<PAGE>
FILE NOS. 2-38827
811-2143
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 40
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
[X]
AMENDMENT NO. 23
(CHECK APPROPRIATE BOX OR BOXES.)
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
(EXACT NAME OF REGISTRANT)
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
(NAME OF DEPOSITOR)
JOHN HANCOCK PLACE, BOSTON, MA 02117
(ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
DEPOSITOR'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 572-5060
SANDRA M. DADALT, ESQUIRE
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
JOHN HANCOCK PLACE
BOSTON, MA 02117
(NAME AND ADDRESS OF AGENT FOR SERVICE)
It is proposed that this filing will become effective (check appropriate
space)
[_] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 1998, pursuant to paragraph (b) of Rule 485
[_] 60 days after filing pursuant to paragraph (a) of Rule 485
[_] on (date) pursuant to paragraph (a) of Rule 485
If appropriate check the following box
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to the provisions of Rule 24f-2, Registrant has registered an in-
definite amount of the securities being offered and filed its Notice for fis-
cal 1997 pursuant to Rule 24f-2 on February 26, 1998.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-4 ITEM NO. SECTION IN PROSPECTUS
----------------- ---------------------
<C> <S> <C>
1. Cover Page................... Cover Page
2. Definitions.................. Special Terms; Variable Account Valuation
Procedures
3. Synopsis or Highlights....... Summary Information
4. Condensed Financial Condensed Financial Information
Information.................
5. General Description of
Registrant, Depositor and John Hancock, The Account and the Series
Portfolio Companies......... Fund; Voting Privileges; Distribution of
the Contracts
6. Deductions................... Charges Under Variable Annuity Contracts
7. General Description of The Contracts; The Accumulation Period;
Variable Annuity Contracts.. Miscellaneous Provisions; Changes in
Applicable Law--Funding and Otherwise
8. Annuity Period............... The Annuity Period
9. Death Benefit................ The Accumulation Period; The Annuity Period
10. Purchases and Contract The Contracts; The Accumulation Period;
Values...................... Variable Account Valuation Procedures;
Performance
11. Redemptions.................. The Accumulation Period; Miscellaneous
Provisions; Summary Information
12. Taxes........................ Federal Income Taxes
13. Legal Proceedings............ Not Applicable
14. Table of Contents of
Statement of Additional Table of Contents of Statement of
Information................. Additional Information
</TABLE>
<PAGE>
[LOGO OF JOHN HANCOCK APPEARS HERE]
Mutual Life
Insurance Company
INDIVIDUAL VARIABLE ANNUITY CONTRACTS JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
JOHN HANCOCK SERVICING OFFICE
P.O. Box 111 Boston, Massachusetts 02117
TELEPHONE 800-REAL LIFE (800-732-5543)
PROSPECTUS MAY 1, 1998
The individual variable annuity contracts ("Contracts") described in this
prospectus can be funded, at the discretion of the Owner by, at any one time, up
to ten of the twenty-three subaccounts of John Hancock Variable Annuity Account
U ("Account"). The assets of each subaccount will be invested in a corresponding
Portfolio of John Hancock Variable Series Trust I ("Fund"), a "series" type
mutual fund advised by John Hancock Mutual Life Insurance Company ("John
Hancock").
Three types of Contracts are offered: (1) a periodic payment deferred
contract, (2) a single payment deferred contract, and (3) a single payment
immediate contract.
This prospectus sets forth concisely information about the Account that a
prospective investor ought to know before investing. A statement of additional
information for the Account, dated May 1, 1998, has been filed with the
Securities and Exchange Commission ("Commission") and is incorporated herein by
reference. This statement, the table of contents of which appears at page 38 of
this prospectus, is available upon request and without charge from the Account
at the address or telephone number above.
The prospectus for the Fund, which is attached to this prospectus, describes
the investment objectives, policies and risks of investing in the Portfolios of
the Fund: Managed, Growth & Income, Equity Index, Large Cap Value, Large Cap
Growth, Mid Cap Value, Mid Cap Growth, Diversified Mid Cap Growth (formerly,
Special Opportunities), Real Estate Equity, Small/Mid Cap CORE, Small Cap Value,
Small Cap Growth, Global Equity, International Balanced, International Equity
Index (formerly, International Equities), International Opportunities, Emerging
Markets Equity, Short-Term Bond (formerly, Short-Term U.S. Government), Bond
Index, Sovereign Bond, Strategic Bond, High Yield Bond, and Money Market. (The
Small/Mid Cap CORE, Global Equity, Emerging Markets Equity, Bond Index, and High
Yield Bond Portfolios are not currently available to Owners but are expected to
be made available later in 1998.)
THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. IT IS NOT
VALID UNLESS ATTACHED TO A CURRENT PROSPECTUS FOR THE FUND.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SYNOPSIS OF EXPENSE INFORMATION . . . . . . . . . . . . . . . . . . . 3
CONDENSED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . 9
SPECIAL TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SUMMARY INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 13
THE VARIABLE ANNUITY . . . . . . . . . . . . . . . . . . . . . . . . . 16
JOHN HANCOCK, THE ACCOUNT AND THE SERIES FUND . . . . . . . . . . . . 16
CHARGES UNDER VARIABLE ANNUITY CONTRACTS . . . . . . . . . . . . . . . 20
Deductions for Sales and Administrative Expenses and Minimum Death
Benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Premium or Similar Taxes . . . . . . . . . . . . . . . . . . . . . . 21
Charges for Mortality and Expense Risks . . . . . . . . . . . . . . 21
Charges for Administrative Services . . . . . . . . . . . . . . . . 21
THE CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
THE ACCUMULATION PERIOD . . . . . . . . . . . . . . . . . . . . . . . 23
Accumulation Shares . . . . . . . . . . . . . . . . . . . . . . . . 23
Value of Accumulation Shares . . . . . . . . . . . . . . . . . . . . 23
Transfers To and From Subaccounts . . . . . . . . . . . . . . . . . 23
Surrender of Contract; Partial Withdrawals . . . . . . . . . . . . . 24
Death Benefit Before Date of Maturity . . . . . . . . . . . . . . . 24
THE ANNUITY PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Deferred Variable Annuity Contracts . . . . . . . . . . . . . . . . 25
Immediate Variable Annuity Contracts . . . . . . . . . . . . . . . . 26
Variable Monthly Annuity Payments . . . . . . . . . . . . . . . . . 26
Assumed Investment Rate . . . . . . . . . . . . . . . . . . . . . . 26
Calculation of Annuity Units . . . . . . . . . . . . . . . . . . . . 26
Annuity Options . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Option VA-1 Life Annuity with Five, Ten or Twenty Years Certain . . 27
Option VA-2 Life Annuity without Refund . . . . . . . . . . . . . . 27
Other Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . 27
VARIABLE ACCOUNT VALUATION PROCEDURES . . . . . . . . . . . . . . . . 28
MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . 28
FEDERAL INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 29
The Account and John Hancock . . . . . . . . . . . . . . . . . . . . 29
Contracts Purchased Other Than to Fund a Tax Qualified Plan . . . . 30
Diversification Requirements . . . . . . . . . . . . . . . . . . . . 30
Contracts Purchased to Fund a Tax Qualified Plan . . . . . . . . . . 31
PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
STATE REGULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
VOTING PRIVILEGES . . . . . . . . . . . . . . . . . . . . . . . . . . 35
CHANGES IN APPLICABLE LAW--FUNDING AND OTHERWISE . . . . . . . . . . . 35
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
DISTRIBUTION OF THE CONTRACTS . . . . . . . . . . . . . . . . . . . . 36
IMPACT OF YEAR 2000 ISSUE. . . . . . . . . . . . . . . . . . . . . . .
REGISTRATION STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . 36
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 36
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION . . . . . . . 37
APPENDIX--ILLUSTRATIVE ACCUMULATION VALUE AND ANNUITY PAYMENT TABLES . 38
</TABLE>
2
<PAGE>
SYNOPSIS OF EXPENSE INFORMATION SINGLE PAYMENT IMMEDIATE CONTRACTS
The purpose of this synopsis is to assist the Owner in understanding the
various costs and expenses that an Owner will bear directly or indirectly on
single payment immediate contracts. This synopsis includes expenses of the
Account as well as those of the Fund. This synopsis does not include any premium
taxes that may be applicable. For a more complete description of the Account
charges, see "Charges under Variable Annuity Contracts." For a more complete
description of the investment advisory fee charged each Portfolio and the annual
operating expenses of each Portfolio, see the prospectus for the Fund.
<TABLE>
<CAPTION>
<S> <C>
CONTRACT EXPENSES
Maximum Sales Load on Purchases/1/ (as a percentage of purchase
payments). . . . . . . . . . . . . . . . . . . . . . . . . . . . . %
Annual Contract Fee . . . . . . . . . . . . . . . . . . . . . . . . $0
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
<TABLE>
<CAPTION>
<S> <C>
Mortality and Expense Risk Charge . . . . . . . . . . . . . 0.75%
Administrative Services Charge . . . . . . . . . . . . . . . 0.25%
-----
Total Separate Account Annual Expenses . . . . . . . . . . . 1.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
The figures in the following chart and the Examples which follow reflect the
investment management fees currently payable and the 1997 other fund expenses
allocated to the Fund (except that other fund expenses for the Small/Mid Cap
CORE, Global Equity, Emerging Markets Equity, Bond Index, and High Yield Bond
Portfolios are based upon estimates for the current fiscal year).
<TABLE>
<CAPTION>
Other
Fund
Other Fund Total Expenses
Expenses Fund Absent
Management After Expense Operating Expense
Fund Name Fee Reimbursement Expenses Reimbursement/3/
--------- ---------- ------------- --------- ----------------
<S> <C> <C> <C> <C>
Managed . . . . . . . 0.33% 0.04% 0.37% N/A
Growth & Income . . . 0.25% 0.03% 0.28% N/A
Equity Index. . . . . 0.15% 0.25% 0.40% 0.40%
Large Cap Value . . . 0.75% 0.25% 1.00% 0.31%
Large Cap Growth. . . 0.39% 0.05% 0.44% N/A
Mid Cap Value . . . . 0.80% 0.25% 1.05% 0.34%
Mid Cap Growth. . . . 0.85% 0.25% 1.10% 0.57%
Diversified Mid Cap
Growth . . . . . . . 0.75% 0.10% 0.85% N/A
Real Estate Equity. . 0.60% 0.09% 0.69% N/A
Small/Mid Cap CORE. . 0.80% 0.25% 1.05% N/A
Small Cap Value . . . 0.80% 0.25% 1.05% 0.50%
Small Cap Growth. . . 0.75% 0.25% 1.00% 0.37%
Global Equity . . . . 0.90% 0.25% 1.15% N/A
International Balanced 0.85% 0.25% 1.10% 0.71%
International Equity
Index. . . . . . . . 0.18% 0.19% 0.37% N/A
International
Opportunities. . . . 0.97% 0.25% 1.22% 0.60%
Emerging Markets
Equity . . . . . . . 1.30% 0.25% 1.55% N/A
Short-Term Bond . . . 0.30% 0.21% 0.51% N/A
Bond Index. . . . . . 0.15% 0.25% 0.40% N/A
Sovereign Bond. . . . 0.25% 0.06% 0.31% N/A
Strategic Bond. . . . 0.75% 0.25% 1.00% 0.57%
High Yield Bond . . . 0.65% 0.25% 0.90% N/A
Money Market. . . . . 0.25% 0.08% 0.33% N/A
</TABLE>
3
<PAGE>
/1/ The Sales Load Imposed on Purchase falls with increasing purchase size. The
sales load is equal to the sum of the $50 Administrative Expense Deduction per
sale PLUS:
4.00% of the first $10,000 (minimum sale is $5,000) 3.00% of the next
$15,000 2.00% of the next $75,000 1.00% of any amount over $100,000
/2/ John Hancock reimburses a Portfolio when the Portfolio's Other Expenses
exceed 0.25% of its average daily net asset value.
EXAMPLES
The following examples should not be considered representations of past or
future expenses; actual expenses may be greater than or less than those shown
above.
Single payment immediate annuity contracts cannot be surrendered and must be
annuitized not more than two months after receipt of the purchase payment at the
Servicing Office of John Hancock. You would pay the following expenses on a
$1000 investment, at the end of the applicable time period, assuming 5% return
on assets:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
MANAGED . . . . . . . . . . . . . . . . $63 $ 91 $121 $206
GROWTH & INCOME . . . . . . . . . . . . $62 $ 89 $117 $197
EQUITY INDEX . . . . . . . . . . . . . $64 $ 92 $123 $210
LARGE CAP VALUE . . . . . . . . . . . . $69 $110 $152 $271
LARGE CAP GROWTH . . . . . . . . . . . $64 $ 93 $125 $214
MID CAP VALUE . . . . . . . . . . . . . $70 $111 $155 $276
MID CAP GROWTH . . . . . . . . . . . . $70 $112 $157 $281
DIVERSIFIED MID CAP GROWTH . . . . . . $68 $105 $145 $256
REAL ESTATE EQUITY . . . . . . . . . . $66 $101 $137 $240
SMALL/MID CAP CORE. . . . . . . . . . . $70 $111 $155 $276
SMALL CAP VALUE . . . . . . . . . . . . $70 $111 $155 $276
SMALL CAP GROWTH . . . . . . . . . . . $69 $110 $152 $271
GLOBAL EQUITY . . . . . . . . . . . . . $71 $114 $160 $286
INTERNATIONAL BALANCED . . . . . . . . $70 $112 $157 $281
INTERNATIONAL EQUITY INDEX . . . . . . $64 $ 93 $124 $213
INTERNATIONAL OPPORTUNITIES . . . . . . $71 $116 $163 $293
EMERGING MARKETS EQUITY . . . . . . . . $75 $125 $179 $324
SHORT-TERM BOND . . . . . . . . . . . . $65 $ 95 $128 $221
BOND INDEX. . . . . . . . . . . . . . . $64 $ 92 $123 $210
SOVEREIGN BOND . . . . . . . . . . . . $63 $ 89 $118 $200
STRATEGIC BOND . . . . . . . . . . . . $69 $110 $152 $271
HIGH YIELD BOND . . . . . . . . . . . . $68 $107 $148 $261
MONEY MARKET . . . . . . . . . . . . . $63 $ 90 $119 $202
</TABLE>
4
<PAGE>
SYNOPSIS OF EXPENSE INFORMATION SINGLE PAYMENT DEFERRED CONTRACTS
The purpose of this synopsis is to assist the Owner in understanding the
various costs and expenses that an Owner will bear directly or indirectly on
single payment immediate contracts. This synopsis includes expenses of the
Account as well as those of the Fund. This synopsis does not include any premium
taxes that may be applicable. For a more complete description of the Account
charges, see "Charges under Variable Annuity Contracts." For a more complete
description of the investment advisory fee charged each Portfolio and the annual
operating expenses of each Portfolio, see the prospectus for the Fund.
CONTRACT EXPENSES
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Load on Purchases/1/ (as a percentage of purchase
payments). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.50%
Annual Contract Fee . . . . . . . . . . . . . . . . . . . . . . . . . $0
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
Mortality and Expense Risk Charge . . . . . . . . . . . . . . . . . . 0.75%
Administrative Services Charge . . . . . . . . . . . . . . . . . . . 0.25%
-----
Total Separate Account Annual Expenses . . . . . . . . . . . . . . . 1.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
The figures in the following chart and the Examples which follow reflect the
investment management fees currently payable and the 1997 other fund expenses
allocated to the Fund (except that other fund expenses for the Small/Mid Cap
CORE, Global Equity, Emerging Markets Equity, Bond Index, and High Yield Bond
Portfolios are based upon estimates for the current fiscal year).
