-15-08 (A) (Y) Zero % $ 75 $ 29 75 29 Esprit Telecom Group Plc, Sr Note (Germany) 06-15-08 (B) # 11.000 40 0 40 0 GT Group Telecom, Inc., Unit (Sr Disc Note & Warrant), Step Coupon (13.125%, 02-01-05) 02-01-10 (A) 1.000 100 28 100 28 PTC International Finance II S.A., Gtd Sr Sub Note (Luxembourg) 12-01-09 (E) 11.250 25 22 25 22 Telewest Communications Plc, Sr Disc Note, Step Coupon (9.875%, 04-15-04) (United Kingdom) 04-15-09 (A) # Zero 25 17 25 17 -------- -------- 202 2,076 -------- -------- Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION Telecommunications - Services (2.66%) COLT Telecom Group Plc, (United Kingdom) Sr Note (Deutsche Mark) 07-31-08# 7.625% $ 300 $ 105 Crown Castle International Corp., Sr Disc Note, Step Coupon (10.625%, 11-15-02) 11-15-07 (A) Zero 150 115 Energis Plc, Sr Note (United Kingdom) 06-15-09 (R) # 9.500 130 165 Jazztel Plc, Sr Note (United Kingdom) 12-15-09 (E) 13.250 200 63 Nextel Partners, Inc., Sr Disc Note, Step Coupon (14.00%, 02-01-04) 02-01-09 (A) Zero 390 218 NTL Communications Corp., Sr Note Ser B 10-01-08 11.500 100 67 Sr Note Ser B, Step Coupon (12.375%, 10-01-03) 10-01-08 (A) Zero 150 63 Orion Network Systems, Sr Note 01-15-07 11.250 100 40 Time Warner Telecom LLC, Sr Note 07-15-08 9.750 200 177 Time Warner Telecom, Inc., Sr Note 02-01-11 10.125 200 179 Tritel PCS, Inc., Sr Sub Disc Note 05-15-09 12.750 100 63 United Pan-Europe Communicatons N.V., Sr Disc Note, Step Coupon (13.375%, 11-01-04) (Netherlands) 11-01-09 (A) (E) Zero 40 10 Sr Note (Netherlands) 11-01-07 (E) 10.875 40 19 Sr Note (Netherlands) 11-01-09 (E) 11.250 65 31 Versatel Telecom International NV, Sr Note (Netherlands) 05-15-08 (Y) 13.250 100 38 Sr Note Ser EU (Netherlands) 07-15-09 (E) 11.875 100 33 -------- 1,386 -------- ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION Telecommunications - Services (2.66%) COLT Telecom Group Plc, (United Kingdom) Sr Note (Deutsche Mark) 07-31-08# $ 300 $ 105 Crown Castle International Corp., Sr Disc Note, Step Coupon (10.625%, 11-15-02) 11-15-07 (A) 150 115 Energis Plc, Sr Note (United Kingdom) 06-15-09 (R) # 130 165 Jazztel Plc, Sr Note (United Kingdom) 12-15-09 (E) 13.250% $ 50 $ 16 250 78 Nextel Partners, Inc., Sr Disc Note, Step Coupon (14.00%, 02-01-04) 02-01-09 (A) Zero 15 8 405 227 NTL Communications Corp., Sr Note Ser B 10-01-08 11.500 50 34 150 101 Sr Note Ser B, Step Coupon (12.375%, 10-01-03) 10-01-08 (A) Zero 100 42 250 105 Orion Network Systems, Sr Note 01-15-07 100 40 Time Warner Telecom LLC, Sr Note 07-15-08 200 177 Time Warner Telecom, Inc., Sr Note 02-01-11 200 179 Tritel PCS, Inc., Sr Sub Disc Note 05-15-09 100 63 United Pan-Europe Communicatons N.V., Sr Disc Note, Step Coupon (13.375%, 11-01-04) (Netherlands) 11-01-09 (A) (E) 40 10 Sr Note (Netherlands) 11-01-07 (E) 10.875 50 24 90 43 Sr Note (Netherlands) 11-01-09 (E) 11.250 25 12 90 43 Versatel Telecom International NV, Sr Note (Netherlands) 05-15-08 (Y) 13.250 125 47 225 85 Sr Note Ser EU (Netherlands) 07-15-09 (E) 100 33 -------- -------- 183 1,569 -------- -------- Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION Textile (0.16%) Coyne International Enterprises Corp., Sr Sub Note 06-01-08 Steel Heddle Group, Inc., Sr Disc Deb, Step Coupon (13.75%, 06-01-03) 06-01-09 (A) Steel Heddle Manufacturing Co., Gtd Sr Sub Note Ser B 06-01-08 (B) Tropical Sportswear International Corp., Sr Sub Note Ser A 06-15-08 Transportation (1.38%) CHC Helicopter Corp., Sr Sub Note (Canada) 07-15-07 (E) 11.750% $ 200 $ 190 Fine Air Services, Corp., Sr Note 06-01-08 (B) (R) 9.875 105 6 North American Van Lines, Inc., Sr Sub Note 12-01-09 (R) 13.375 150 138 Amtran, Inc., Sr Note 08-01-04 Cenargo International Plc, 1st Mtg Note (United Kingdom) 06-15-08 (Y) Northwest Airlines Corp., Gtd Note 03-15-07 Pacer International, Inc., Sr Sub Note 06-01-07 Pacific & Atlantic Holdings, Inc., Sr Sec Note 12-31-07 (R) US Airways, Inc., Pass Thru Ctf Ser 1993-A3 03-01-13 -------- 334 -------- ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION Textile (0.16%) Coyne International Enterprises Corp., Sr Sub Note 06-01-08 11.250% $ 75 $ 32 $ 75 $ 32 Steel Heddle Group, Inc., Sr Disc Deb, Step Coupon (13.75%, 06-01-03) 06-01-09 (A) Zero 200 10 200 10 Steel Heddle Manufacturing Co., Gtd Sr Sub Note Ser B 06-01-08 (B) 10.625 50 7 50 7 Tropical Sportswear International Corp., Sr Sub Note Ser A 06-15-08 11.000 50 46 50 46 -------- -------- 95 95 -------- -------- Transportation (1.38%) CHC Helicopter Corp., Sr Sub Note (Canada) 07-15-07 (E) 11.750 100 95 300 285 Fine Air Services, Corp., Sr Note 06-01-08 (B) (R) 9.875 105 6 210 13 North American Van Lines, Inc., Sr Sub Note 12-01-09 (R) 13.375 100 92 250 230 Amtran, Inc., Sr Note 08-01-04 10.500 50 44 50 44 Cenargo International Plc, 1st Mtg Note (United Kingdom) 06-15-08 (Y) 9.750 20 15 20 15 Northwest Airlines Corp., Gtd Note 03-15-07 8.700 100 97 100 97 Pacer International, Inc., Sr Sub Note 06-01-07 11.750 50 49 50 49 Pacific & Atlantic Holdings, Inc., Sr Sec Note 12-31-07 (R) 10.500 21 11 21 11 US Airways, Inc., Pass Thru Ctf Ser 1993-A3 03-01-13 10.375 75 73 75 73 -------- -------- 482 816 -------- -------- Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION Utilities (1.59%) CMS Energy Corp., Sr Note 10-15-07 9.875% $ 200 $ 211 Midland Funding Corp. II, Deb Ser A 07-23-05 11.750 200 221 Deb Ser B 07-23-06 13.250 150 174 Monterrey Power S.A. de C.V., Sr