<TABLE>
<CAPTION>
Other
Fund
Other Fund Total Expenses
Expenses Fund Absent
Management After Expense Operating Expense
Fund Name Fee Reimbursement Expenses Reimbursement/3/
--------- ---------- ------------- --------- ----------------
<S> <C> <C> <C> <C>
Managed . . . . . . . 0.33% 0.04 % 0.37% N/A
Growth & Income . . . 0.25% 0.03 % 0.28% N/A
Equity Index. . . . . 0.15% 0.25 % 0.40% 0.40%
Large Cap Value . . . 0.75% 0.25 % 1.00% 0.31%
Large Cap Growth. . . 0.39% 0.05 % 0.44% N/A
Mid Cap Value . . . . 0.80% 0.25 % 1.05% 0.34%
Mid Cap Growth. . . . 0.85% 0.25 % 1.10% 0.57%
Diversified Mid Cap
Growth . . . . . . . 0.75% 0.10% 0.85% N/A
Real Estate Equity. . 0.60% 0.09 % 0.69% N/A
Small/Mid Cap CORE. .
Small Cap Value . . . 0.80% 0.25 % 1.05% 0.50%
Small Cap Growth. . . 0.75% 0.25 % 1.00% 0.37%
Global Equity . . . .
International Balanced 0.85% 0.25 % 1.10% 0.71%
International Equity
Index. . . . . . . . 0.18% 0.19 % 0.37% N/A
International
Opportunities. . . . 0.97% 0.25 % 1.22% 0.60%
Emerging Markets
Equity . . . . . . .
Short-Term Bond . . . 0.30% 0.21% 0.51%
Bond Index. . . . . .
Sovereign Bond. . . . 0.25% 0.06 % 0.31% N/A
Strategic Bond. . . . 0.75% 0.25 % 1.00% 0.57%
High Yield Bond . . .
Money Market. . . . . 0.25% 0.08 % 0.33% N/A
</TABLE>
5
<PAGE>
/1/ The Sales Load Imposed on Purchase falls with increasing purchase size. The
sales load is equal to the sum of the $50 Administrative Expense Deduction
PLUS:
4.50% of the first $10,000 (minimum sale is $5,000) 3.50% of the next
$15,000 2.50% of the next $75,000 1.50% of any amount over $100,000
The minimum death benefit charge included in the above sales loads is 0.50%.
Because no minimum death benefit is provided under single payment immediate
Contracts or under deferred Contracts where the single payment is made on or
after the Contract anniversary nearest the Annuitant's 65th birthday, no
deduction is made for such benefit from payments made on or after such date.
/2 /John Hancock reimburses a Portfolio when the Portfolio's Other Expenses
exceed 0.25% of its average daily net asset value.
EXAMPLES
The following examples should not be considered representations of past or
future expenses; actual expenses may be greater than or less than those shown
above.
Whether or not you surrender your contract or annuitize at the end of the
applicable time period, you would pay the following current expenses on a $1,000
investment, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
MANAGED . . . . . . . . . . . . . . . . $68 $ 96 $126 $211
GROWTH & INCOME . . . . . . . . . . . . $67 $ 93 $121 $201
EQUITY INDEX . . . . . . . . . . . . . $68 $ 97 $127 $214
LARGE CAP VALUE . . . . . . . . . . . . $74 $114 $157 $275
LARGE CAP GROWTH . . . . . . . . . . . $69 $ 98 $129 $218
MID CAP VALUE . . . . . . . . . . . . . $75 $116 $159 $280
MID CAP GROWTH . . . . . . . . . . . . $75 $117 $162 $285
DIVERSIFIED MID CAP GROWTH. . . . . . . $73 $110 $150 $260
REAL ESTATE EQUITY . . . . . . . . . . $71 $105 $142 $244
SMALL/MID CAP CORE. . . . . . . . . . . $75 $116 $159 $280
SMALL CAP VALUE . . . . . . . . . . . . $75 $116 $159 $280
SMALL CAP GROWTH . . . . . . . . . . . $74 $114 $157 $275
GLOBAL EQUITY . . . . . . . . . . . . . $76 $119 $164 $290
INTERNATIONAL BALANCED . . . . . . . . $75 $117 $162 $285
INTERNATIONAL EQUITY INDEX . . . . . . $69 $ 98 $129 $217
INTERNATIONAL OPPORTUNITIES . . . . . . $76 $121 $167 $269
EMERGING EQUITY MARKETS . . . . . . . . $79 $130 $183 $328
SHORT-TERM BOND . . . . . . . . . . . . $70 $100 $133 $225
BOND INDEX. . . . . . . . . . . . . . . $68 $ 97 $127 $214
SOVEREIGN BOND . . . . . . . . . . . . $68 $ 94 $123 $204
STRATEGIC BOND . . . . . . . . . . . . $74 $114 $157 $275
HIGH YIELD BOND . . . . . . . . . . . . $73 $111 $152 $265
MONEY MARKET . . . . . . . . . . . . . $68 $ 95 $124 $206
</TABLE>
6
<PAGE>
SYNOPSIS OF EXPENSE INFORMATION PERIODIC PAYMENT DEFERRED CONTRACTS
The purpose of this synopsis is to assist the Owner in understanding the
various costs and expenses that an Owner will bear directly or indirectly on
periodic payment deferred contracts. This synopsis includes expenses of the
Account as well as those of the Fund. This synopsis does not include any premium
taxes that may be applicable. For a more complete description of the Account
charges, see "Charges under Variable Annuity Contracts." For a more complete
description of the investment advisory fee charged each Portfolio and the annual
operating expenses of each Portfolio, see the prospectus for the Fund.
CONTRACT EXPENSES
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Load on Purchases/1/ (as a percentage of purchase
payments). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.00%
Annual Contract Fee/2/ . . . . . . . . . . . . . . . . . . . . . . . $10
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
Mortality and Expense Risk Charge . . . . . . . . . . . . . . . . . . 0.75%
Administrative Services Charge. . . . . . . . . . . . . . . . . . . . 0.25%
----
Total Separate Account Annual Expenses. . . . . . . . . . . . . . . . 1.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
The figures in the following chart and the Examples which follow reflect the
investment management fees currently payable and the 1997 other fund expenses
allocated to the Fund (except that other fund expenses for the Small/Mid Cap
CORE, Global Equity, Emerging Markets Equity, Bond Index, and High Yield Bond
Portfolios are based upon estimates for the current fiscal year).
<TABLE>
<CAPTION>
Other
Fund
Other Fund Total Expenses
Expenses Fund Absent
Management After Expense Operating Expense
Fund Name Fee Reimbursement Expenses Reimbursement/3/
--------- ---------- ------------- --------- ----------------
<S> <C> <C> <C> <C>
Managed . . . . . . . 0.33% 0.04 % 0.37% N/A
Growth & Income . . . 0.25% 0.03 % 0.28% N/A
Equity Index. . . . . 0.15% 0.25 % 0.40% 0.40%
Large Cap Value . . . 0.75% 0.25 % 1.00% 0.31%
Large Cap Growth. . . 0.39% 0.05 % 0.44% N/A
Mid Cap Value . . . . 0.80% 0.25 % 1.05% 0.34%
Mid Cap Growth. . . . 0.85% 0.25 % 1.10% 0.57%
Diversified Mid Cap
Growth . . . . . . . 0.75% 0.10% 0.85% N/A
Real Estate Equity. . 0.60% 0.09 % 0.69% N/A
Small/Mid Cap CORE. .
Small Cap Value . . . 0.80% 0.25 % 1.05% 0.50%
Small Cap Growth. . . 0.75% 0.25 % 1.00% 0.37%
Global Equity . . . .
International Balanced 0.85% 0.25 % 1.10% 0.71%
International Equity
Index. . . . . . . . 0.18% 0.19 % 0.37% N/A
International
Opportunities. . . . 0.97% 0.25 % 1.22% 0.60%
Emerging Markets
Equity . . . . . . .
Short-Term Bond . . . 0.30% 0.21% 0.51%
Bond Index. . . . . .
Sovereign Bond. . . . 0.25% 0.06 % 0.31% N/A
Strategic Bond. . . . 0.75% 0.25 % 1.00% 0.57%
High Yield Bond . . .
Money Market. . . . . 0.25% 0.08 % 0.33% N/A
</TABLE>
7
<PAGE>
/1// /The Sales Load Imposed on Purchases falls with increasing purchase size.
The sales load is calculated as follows:
8.00% of the first $10,000 (minimum sale is $5,000) 7.00% of the next
$15,000 3.00% of any amount over $25,000
The minimum death benefit charge included in the above sales loads is 0.50%.
Because no minimum death benefit is provided on or after the contract
anniversary nearest the Annuitant's 65th birthday, no deduction is made for
such benefit from payments made on or after such date.
/2/ The Annual Contract Fee will be the lesser of $10 or 2% of the value of a
Contract's Accumulation Shares. The annual contract fee is assessed only during
the Accumulation Period. In the preceding Examples, the annual contract fee has
been expressed as an annual percentage of assets based on the average Contract
size during the year ended December 31, 1997.
/3 /John Hancock reimburses a Portfolio when the Portfolio's Other Expenses
exceed 0.25% of its average daily net asset value.
EXAMPLES
The following examples should not be considered representations of past or
future expenses; actual expenses may be greater than or less than those shown
above.
Whether or not you surrender your contract or annuitize at the end of the
applicable time period, you would pay the following current expenses on a $1,000
investment, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
MANAGED . . . . . . . . . . . . . . . . $ 93 $121 $150 $235
GROWTH & INCOME . . . . . . . . . . . . $ 92 $118 $146 $225
EQUITY INDEX . . . . . . . . . . . . . $ 93 $122 $152 $238
LARGE CAP VALUE . . . . . . . . . . . . $ 99 $139 $181 $297
LARGE CAP GROWTH . . . . . . . . . . . $ 94 $123 $154 $242
MID CAP VALUE . . . . . . . . . . . . . $ 99 $140 $183 $302
MID CAP GROWTH . . . . . . . . . . . . $100 $141 $185 $307
DIVERSIFIED MID CAP GROWTH . . . . . . $ 98 $134 $173 $282
REAL ESTATE EQUITY . . . . . . . . . . $ 96 $130 $166 $267
SMALL/MID CAP CORE. . . . . . . . . . . $ 99 $140 $183 $302
SMALL CAP VALUE . . . . . . . . . . . . $ 99 $140 $183 $302
SMALL CAP GROWTH . . . . . . . . . . . $ 99 $139 $181 $297
GLOBAL EQUITY . . . . . . . . . . . . . $100 $143 $188 $311
INTERNATIONAL BALANCED . . . . . . . . $100 $141 $185 $307
INTERNATIONAL EQUITY INDEX . . . . . . $ 94 $122 $153 $241
INTERNATIONAL OPPORTUNITIES . . . . . . $101 $145 $191 $318
EMERGING MARKETS EQUITY . . . . . . . . $104 $154 $206 $348
SHORT-TERM BOND . . . . . . . . . . . . $ 94 $125 $157 $249
BOND INDEX. . . . . . . . . . . . . . . $ 93 $122 $152 $238
SOVEREIGN BOND . . . . . . . . . . . . $ 93 $119 $148 $228
STRATEGIC BOND . . . . . . . . . . . . $ 99 $139 $181 $297
HIGH YIELD BOND . . . . . . . . . . . . $ 98 $136 $176 $287
MONEY MARKET. . . . . . . . . . . . . . $ 93 $120 $149 $230
</TABLE>
8
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U CONDENSED FINANCIAL INFORMATION
- -----------------------------------------------------------------------------
SELECTED DATA FOR EACH ACCUMULATION SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year
Ended Year Ended Year Ended December 31, December
31, December 31, December 31, December 31, December
31, December 31,
1997 1996 1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
GROWTH & INCOME SUBACCOUNT
Accumulation share value:
Beginning of period . . . $111.437 $93.721 $70.532 $71.638 $63.844 $59.218 $47.482
End of period . . . . . $143.253 $111.437 $93.721 $70.532 $71.638 $63.844 $59.218
Number of Accumulation
Shares outstanding at end
of period . . . . . . . . 1,901,446 2,065,540 2,225,393 2,417,577 2,566,107 2,736,951 2,924,816
SOVEREIGN BOND SUBACCOUNT Accumulation share value:
Beginning of period . . . $44.514 $43.188 $36.491 $37.828 $34.492 $32.360 $28.016
End of period . . . . . $48.526 $44.514 $43.188 $36.491 $37.828 $34.492 $32.360
Number of Accumulation
Shares outstanding at end
of period . . . . . . . . 1,749,513 1,980,126 2,205,467 2,486,013 2,730,735 2,953,463 3,166,240
MONEY MARKET SUBACCOUNT Accumulation share value:
Beginning of period . . . $22.554 $21.627 $20.649 $20.036 $19.636 $19.136 $18.238
End of period . . . . . $23.548 $22.554 $21.627 $20.649 $20.036 $19.636 $19.136
Number of Accumulation
Shares outstanding at end
of period . . . . . . . . 743,856 857,514 972,149 1,068,017 1,171,917 1,598,576 2,013,162
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1990 1989 1988
------------ ------------ ------------
<S> <C> <C> <C>
GROWTH & INCOME SUBACCOUNT
Accumulation share value:
Beginning of period . . . $46.043 $36.714 $31.474
End of period . . . . . $47.482 $46.043 $36.714
Number of Accumulation 3,193,137 3,523,823 4,108,528
Shares outstanding at end
of period . . . . . . . .
SOVEREIGN BOND SUBACCOUNT Accumulation share value:
Beginning of period . . . $26.350 $23.666 $22.052
End of period . . . . . $28.016 $26.350 $23.666
Number of Accumulation 3,455,875 3,913,241 4,557,497
Shares outstanding at end
of period . . . . . . . .
MONEY MARKET SUBACCOUNT Accumulation share value:
Beginning of period . . . $17.015 $15.718 $14.755
End of period . . . . . $18.238 $17.015 $15.718
Number of Accumulation 2,357,840 2,653,748 2,948,321
Shares outstanding at end
of period . . . . . . . .
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
Year Ended Year Ended December 31, December 31, December
31, December 31, December 31, December 31, December 31,
1997 1996 1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
LARGE CAP GROWTH
SUBACCOUNT
Accumulation Share
Value:
Beginning of Period $24.935 $21.295 $16.339 $16.666 $14.791 $13.589 $10.941
End of Period . . . $32.329 $24.935 $21.295 $16.339 $16.666 $14.791 $13.589
Number of Accumulation
Shares outstanding at
end of period . . . 160,590 159,241 159,494 141,064 110,712 86,619 58,121
INTERNATIONAL EQUITIES
SUBACCOUNT
Accumulation Share
Value:
Beginning of Period $16.246 $15.028 $14.053 $15.117 $11.559 $11.871 $9.719
End of Period . . . $15.277 $16.246 $15.028 $14.053 $15.117 $11.559 $11.871
Number of Accumulation
Shares outstanding at
end of period . . . 102,698 131,774 133,791 156,006 89,934 33,160 27,855
REAL ESTATE EQUITY
SUBACCOUNT
Accumulation Share
Value:
Beginning of Period $21.908 $16.628 $14.955 $14.684 $12.644 $11.009 $8.328
End of Period . . . $25,424 $21.908 $16.628 $14.955 $14.684 $12.644 $11.009
Number of Accumulation
Shares outstanding at
end of period 99,634 103,394 92,870 130,412 131,016 25,136 8,004
MANAGED SUBACCOUNT
Accumulation Share
Value:
Beginning of Period $20.449 $18.655 $14.826 $15.316 $13.861 $11.962 $10.763
End of Period . . . $24.039 $20.449 $18.655 $14.826 $15.316 $13.861 $11.962
Number of Accumulation
Shares outstanding at
end of period . . . 984,740 1,053,821 1,072,417 1,100,811 1,115,432 806,671 451,945
<CAPTION>
Period from
***May 1,
1990 to
December 31,
1990
------------
<S> <C>
LARGE CAP GROWTH
SUBACCOUNT
Accumulation Share
Value:
Beginning of Period $10.000
End of Period . . . $10.941
Number of Accumulation 36,358
Shares outstanding at
end of period . . .
INTERNATIONAL EQUITIES
SUBACCOUNT
Accumulation Share
Value:
Beginning of Period $10.000
End of Period . . . $9.719
Number of Accumulation 28,024
Shares outstanding at
end of period . . .