Sec Bond (Mexico) 11-15-09 (R) (Y) 9.625 90 94 Niagara Mohawk Power Corp., Sec Fac Bond 01-01-18 8.770 141 146 -------- 846 -------- Waste Disposal Service & Equip (0.21%) Allied Waste North America, Inc., Sr Sub Note Ser B 08-01-09 Waste Systems International, Inc., Gtd Sr Note 01-15-06 (B) TOTAL LONG-TERM DEBT (85.46%) (Cost $55,341,393) 45,639 -------- NUMBER OF SHARES OR WARRANTS ----------- COMMON STOCK AT&T Canada, Inc., Common Stock (Canada) (Y) ** 2,000 60 GT Group Telecom, Inc. (Class B), Common Stock (Canada) (Y) ** 982 4 Common Stock (Netherlands) (Y) 397 7 ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION Utilities (1.59%) CMS Energy Corp., Sr Note 10-15-07 9.875% $ 25 $ 26 $ 225 $ 237 Midland Funding Corp. II, Deb Ser A 07-23-05 200 221 Deb Ser B 07-23-06 150 174 Monterrey Power S.A. de C.V., Sr Sec Bond (Mexico) 11-15-09 (R) (Y) 9.625 68 70 158 164 Niagara Mohawk Power Corp., Sec Fac Bond 01-01-18 141 146 -------- -------- 96 942 -------- -------- Waste Disposal Service & Equip (0.21%) Allied Waste North America, Inc., Sr Sub Note Ser B 08-01-09 10.000 125 128 125 128 Waste Systems International, Inc., Gtd Sr Note 01-15-06 (B) 11.500 15 3 15 3 -------- -------- 131 131 -------- -------- TOTAL LONG-TERM DEBT (85.46%) (Cost $55,341,393) 4,887 50,526 -------- -------- NUMBER OF NUMBER OF SHARES SHARES OR WARRANTS OR WARRANTS ----------- ----------- COMMON STOCK AT&T Canada, Inc., Common Stock (Canada) (Y) ** 2,000 60 GT Group Telecom, Inc. (Class B), Common Stock (Canada) (Y) ** 982 4 Common Stock (Netherlands) (Y) 397 7 Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION NUMBER OF SHARES OR WARRANTS ----------- Kraft Foods, Inc. (Class A) ** 1,540 $ 48 Nortek, Inc., Common Stock ** 704 22 Versatel Telecom International N.V., ADR Common Stock (Netherlands) ** 1,333 4 American Pacific Corp.** AMR Corp.** Chesapeake Energy Corp.** Gaylord Container Corp. (Class A)** Grey Wolf, Inc.** International Wireless Communications Holdings, Inc. KLM Royal Dutch Airlines N.V. (Netherlands) (Y) Northwest Airlines Corp.** Pathmark Stores, Inc.** Star Gas Partners, L.P. Waste Systems International, Inc. (B)** -------- TOTAL COMMON STOCK (1.14%) (Cost $896,922) 145 -------- PREFERRED STOCKS AND WARRANTS Allegiance Telecom, Inc. Warrant ** 250 15 Comunicacion Celular S.A., Warrant (Colombia) (Y) ** 100 0 DIVA Systems Corp. Warrant (R) ** 750 1 Loral Space & Communications Ltd. Warrant ** 100 0 ONO Finance Plc, Warrant (United Kingdom) (E) (R) ** 50 1 ONO Finance Plc, Warrant (United Kingdom) (R) (Y) ** 50 2 ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION NUMBER OF NUMBER OF SHARES SHARES OR WARRANTS OR WARRANTS ----------- ----------- Kraft Foods, Inc. (Class A) ** 255 $ 8 1,795 $ 56 Nortek, Inc., Common Stock ** 563 18 1,267 40 Versatel Telecom International N.V., ADR Common Stock (Netherlands) ** 1,333 4 American Pacific Corp.** 5,000 32 5,000 32 AMR Corp.** 2,000 72 2,000 72 Chesapeake Energy Corp.** 1,872 12 1,872 12 Gaylord Container Corp. (Class A)** 6,500 7 6,500 7 Grey Wolf, Inc.** 28,850 116 28,850 116 International Wireless Communications Holdings, Inc. 2,417 1 2,417 1 KLM Royal Dutch Airlines N.V. (Netherlands) (Y) 78 1 78 1 Northwest Airlines Corp.** 6,500 164 6,500 164 Pathmark Stores, Inc.** 1,046 26 1,046 26 Star Gas Partners, L.P. 3,300 69 3,300 69 Waste Systems International, Inc. (B)** 8,715 8,715 -------- -------- TOTAL COMMON STOCK (1.14%) (Cost $896,922) 526 671 -------- -------- PREFERRED STOCKS AND WARRANTS Allegiance Telecom, Inc. Warrant ** 250 15 Comunicacion Celular S.A., Warrant (Colombia) (Y) ** 100 0 DIVA Systems Corp. Warrant (R) ** 150 0 900 1 Loral Space & Communications Ltd. Warrant ** 100 0 ONO Finance Plc, Warrant (United Kingdom) (E) (R) ** 50 1 ONO Finance Plc, Warrant (United Kingdom) (R) (Y) ** 50 2 100 4 Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION NUMBER OF SHARES OR WARRANTS ----------- XO Communications Inc., 14% Preferred Stock 2,505 $ 75 Asia Pulp & Paper Co. Ltd., Warrant (R)** Gothic Energy Corp., Warrant** HF Holdings, Inc., Warrant** Hills Stores Co., Warrant** Nakornthai Strip Mill Plc, Warrant (Thailand) (R) (Y)** Nextel Communications, Inc., 11.125%, Payment-In-Kind, Ser E, Preferred Stock Pacific & Atlantic Holdings, Inc., 7.50%, Preferred Stock Pathmark Stores, Inc., Warrant** Smurfit-Stone Container Corp., 7.00%, Ser A, Preferred Stock SpinCycle, Inc., Warrant (R)** TimberWest Forest Corp., Unit (Common & Preferred Shares) (Canada) # Waste Systems International, Inc., 8.00%, Ser E, Preferred Stock (B)** Waste Systems International, Inc., Warrant (B) (R)** XM Satellite Radio Holdings, Inc., Warrant (R)** -------- TOTAL PREFERRED STOCKS AND WARRANTS (1.06%) (Cost $895,388) 94 -------- ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION NUMBER OF NUMBER OF SHARES SHARES OR WARRANTS OR WARRANTS ----------- ----------- XO Communications Inc., 14% Preferred Stock 2,505 $ 75 Asia Pulp & Paper Co. Ltd., Warrant (R)** 250 $ 0 0 0 Gothic Energy Corp., Warrant** 79 0 79 0 HF Holdings, Inc., Warrant** 212 0 212 0 Hills Stores Co., Warrant** 35,000 0 35,000 0 Nakornthai Strip Mill Plc, Warrant (Thailand) (R) (Y)** 63,309 0 63,309 0 Nextel Communications, Inc., 11.125%, Payment-In-Kind, Ser E, Preferred Stock 208 131 208 131 Pacific & Atlantic Holdings, Inc., 7.50%, Preferred Stock 1,172 6 1,172 6 Pathmark Stores, Inc., Warrant** 740 6 740 6 Smurfit-Stone Container Corp., 7.00%, Ser A, Preferred Stock 4,100 80 4,100 80 SpinCycle, Inc., Warrant (R)** 25 0 25 0 TimberWest Forest Corp., Unit (Common & Preferred Shares) (Canada) # 38,000 306 38,000 306 Waste Systems International, Inc., 8.00%, Ser E, Preferred Stock (B)** 160 0 160 0 Waste Systems International, Inc., Warrant (B) (R)** 225 0 225 0 XM Satellite Radio Holdings, Inc., Warrant (R)** 150 3 150 3 -------- -------- TOTAL PREFERRED STOCKS AND WARRANTS (1.06%) (Cost $895,388) 534 628 -------- -------- Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Strategic Income Fund and the V.A. High Yield Bond Fund, combined on June 30, 2001. ----------------------------------------- John Hancock V.A. Strategic Income Fund ----------------------------------------- PAR VALUE MARKET VALUE INTEREST (000's (000's RATE OMITTED) OMITTED) ----------------------------------------- ISSUER, DESCRIPTION SHORT-TERM INVESTMENTS Joint Repurchase Agreementss Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 06-29-01, due 07-02-01 (Secured by U.S. Treasury Bonds, 10.625% due 08-15-15 and 6.250% due 08-15-23, U.S. Treasury Note 5.625% due 11-30-02) - Note A 3.970% $ 12,252 $ 12,252 Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 06-29-01, due 07-02-01 (Secured by U.S. Treasury Bonds, 10.625% due 08-15-15 and 6.250% due 08-15-23, U.S. Treasury Note 5.625% due 11-30-02) - Note B -------- SHORT-TERM INVESTMENTS (20.87%) 12,252 -------- TOTAL INVESTMENTS (108.53%) 58,130 -------- OTHER ASSETS AND LIABILITIES, NET (8.53%) (5,294) -------- TOTAL NET ASSETS (100.00%) $ 52,836 ======== ----------------------------------------------------------------------- John Hancock V.A. High Yield Bond Fund Combined ----------------------------------------------------------------------- PAR VALUE MARKET VALUE PAR VALUE MARKET VALUE INTEREST (000's (000's (000's (000's RATE OMITTED) OMITTED) OMITTED) OMITTED) ----------------------------------------------------------------------- ISSUER, DESCRIPTION SHORT-TERM INVESTMENTS Joint Repurchase Agreementss Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 06-29-01, due 07-02-01 (Secured by U.S. Treasury Bonds, 10.625% due 08-15-15 and 6.250% due 08-15-23, U.S. Treasury Note 5.625% due 11-30-02) - Note A $ 12,252 $ 12,252 Investment in a joint repurchase agreement transaction with UBS Warburg, Inc. - Dated 06-29-01, due 07-02-01 (Secured by U.S. Treasury Bonds, 10.625% due 08-15-15 and 6.250% due 08-15-23, U.S. Treasury Note 5.625% due 11-30-02) - Note B 3.970% $ 85 85 85 85 -------- -------- SHORT-TERM INVESTMENTS (20.87%) 85 12,337 -------- -------- TOTAL INVESTMENTS (108.53%) 6,032 64,162 -------- -------- OTHER ASSETS AND LIABILITIES, NET (8.53%) 252 (5,042) -------- -------- TOTAL NET ASSETS (100.00%) $ 6,284 $ 59,120 ======== ======== Notes to Schedule of Investments * Credit Ratings are unaudited and rated by Moodys's Investor Service or John Hancock Advisers, Inc. where Standard & Poor's ratings are not available. ** Non-income producing security. # Par value of foreign bonds is expressed in local currency, as shown parathentically in security description. (A) Cash interest will be paid on this obligation at the stated rate beginning on the stated date. (B) Non-income producing issuer filed for protection under Federal Bankruptcy Code or is in default of interest payment. (E) Parenthetical disclosure of a country in the Security description represents country of issuer; however, security is Euro Denominated. (R) These securities are exempt from registration under rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers, in transactions exempt from registration. Rule 144A securities amounted to $3,649,429 or 6.17% of the fund's net assets as of June 30, 2001. (Y) Parenthetical disclosure of a foreign country in the security description represents country of foreign issuer, however, security is U. S. dollar denominated. (r) Direct placement securities are restricted as to resale. They have been valued in accordance with procedures approved by the Trustees after consideration of restrictions as to resale, financial condition and prospects of the issuer, general market conditions and pertinent information in accordance with the Fund's By-Laws and the Investment Company Act of 1940, as amended. The Fund has limited rights to registration under the Securities Act of 1933 with respect to these restricted securities. MARKET VALUE AS A MARKET ACQUISITION % VALUE AT ACQUISITION COST OF FUND'S 30-Jun-2001 ISSUER, DESCRIPTION DATE (000 OMITTED) NET ASSETS (000 OMITTED) - ------------------- ---- ------------- ---------- ------------- Oregon Steel CF & I 05-14-98 44 #REF! 42 The percentage shown for each investment category is the total value of that category as a percentage of the combined net assets of the funds. Exhibit C JOHN HANCOCK V.A. FINANCIAL INDUSTRIES FUND NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS JUNE 30, 2001 Pro forma information is intended to provide the shareholders of the John Hancock V.A. Financial Industries Fund and the John Hancock V.A. Regional Bank Fund with information about the impact of the proposed merger by indicating how the merger might have affected information had the merger been consummated as of June 30, 2000. The pro forma combined statements of assets and liabilities and results of operations as of June 30, 2001 have been prepared