REAL ESTATE EQUITY
SUBACCOUNT
Accumulation Share
Value:
Beginning of Period $10.000
End of Period . . . $8.328
Number of Accumulation 7,621
Shares outstanding at
end of period
MANAGED SUBACCOUNT
Accumulation Share
Value:
Beginning of Period $10.000
End of Period . . . $10.763
Number of Accumulation 262,273
Shares outstanding at
end of period . . .
</TABLE>
- ---------
*** Date of initial public offering of Accumulation Shares.
9
<PAGE>
<TABLE>
<CAPTION>
Period from
May 1, 1996
(commencement
Year Ended of operations) to
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
EQUITY INDEX SUBACCOUNT
Accumulation Share Value
Beginning of Period. . . . . . . . . $11.347 $10.000
End of Period. . . . . . . . . . . . $14.918 $11.347
Number of Accumulation Shares
outstanding at end of period. . . . . 54,198 3,749
LARGE CAP VALUE
Accumulation Share Value
Beginning of Period. . . . . . . . . $11.315 $10.000
End of Period. . . . . . . . . . . . $14.401 $11.315
Number of Accumulation Shares
outstanding at end of period. . . . . 23,612 11,411
MID CAP GROWTH SUBACCOUNT
Accumulation Share Value
Beginning of Period. . . . . . . . . $10.200 $10.000
End of Period. . . . . . . . . . . . $11.785 $10.200
Number of Accumulation Shares
outstanding at end of period. . . . . 16,957 14.603
MID CAP VALUE SUBACCOUNT
Accumulation Share Value
Beginning of Period. . . . . . . . . $11.540 $10.000
End of Period. . . . . . . . . . . . $15.112 $11.540
Number of Accumulation Shares
outstanding at end of period. . . . . 37,067 5,764
SMALL CAP GROWTH SUBACCOUNT
Accumulation Share Value
Beginning of Period. . . . . . . . . $ 9.884 $10.000
End of Period. . . . . . . . . . . . $11.181 $ 9.884
Number of Accumulation Shares
outstanding at end of period. . . . . 35,818 15,438
SMALL CAP VALUE SUBACCOUNT
Accumulation Share Value
Beginning of Period. . . . . . . . . $10.960 $10.000
End of Period. . . . . . . . . . . . $13.634 $10.960
Number of Accumulation Shares
outstanding at end of period. . . . . 17,720 2,982
STRATEGIC BOND SUBACCOUNT
Accumulation Share Value
Beginning of Period. . . . . . . . . $10.600 $10.000
End of Period. . . . . . . . . . . . $11.445 $10.600
Number of Accumulation Shares
outstanding at end of period. . . . . 23,759 7,670
INTERNATIONAL OPPORTUNITIES SUBACCOUNT
Accumulation Share Value
Beginning of Period. . . . . . . . . $10.601 $10.000
End of Period. . . . . . . . . . . . $10.700 $10.601
Number of Accumulation Shares
outstanding at end of period. . . . . 8,683 6,637
INTERNATIONAL BALANCED SUBACCOUNT
Accumulation Share Value
Beginning of Period. . . . . . . . . $10.602 $10.000
End of Period. . . . . . . . . . . . $10.773 $10.602
Number of Accumulation Shares
outstanding at end of period. . . . . 7,961 3,139
</TABLE>
10
<PAGE>
SPECIAL TERMS
As used in this prospectus, the following terms have the indicated meanings:
ACCUMULATION SHARE: a unit of measurement used in determining the value of a
Contract prior to the commencement of annuity payments or, if earlier, contract
lapse. The value of an Accumulation Share for each subaccount will reflect the
investment performance of that subaccount and will vary in dollar amount.
ANNUITANT: the person on whose life the Contract is issued.
ANNUITY OPTION: the provisions under which a series of annuity payments is made
to the Annuitant or other payee, such as the Life Annuity with Twenty Years
Certain.
ANNUITY UNIT: a unit of measurement used in determining the amount of each
variable annuity payment. The value of an Annuity Unit for each subaccount will
depend upon the assumed investment rate and the investment performance of that
subaccount and will vary in dollar amount.
BENEFICIARY: the person who receives the proceeds in the event of the death of
the Owner or the Annuitant.
CODE: the Internal Revenue Code of 1986, as amended.
OWNER: the person(s) or entity, usually the person(s) or entity to whom the
Contract is issued, who has the sole right to exercise all rights and privileges
under the Contract except as otherwise provided in the Contract.
DATE OF MATURITY OF A DEFERRED CONTRACT: the date elected by the Owner as of
which annuity payments will commence. The election is subject to certain
conditions described in "The Annuity Period--Deferred Variable Annuity
Contracts".
MAJORITY VOTE OF THE OUTSTANDING CONTRACTS: the vote of Owners, at any meeting
of Owners duly called, having more than 50% of the number of votes represented
by outstanding contracts or, if it is less, having 67% or more of the votes
represented at a meeting at which more than 50% of such a number of votes are
present or represented by proxy.
MINIMUM DEATH BENEFIT: the undertaking of John Hancock under a deferred Contract
to make a payment on the death of the Annuitant at any time before the contract
anniversary nearest the Annuitant's 65th birthday equal to the greater of the
aggregate amount of the purchase payments made under the Contract (reduced to
reflect redemptions of Accumulation Shares, if any, previously made as partial
withdrawals) or the value of the Accumulation Shares credited to the Contract
next determined following John Hancock's receipt of due proof of death. See "The
Accumulation Period--Death Benefit Before Date of Maturity".
NET PURCHASE PAYMENT: the amount of any purchase payment reduced by (i)
applicable taxes, if any, based on the amount of the purchase payment, (ii) the
deduction to compensate John Hancock for its minimum death benefit undertaking,
if any, and (iii) the deduction for sales and administrative expenses.
SERVICING OFFICE: P.O. Box 111, Boston, MA 02117.
SURRENDER VALUE: a cash payment, made prior to a Contract's maturity, equal to
all or part of the Accumulation Shares credited to the Contract.
11
<PAGE>
SUMMARY INFORMATION
The Contracts are designed both for purchase by individuals doing their own
retirement planning, including plans and trusts not qualifying under the
Internal Revenue Code of 1986 ("Code") and for purchase for persons
participating in (1) pension and profit-sharing plans qualified under Section
401(c) of the Code, known as "H.R. 10 plans", (2) pension or profit-sharing
plans qualified under Sections 401(a) or 403(a) of the Code, known as "corporate
plans", (3) annuity purchase plans adopted under the provisions of Section
403(b) of the Code by public school systems and certain other tax-exempt
organizations, (4) individual retirement annuity plans satisfying the
requirements of Section 408 of the Code, and (5) deferred compensation plans
maintained by a state or political subdivision under Section 457 of the Code.
In order to accommodate "employer-related" plans funded by the Contracts,
contract forms using "unisex" purchase rates, i.e. rates the same for males and
females, are available. Any questions you have as to whether you are
participating in an employer-related plan should be directed to your employer.
Any other question you or your employer may have with respect to this topic can
be asked of John Hancock by calling 800-REAL LIFE (732-5543) or by writing John
Hancock Servicing Office, Post Office Box 111, Boston, MA 02117.
WHAT ARE THE VARIABLE ANNUITIES BEING OFFERED?
Three kinds of Contracts are offered: (1) a periodic payment deferred Contract
under which purchase payments may be made at intervals until the maturity date
selected by the Owner at which time annuity payments by John Hancock will begin;
(2) a single payment deferred Contract under which one purchase payment is made
and annuity payments begin as of the maturity date; and (3) a single payment
immediate Contract under which one purchase payment is made and annuity payments
begin immediately thereafter.
An application for a Contract is available from a sales representative. Upon
completion, it is transmitted along with the purchase payment to John Hancock's
Servicing Office for review. (See "Distribution of the Contracts.")
WHAT IS JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U?
The Account is a separate investment account of John Hancock, operated as a
unit investment trust, which supports benefits payable under its Contracts.
There are currently twenty-three subaccounts within the Account: Managed, Growth
& Income, Equity Index, Large Cap Value, Large Cap Growth, Mid Cap Value, Mid
Cap Growth, Diversified Mid Cap Growth, Real Estate Equity, Small/Mid Cap CORE,
Small Cap Value, Small Cap Growth, Global Equity, International Balanced,
International Equity Index, International Opportunities, Emerging Markets
Equity, Short-Term Bond, Bond Index, Sovereign Bond, Strategic Bond, High Yield
Bond, and Money Market. The assets of each subaccount are invested in the
corresponding Portfolio of the Fund.
Each Portfolio has a different investment objective. John Hancock receives a
fee from each Portfolio for providing investment management services. In turn,
John Hancock pays a fee to the following sub-investment managers for providing
sub-investment services to the various Portfolios:
<TABLE>
<CAPTION>
NAME OF FUND NAME OF SUB-INVESTMENT MANAGER
------------ ------------------------------
<S> <C>
Managed Independence Investment Associates, Inc.
Growth & Income. . . . . . . . . . . . . . . . . . Independence Investment Associates, Inc.
Equity Index State Street Bank & Trust, N.A.
Large Cap Value. . . . . . . . . . . . . . . . . . T. Rowe Price Associates, Inc.
Large Cap Growth. . . . . . . . . . . . . . . . . . Independence Investment Associates, Inc.
Mid Cap Value Neuberger & Berman Management, Inc.
Mid Cap Growth Janus Capital Corporation
Diversified Mid Cap Growth. . . . . . . . . . . . . John Hancock Advisers, Inc.
Real Estate Equity Independence Investment Associates, Inc.
Small/Mid Cap CORE Goldman Sachs Asset Management
Small Cap Value INVESCO Management & Research, Inc.
Small Cap Growth. . . . . . . . . . . . . . . . . . John Hancock Advisers, Inc.
Global Equity. . . . . . . . . . . . . . . . . . . Scudder Kemper Investments
International Balanced Brinson Partners, Inc.
International Equity Index Independence Investment International Associates, Inc.
International Opportunities Rowe Price-Fleming International, Inc.
Emerging Markets Equity. . . . . . . . . . . . . . Montgomery Asset Management, LLC
Short-Term Bond Independence Investment Associates, Inc.
Bond Index Mellon Bond Associates
Sovereign Bond. . . . . . . . . . . . . . . . . . . John Hancock Advisers, Inc.
Strategic Bond. . . . . . . . . . . . . . . . . . . J.P. Morgan Investment Management, Inc.
High Yield Bond Wellington Management Company, LLP
</TABLE>
12
<PAGE>
The fee paid by John Hancock to the sub-investment managers for these services
is borne by John Hancock and is not charged to the Fund, the Account, or Owners.
For a full description of the Fund, see the prospectus for the Fund following
at the end of this prospectus.
HOW ARE PURCHASE PAYMENTS ALLOCATED?
Purchase payments received under Contracts, after certain deductions, are
allocated by John Hancock to the subaccounts of the Account, as directed by the
Owner. If the Contract is an immediate annuity, the Owner may allocate purchase
payments to, at any one time, up to four subaccounts. If the Contract is a
deferred annuity, the Owner may allocate purchase payments to, at any one time,
up to ten subaccounts. The assets in each subaccount are invested in shares of
the corresponding Portfolio of the Fund.
Purchase payments should be mailed to John Hancock Servicing Office, John
Hancock Place, Post Office Box 111, Boston, MA 02117.
WHAT FEES ARE CHARGED TO THE ACCOUNT?
The charges made directly to the Account aggregate approximately 1% per annum
of the net asset value of the Account and are made up of daily charges
aggregating 0.75% annually for mortality and expense risks assumed (0.50% on an
annual basis for mortality risks and 0.25% on an annual basis for expense risks)
and 0.25% for certain administrative services. (See "Charges Under Variable
Annuity Contracts".)
WHAT FEES ARE CHARGED TO THE FUND?
Investment management fees at annual rates ranging from 0.15% to 1.30% of
average daily net assets are paid by the Portfolios to John Hancock. The
Portfolios also incur charges for other expenses incurred in their operations.
Investment management fees and other expenses are reflected in the net asset
value of each Portfolio's shares. For a description of these charges and
expenses, see the prospectus for the Fund. (See also "Synopsis of Expense
Information" in this prospectus.)
13
<PAGE>
WHO IS THE PRINCIPAL UNDERWRITER OF THE ACCOUNT?
John Hancock Distributors, Inc., a registered broker-dealer since 1968, makes
Contracts available through its registered representatives licensed to sell life
insurance policies and annuity contracts.
WHAT ARE THE AMOUNTS DEDUCTED FROM PURCHASE PAYMENTS FOR SALES AND
ADMINISTRATIVE EXPENSES?
For periodic payment deferred Contracts the deduction (including 0.50% for the
minimum death benefit) is 8% of the first $10,000 paid (8.7% of the net amount
invested), 7% of the next $15,000, and 3% of any amount over $25,000.
For single payment immediate and deferred Contracts the deduction is 4% of the
first $10,000 paid, 3% of the next $15,000, 2% of the next $75,000 and 1% of any
amount over $100,000, plus an administrative expense deduction of $50 in any
event. An additional deduction of 0.5% of the purchase payment is made under
single payment deferred Contracts for the minimum death benefit. These
deductions total 5.82% of the net amount invested under a minimum single payment
deferred Contract. (See "Charges Under Variable Annuity Contracts.")
ARE THERE ANY OTHER CHARGES OR DEDUCTIONS?
Deductions are made for any applicable taxes based on the amount of a purchase
payment: currently such taxes in certain states may be as high as 3% of each
purchase payment. (See "Charges Under Variable Annuity Contracts.")
Charges are made for any taxes or interest expense attributable to the
Account. (See "Charges Under Variable Annuity Contracts.")
Under periodic payment Contracts, a maintenance charge equal to the lesser of
$10 or 2% of the value of the Contract will be deducted from each Contract
annually. (See "Charges Under Variable Annuity Contracts.")
WHAT ARE THE MINIMUMS APPLICABLE TO PURCHASE PAYMENTS?
The minimum for a single payment Contract is $5,000. The minimum for a payment
under a periodic payment Contract is $50. One additional payment of at least
$2,500 can be made prior to maturity under a single payment deferred Contract.
The initial purchase payment under any periodic payment Contract must be at
least $1,000; thereafter any periodic payment must be at least $50. (See "The
Contracts--Purchase of Contracts.")
CAN MONEY BE WITHDRAWN PRIOR TO MATURITY?
At any time before annuity payments begin, if the Annuitant is living, a
deferred Contract may be surrendered in full for its then value or a portion of
the value of the Contract may be withdrawn, subject to certain limits. (See "The
Accumulation Period--Surrender of Contract; Partial Withdrawal.") A 10 percent
penalty tax is generally applicable to premature withdrawals.
DOES THE CONTRACT PROVIDE A DEATH BENEFIT?
Deferred Contracts include a death benefit. The amount depends upon whether
the Annuitant dies before or after the contract anniversary nearest his or her
65th birthday. If before that date, the death benefit is the greater of (a) the
then value of the Accumulation Shares credited to the Contract or (b) the
purchase payments made under the Contract, adjusted for any prior partial
withdrawals. If after that date, the death benefit is equal to the then value of
the Accumulation Shares credited to the Contract.
14
<PAGE>
However, if the Contract is used to fund an annuity purchase plan adopted
under Section 403(b) of the Code by a public school system or by a tax-exempt
organization as defined in Section 501(c)(3) of the Code, or is purchased other
than to fund a tax-qualified plan, the death benefit payable may be payable on
the death of the Owner of the Contract and in an amount different than that
which would have been payable on the Annuitant's death.
IS THERE A SHORT-TERM CANCELLATION RIGHT?
An Owner may surrender the Contract for any reason within 10 days after its
receipt and receive in cash the total purchase payment. An Owner of a periodic
payment Contract in Illinois, Minnesota, New York, Pennsylvania, Arizona or
South Dakota will receive the sum of the Contract's current value and all
deductions from the purchase payment.
THE VARIABLE ANNUITY
A variable annuity is significantly different from a fixed annuity in that it
is the Owner and Annuitant under a variable annuity who assume the risk of
investment gain or loss rather than the insurance company. While under a fixed
annuity the insurance company guarantees a specified interest rate and specific
monthly annuity payments, the amounts of annuity payments under a variable
annuity are not guaranteed and will vary with the investment performance of the
portfolio securities in the underlying Fund.