to reflect the merger of John Hancock V.A. Financial Industries Fund and John Hancock V.A. Regional Bank Fund after giving effect to pro forma adjustments described in the notes below. (a) Acquisition by John Hancock V.A. Financial Industries Fund of all assets of John Hancock V.A. Regional Bank Fund and issuance of John Hancock V.A. Financial Industries Fund shares in exchange for all of the outstanding shares of John Hancock V.A. Regional Bank Fund. (b) The actual expenses incurred by the John Hancock V.A. Strategic Income Fund and John Hancock V.A. High Yield Bond Fund were reduced to reflect the estimated savings arising from the merger John Hancock VA Financial Industries Fund Exhibit C Pro-forma combined statement of assets and liabilities June 30, 2001 (000's omitted) John Hancock John Hancock VA Financial VA Regional Pro Forma Industries Fund Bank Fund Adjustments Combined --------------- --------- ----------- --------- Assets Investments at value $ 76,589 $ 11,104 $ 87,693 Joint repurchase agreements 5,059 743 5,802 -------- -------- -------- -------- Total investments 81,648 11,847 -- 93,495 Cash 1 1 2 Receivable for investments sold 44 34 78 Receivable for shares sold 266 -- 266 Dividends and interest receivable 93 27 120 Other Assets 6 -- 6 -------- -------- -------- -------- Total assets 82,058 11,909 -- 93,967 -------- -------- -------- -------- Liabilities Payable to John Hancock Advisers, Inc. and affiliates 54 8 62 Accounts payable and accrued expenses 14 13 27 -------- -------- -------- -------- Total Liabilities 68 21 -- 89 -------- -------- -------- -------- Net Assets: Capital paid-in 73,523 11,971 85,494 Accumulated net realized gain (loss) on investments, options and foreign currency transactions 340 (2,369) (2,029) Net unrealized appreciation of investments and translation of assets and liabilities in foreign curriencies 7,892 2,286 10,178 Undistributed net investment income 235 -- 235 -------- -------- -------- -------- Net Assets 81,990 11,888 -- 93,878 -------- -------- -------- -------- Net assets: V.A. Financial Industries Fund 81,990 -- 11,888(a) 93,878 V.A. Regional Bank Fund -- 11,888 (11,888)(a) -- -------- -------- -------- -------- 81,990 11,888 -- 93,878 -------- -------- -------- -------- Shares outstanding: V.A. Financial Industries Fund 4,941 -- 718(a) 5,659 V.A. Regional Bank Fund -- 1,121 (1,121)(a) -- -------- -------- -------- -------- 4,941 1,121 (403) 5,659 -------- -------- -------- -------- Net asset value per share: V.A. Financial Industries Fund $ 16.59 -- -- $ 16.59 V.A. Regional Bank Fund -- $ 10.61 $ (10.61)(a) -- ======== ======== ======== ======== John Hancock VA Financial Industries Fund Exhibit C Pro-forma combined statement of operations For the year ended June 30, 2001 (000's omitted) John Hancock VA John Hancock VA Financial Industries Regional Bank Fund Fund 12 months ended 12 months ended Pro-Forma June 30, 2001 June 30, 2001 Adjustments Combined -------------------- --------------- ----------- --------- Investement income: Dividends $ 790 $ 294 $ -- $ 1,084 Interest 41 40 -- 81 Securities lending income 62 3 -- 65 ------- ------- ------- ------- Total Investment Income 893 337 -- 1,230 ------- ------- ------- ------- Expenses: Investment management fee 530 103 -- 633 Custodian fee 28 9 (5)(b) 32 Auditing fee 24 14 (10)(b) 28 Printing 4 1 -- 5 Legal fees 1 -- -- 1 Accounting and legal services fee 13 3 -- 16 Trustees' fee 4 1 -- 5 Miscellaneous 3 -- -- 3 Interest Expense 1 1 -- 2 ------- ------- ------- ------- Total expenses 608 132 (15) 725 Net expenses 608 132 (15) 725 ------- ------- ------- ------- Net investment income 285 205 15 505 ------- ------- ------- ------- REALIZED AND UNREALIZED GAIN (LOSS) Net realized and unrealized gain(loss) on: Investments 4,811 (354) -- 4,457 Foreign currency transactions (12) -- -- (12) Change in unrealized appreciation (depreciation) on: Investments (1,459) 4,510 -- 3,051 ------- ------- ------- ------- Net realized and unrealized gain (loss) 3,340 4,156 -- 7,496 ------- ------- ------- ------- Increase (decrease) in net assets from operations $ 3,625 $ 4,361 $ 15 $ 8,001 ======= ======= ======= ======= Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Financial Industries Fund and the V.A. Regional Bank Fund combined on June 30, 2001. --------------------------------------------------------------------------------------------- V.A. Financial Industries Fund V.A. Regional Bank Fund Combined --------------------------------------------------------------------------------------------- NUMBER OF MARKET VALUE NUMBER OF MARKET VALUE NUMBER OF MARKET VALUE INTEREST SHARES OR (000'S INTEREST SHARES OR (000'S SHARES OR (000'S RATE WARRANTS OMITTED) RATE WARRANTS OMITTED) WARRANTS OMITTED) --------------------------------------------------------------------------------------------- ISSUER, DESCRIPTION COMMON STOCK Banks - Foreign (2.90%) Banco Popular Espanol SA (Spain) 36,500 $ 1,276 36,500 $ 1,276 Lloyds TSB Group Plc (United Kingdom) 145,000 1,451 145,000 1,451 ------- ------- 2,727 2,727 ------- ------- Banks - Midwest (6.57%) Fifth Third Bancorp 57,250 3,438 7,092 $ 426 64,342 3,864 Northern Trust Corp. 36,900 2,306 36,900 2,306 ------- ------- ------- 5,744 426 6,170 ------- ------- ------- Banks - Money Center (5.71%) Citigroup, Inc. 62,000 3,276 7,000 370 69,000 3,646 J.P. Morgan Chase & Co. 34,000 1,516 4,500 201 38,500 1,717 ------- ------- ------- 4,792 571 5,363 ------- ------- ------- Banks - Northeast (2.38%) State Street Corp. 43,100 2,133 2,000 99 45,100 2,232 ------- ------- ------- Banks - Southeast (2.69%) BB&T Corp. 65,900 2,419 3,000 110 68,900 2,529 ------- ------- ------- Banks - Superregional (13.12%) Bank of New York Co., Inc. (The) 44,500 2,136 44,500 2,136 FleetBoston Financial Corp. 66,536 2,625 66,536 2,625 PNC Financial Services Group 15,000 987 4,000 263 19,000 1,250 U.S. Bancorp 106,260 2,422 5,000 114 111,260 2,536 Wells Fargo & Co. 64,500 2,995 6,000 279 70,500 3,274 Bank One Corp. (OH) 3,000 107 3,000 107 Mellon Financial Corp. (PA) 8,500 391 8,500 391 ------- ------- ------- 11,165 1,154 12,319 ------- ------- ------- Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Financial Industries Fund and the V.A. Regional Bank Fund combined on June 30, 2001. --------------------------------------------------------------------------------------------- V.A. Financial Industries Fund V.A. Regional Bank Fund Combined --------------------------------------------------------------------------------------------- NUMBER OF MARKET VALUE NUMBER OF MARKET VALUE NUMBER OF MARKET VALUE INTEREST SHARES OR (000'S INTEREST SHARES OR (000'S SHARES OR (000'S RATE WARRANTS OMITTED) RATE WARRANTS OMITTED) WARRANTS OMITTED) --------------------------------------------------------------------------------------------- ISSUER, DESCRIPTION Banks - United States (8.37%) BancFirst Corp. (OK) 2,500 $ 101 2,500 $ 101 BancWest Corp. (HI) 3,000 103 3,000 103 Cascade Bancorp (OR) 21,612 302 21,612 302 Charter One Financial, Inc. (OH) 6,017 192 6,017 192 Chittenden Corp. (VT) 5,000 168 5,000 168 City National Corp. (CA) 5,000 221 5,000 221 Comerica, Inc. (MI) 3,500 202 3,500 202 Commerce Bancshares, Inc. (MO) 10,047 371 10,047 371 Community First Bankshares, Inc. (ND) 7,500 172 7,500 172 Cullen/Frost Bankers., Inc. (TX) 6,500 220 6,500 220 Financial Institutions, Inc. (NY) 9,000 202 9,000 202 First Financial Holdings, Inc. (SC) 5,300 122 5,300 122 First Midwest Bancorp., Inc. (IL) 5,000 154 5,000 154 FirstMerit Corp. (OH) 5,000 132 5,000 132 Independent Bank Corp. (MI) 8,000 196 8,000 196 M & T Bank Corp. (NY) 4,000 302 4,000 302 Mercantile Bankshares Corp. (MD) 9,500 372 9,500 372 Mid-State Bancshares (CA) 25,000 456 25,000 456 National Commerce Financial Corp. (TN) 9,000 219 9,000 219 Northern Trust Corp. (IL) 1,500 94 1,500 94 Northrim Bank (AK) 16,695 232 16,695 232 Pacific Capital Bancorp. (CA) 13,500 411 13,500 411 Prosperity Bancshares, Inc. (TX) 14,000 335 14,000 335 SJNB Financial Corp. (CA) 8,000 346 8,000 346 SouthTrust Corp. (AL) 3,000 78 3,000 78 Southwest Bancorp. of Texas, Inc.* (TX) 5,000 151 5,000 151 Sterling Bancshares, Inc. (TX) 10,000 192 10,000 192 Summit Bancshares, Inc. (TX) 12,000 226 12,000 226 Texas Regional Bancshares, Inc. (Class A) (TX) 1,750 71 1,750 71 Umpqua Holdings Corp. (OR) 33,000 423 33,000 423 Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Financial Industries Fund and the V.A. Regional Bank Fund combined on June 30, 2001. --------------------------------------------------------------------------------------------- V.A. Financial Industries Fund V.A. Regional Bank Fund Combined --------------------------------------------------------------------------------------------- NUMBER OF MARKET VALUE NUMBER OF MARKET VALUE NUMBER OF MARKET VALUE INTEREST SHARES OR (000'S INTEREST SHARES OR (000'S SHARES OR (000'S RATE WARRANTS OMITTED) RATE WARRANTS OMITTED) WARRANTS OMITTED) --------------------------------------------------------------------------------------------- ISSUER, DESCRIPTION Valley National Bancorp. (NJ) 16,485 $ 467 16,485 $ 467 Warren Bancorp., Inc. (MA) 20,000 180 20,000 180 Whitney Holding Corp. (LA) 5,000 235 5,000 235 Yardville National Bancorp. (NJ) 15,000 210 15,000 210 ------- ------- 7,858 7,858 ------- ------- Banks - West (2.39%) Zions Bancorp 34,000 $ 2,006 4,000 236 38,000 2,242 ------- ------- ------- Broker Services (9.79%) Goldman Sachs Group, Inc. 26,500 2,274 26,500 2,274 Instinet Group Inc.* 3,450 64 3,450 64 Lehman Brothers Holdings, Inc. 32,500 2,527 32,500 2,527 Merrill Lynch & Co., Inc. 40,500 2,399 40,500 2,399 Schwab (Charles) Corp. (The) 126,076 1,929 126,076 1,929 ------- ------- 9,193 9,193 ------- ------- Computer - Services (2.59%) Fiserv, Inc.* 38,000 2,431 38,000 2,431 ------- ------- Computers (0.13%) SEI Investments Co. (PA) 2,500 119 2,500 119 ------- ------- Diversified Operations (4.38%) General Electric Co. 62,000 3,023 62,000 3,023 Tyco International Ltd. 20,000 1,090 20,000 1,090 ------- ------- 4,113 4,113 ------- ------- Finance - Consumer Loans (7.91%) American Express Co. 63,900 2,479 3,000 116 66,900 2,595 ------- Household International, Inc. 42,000 2,802 42,000 2,802 MBNA Corp. 61,650 2,031 61,650 2,031 ------- ------- ------- 7,312 116 7,428 ------- ------- ------- Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Financial Industries Fund and the V.A. Regional Bank Fund combined on June 30, 2001. --------------------------------------------------------------------------------------------- V.A. Financial Industries Fund V.A. Regional Bank Fund Combined --------------------------------------------------------------------------------------------- NUMBER OF MARKET VALUE NUMBER OF MARKET VALUE NUMBER OF MARKET VALUE INTEREST SHARES OR (000'S INTEREST SHARES OR (000'S SHARES OR (000'S RATE WARRANTS OMITTED) RATE WARRANTS OMITTED) WARRANTS OMITTED) --------------------------------------------------------------------------------------------- ISSUER, DESCRIPTION Finance - Investment Management (2.39%) Amvescap Plc (United Kingdom) 129,000 $ 2,241 129,000 $ 2,241 ------- ------- Insurance - Brokers (3.07%) Marsh & McLennan Cos., Inc. 28,300 2,858 28,300 2,858 Willis Group Holdings Ltd.