The Owner will be determining the investment objective of each contract on a
continuing basis by directing the allocation of purchase payments, and possibly
accumulated values, between the subaccounts. There can be no assurance that
these investment objectives will be achieved.
JOHN HANCOCK, THE ACCOUNT AND THE SERIES FUND
JOHN HANCOCK
John Hancock is a mutual life insurance company chartered in Massachusetts in
1862. Its Home Office is at 200 Clarendon Street, Boston, Massachusetts 02117.
It conducts a conventional life insurance business in all of the United States,
the District of Columbia and Puerto Rico. John Hancock sells insurance policies
and annuity contracts directly to customers or through a career agency system,
banks, or broker/dealers.
THE ACCOUNT
The Account is a separate account established in its current form under
Massachusetts Law on January 14, 1985. The Account, although an integral part of
John Hancock, meets the definition of "separate account" under the Federal
Securities laws and is registered as a unit investment trust under the
Investment Company Act of 1940, as amended ("1940 Act"). Three of the Account's
subaccounts replaced the six management-type investment companies previously
established by John Hancock. Pursuant to a reorganization as of February 20,
1987, the investment assets formerly held in these Accounts were contributed to
the Stock (renamed Growth & Income), Bond (renamed Sovereign Bond), and Money
Market Portfolios, as appropriate, of the Fund. This reorganization was
accomplished by dividing the former Variable Account A into three subaccounts
and renaming it the John Hancock Variable Annuity Account U ("Account").
The Account's assets are the property of John Hancock and the obligations
under the Contracts are the obligations of John Hancock. Each Contract provides
that the portion of the Account's assets equal to the reserves and other
liabilities under the Contract with respect to the Account shall not be
chargeable with liabilities arising out of any other business John Hancock may
conduct. In addition to the net assets and other liabilities for Contracts, the
Account's assets include assets derived from charges made by John Hancock and,
possibly, funds contributed by John Hancock to commence operation of the
subaccounts or their
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<PAGE>
predecessors. From time to time these additional assets may be transferred in
cash by John Hancock to its general account. Before making any such transfer,
John Hancock will consider any possible adverse impact the transfer might have
on any subaccount.
Income, gains and losses, whether or not realized, from assets allocated to
the Account are, in accordance with the Contracts, credited to or charged
against the Account without regard to other income, gains or losses of John
Hancock.
There currently are twenty-three subaccounts in the Account: Managed, Growth &
Income, Equity Index, Large Cap Value, Large Cap Growth, Mid Cap Value, Mid Cap
Growth, Diversified Mid Cap Growth, Real Estate Equity, Small/Mid Cap CORE,
Small Cap Value, Small Cap Growth, Global Equity, International Balanced,
International Equity Index, International Opportunities, Emerging Markets
Equity, Short-Term Bond, Bond Index, Sovereign Bond, Strategic Bond, High Yield
Bond, and Money Market. The assets in each are invested in shares of beneficial
interest issued by each Portfolio of the Fund, but the assets of one subaccount
are not necessarily legally insulated from liabilities associated with another
subaccount. New subaccounts may be added and made available to Owners.
There is a limitation on the number of subaccounts that may be utilized over
the lifetime of a Contract. At the current time that limit is eighteen.
However, it is John Hancock's intention to raise that limit later in 1998 to
ninety-nine subaccounts. For purposes of this limit, each deposit or transfer of
funds into a subaccount will count as one "use" of a subaccount even if the
subaccount has been used before.
THE SERIES FUND
The Fund is a "series" type of mutual fund which is registered under the 1940
Act as an open-end diversified management investment company and organized as a
Massachusetts business trust. The Fund serves as the investment medium for the
Account and for various unit investment trust separate accounts established by
John Hancock and John Hancock Variable Life Insurance Company for variable life
insurance policies and variable annuity contracts. A full description of the
Fund, its investment objectives, policies and restrictions, its charges,
expenses and all other aspects of its operation is contained in the attached
prospectus (which should be read carefully before investing) and the statement
of additional information referred to therein, which should be read together
with this prospectus. Among other items, note the description of the need to
monitor events on the part of the Fund's Board of Trustees for possible
conflicts between separate accounts and other consequences.
A very brief summary of the investment objectives of each Portfolio is set
forth below.
Managed Portfolio
The investment objective of this Portfolio is to achieve maximum long-term
total return consistent with prudent investment risk. Investments will be made
in common stocks, convertibles and other equity investments, in bonds and other
fixed income securities and in money market instruments.
Growth & Income Portfolio
The investment objective of this Portfolio is to achieve intermediate and
long-term growth of capital, with income as a secondary consideration. This
objective will be pursued by investments principally in common stocks (and
securities convertible into or with rights to purchase common stocks) of
companies believed to offer growth potential over both the intermediate and the
long term.
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<PAGE>
Equity Index Portfolio
The investment objective of this Portfolio is to provide investment results
that correspond to the total return of the U.S. market as represented by the S&P
500 utilizing common stocks that are publicly traded in the United States.
Large Cap Value Portfolio
The investment objective of this Portfolio is to provide substantial dividend
income, as well as long-term capital appreciation, through investments in the
common stocks of established companies believed to offer favorable prospects for
increasing dividends and capital appreciation.
Large Cap Growth Portfolio
The investment objective of this Portfolio is to achieve above-average capital
appreciation through the ownership of common stocks (and securities convertible
into with rights to purchase common stocks) of companies believed to offer
above-average capital appreciation opportunities. Current income is not an
objective of the Portfolio.
Mid Cap Value Portfolio
The investment objective of this Portfolio is to provide long-term growth of
capital primarily through investment in the common stocks of medium
capitalization companies believed to sell at a discount to their intrinsic
value.
Mid Cap Growth Portfolio
The investment objective of this Portfolio is to provide long-term growth of
capital through a non-diversified portfolio investing primarily in common stocks
of medium capitalization companies.
Diversified Mid Cap Growth Portfolio
The investment objective of this Portfolio is to provide long-term growth of
capital through a diversified portfolio investing primarily in common stocks of
medium capitalization growth companies.
Real Estate Equity Portfolio
The investment objective of this Portfolio is to provide above-average income
and long-term growth of capital by investment principally in equity securities
of companies in the real estate and related industries.
Small/Mid Cap CORE Portfolio
The investment objective of this Portfolio is to achieve long-term growth of
capital through a broadly diversified portfolio of equity securities of U.S.
issuers which are included in the Russell 2500 Index at the time of investment.
Small Cap Value Portfolio
The investment objective of this Portfolio is to provide long-term growth of
capital by investing in a well diversified portfolio of equity securities of
small capitalization companies exhibiting value characteristics.
Small Cap Growth Portfolio
The investment objective of this Portfolio is to provide long-term growth of
capital through a diversified portfolio investing primarily in common stocks of
small capitalization emerging growth companies.
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<PAGE>
Global Equity Portfolio
The investment objective of this Portfolio is to achieve long-term growth of
capital through a diversified portfolio of marketable securities, primarily
equity securities, of both U.S. and foreign issuers.
International Balanced Portfolio
The investment objective of this Portfolio is to maximize total U.S. dollar
return, consisting of capital appreciation and current income, through
investment in non-U.S. equity and fixed income securities.
International Equity Index Portfolio
The investment objective of this Portfolio is to provide investment results
that correspond to the total return of the major developed international
(non-U.S.) equity markets, as represented by the MSCI AEFE GDP Index.
International Opportunities Portfolio
The investment objective of this Portfolio is to provide capital appreciation
through investments in common stocks of primarily well-established, non-United
States companies.
Emerging Markets Equity Portfolio
The investment objective of this Portfolio is to achieve capital appreciation
by investing primarily in equity securities of companies in countries having
economies and markets generally considered by the World Bank or the United
Nations to be emerging or developing.
Short-Term Bond Portfolio
The investment objective of this Portfolio is to provide a high level of
current income consistent with a low degree of share price fluctuation through
investment primarily in a diversified portfolio of short- and intermediate-term
investment-grade debt obligations.
Bond Index Portfolio
The investment objective of this Portfolio is to provide investment results
that correspond to the total return and risk characteristics of the U.S.
investment grade fixed income market, as represented by a Lehman Brothers bond
index that tracks the performance of investment grade debt securities.
Sovereign Bond Portfolio
The investment objective of this Portfolio is to provide as high a level of
long-term total rate of return as is consistent with prudent investment risk
through investment primarily in a diversified portfolio of freely marketable
debt securities.
Strategic Bond Portfolio
The investment objective of this Portfolio is to provide total return
consistent with moderate risk of capital and maintenance of liquidity, through a
portfolio of domestic and international fixed income securities.
High Yield Bond Portfolio
The investment objective of this Portfolio is to provide high current income
and capital appreciation with capital preservation through investing primarily
in high yield (below investment grade) debt securities.
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<PAGE>
Money Market Portfolio
The investment objective of this Portfolio is to provide maximum current
income consistent with capital preservation and liquidity, through investment in
high quality money market instruments.
John Hancock acts as the investment manager for the Fund. Independence
Investment Associates, Inc. ("IIA"), an indirectly owned subsidiary of John
Hancock with its principal place of business at 53 State Street, Boston, MA
02109, provides sub-investment advice with respect to the Managed,Growth &
Income, Large Cap Growth, Real Estate Equity, and Short-Term Bond Portfolios.
Independence International Associates, Inc., a subsidiary of IIA located at the
same address as IIA, is a sub-investment adviser to the International Equity
Index Portfolio.
John Hancock Advisers, Inc., another indirectly owned subsidiary of John
Hancock, located at 101 Huntington Avenue, Boston, MA 02199, provides
sub-investment advice with respect to the Sovereign Bond, Diversified Mid Cap
Growth, and Small Cap Growth Portfolios.
T. Rowe Price Associates, Inc., located at 100 East Pratt St., Baltimore, MD
21202, provides sub-investment advice with respect to the Large Cap Value
Portfolio and its subsidiary, Rowe Price-Fleming International, Inc., also
located at 100 East Pratt St., Baltimore, MD 21202, provides sub-investment
advice with respect to the International Opportunities Portfolio.
State Street Bank & Trust, N.A., at Two International Place, Boston, MA 02110,
is the sub-investment adviser to the Equity Index Portfolio. INVESCO Management
& Research located at 101 Federal Street, Boston, MA 02110, is the
sub-investment adviser to the Small Cap Value Portfolio. Janus Capital
Corporation, with its principal place of business at 100 Filmore Street, Denver,
CO 80206, is the sub-investment adviser to the Mid Cap Growth Portfolio.
Neuberger & Berman, LLC, of 605 Third Avenue, New York, NY 10158, provides
sub-investment advice to the Mid Cap Value Portfolio. J.P. Morgan Investment
Management Inc., located at 522 Fifth Avenue, New York, NY 10036, provides
investment advice with respect to the Strategic Bond Portfolio and Brinson
Partners, Inc., of 209 South LaSalle Street, Chicago, IL 60604, does likewise
with respect to the International Balanced Portfolio.
Goldman Sachs & Company, located at One New York Plaza, New York, New York
10004, is sub-investment adviser to the Small/Mid Cap CORE Portfolio. Scudder
Kemper Investments, Inc., located at 345 Park Avenue, New York, New York 10154,
is the sub-investment adviser to the Global Equity Portfolio. Montgomery Asset
Management, LLC, located at 101 California Street, San Francisco, California
94111, is the sub-investment adviser to the Emerging Markets Equity Portfolio.
Mellon Bond Associates, located at One Mellon Bank Center, Suite 4135,
Pittsburgh, Pennsylvania 15258, is the sub-investment adviser to the Bond Index
Portfolio. Wellington Management Company, LLC, located at 75 State Street,
Boston, Massachusetts 02109, is the sub-investment adviser to the High Yield
Bond Portfolio.
John Hancock will purchase and redeem Fund shares for the Account at their net
asset value without any sales or redemption charges. Shares of the Fund
represent an interest in one of the Portfolios of the Fund which corresponds to
the subaccount of the Account. Any dividend or capital gains distributions
received by the Account will be reinvested in Fund shares at their net asset
value as of the dates paid. Any such distribution will result in a reduction in
the value of the Fund shares of the Portfolio from which the distribution was
made. The total net asset value of the Account will not change because of such
distribution, however.
On each Valuation Date, shares of each Portfolio are purchased or redeemed by
John Hancock for each subaccount based on, among other things, the amount of net
purchase payments allocated to the subaccount, dividends and distributions
reinvested, transfers to, from and among subaccounts, all to be effected as of
that
19
<PAGE>
date. Such purchases and redemptions are effected at the net asset value per
Fund share for each Portfolio determined on that same Valuation Date.
CHARGES UNDER VARIABLE ANNUITY CONTRACTS
Charges under Contracts are assessed in two ways: as deductions from purchase
payments for sales and administrative expenses and John Hancock's minimum death
benefit undertaking and as daily charges to the Account for mortality and
expense risks and administrative services. Under a periodic payment Contract,
there is also an annual maintenance charge equal to the lesser of $10 or 2% of
the value of the Contract. These charges (which are exclusive of taxes based on
the amount of a purchase payment) and the Contract's annuity purchase rates will
apply for the duration of each Contract and will not be increased by John
Hancock.
As illustrated above, John Hancock is compensated and reimbursed for
administrative services and expenses through the deduction from purchase
payments and in part through charges, described below. John Hancock makes no
allocation of administrative costs of this character as between the two sources
of payment. John Hancock believes that the principal administrative costs result
from accounting for the interest of each Owner, Annuitant or beneficiary and
from other phases of contract administration. The aggregate of the deductions
from purchase payments for administration services is expected by John Hancock
not to exceed the average expected cost of administrative services for the life
of the Contracts.
The foregoing charges do not include all of the expenses which may be incurred
for the account of Owners and Annuitants. Additional charges will be made
directly to the Account for taxes, if any, based on the income of, capital gains
of, assets in, or the existence of, the Account and interest on funds borrowed.
Moreover, the Account purchases and redeems shares of the Fund at net asset
value, a value which reflects the deduction from the assets of the Fund of its
investment management fee and of certain operating expenses described, above,
under "Summary Information--What fees are charged to the Fund?".
DEDUCTIONS FOR SALES AND ADMINISTRATIVE EXPENSES AND MINIMUM DEATH BENEFIT
John Hancock Distributors, Inc. acts as "principal underwriter" (as defined in
the 1940 Act) for the Account.
As compensation for sales and administrative expenses and for providing the
minimum death benefit, John Hancock currently makes the deductions from purchase
payments set forth in the tables below (expressed as a percentage of the
purchase payments except where stated as a percentage of the amount invested).
To the extent that the proceeds from the explicit sales charges deducted from
the purchase payments may be insufficient to cover distribution costs, John
Hancock will recover them from its general account assets, which may consist of,
among other things, proceeds derived from mortality and expense risk charges
deducted from the Account.
In the case of a purchase payment for a single payment Contract which is
derived from proceeds (maturity benefit, cash surrender values, sums due under
optional methods of settlement and the like) of fixed dollar insurance policies
and annuity contracts issued by John Hancock, the deduction for sales expenses
is at one-half the rate otherwise applicable and the $50 administrative expense
deduction will be waived; the other deductions, however, are made from such a
purchase payment. No deductions for sales expenses will be made from purchase
payments received from any officer or member of the Board of Trustees of the
Fund or from any sales representative of John Hancock who has acted as such for
not less than 90 days. Deductions other than for sales expenses are nevertheless
made from such purchase payments.
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<PAGE>
- -----------------------------------------------------------------------------
SINGLE PAYMENT CONTRACT TABLE (IMMEDIATE AND DEFERRED)
<TABLE>
<CAPTION>
Percentage Total Deductions including
Percentage Percentage Deduction Deduction for $50 Administrative
Amount of Deduction for Sales for Administrative Minimum Death Total Percentage Deduction as a Percentage of
Payment Expenses Expenses Benefit/a/ Deduction/b/ Amount Invested/b/
- --------- ------------------- -------------------- ------------- ---------------- ----------------------------
<S> <C> <C> <C> <C> <C>
First $10,000 3.5% .5% .5% 4.5% 5.82-5.26%
Next $15,000 2.5% .5% .5% 3.5% 5.26-4.27%
Next $75,000 2.0% -- .5% 2.5% 4.27-2.99%
Over $100,000 1.0% -- .5% 1.5% 2.99-1.81%
</TABLE>
/a /Because no minimum death benefit is provided under single payment immediate
Contracts or under deferred Contracts where the single payment is made on or
after the contract anniversary nearest the Annuitant's 65th birthday, no
deduction is made from such payments.