* 1,240 22 1,240 22 ------- ------- 2,880 2,880 ------- ------- Insurance - Life (3.96%) AFLAC, Inc. 98,400 3,099 98,400 3,099 American General Corp. 12,400 576 1,000 $ 46 13,400 622 ------- ------- ------- 3,675 46 3,721 ------- ------- ------- Insurance - Multi Line (3.58%) AXA (France) 48,000 1,367 48,000 1,367 Loews Corp. 31,000 1,997 31,000 1,997 ------- ------- 3,364 3,364 ------- ------- Insurance - Property & Casualty (7.99%) Allstate Corp. (The) 46,000 2,023 46,000 2,023 Ambac Financial Group, Inc. 37,750 2,197 37,750 2,197 American International Group, Inc. 38,125 3,279 38,125 3,279 ------- ------- 7,499 7,499 ------- ------- Insurance - Additional - (0.21%) Hartford Financial Services Group, Inc. (The) (CT) 2,000 137 2,000 137 MetLife, Inc. (NY) 2,000 62 2,000 62 ------- ------- 199 199 ------- ------- Mortgage & Real Estate Services (3.27%) Fannie Mae 34,000 2,895 2,000 170 36,000 3,065 ------- ------- ------- ------- ------- ------- TOTAL COMMON STOCK (93.41%) 76,589 11,104 87,693 ------- ------- ------- Schedule of Investments Exhibit C June 30, 2001 - -------------------------------------------------------------------------------- The Schedule of Investments is a complete list of all the securities owned by the V.A. Financial Industries Fund and the V.A. Regional Bank Fund combined on June 30, 2001. --------------------------------------------------------------------------------------------- V.A. Financial Industries Fund V.A. Regional Bank Fund Combined --------------------------------------------------------------------------------------------- NUMBER OF MARKET VALUE NUMBER OF MARKET VALUE NUMBER OF MARKET VALUE INTEREST SHARES OR (000'S INTEREST SHARES OR (000'S SHARES OR (000'S RATE WARRANTS OMITTED) RATE WARRANTS OMITTED) WARRANTS OMITTED) --------------------------------------------------------------------------------------------- ISSUER, DESCRIPTION PAR VALUE PAR VALUE PAR VALUE (000'S (000'S (000'S OMITTED) OMITTED) OMITTED) --------- --------- --------- SHORT-TERM INVESTMENTS Joint Repurchase Agreement (6.18%) Investment in a joint repurchase agreement transaction with UBS Warburg, Inc.- Dated 06-29-01 due 07-02-01 (Secured by U.S. Treasury Bonds, 10.625% due 08-15-15 and 6.250% due 08-15-23, U.S. Treasury Note 5.625% due 11-30-02) $ 5,059 $ 5,059 3.97% $ 743 $ 743 $ 5,802 $ 5,802 ------- ------- ------- TOTAL SHORT TERM INVESTMENTS (6.18%) 5,059 743 5,802 ------- ------- ------- TOTAL INVESTMENTS (99.59%) 81,648 11,847 93,495 ------- ------- ------- OTHER ASSETS AND LIABILITIES, NET (0.41%) 342 41 383 ------- ------- ------- TOTAL NET ASSETS (100.00%) $81,990 $11,888 $93,878 ======= ======= ======= NOTES TO THE SCHEDULE OF INVESTMENTS * Non-income producing security. The percentage shown for each investment category is the total value of that category as a percentage of the combined net assets of the Funds. PART C OTHER INFORMATION ITEM 15. INDEMNIFICATION No change from the information set forth in Item 27 of the Registration Statement of John Hancock Declaration Trust (the "Registrant") on Form N-1A under the Securities Act of 1933 and the Investment company Act of 1940 (File Nos. 33-64465 and 811-07437), which information is incorporated herein by reference. ITEM 16. EXHIBITS: 1. Registrant's Amended and Restated Filed as Exhibit 99.(a) to Registrant's Declaration of Trust initial Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. (file nos. 811-07437 and 33-64465 on November 20, 1995; accession no.0000950146-95-000740) ("PEA ") 1.1 Amendment to Declaration of Trust Filed as Exhibit 99.(a) 1 to Registrant's Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 6 (file nos. 811-074375 and 33-64465 on October 1, 1997; accession no. 0001010521-97-000403) ("PEA 6") 1.2 Amendment to Declaration of Trust Filed as Exhibit 99.(a) 2 to Registrant's Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 9 (file nos. 811-074375 and 33-64465 on February 23, 1999; accession no. 0001010521-99-000137) ("PEA 9") 1.3 Amendment to Declaration of Trust Filed as Exhibit 99.(a) 3 to Registrant's Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 4 (file nos. 811-074375 and 33-64465 on April 29, 1997; accession no. 0001010521-97-000278) ("PEA 4") 1.4 Amendment to Declaration of Trust Filed as Exhibit 99.(a) 4 to Registrant's Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 6 (file nos. 811-074375 and 33-64465 on October 1, 1997; accession no. 0001010521-97-000403) ("PEA 6") 1.5 Amendment to Declaration of Trust Filed as Exhibit 99.(a) 5 to PEA 9 and incorporated herein by reference. 1.6 Amendment to Declaration of Trust Filed as Exhibit 99.(a) 6 to PEA 9 and incorporated herein by reference. 1.7 Amendment to Declaration of Trust Filed as Exhibit 99.(a) 7 to Registrant's Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 10 (file nos. 811-074375 and 33-64465 on April 29, 1999; accession no. 0001010521-99-000201) ("PEA 10") 1.8 Amendment to Declaration of Trust Filed as Exhibit 99.