/b /Percentages do not include any deduction for taxes based on the amount of
the purchase payment.
- -----------------------------------------------------------------------------
PERIODIC PAYMENT DEFERRED CONTRACT TABLE
<TABLE>
<CAPTION>
Percentage Percentage Deduction Percentage Deduction Total Deductions as a
Cumulative Deduction for Sales for Administrative for Minimum Death Total Percentage Percentage of Amount
Purchase Payments Expenses Expenses Benefit/a/ Deduction/b/ Invested/b/
- ----------------- ------------------- -------------------- -------------------- ---------------- ---------------------
<S> <C> <C> <C> <C> <C>
First $10,000 6% 1.5% .5% 8% 8.7%
Next $15,000 5% 1.5% .5% 7% 8.70-7.99%
Over $25,000 1.5% 1.0% .5% 3% 7.99-3.33%
</TABLE>
/a /Because no minimum death benefit is provided on or after the contract
anniversary nearest the Annuitant's 65th birthday, no deduction is made for
such benefit from payments made on or after such date.
/b /Percentages do not include any deduction for taxes based on the amount of
the purchase payment.
- -----------------------------------------------------------------------------
PREMIUM OR SIMILAR TAXES
In addition, any applicable taxes based on the amount applied to an annuity
option will be deducted normally from the amount applied to an Annuity Option,
but the right is reserved to deduct such taxes from the purchase payments. The
deductions in states having such a tax may currently be as high as 3%.
CHARGES FOR MORTALITY AND EXPENSE RISKS
While the variable annuity payments to Annuitants will vary in accordance with
the investment performance of the Account, the amount of such payments will not
be decreased because of adverse mortality experience of Annuitants as a class or
because of an increase in actual expenses of John Hancock over the expense
charges provided for in the Contracts. John Hancock assumes the risk that
Annuitants as a class may live longer than expected (necessitating a greater
number of annuity payments) and that its expenses may be higher than the
deductions for such expenses.
In return for the assumption for these mortality and expense risks, John
Hancock charges the Account daily 0.00137% (0.5% on an annual basis) of the
current value of Account net assets for mortality risks and 0.000685% (0.25% on
an annual basis) for expense risks.
CHARGES FOR ADMINISTRATIVE SERVICES
John Hancock maintains an account for each Owner and Annuitant and makes all
disbursements of benefits. John Hancock also furnishes such administrative and
clerical services, including the calculation of net asset values and the values
and interests determined thereby, as are required for each subaccount. John
21
<PAGE>
Hancock makes disbursements from Account funds to pay obligations chargeable to
the Account and maintains the accounts, records, and other documents relating to
the business of the Account required by regulatory authorities.
For these and other administrative services, John Hancock makes a daily charge
to the Account of 0.000685% (0.25% on an annual basis) of the current value of
its net assets, and with respect to periodic payment contracts, an annual
maintenance charge equal to the lesser of $10 or 2% of the value of a Contract's
Accumulation Shares will be deducted from such value (on the contract
anniversary) each year prior to the Contract's date of maturity. The annual
maintenance charge will be allocated among the subaccounts in the proportion
that the value of the Accumulation Shares in each subaccount bears to the total
value of the Accumulation Shares. The annual maintenance charge is assessed only
during the Accumulation Period.
The administrative service charges were not designed, nor are they expected,
to exceed John Hancock's cost in providing these services.
THE CONTRACTS
This section is based on certain provisions of the Contracts offered by this
Prospectus. Reference should be made to the actual Contracts and to the terms
and limitations of any tax-qualified plan which is to be funded by such
Contracts. Tax-qualified plans are subject to several requirements and
limitations which may affect the terms of any particular Contract or the
advisability of taking certain action permitted thereby.
PURCHASE OF CONTRACTS
The sales representative will assist in the completion of the application for
the Contract and will be responsible for its transmittal, together with the
necessary purchase payment, to John Hancock's Servicing Office. If the
application is complete and the Contract applied for is suitable, the Contract
will be issued and thereafter delivered by the sales representative. If a
completed application is received in proper order, the purchase payment
accompanying the application is applied within two business days after receipt.
If an initial purchase payment is not applied within five business days after
receipt, it will be refunded unless John Hancock has received the consent of the
applicant to retain the purchase payment until receipt of information necessary
to complete the issuance of the Contract.
Single payment deferred and immediate Contracts may be purchased by a single
purchase payment of $5,000 or more. However, in the case of a single payment
deferred Contract being purchased with the proceeds of fixed dollar insurance
policies and annuity contracts issued by John Hancock the single purchase
payment may be $2,000 or more. One additional payment of at least $2,500 can be
made prior to maturity under a single payment deferred Contract.
Under periodic payment deferred Contracts, the initial purchase payment must
be at least $1,000, subsequent scheduled payments payable on a monthly basis
must be at least $50 in amount, and, if subsequent purchase payments are
scheduled to be made less frequently, purchase payments must total at least $600
on an annual basis, except where a lower amount is required under the terms of a
plan or arrangement of an employer or organization. Although an amount is
specified in the Contract for the purchase payments, each purchase payment after
the first must be at least $50. Payments for the first contract year may exceed
the specified amount but shall not be more than twice the amount of the
specified payments for a contract year, and payments for any contract year after
the first shall not be more than twice the total payments actually made with
respect to any prior contract year. Increases in purchase payments beyond the
foregoing limits may be made only with John Hancock's written consent. If a
specified purchase payment is not made on its due date or within 31 days
thereafter, the Contract will nevertheless remain in force as a paid-up annuity.
While the Annuitant is living and the Contract is in force purchase payments may
be resumed at any time before maturity.
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<PAGE>
THE ACCUMULATION PERIOD
ACCUMULATION SHARES
Net purchase payments are allocated by John Hancock to any one or more of the
subaccounts or allocated among the subaccounts in the proportion specified in
the application for the Contract or as directed by the Owner from time to time.
Any change in the election will be effective as to purchase payments made after
the receipt by John Hancock at its Servicing Office of notice in form
satisfactory to John Hancock.
Each net purchase payment allocated to a subaccount under a deferred Contract
purchases Accumulation Shares of that subaccount at the value of such shares
next determined after the receipt of such net purchase payment at the Servicing
Office of John Hancock. See "Variable Account Valuation Procedures." The number
of Accumulation Shares of a subaccount purchased with a specific purchase
payment will be determined by dividing the net purchase payment by the value of
an Accumulation Share in that subaccount when the net purchase payment is
applied. The value of the Accumulation Shares so purchased will vary in amount
thereafter depending upon the investment performance of the subaccount and the
charges and deductions made against the subaccount.
VALUE OF ACCUMULATION SHARES
At any date prior to a Contract's maturity date, the total value of the
Accumulation Shares in a subaccount which have been credited to a Contract can
be computed by multiplying the number of such Accumulation Shares by the
appropriate Accumulation Share Value in effect for such date.
TRANSFERS TO AND FROM SUBACCOUNTS
Not more often than four times in each contract year, the Owner may elect to
transfer all or any part of the Accumulation Shares or Annuity Units credited to
a Contract from one subaccount to another. Any such transfer will result in the
redemption and purchase of Accumulation Shares or Annuity Units, whichever is
applicable, on the basis of the respective values next determined after receipt
of notice satisfactory to John Hancock at its Servicing Office. Currently, there
is no charge for transfers, and John Hancock has no present intention of
imposing a charge on transfers among subaccounts.
An Owner may request a transfer in writing or, once a written telephone
transfer authorization form is completed by the Owner, the Owner may request a
transfer by telephoning John Hancock at 800-REAL LIFE (732-5543) or sending a
written request to John Hancock via the John Hancock fax machine at
617-886-3048. Any written request should include the Owner's name, daytime
telephone number, and contract number as well as the names of the subaccounts
from which and to which money will be transferred. John Hancock reserves the
right to discontinue telephone transfers at any time without notice to the
Owners. If the fax request option becomes unavailable, another means of
telecommunication will be substituted.
An Owner who authorizes telephone transfers will be liable for any loss,
expense or cost arising out of any unauthorized or fraudulent telephone transfer
instructions which John Hancock reasonably believes to be genuine, unless such
loss, expense or cost is the result of John Hancock's mistake or negligence.
John Hancock employs procedures which provide safeguards against the execution
of unauthorized transfers, and which are reasonably designed to confirm that
transfer instructions received by telephone are genuine. These procedures
include requiring personal identification, tape recording calls, and providing
written confirmation to the Owner. If John Hancock does not employ reasonable
procedures to confirm that instructions communicated by telephone are genuine,
it may be liable for any loss due to unauthorized or fraudulent instructions.
23
<PAGE>
SURRENDER OF CONTRACT; PARTIAL WITHDRAWALS
Prior to its date of maturity, if the Annuitant is living, a deferred Contract
may be surrendered for a cash payment representing all or part of the total
value of Accumulation Shares credited to the Contract. The appropriate number of
Accumulation Shares will be redeemed at their value next determined after the
receipt by John Hancock at its Servicing Office of notice in form satisfactory
to John Hancock. Unless directed otherwise by the Owner, the Accumulation Shares
redeemed in a partial withdrawal will be redeemed in each subaccount in the same
proportion as the Accumulation Share Value of the Contract is then allocated
among the subaccounts. The redemption value may be more or less than the net
purchase payments applied under the Contract to purchase the Accumulation
Shares, depending upon the market value of the Fund shares held in the
subaccount at the time. The resulting cash payment will be made in a single sum,
ordinarily within seven days after receipt of such notice. As described under
"Miscellaneous Provisions--Deferment of Payment," however, redemption and
payment may be delayed under certain circumstances. See "Federal Income Taxes"
for possible adverse tax consequences of certain surrenders and partial
withdrawals.
Any request for a surrender or partial withdrawal should be mailed to John
Hancock Servicing Office, Post Office Box 111, Boston, MA 02117.
A partial withdrawal is not permitted in an amount less than $100 or if the
total value of all Accumulation Shares credited to a Contract remaining after
the withdrawal would be less than $500. A partial withdrawal is not a loan and,
once made, cannot be repaid.
DEATH BENEFIT BEFORE DATE OF MATURITY
If the Annuitant dies before the date of maturity of a deferred Contract or
the redemption or conversion of all of the Accumulation Shares credited to such
Contract, a death benefit is payable. If the death occurs at any time before the
contract anniversary nearest the Annuitant's 65th birthday, the death benefit
will be greater of (a) the value of all Accumulation Shares credited to the
Contract next determined following receipt at the Servicing Office of John
Hancock of due proof of death or (b) the amount of the purchase payments made
under the Contract reduced to reflect redemptions of Accumulation Shares, if
any, previously made as partial withdrawals. The reduction in purchase payments
to reflect a prior withdrawal is in the proportion to which the number of
Accumulation Shares of each subaccount redeemed bore to the number of
Accumulation Shares of each subaccount to the credit of the Contract at the date
of receipt of the withdrawal request. In the event of a partial withdrawal when
the value of the Accumulation Shares in a subaccount is less than the amount of
the purchase payments made, the reduction in death benefit will be greater than
the amount of the withdrawal. If the death occurs on or subsequent to the
contract anniversary nearest the Annuitant's 65th birthday, the death benefit
will be equal to the value of all the Accumulation Shares credited to the
Contract next determined following receipt at the Servicing Office of John
Hancock of due proof of death.
Payment of the death benefit will be made in a single sum to the beneficiary
designated by the Owner prior to the Annuitant's death unless an optional method
of settlement has been elected by the Owner. If an optional method of settlement
has not been elected by the Owner, the beneficiary may elect an optional method
of settlement in lieu of a single sum. No deduction is made for sales or other
expenses upon such election. Payment will be made in single sum in any event if
the death benefit is less than $2,000. (See "Annuity Period--Annuity Options".)
If there is no surviving beneficiary, the Owner, or his or her estate is the
beneficiary.
Some Contracts are subject to different provisions than those outlined above,
however. The Code requires certain distribution provisions to be included in any
Contract used to fund other than a tax-qualified plan (see "Federal Income
Taxes"). Failure to include the required distribution provisions results in the
Contract not being treated as an annuity for Federal tax purposes. These
required provisions will be reflected by means of an "endorsement" to the
Contract furnished by John Hancock.
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The Code distribution requirements are expected to present no practical
problems when the Annuitant and Owner are the same person. Nevertheless, all
Owners for whom these endorsements are required should be aware that the
following distribution requirements are applicable notwithstanding any provision
to the contrary in the Contract (or in this prospectus) relating to payment of
the death benefit or death of the Annuitant.
If the Owner dies: (1) on or after annuity payments have begun, any remaining
benefit must be paid out at least as rapidly as under the method of making
annuity payments then in effect; or (2) before annuity payments have begun: (a)
if the beneficiary is the spouse of the Owner, the beneficiary may continue the
Contract in force as Owner; or (b) otherwise, the entire interest in the
Contract on the date of death of the Owner must be: (i) paid out in full within
5 years of the Owner's death; or (ii) applied in full towards the purchase of a
life annuity on the beneficiary with payments commencing within 1 year of the
Owner's death. The Code imposes comparable distribution requirements on
tax-qualified plans.
Note that "the entire interest in the Contract on the date of death of the
Owner" which is payable if the Owner dies before annuity payments have begun may
be an amount less than the death benefit which would have been payable if the
Annuitant had died instead. Note also that notice should be furnished promptly
to John Hancock upon the death of the Owner.
THE ANNUITY PERIOD
DEFERRED VARIABLE ANNUITY CONTRACTS
During the annuity period, the total value of any one Contract must be
allocated among no more than four subaccounts.
Annuity payments will commence on the date of maturity of the Contract if the
Annuitant is then living and the Contract is then in force. Each deferred
Contract will provide at the time of its issuance for a Life Annuity with Ten
Years Certain. Under this form of annuity, variable annuity payments are made
monthly to the Annuitant for life and, if the Annuitant dies within ten years
after the date of maturity of the Contract, the beneficiary will be paid a
single sum equal in amount to the commuted value of the payments remaining in
the ten-year period, based upon the appropriate Annuity Unit Values next
determined after receipt at the Servicing Office of John Hancock of due proof of
death of the Annuitant. A different form of annuity may be elected by the Owner,
as described in "Annuity Options", prior to the date of maturity of the
Contract. Once a given form of annuity takes effect, it may not be changed.
If the initial monthly annuity payment under a Contract would be less than
$20, John Hancock may make a single sum payment equal to the total value of the
Accumulation Shares credited to the Contract on the date the initial payment
would be payable, in place of all other benefits, or, if agreed to by the Owner,
make periodic payments at quarterly, semi-annual or annual intervals in place of
monthly payments.
Each deferred Contract specifies a provisional date of maturity at the time of
its issuance. The Owner may subsequently elect a different date of maturity,
however, which may be any earlier date or a date not later than five years after
the provisional date of maturity specified in the Contract. The election is made
by written notice received by John Hancock at its Servicing Office before the
provisional date of maturity and at least 31 days prior to the date of maturity.
If a date of maturity different from the provisional date of maturity is not
elected by the Owner, the provisional date of maturity shall be the date of
maturity of the Contract. Particular care should be taken in electing the date
of maturity of Contracts issued under tax-qualified plans. (See "Federal Income
Taxes").
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IMMEDIATE VARIABLE ANNUITY CONTRACTS
Variable annuity payments under immediate Contracts will commence on a date
mutually agreed upon by the Owner and John Hancock, which date normally is one
month and may not be more than one year after the receipt of the purchase
payment at the Servicing Office of John Hancock. The Annuity Options available
under such Contracts are Life Annuity without Refund, Life Annuity with Ten or
Twenty Years Certain (see "Annuity Options") and Joint and Last Survivor Life
Annuity. A Joint and Last Survivor Life Annuity provides variable monthly
annuity payments during the joint lifetime of the two persons on whose survival
payments depend and thereafter during the lifetime of the survivor. No minimum
number of payments is guaranteed. Immediate Contracts may not be surrendered.
VARIABLE MONTHLY ANNUITY PAYMENTS
Variable monthly annuity payments under any deferred Contract are determined
by converting each subaccount's Accumulation Shares credited to the Contract
(less any applicable premium tax) into the respective Annuity Units of each
subaccount on the date of maturity of the Contract or some other date elected
for commencement of variable annuity payments. Variable monthly annuity payments
under any immediate Contract are determined by converting the net purchase
payment allocated to each subaccount into the respective Annuity Units of each
subaccount as of the date of issuance, which will be the later of (a) the date
of approval by John Hancock of the application for the Contract and (b) the date
of receipt of the purchase payment at the Servicing Office of John Hancock. (See
"Calculation of Annuity Units".)
The amount of each annuity payment after the first payment will depend on the
investment performance of the subaccounts being used. If the actual net
investment return (after deducting all charges) of a subaccount during the
period between the dates for determining two monthly payments based on that
subaccount exceeds the "assumed investment rate" (explained below), the latter
monthly payment will be larger than the former. On the other hand, if the actual
net investment return is less than the assumed investment rate, the latter
monthly payment will be smaller than the former.
ASSUMED INVESTMENT RATE
The assumed investment rate for all Contracts will be3 1/2% per year except as
provided below. The assumed investment rate is significant in determining the
amount of the initial monthly annuity payment and the amount by which subsequent
variable monthly payments are more or less than the initial variable monthly
payment.
Where applicable state law so provides, an Owner may elect a variable annuity
option with a different assumed investment rate, not in excess of 5%, if such a
rate is made available by John Hancock in the Owner's state. Election of a
higher assumed investment rate produces a larger initial annuity payment but
also means that eventually the monthly annuity payments would be smaller than if
a lower assumed investment rate had been elected.
CALCULATION OF ANNUITY UNITS
Under a deferred Contract, Accumulation Shares are converted into Annuity
Units by first multiplying the number of each subaccount's Accumulation Shares
credited to the Contract on the date of conversion by the appropriate
Accumulation Share Value as of ten calendar days prior to the date the initial
variable monthly annuity payment is due. For each subaccount the resulting value
(less any applicable premium tax) is then multiplied by the applicable annuity
purchase rate, which reflects the sex and age of the Annuitant and the assumed
investment rate, specified in the Contract. This computation determines the
amount of each subaccount's initial monthly variable annuity payment to the
Annuitant. The number of each subaccount's Annuity Units to be credited to the
Contract is then determined by dividing the amount of each subaccount's initial
variable monthly annuity payment by each subaccount's Annuity Unit Value as of
ten calendar days prior to the date the initial payment is due.
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Under an immediate Contract, the number of each subaccount's Annuity Units to
be credited to the Contract is determined by first multiplying the net purchase
payment allocated to each subaccount by the applicable annuity purchase rate,
which reflects the sex and age of the Annuitant and the assumed investment rate,
for the Annuity Option elected, and then dividing the result by the appropriate
Annuity Unit Value on the date of issuance of the immediate Contract.
ANNUITY OPTIONS
The Owner may elect an Annuity Option during the lifetime of the Annuitant by
written notice received by John Hancock at its Servicing Office prior to the
date of maturity of the Contract. If no option is selected, Option VA-1 with Ten
Years Certain will be used. A beneficiary entitled to payment of a death benefit
in a single sum may, if no election has been made by the Owner prior to the
Annuitant's death, elect an Annuity Option by written notice received by John
Hancock at its Servicing Office prior to the date the proceeds become payable.
No option may be elected if the value of the Accumulation Shares to be applied
is less than $2,000. Two basic Annuity Options are available under deferred
Contracts.
OPTION VA-1 LIFE ANNUITY WITH FIVE, TEN OR TWENTY YEARS CERTAIN
Variable monthly payments will be made for a designated period of 5, 10 or 20
years and thereafter as long as the payee lives, with the guarantee that if the
payee dies prior to the end of the 5, 10 or 20 year period, whichever is
applicable, the commuted value of the remaining payments during the guaranteed
period, based upon the applicable Annuity Unit Values next determined after
receipt by John Hancock of due proof of death of the payee, will then be paid
within seven days of such determination in a single sum as a final payment to
the payee's estate or to another person designated as contingent payee.
OPTION VA-2 LIFE ANNUITY WITHOUT REFUND
Variable monthly payments will be made to the payee as long as he lives. No
minimum number of payments is guaranteed.
OTHER CONDITIONS
John Hancock reserves the right at its sole discretion to make available to
Owners and other payees optional methods of payment in addition to the Annuity
Options described in this Prospectus and the applicable Contract.
Federal income tax requirements currently applicable to H.R. 10 and individual
retirement annuity plans provide that the period of years guaranteed under
Option VA-1 cannot be any greater than the joint life expectancies of the payee
and his or her designated beneficiary.
If the Owner of a Contract used to fund an annuity purchase plan or to fund
other than a tax-qualified plan (See "Federal Income Taxes") dies on or after
annuity payments have begun, the remaining benefit payments must be distributed
at least as rapidly as under the method of making annuity payments then in
effect.
If the initial monthly annuity payment under an Annuity Option would be less
than $20, John Hancock may make a single sum payment equal to the total value of
the Accumulation Shares on the date the initial payment would be payable, in
place of all other benefits provided by the Contract, or if agreed to by the
Owner, may make periodic payments at quarterly, semi-annual or annual intervals
in place of monthly payments.
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VARIABLE ACCOUNT VALUATION PROCEDURES
VALUATION DATE--A Valuation Date is any date on which the New York Stock
Exchange is open for trading and on which the Fund values its shares. On any
date other than a Valuation Date, the Accumulation Share Value or Annuity Unit
Value will be the same as that on the next following Valuation Date.
VALUATION PERIOD--A Valuation Period is that period of time from the beginning
of the day following a Valuation Date to the end of the next following Valuation
Date.
ACCUMULATION SHARE VALUE--The Accumulation Share Value is calculated separately
for each subaccount. The value of one Accumulation Share on any Valuation Date
is determined for each subaccount by multiplying the immediately preceding
Accumulation Share Value by the applicable Net Investment Factor for the
Valuation Period ending on such Valuation Date.
ANNUITY UNIT VALUE--The Annuity Unit Value is calculated separately for each
subaccount. The value of one Annuity Unit on any Valuation Date is determined
for each subaccount by first multiplying the immediately preceding Annuity Unit
Value by the applicable Net Investment Factor for the Valuation Period ending on
such date and then multiplying this product by an adjustment factor which will
neutralize the assumed investment rate used in determining the amounts of
annuity payable. The adjustment factor for a Valuation Period of one day for
Contracts with an assumed investment rate of3 1/2% per year is .99990575. The
assumed investment rate is neutralized by applying the adjustment factor so that
the variable annuity payments will reflect only the actual net investment rate
of the subaccount.
NET INVESTMENT FACTOR--The Net Investment Factor for each subaccount for any
Valuation Period is equal to 1.00000000 plus the applicable net investment rate
for such Valuation Period. A Net Investment Factor may be more or less than
1.00000000. The net investment rate for each subaccount for any Valuation Period
is equal to (a) the accrued investment income and capital gains and losses,
whether realized or unrealized, of the subaccount for such Valuation Period less
(b) the sum of a deduction for any applicable income taxes and, for each
calendar day in the Valuation Period, a deduction of 0.002740% of the value of
each subaccount at the beginning of the Valuation Period, as described under
"Charges for Mortality and Expense Risks and Administrative Services" the result
then being divided by (c) the value of the total net assets of each subaccount
at the beginning of the Valuation Period determined as described below under
"Valuation of Assets".
ADJUSTMENT OF UNITS AND VALUES--John Hancock reserves the right to change the
number and value of the Accumulation Shares or Annuity Units or both credited to
any Contract, without the consent of the Owner or any other person, provided
strict equity is preserved and the change does not otherwise affect the
benefits, provisions or investment return of the Contract.
MISCELLANEOUS PROVISIONS
RESTRICTION ON ASSIGNMENT
In order to qualify for favorable tax treatment, certain Contracts may not be
sold, assigned, discounted or pledged as collateral for a loan or as security
for the performance of an obligation or for any other purpose, to any person
other than John Hancock, unless the Owner is the trustee of a trust described in
Section 401(a) of the Code. Because an assignment, pledge or transfer may be a
taxable event, an Owner should consult a competent tax adviser before taking any
such action.
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DEFERMENT OF PAYMENT
Payment of the value of any Accumulation Shares in a single sum upon a
surrender or partial withdrawal will ordinarily be made within seven days after
receipt of the written request therefor by John Hancock at its Home Office.
However, redemption may be suspended and payment may be postponed at times (a)
when the New York Stock Exchange is closed, other than customary week-end and
holiday closings, (b) when trading on that Exchange is restricted, (c) when an
emergency exists as a result of which disposal of securities in a subaccount is
not reasonably practicable or it is not reasonably practicable to determine the
value of the net assets of a subaccount or (d) when a governmental body having
jurisdiction over the Account by order permits such suspension. Rules and
regulations of the Securities and Exchange Commission, if any are applicable,
will govern as to whether conditions described in (b) or (c) exist.
RESERVATION OF RIGHTS
John Hancock reserves the right to add or delete subaccounts, to change the
underlying investments of any subaccount, to operate the Account in any form
permitted by law and to terminate the Account's registration under the 1940 Act
if such registration should no longer be legally required. Such registration may
be terminated only upon majority vote of Owners, and certain other changes may,
under applicable laws and regulations, require notice to or approval of Owners.
Otherwise, changes do not require such notice or approval.
OWNER AND BENEFICIARY
The Owner has the sole and absolute power to exercise all rights and
privileges under the Contract, except as otherwise provided by the Contract or
by written notice of the Owner. The Owner and the beneficiary are designated in
the application and may be changed by the Owner, effective upon receipt of
written notice at the Home Office, subject to the rights of any assignee of
record, any action taken prior to receipt of the notice and certain other
conditions. While the Annuitant is alive, the Owner may be changed by written
notice. The beneficiary may be changed by written notice no later than receipt
of due proof of the Annuitant's death. The change will take effect whether or
not the Owner or the Annuitant is then alive.
FEDERAL INCOME TAXES
THE ACCOUNT AND JOHN HANCOCK
John Hancock is taxed as a life insurance company under the Code. The Account
is part of John Hancock's total operations and is not taxed separately as a
"regulated investment company" or otherwise.
The Contracts permit John Hancock to charge against the Account any taxes, or
provisions for taxes, attributable to the operation or existence of the
Contracts or the Account. No specific charge is currently made against the
Account for any such taxes. John Hancock pays such taxes out of its general
account assets which may consist of, among other things, proceeds derived from
mortality and expense risk charges deducted from the Account. Currently, John
Hancock does not anticipate making a separate charge for income and other taxes
because of the level of such taxes. If the level of current tax is increased, or
is expected to increase in the future, John Hancock reserves the right to make
such a charge in the future.
John Hancock assumes no responsibility for determining whether a particular
retirement plan satisfies the applicable requirements of the Code or whether a
particular employee is eligible for inclusion under a plan.
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CONTRACTS PURCHASED OTHER THAN TO FUND A TAX QUALIFIED PLAN
The Annuitant or Other Payee
The Contracts are considered annuity contracts under Section 72 of the Code.
Currently no Federal income tax is payable on increases in value of Accumulation
Shares or Annuity Units credited to a variable annuity contract until payments
are made to the Annuitant or other payee under such Contract. However, a
Contract owned other than by a natural person is not generally an annuity for
tax purposes and any increase in the value thereunder is taxable as ordinary
income as accrued.
When payments under a Contract are made in the form of an annuity, the amount
of each payment is taxed to the Annuitant or other payee as ordinary income to
the extent that such payment exceeds any allocable portion of the Annuitant's
"investment in the contract" (as defined in the Code). In general, an
Annuitant's "investment in the contract" is the aggregate amount of purchase
payments made by him, reduced by any amounts previously distributed from the
Contract that were not subject to tax. The portion of each variable annuity
payment to be excluded from income is determined by dividing the "investment in
the contract", adjusted by any refund feature, by the number of periodic
payments anticipated during the time that periodic payments are to be made. In
the case of a fixed annuity payment, the amount to be excluded in each year is
determined by dividing the "investment in the contract," adjusted by any refund
feature, by the amount of "expected return" during the time that periodic
payments are to be made, and then multiplying by the amount of the payment.
When a payment under a Contract is made in a single sum, the amount of the
payment is taxed as ordinary income to the Annuitant or other payee to the
extent it exceeds the Annuitant's "investment in the contract".
Partial Withdrawals Before Annuity Starting Date
When a payment under a Contract is less than the amount that would be paid
upon the Contract's complete surrender and such payment is made prior to the
commencement of annuity payments under the Contract, part or all of the payment
(the partial withdrawal) may be taxed to the Annuitant or other payee as
ordinary income.
On the date of the partial withdrawal, if the cash value of the Contract is
greater than the investment in the Contract, any part of such excess value so
withdrawn is subject to tax as ordinary income.
If an individual assigns or pledges any part of the value of a Contract, the
value so pledged or assigned is taxed as ordinary income to the same extent as a
partial withdrawal.
Penalty for Premature Withdrawals
In addition to being included in ordinary income, the taxable portion of any
withdrawal will be subject to a 10-percent penalty tax. The penalty tax does not
apply to payments made to the Annuitant or other payee after age59 1/2, or on
account of death or disability. If the withdrawal is made in substantially equal
periodic payments over the life of the Annuitant or other payee or over the
joint lives of the Annuitant and the Annuitant's beneficiary, the penalty will
also not apply.
DIVERSIFICATION REQUIREMENTS
Each of the Portfolios of the Fund intends to qualify as a regulated
investment company under Subchapter M of the Code and will have to meet the
investment diversification tests of Section 817(h) of the Code and the
underlying regulations. The Treasury Department and the Internal Revenue Service
may, at some future time, issue a ruling or a regulation presenting situations
in which it will deem "investor control" to be present over the assets of the
underlying Portfolios, causing the Owner to be taxed currently on income
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credited to the Contracts. In such a case, John Hancock reserves the right to
amend the Contract or the choice of underlying portfolios to avoid current
taxation to the Owners.
CONTRACTS PURCHASED TO FUND A TAX QUALIFIED PLAN
Withholding on Eligible Rollover Distributions
Recent legislation requires 20% withholding on certain distributions from tax
qualified plans. An Owner wishing to rollover his entire distribution should
have it paid directly to the successor plan. Otherwise, the Owner's distribution
will be reduced by the 20% mandatory income tax. Consult a qualified tax adviser
before taking such a distribution.
Contracts Purchased under Individual Retirement Annuity Plans (IRA)
In general, the maximum amount of purchase payments deductible each year with
respect to an individual retirement annuity contract (as defined in Section 408
of the Code) issued on the life of an eligible purchaser is the lesser of $2,000
or 100% of compensation includible in gross income. A person may also purchase a
Contract for the benefit of his or her spouse (including, for example, a
homemaker who does not work outside the home). Where an individual elects to
deduct amounts contributed on his or her own behalf and on behalf of a spouse,
the maximum amount of purchase payments deductible is $2,000 for each spouse if
their combined compensation is at least equal to the contributed amount.
However, not more than $2,000 can be allocated to either person's account. If an
individual or his or her spouse is an active participant in an
employer-sponsored retirement plan, the individual is permitted to make a
deductible purchase payment only if the adjusted gross incomes of the individual
and his or her spouse are below certain amounts.
No deduction is allowed for purchase payments made in or after the taxable
year in which the annuitant has attained the age of70 1/2 years nor is a
deduction allowed for a "rollover contribution" as defined in the Code.
When payments under a Contract are made in the form of an annuity, or in a
single sum such as on surrender of the Contract or by partial withdrawal, the
payment is taxed as ordinary income.