(a) 8 to PEA 10 and incorporated herein by reference. 1.9 Amendment to Declaration of Trust Filed as Exhibit 99.(a) 9 to Registrant's Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 11 (file nos. 811-074375 and 33-64465 on February 16, 2000; accession no. 0001010521-00-000186) ("PEA 11") 1.10 Amendment to Declaration of Trust Filed as Exhibit 99.(a) 10 to Registrant's Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 12 (file nos. 811-074375 and 33-64465 on April 27, 2000; accession no. 0001010521-00-000253) ("PEA 12") 1.11 Amendment to Declaration of Trust Filed as Exhibit 99.(a) 11 to PEA 12 and incorporated herein by reference. 2 Amended and Restated By-Laws of Filed as Exhibit 99.(b) to Registrant's Registrant. Registration Statement on Form N-1A and incorporated herein by reference to post-effective amendment no. 2 (file nos. 811-07437 and 33-64465 on February 14, 1997; accession no.0000950146-97-000212) ("PEA 2") 3 Not applicable 4 Form of Agreement and Plan of Filed herewith as Exhibit B to the Proxy reorganization Statement and Prospectus included as Part A of this Registration Statement. 5 Not applicable 6 Investment Management Contract Filed as Exhibit 99.(d) to Registrant's between the Registrant and John Registration Statement on Form N-1A and Hancock Advisers, Inc. incorporated herein by reference to post-effective amendment no. 1 (file nos. 811-07437 and 33-64465 on August 7, 1996; accession no.0000950146-96-000139) ("PEA 1") 6.1 Investment Management Contract Filed as Exhibit 99.(d) 1 to PEA 9 and between the Registrant and John incorporated herein by reference. Hancock Advisers, Inc. 6.2 Investment Management Contract Filed as Exhibit 99.(d) 2 to PEA 9 and between the Registrant and John incorporated herein by reference. Hancock Advisers, Inc. 6.3 Investment Management Contract Filed as Exhibit 99.(d) 3 to PEA 9 and between the Registrant and John incorporated herein by reference. Hancock Advisers, Inc. 6.4 Sub-Investment Management Contract Filed as Exhibit 99.(d) 4 to PEA 1 and between the Registrant and John incorporated herein by reference. Hancock Advisers, Inc. 6.5 Sub-Investment Management Contract Filed as Exhibit 99.(d) 5 to PEA 1 and between the Registrant and John incorporated herein by reference. Hancock Advisers, Inc. 6.6 Sub-Investment Management Contract Filed as Exhibit 99.(d) 6 to PEA 11 and between the Registrant and John incorporated herein by reference. Hancock Advisers, Inc. 6.7 Investment Management Contract Filed as Exhibit 99.(d) 7 to PEA 12 and between the Registrant and John incorporated herein by reference. Hancock Advisers, Inc. 6.8 Investment Management Contract Filed as Exhibit 99.(d) 8 to PEA 12 and between the Registrant and John incorporated herein by reference. Hancock Advisers, Inc. 6.9 Investment Management Contract Filed as Exhibit 99.(d) 9 to PEA 12 and between the Registrant and John incorporated herein by reference. Hancock Advisers, Inc. 6.10 Sub-Investment Management Contract Filed as Exhibit 99.(d) 10 to PEA 12 and between the Registrant and John incorporated herein by reference. Hancock Advisers, Inc. 6.11 Sub-Investment Management Contract Filed as Exhibit 99.(d) 11 to between the Registrant and John Registrant's Registration Statement on Hancock Advisers, Inc. Form N-1A and incorporated herein by reference to post-effective amendment no. 13 (file nos. 811-07437 and 33-64465 on February 21, 2001; accession no.0001010521-01-000158) ("PEA 13") 6.12 Sub-Investment Management Contract Filed as Exhibit 99.(d) 12 to PEA 13 and between the Registrant and John incorporated herein by reference. Hancock Advisers, Inc. 6.13 Sub-Investment Management Contract Filed herewith as Exhibit (B?) to the --- among the Registrant on behalf of Proxy Statement and Prospectus included John Hancock V.A. International Fund, as Part A of this Registration Statement. John Hancock Advisers and Nicolas-Applegate Capital Management. 7 Distribution Agreement between the Filed as Exhibit 99.(e) to PEA 2 and Registrant and John Hancock Funds, incorporated herein by reference. Inc. (formerly named John Hancock Broker Distribution Services, Inc. 7.1 Amendment to Distribution Agreement Filed as Exhibit 99.(e) 1 to PEA 9 and between the Registrant and John incorporated herein by reference. Hancock Funds, Inc. 7.2 Amendment to Distribution Agreement Filed as Exhibit 99.(e) 2 to PEA 9 and between the Registrant and John incorporated herein by reference. Hancock Funds, Inc. 7.3 Amendment to Distribution Agreement Filed as Exhibit 99.(e) 3 to PEA 9 and between the Registrant and John incorporated herein by reference. Hancock Funds, Inc. 7.4 Amendment to Distribution Agreement Filed as Exhibit 99.(e) 4 to PEA 12 and between the Registrant and John incorporated herein by reference. Hancock Funds, Inc. 8 Not applicable. 9 Master Custodian Agreement between Filed as Exhibit 99.(g) to PEA 10 and John Hancock Mutual Funds (including incorporated herein by reference. Registrant) and Investors Bank & Trust Company. 9.1 Amendment to Master Custodian Filed as Exhibit 99.(g) 1 to PEA 10 and Agreement between John Hancock Mutual incorporated herein by reference. Funds (including Registrant) and Investors Bank & Trust Company. 9.2 Amendment to Master Custodian Filed as Exhibit 99.(g) 2 to PEA 12 and Agreement between John Hancock Mutual incorporated herein by reference. Funds (including Registrant) and Investors Bank & Trust Company. 