IRS required minimum distributions must begin no later than April 1 of the
year following the year in which the Annuitant attains age70 1/2. The Annuitant
can suffer adverse tax consequences if a distribution or surrender of the
Contract or partial withdrawal is made prior to his attaining age59 1/2, except
in the event of death or total disability or certain other circumstances.
Contracts Purchased under Non-Deductible IRAs (Roth IRAs)
In general, for years after 1997, an individual may make purchase payments of
up to $2,000 each year for a new type of non-deductible IRA, known as a Roth
IRA. This $2,000 maximum on purchase payments applies to all of an individual's
annual IRA contributions (deductible and non-deductible), except for rollover
contributions. The maximum amount that can be made to a Roth IRA is phased out
for adjusted gross incomes between $95,000 and $110,000 in the case of single
taxpayers, between $150,000 and $160,000 in the case of married taxpayers filing
jointly, and between $0 and $15,000 in the case of married taxpayers filing
separately.
"Qualified distributions" for Roth IRAs are not includible in gross income or
subject to the penalty tax on early withdrawals. As defined in Section 408A of
the Code, a qualified distribution requires that the individual has held the
Roth IRA for at least five years and, in addition, that the distribution is made
after the individual reaches age 59-1/2, on the individual's death or
disability, or to a qualified first-time home purchaser, subject to a $10,000
lifetime maximum, for the individual, a spouse, a child, a grandchild, or an
ancestor. Non-qualified distributions are treated as being made from
contributions first. When all distributions exceed the amount of contributions,
the excess is includible in gross income. The age 70-1/2 pre-death distribution
rules do not apply to Roth IRAs.
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An individual may make a rollover contribution from a non-Roth IRA, unless the
individual has adjusted gross income over $100,000 or the individual is a
married taxpayer filing a separate return. The individual must pay tax on any
portion of the IRA being rolled over that represents income on a previously
deductible IRA contribution. For rollovers in 1998, the individual may pay that
tax ratably in 1998 and over the succeeding three years. There are no similar
limitations on rollovers from a Roth IRA to another Roth IRA.
Contracts Purchased under SIMPLE Retirement Accounts (SIMPLE IRAs)
In general, premium payments may be made to a SIMPLE IRA retirement plan
established by a small business employer who employs 100 or fewer employees on
any day during the preceding calendar year. An eligible employee may specify the
percentage of compensation the employee elects to contribute not to exceed
$6,000 a year. The employer must elect to make a matching contribution of up to
3% of the employee's compensation or a non-elective contribution equal to 2% of
the employee's compensation.
Contracts Purchased under Section 403(b) Plans (TSA)
Purchase payments made by an employer which is a public school system or a
tax-exempt organization described in Section 501(c)(3) of the Code under annuity
purchase arrangements described in Section 403(b) of the Code are not taxable
currently to the Annuitant, to the extent that the aggregate of such amounts
does not exceed the Annuitant's "exclusion allowance" (as defined in the Code).
In general, an Annuitant's "exclusion allowance" is determined by multiplying
20% of his "includible compensation" (as defined in the Code) by the number of
years of his service with the employer and then subtracting from that product
the aggregate amount of purchase payments previously excluded from income and
certain other employer payments to retirement plans in which the Annuitant is a
participant. Additional limitations applicable to purchase payments are
described in Section 415 of the Code. Deferrals under all plans made at the
election of the Annuitant generally are limited to an aggregate of $9,500
annually.
When payments under a Contract are made in the form of an annuity, such
payments are taxed to the Annuitant or other payee under the same rules that
apply to such payments under corporate plans (discussed earlier), except that
five-year averaging and capital gain phase-out are not available.
When payment under a Contract is made in a single sum, such as on surrender of
the Contract or by partial withdrawal, the taxable portion of the payment is
taxed as ordinary income and the penalty for premature withdrawals may be
applicable.
Ordinarily an Annuitant in a Section 403(b) plan does not have an "investment
in the contract" and, thus, any distribution is fully taxed as ordinary income.
Distributions are prohibited before the Owner is age59 1/2, except on the
Owner's separation from service, death, or disability and except with respect to
distributions attributable to assets held as of December 31, 1988. This
prohibition does not (1) preclude transfers and exchanges to other products that
qualify under Section 403 (b) and (2) restrict withdrawals of certain amounts
attributable to pre-January 1, 1989, premium payments.
Contracts Purchased under Corporate Plans
In general, purchase payments made by a corporation under a qualified pension
or profit-sharing plan described in Section 401(a) of the Code or a qualified
annuity plan described in Section 403(a) of the Code are deductible by the
corporation and are not taxable currently to the employees.
When payments under a Contract are made in the form of an annuity, the amount
of each payment is taxed to the Annuitant or other payee as ordinary income
except in those cases where the Annuitant has an "investment in the contract"
(as defined in the Code). In general, an Annuitant's "investment in the
contract" is the aggregate amount of purchase payments made by him. If an
Annuitant has an "investment in the
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contract," a portion of each annuity payment is excluded from income until the
investment in the contract is recovered. The amount to be excluded in each year,
in the case of a variable annuity payment, is determined by dividing the
"investment in the contract," adjusted by any refund feature, by the number of
periodic payments anticipated during the time that periodic payments are to be
made.
When payment under a Contract is made in a single sum or total distribution is
made within one taxable year of the Annuitant or other payee, the amount of the
payment is taxed to the Annuitant or other payee to the extent it exceeds the
Annuitant's "investment in the contract." If such payment is made after the
Annuitant has attained the age of59 1/2, or on account of his death, retirement
or other termination of employment or on account of his death after termination
of employment, five year averaging and a phase-out of capital gains treatment
for pre-1974 contributions may be available with respect to one distribution.
Other rules may be available to taxpayers who have attained age 50 prior to
January 1, 1986.
IRS required minimum distributions must begin no later than April 1 of the year
following the year in which the Annuitant attains age70 1/2 even if the
Annuitant has not retired.
Contracts Purchased under H.R. 10 Plans
Self-employed persons, including partnerships, may establish tax-qualified
pension and profit sharing plans and annuity plans for themselves and for their
employees. Generally, the maximum amount of purchase payments deductible each
year with respect to variable annuity contracts issued on the life of
self-employed persons is $30,000 or 25% of "earned income" (as defined in the
Code), whichever is less. Self-employed persons must also make purchase payments
for their employees (who have met certain eligibility requirements) at least at
the same rate as they do for themselves. In general, such purchase payments are
deductible in full and are not taxable currently to such employees.
Tax-qualified plans may permit self-employed persons and their employees to
make additional purchase payments themselves (which are not deductible) of up to
10% of earned income or compensation (discussed earlier).
When payments under a Contract are made in the form of an annuity, such
payments are taxed to the Annuitant or other payee under the same rules that
apply to such payments under corporate plans.
The tax treatment of single sum payments is also the same as under corporate
plans except that five year averaging may be unavailable to a self-employed
Annuitant on termination of service for reasons other than disability.
The same rules that apply to commencement of annuity payments under corporate
plans apply to H.R. 10 plans.
Contracts Purchased By Top-Heavy Plans
Certain corporate and H.R. 10 plans may be characterized under Section 416 of
the Code as "top-heavy plans" if a significant portion of the plan assets is
held for the benefit of "key employees" (as defined in the Code). Care must be
taken to consider the special limitations applicable to top-heavy plans and the
potentially adverse tax consequences to key employees.
Contracts Purchased Under Government Deferred Compensation Plans (Section 457)
Participants in certain deferred compensation plans maintained by a state, a
political subdivision of a state, or their agencies or instrumentalities or
tax-exempt organizations and tax-exempt employers are permitted to exclude a
portion of their compensation from gross income. Amounts so deferred (including
any
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income thereon) shall be includible in gross income only for the taxable year in
which such amounts are paid or otherwise made available to the Annuitant or
other payee.
In general, the maximum amount of compensation which may be deferred under
such tax-favored plans is the lesser of $7,500 or33 1/3% of the participant's
"includible compensation" (as defined in the Code). The deferred compensation
plan itself must satisfy several conditions, among which are that the plan must
not permit distributions prior to the participant's separation from service
(except in the case of an unforeseen emergency), and that all compensation
deferred under the plan shall remain solely the employer's property and may be
subject to the claims of its creditors.
When payment under a Contract is made in the form of an annuity, or in a
single sum such as on surrender of the Contract or by partial withdrawal, the
payment is taxed as ordinary income.
Withholding of Taxes
John Hancock is obligated to withhold taxes from certain payments unless the
recipient elects otherwise. The withholding rate varies depending upon the
nature and the amount of the distribution. John Hancock will notify the
Annuitant or other payee in advance of the first payment of his or her right to
elect out of withholding and furnish a form on which the election may be made.
Any election must be received by John Hancock in advance of the payment in order
to avoid withholding.
See Your Own Tax Adviser
The above description of Federal income tax consequences of owning a Contract
and of the different kinds of tax-qualified plans which may be funded by the
Contracts is only a brief summary and is not intended as tax advice. Nor does it
include a discussion of Federal estate or gift tax or state tax consequences.
Tax laws and regulations are subject to change and such changes may be
retroactive. The rules governing the provisions of tax-qualified plans are
extremely complex and often difficult to understand. Anything less than full
compliance with the applicable rules, all of which are subject to change from
time to time, can have adverse tax consequences. For example, premature
withdrawals are generally subject to a 10-percent penalty tax. The taxation of
an Annuitant or other payee has become so complex and confusing that great care
must be taken to avoid pitfalls. For further information, a prospective
purchaser should consult a qualified tax adviser.
PERFORMANCE
The Account may, from time to time, advertise certain performance information
with respect to its subaccounts. THE PERFORMANCE INFORMATION IS BASED ON
HISTORICAL INVESTMENT EXPERIENCE OF THE SUBACCOUNTS AND DOES NOT INDICATE OR
REPRESENT FUTURE PERFORMANCE.
The subaccounts may include total return in advertisements. When a subaccount
advertises its total return, it will usually be calculated for one year, five
years, and ten years or some other relevant period, if the corresponding
Portfolio has not been in existence for at least ten years. Total return is the
percentage change between the value of a hypothetical investment in the
subaccount at the beginning of the relevant period to the value of the
investment at the end of the period, if the Owner surrendered the Contract at
the end of the period indicated. Total return at the Account level reflects all
Contract charges (other than any premium tax charges)--mortality and expense
risk charges, administrative service charge, (including the annual maintenance
charge in the case of a periodic payment Contract), and the sales charges (as
reflected under "Synopsis of Expense Information")--and is therefore lower than
total return at the Fund level where no comparable charges have been deducted.
34
<PAGE>
The Money Market Subaccount may advertise "current yield" and "effective
yield." Current yield refers to the income earned by the subaccount over a
seven-day period and then annualized; i.e., the income earned in the period is
assumed to be earned every seven days over a 52-week period and stated as a
percentage of the investment. Effective yield is calculated similarly but, when
annualized, the income earned by the investment is assumed to be reinvested in
the subaccount and thus compounded in the course of a 52-week period. The
effective yield will be slightly higher than the current yield because of this
compounding effect of the assumed reinvestment.
The other subaccounts may also advertise current yield. For these subaccounts,
the current yield will be calculated by dividing the annualization of the income
earned by the subaccount during a recent thirty-day period by the maximum
offering price per unit at the end of such period. In all cases, current yield
and effective yield reflect the recurring charges on the Account level including
the periodic administrative expense charges, but do not include any premium tax
charges or any charges for minimum death benefit, sales expenses, or
administrative expenses that are deducted from premium payments.
Performance information for the subaccounts may be compared to other variable
annuity separate accounts or other investment products surveyed by Lipper
Analytical Services, Inc., an independent service which monitors and ranks the
performance of investment companies, or tracked by other rating services,
companies, publications, or persons who independently monitor and rank
investment company performance. Performance figures are calculated in accordance
with standardized methods established by each reporting service.
STATE REGULATION
John Hancock is subject to the provisions of the Massachusetts insurance laws
applicable to mutual life insurance companies and to regulation and supervision
by the Massachusetts Commissioner of Insurance. John Hancock is also subject to
the applicable insurance laws of all the other states and jurisdictions in which
it does an insurance business.
REPORTS
Reports will be furnished at least annually to an Owner showing the number and
value of Accumulation Shares credited to the variable annuity contract and
containing the financial statements of the Fund.
VOTING PRIVILEGES
THE ACCOUNT
All of the assets in the subaccounts of the Account are invested in shares of
the corresponding Portfolios of the Fund. John Hancock will vote the shares of
each of the Portfolios of the Fund which are deemed attributable to qualifying
variable annuity contracts or variable life insurance policies at meetings of
the Fund's shareholders in accordance with instructions received from owners of
such contracts or policies. Shares of the Fund held in the Account which are not
attributable to such contracts or policies and those for which instructions from
owners are not received will be represented by John Hancock at the meeting and
will be voted for and against each matter in the same proportion as the votes
based upon the instructions received from the owners of all such contracts and
policies.
The number of Fund shares held in each subaccount deemed attributable to each
owner is determined by dividing a Contract's Accumulation Share Value (or for a
Contract under which annuity payments have commenced, the equivalent) in the
subaccount by the net asset value of one share in the corresponding Fund
Portfolio in which the assets of that subaccount are invested. Fractional votes
will be counted. The number of
35
<PAGE>
shares as to which the owner may give instructions will be determined as of the
record date for the Fund's meeting.
Owners of Contracts may give instructions regarding the election of the Board
of Trustees of the Fund, ratification of the selection of independent auditors,
approval of the Fund's investment management agreement and other matters
requiring a vote under the 1940 Act. Owners will be furnished information and
forms by John Hancock in order that voting instructions may be given.
JOHN HANCOCK
An Owner (or the Annuitant if a different person) will have the right to vote
at annual meetings of all John Hancock policyholders for the election of members
of the Board of Directors of John Hancock and on other corporate matters, if
any, where a policyholders' vote is taken. The Owner (or the Annuitant if a
different person) may cast only one vote as the holder of a variable annuity
contract, irrespective of the value of the contract or the number of variable
annuity contracts held.
CHANGES IN APPLICABLE LAW--FUNDING AND OTHERWISE
The voting privileges described in this prospectus are afforded based on John
Hancock's understanding of applicable Federal securities law requirements. To
the extent that applicable law, regulations or interpretations change to
eliminate or restrict the need for such voting privileges, John Hancock reserves
the right to proceed in accordance with any such revised requirements. John
Hancock also reserves the right, subject to compliance with applicable law,
including approval of owners if so required, to transfer assets determined by
John Hancock to be associated with the class of contracts to which the Contracts
belong from the Account to another separate account by withdrawing the same
percentage of each investment in the Account with appropriate adjustments to
avoid odd lots and fractions.
LEGAL MATTERS
The legal validity of the Contracts has been passed upon by Ronald J. Bocage,
Vice President and Counsel of John Hancock.
DISTRIBUTION OF THE CONTRACTS
John Hancock Distributors, Inc. ("Distributors"), a wholly-owned subsidiary of
John Hancock, located at 197 Clarendon Street, Boston, MA 02117, is registered
as a broker-dealer with the Commission under the Securities Exchange Act of 1934
and is a member of the National Association of Securities Dealers, Inc.
Distributors acts as principal underwriter and distributor of the Contracts,
pursuant to a distribution agreement it has entered into with John Hancock. The
Contracts may be purchased through either the Distributors' registered
representatives who are licensed to sell John Hancock life insurance policies
and annuity contracts or other registered broker-dealers whose representatives
are authorized by applicable law to sell variable annuity contracts. The
compensation paid to such broker-dealers is not expected to exceed 3% of
purchase payments.
Distributors' registered representatives are compensated for sales of the
Contracts on a commission and service fee basis by Distributors, and John
Hancock reimburses Distributors for such compensation and for other direct and
indirect expenses actually incurred in connection with the marketing and sale of
the Contracts. In addition, John Hancock performs certain insurance underwriting
and determines whether to accept or reject the application for a Contract.