9.3 Amendment Dated June 7, 2001 to the Filed herewith as Exhibit (B?) to the --- Amended and Restated Master Custodian Proxy Statement and Prospectus included Agreement between John Hancock Mutual as Part A of this Registration Statement. Funds and Investors Bank & Trust Co. 10 Master Transfer Agent Service Filed as Exhibit 99(h) to PEA 9 and Agreement between John Hancock Mutual incorporated herein by reference. Funds (including Registrant) and John Hancock Funds, Inc. 10.1 Accounting Services Agreement Filed as Exhibit 99(h) 1 to PEA 1 and incorporated herein by reference. 10.2 Amendment to Master Transfer Agent Filed as Exhibit 99.(h) 2 to PEA 12 and Service Agreement between John incorporated herein by reference. Hancock Mutual Funds (including Registrant) and John Hancock Funds, Inc. 11 Not Applicable. 12 Not applicable 13 Code of Ethics John Hancock Advisers Filed as Exhibit 99.(p) to PEA 12 and and each John Hancock Fund, incorporated herein by reference. Independence Investments LLC and American Fund Advisers. 13.1 Code of Ethics and Conduct Filed as Exhibit 99(h) to PEA 13 and -Nicholas-Applegate incorporated herein by reference. 14 Opinion as to legality of shares and Filed herewith as Exhibit 14 consent. 15 Form of opinion as to tax matters and Filed herewith as Exhibit 15 consent. 16 Not applicable 17 Consents of Ernst & Young LLP Filed herewith as Exhibit 17 regarding the audited financial statements of Registrant. 18 Not applicable 19 Powers of Attorney Filed as addendum to signature pages and incorporated herein by reference. 20 Prospectus of John Hancock Filed herewith as Exhibit 20 Declaration Funds dated May 1, 2001 21 Statement of Additional Information Filed herewith as Exhibit A and B to Part of John Hancock Declaration Funds B of this Registration Statement. dated May 1, 2001 ITEM 17 (1) The undersigned Registrant agrees that prior to any public reoffering of the securities registered through the use of a propectus which is a part of this Registration Statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) under the Securities Act of 1933, as amended (the "1933 Act"), the reoffering prospectus will contain the information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (2) The undersigned Registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to the Registration Statement and will not be used until the amendment is effective, and that, in determining any liability under the 1933 Act, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston and The Commonwealth of Massachusetts, on the 14th day of September, 2001. JOHN HANCOCK DECLARATION TRUST By: * ----------------------------- Maureen R. Ford Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Registration has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- * Chairman, President and Chief Executive Officer - ----------------------- (Principal Executive Officer) Maureen R. Ford * Senior Vice President and Chief - ----------------------- Financial Officer Richard A. Brown /s/William H. King Senior Vice President, Treasurer September 14, 2001 - ----------------------- (Chief Accounting Officer) William H. King * Trustee - ----------------------- Dennis S. Aronowitz * Trustee - ----------------------- John M. DeCiccio * Trustee - ----------------------- Richard P. Chapman, Jr. * Trustee - ----------------------- William J. Cosgrove * Trustee - ----------------------- Richard A. Farrell * Trustee - ----------------------- Gail D. Fosler * Trustee - ----------------------- William F. Glavin Signature Title Date --------- ----- ---- * Trustee - ----------------------- Dr. John A. Moore * Trustee - ----------------------- Patti McGill Peterson * Trustee - ----------------------- John W. Pratt *By: /s/Susan S. Newton September 14, 2001 ------------------- Susan S. Newton Attorney-in-Fact under Powers of Attorney dated December 7, 1999, February 27, 2001, Powers of Attorney dated June 23, 2001 and September 12, 2001 filed herewith. 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 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. Champman, 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 /s/Richard A. Farell - -------------------- Richard A. Farrell COMMONWEALTH OF MASSACHIUSETTS) - ------------------------------ )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 Nager -------------- Notary Public My Commission Expires: June 14, 2007 ------------- s:\general\prwattn\01Sept12.doc EXHIBIT INDEX The following exhibits are filed as part of this Registration Statement: Exhibit No. Description 6. Agreement and Plan of Reorganization between the Registrant and John Hancock John Hancock V.A. High Yield Bond Fund and John Hancock V.A. Regional Bank Fund. (filed as EXHIBIT A to Part A of this Registration Statement). 6.13 Sub-Investment Management Contract among the Registrant on behalf of John Hancock V.A. International Fund, John Hancock Advisers and Nicolas-Applegate Capital Management. 9.3 Amendment Dated June 7, 2001 to the Amended and Restated Master Custodian Agreement between John Hancock Mutual Funds and Investors Bank & Trust Co. 14 Opinion as to legality of shares and consent. 15 Form of opinion as to tax matters and consent. 17 Consent of Ernst & Young LLP regarding the audited financial statements and highlights of the Registrant.