36
<PAGE>
IMPACT OF YEAR 2000 ISSUE
The advent of the Year 2000 presents a technological challenge to John
Hancock. Responding to this challenge, John Hancock has developed a plan to
modify or replace significant portions of its computer information and automated
technologies so that its systems will function properly with respect to dates in
the year 2000 and thereafter. The plan also involves coordination and testing
with business partners to ensure that external factors do not adversly impact
John Hancock's systems. John Hancock presently believes that with modifications
to existing systems. and conversions to new technologies, the year 2000 issue
will not pose significant operational problems for its computer systems.
However, if certain modifications and conversions are not made or are not
completely on time, the year 2000 issue could have an adverse impact on the
operations of John Hancock.
John Hancock expects the project to be substantially complete by early 1999.
This completion target was derived utilizing numerous assumptions of future
events, including availability of certain resources and other factors. However,
there can be no guarantee that this estimate will be achieved, that these steps
will be sufficient, or that actual results may not differ materially from those
anticipated.
REGISTRATION STATEMENT
This Prospectus omits certain information contained in the Registration
Statement which has been filed with the Securities and Exchange Commission. More
details may be obtained from the Commission upon payment of the prescribed fee.
EXPERTS
The financial statements of the Account and of John Hancock included in the
Statement of Additional Information have been audited by Ernst & Young LLP,
independent auditors, whose reports thereon appear in the Statement of
Additional Information and have been so included in reliance on their reports
given on their authority as experts in accounting and auditing.
FINANCIAL STATEMENTS
Financial statements of the Account and John Hancock may be found in the
Statement of Additional Information. The financial statements of John Hancock
should be distinguished from the financial statements of the Account and should
be considered only as bearing upon the ability of John Hancock to meet its
obligations under the Contracts.
37
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Cross Reference to
Page Page in Prospectus
---- ------------------
<S> <C> <C>
Business History . . . . . . . . . . . . . . . . 1 15-16
Distribution Agreement and Other Services . . . . 1 18, 19-20, 34
Distribution Agreement . . . . . . . . . . . . 1 19-20, 34
Investment Advisory Agreement . . . . . . . . . 2 18
Custodian Agreement . . . . . . . . . . . . . . 2 --
Independent Auditors . . . . . . . . . . . . . 3 34
Calculation of Performance Data . . . . . . . . . 3 32
Calculation of Annuity Payments . . . . . . . . . 4 25-27
Financial Statements . . . . . . . . . . . . . . 6 35
</TABLE>
38
<PAGE>
APPENDIX--ILLUSTRATIVE ACCUMULATION VALUE AND ANNUITY PAYMENT TABLES
The following Tables present illustrative periodic accumulation values and
annuity payments that would have resulted under a Contract described in this
prospectus had such values and payments been based exclusively upon the
investment experience of the predecessors of each of the three Subaccounts
during the periods shown.
Since 1980 the Contracts may have participated in more than one investment
option. Moreover, Contracts offered prior to 1980 differ somewhat from the
Contracts described in this current prospectus. Accordingly, the results shown
in the Tables applicable to each investment option are illustrative only, but
reflect the actual investment performance of each investment option.
John Hancock reorganized its variable annuity separate accounts on February
20, 1987, as described under "John Hancock, the Account and the Series Fund."
Figures are based on the pre-reorganization financial results of John Hancock's
separate accounts which combined and ceased their separate operations pursuant
to the reorganization (i.e., John Hancock Variable Accounts A, A-1, A-2, C, C-1
and C-2) are, for illustrative purposes, shown separately in the following
Tables.
Pro forma adjustments were unnecessary for all of the years shown in Tables I
and II even though the contract forms described in this prospectus are not
exactly the same as those available in those years. The current forms differ,
for example, in that the deductions from a $10,000 single purchase payment for
sales expenses and administrative expense now total 4% (plus an administrative
expense deduction of $50) rather than 7%. They also differ in that the annuity
purchase rates were liberalized for the years 1980 and thereafter so that a
greater amount of annuity is now purchased by the same amount of net purchase
payment.
The Tables assume investment of a single purchase payment of $10,000, net of
all deductions from purchase payments for sales and administrative expenses, any
minimum death benefit guarantee and premium taxes, and that charges have been
made at an annual rate of 1.00% for mortality and expense risks and investment
advisory services. A gross purchase payment of $10,450, in a state in which no
premium tax was applicable, would result in a $10,000 net purchase payment. The
Tables also reflect actual investment management fees and other portfolio
expenses for the periods illustrated.
WHAT THE TABLES ILLUSTRATE
Subject to the foregoing, Table I presents for the periods shown the
illustrative periodic accumulation values for each Account which would have
resulted at yearly intervals under a Contract where a net single purchase
payment of $10,000 was made. The Tables indicate the accumulation value which
would have resulted upon a full surrender of the Contract, based upon the
investment performance of the applicable funding medium.
Subject to the foregoing, the Tables II indicate, at yearly intervals,
illustrative monthly variable annuity payments for each subaccount which would
have been received by an Annuitant, assuming that an initial annuity payment of
$100 was received in the month and year indicated in the respective Tables. The
form of annuity illustrated is a life annuity with payments guaranteed for 10
years.
CAUTION
The following Tables do not necessarily represent the operating results of an
actual contract of the single payment form described in this prospectus and are
qualified by, and should be read with, the foregoing introductory materials.
The results shown should not be considered a representation of the future. A
program of the type illustrated in the Tables does not assure a profit or
protect against depreciation in declining markets.
39
<PAGE>
ILLUSTRATIVE PERIODIC ACCUMULATION VALUES AND ANNUITY PAYMENTS
GROWTH & INCOME SUBACCOUNT
TABLE I--ACCUMULATION PERIOD--ILLUSTRATIVE ACCUMULATION VALUES RESULTING FROM A
$10,000 NET PURCHASE PAYMENT CONTRACT ISSUED JANUARY 2, 1975
<TABLE>
<CAPTION>
Accumulation
Value on
December 31
Contract Year Commencing of the same year
- ------------------------ ----------------
<S> <C>
January 1975 . . . . . . . . . . . . . . . . . . $ 12,819.53
January 1976 . . . . . . . . . . . . . . . . . . 14,966.77
January 1977 . . . . . . . . . . . . . . . . . . 13,228.07
January 1978 . . . . . . . . . . . . . . . . . . 13,894.65
January 1979 . . . . . . . . . . . . . . . . . . 15,986.35
January 1980 . . . . . . . . . . . . . . . . . . 20,643.34
January 1981 . . . . . . . . . . . . . . . . . . 20,623.76
January 1982 . . . . . . . . . . . . . . . . . . 26,146.27
January 1983 . . . . . . . . . . . . . . . . . . 31,543.15
January 1984 . . . . . . . . . . . . . . . . . . 32,710.95
January 1985 . . . . . . . . . . . . . . . . . . 43,647.00
January 1986 . . . . . . . . . . . . . . . . . . 50,007.66
January 1987 . . . . . . . . . . . . . . . . . . 51,447.97
January 1988 . . . . . . . . . . . . . . . . . . 59,612.93
January 1989 . . . . . . . . . . . . . . . . . . 76,444.82
January 1990 . . . . . . . . . . . . . . . . . . 77,614.58
January 1991 . . . . . . . . . . . . . . . . . . 96,797.30
January 1992 . . . . . . . . . . . . . . . . . . 104,360.13
January 1993 . . . . . . . . . . . . . . . . . . 117,099.31
January 1994 . . . . . . . . . . . . . . . . . . 115,292.09
January 1995 . . . . . . . . . . . . . . . . . . 153,196.33
January 1996 . . . . . . . . . . . . . . . . . . 182,154.78
January 1997 . . . . . . . . . . . . . . . . . . 234,162.54
</TABLE>
TABLE II--ANNUITY PERIOD--ILLUSTRATIVE MONTHLY VARIABLE ANNUITY PAYMENTS AN
ANNUITANT WOULD RECEIVE ASSUMING A FIRST ANNUITY PAYMENT OF $100 IN JANUARY
1975.
<TABLE>
<CAPTION>
Payment
Month For Month
- ----- ---------
<S> <C>
January 1975 . . . . . . . . . . . . . . . . . . . $ 100.00
January 1976 . . . . . . . . . . . . . . . . . . . 126.56
January 1977 . . . . . . . . . . . . . . . . . . . 141.12
January 1978 . . . . . . . . . . . . . . . . . . . 123.05
January 1979 . . . . . . . . . . . . . . . . . . . 125.58
January 1980 . . . . . . . . . . . . . . . . . . . 139.22
January 1981 . . . . . . . . . . . . . . . . . . . 172.58
January 1982 . . . . . . . . . . . . . . . . . . . 167.75
January 1983 . . . . . . . . . . . . . . . . . . . 204.49
January 1984 . . . . . . . . . . . . . . . . . . . 235.65
January 1985 . . . . . . . . . . . . . . . . . . . 237.41
January 1986 . . . . . . . . . . . . . . . . . . . 307.45
January 1987 . . . . . . . . . . . . . . . . . . . 348.17
January 1988 . . . . . . . . . . . . . . . . . . . 347.67
January 1989 . . . . . . . . . . . . . . . . . . . 384.54
January 1990 . . . . . . . . . . . . . . . . . . . 456.19
January 1991 . . . . . . . . . . . . . . . . . . . 462.95
January 1992 . . . . . . . . . . . . . . . . . . . 530.83
January 1993 . . . . . . . . . . . . . . . . . . . 583.54
January 1994 . . . . . . . . . . . . . . . . . . . 631.13
January 1995 . . . . . . . . . . . . . . . . . . . 602.56
January 1996 . . . . . . . . . . . . . . . . . . . 768.39
January 1997 . . . . . . . . . . . . . . . . . . . 888.58
January 1998. . . . . . . . . . . . . . . . . . . . 1057.91
</TABLE>
40
<PAGE>
The amounts shown are based on the investment performance of the Growth &
Income Subaccount and its predecessors. All amounts reflect the provisions of
the contracts described in this prospectus, including annuity tables based on
the standard assumed investment rate of3 1/2% per annum. The amounts shown do
not reflect the deduction for any applicable premium tax. See text preceding
these Tables.
SOVEREIGN BOND SUBACCOUNT
TABLE I--ACCUMULATION PERIOD--ILLUSTRATIVE ACCUMULATION VALUES RESULTING FROM A
$10,000 NET PURCHASE PAYMENT CONTRACT ISSUED JUNE 2, 1980
<TABLE>
<CAPTION>
Accumulation
Value on December
Contract year Commencing 31 of the same year
- ------------------------ -------------------
<S> <C>
June 1980 . . . . . . . . . . . . . . . . . . . $10,253.83
June 1981 . . . . . . . . . . . . . . . . . . . 10,562.69
June 1982 . . . . . . . . . . . . . . . . . . . 13,469.69
June 1983 . . . . . . . . . . . . . . . . . . . 14,149.33
June 1984 . . . . . . . . . . . . . . . . . . . 16,041.33
June 1985 . . . . . . . . . . . . . . . . . . . 19,306.75
June 1986 . . . . . . . . . . . . . . . . . . . 21,698.31
June 1987 . . . . . . . . . . . . . . . . . . . 22,052.03
June 1988 . . . . . . . . . . . . . . . . . . . 23,615.72
June 1989 . . . . . . . . . . . . . . . . . . . 26,354.41
June 1990 . . . . . . . . . . . . . . . . . . . 28,015.98
June 1991 . . . . . . . . . . . . . . . . . . . 32,360.46
June 1992 . . . . . . . . . . . . . . . . . . . 34,492.94
June 1993 . . . . . . . . . . . . . . . . . . . 37,828.50
June 1994 . . . . . . . . . . . . . . . . . . . 36,490.86
June 1995 . . . . . . . . . . . . . . . . . . . 43,187.99
June 1996 . . . . . . . . . . . . . . . . . . . 44,514.03
June 1997 . . . . . . . . . . . . . . . . . . . 48,526.20
</TABLE>
41
<PAGE>
TABLE II--ANNUITY PERIOD--ILLUSTRATIVE MONTHLY VARIABLE ANNUITY PAYMENTS AN
ANNUITANT WOULD RECEIVE ASSUMING A FIRST ANNUITY PAYMENT OF $100 IN JUNE 1980.
<TABLE>
<CAPTION>
Payment
Month For Month
- ----- ---------
<S> <C>
June 1980 . . . . . . . . . . . . . . . . . . . . . $ 100.00
June 1981 . . . . . . . . . . . . . . . . . . . . . 96.41
June 1982 . . . . . . . . . . . . . . . . . . . . . 105.17
June 1983 . . . . . . . . . . . . . . . . . . . . . 126.21
June 1984 . . . . . . . . . . . . . . . . . . . . . 120.98
June 1985 . . . . . . . . . . . . . . . . . . . . . 145.80
June 1986 . . . . . . . . . . . . . . . . . . . . . 165.31
June 1987 . . . . . . . . . . . . . . . . . . . . . 166.02
June 1988 . . . . . . . . . . . . . . . . . . . . . 172.28
June 1989 . . . . . . . . . . . . . . . . . . . . . 181.81
June 1990 . . . . . . . . . . . . . . . . . . . . . 187.02
June 1991 . . . . . . . . . . . . . . . . . . . . . 200.83
June 1992 . . . . . . . . . . . . . . . . . . . . . 215.21
June 1993 . . . . . . . . . . . . . . . . . . . . . 230.96
June 1994 . . . . . . . . . . . . . . . . . . . . . 224.68
June 1995 . . . . . . . . . . . . . . . . . . . . . 238.43
June 1996 . . . . . . . . . . . . . . . . . . . . . 243.64
June 1997 . . . . . . . . . . . . . . . . . . . . . 251.72
</TABLE>
The amounts shown are based on the investment performance of the Sovereign
Bond Subaccount and its predecessors. All amounts reflect the provisions of the
contracts described in this prospectus, including annuity tables based on the
standard assumed investment rate of3 1/2% per annum. The amounts shown do not
reflect the deduction for any applicable premium tax. See text preceding these
Tables.
MONEY MARKET SUBACCOUNT
TABLE I--ACCUMULATION PERIOD--ILLUSTRATIVE ACCUMULATION VALUES RESULTING FROM A
$10,000 NET PURCHASE PAYMENT CONTRACT ISSUED MAY 13, 1982
<TABLE>
<CAPTION>
Accumulation
Value on December
31 of the same
Contract Year Commencing year
- ------------------------ -----------------
<S> <C>
May 1982 . . . . . . . . . . . . . . . . . . . $10,482.07
May 1983 . . . . . . . . . . . . . . . . . . . 11,284.20
May 1984 . . . . . . . . . . . . . . . . . . . 12,347.06
May 1985 . . . . . . . . . . . . . . . . . . . 13,220.57
May 1986 . . . . . . . . . . . . . . . . . . . 13,966.07
May 1987 . . . . . . . . . . . . . . . . . . . 14,753.07
May 1988 . . . . . . . . . . . . . . . . . . . 15,728.09
May 1989 . . . . . . . . . . . . . . . . . . . 17,018.30
May 1990 . . . . . . . . . . . . . . . . . . . 18,236.49
May 1991 . . . . . . . . . . . . . . . . . . . 19,134.07
May 1992 . . . . . . . . . . . . . . . . . . . 19,633.92
May 1993 . . . . . . . . . . . . . . . . . . . 20,034.00
May 1994 . . . . . . . . . . . . . . . . . . . 20,646.91
May 1995 . . . . . . . . . . . . . . . . . . . 21,624.81
May 1996 . . . . . . . . . . . . . . . . . . . 22,551.19
May 1997. . . . . . . . . . . . . . . . . . . . 23,545.36
</TABLE>
42
<PAGE>
TABLE II--ANNUITY PERIOD--ILLUSTRATIVE MONTHLY VARIABLE ANNUITY PAYMENTS AN
ANNUITANT WOULD RECEIVE ASSUMING A FIRST ANNUITY PAYMENT OF $100 IN MAY 1982.
<TABLE>
<CAPTION>
Payment For
Month Month
- ----- -----------
<S> <C>
May 1982 . . . . . . . . . . . . . . . . . . . . . $100.00
May 1983 . . . . . . . . . . . . . . . . . . . . . 103.76
May 1984 . . . . . . . . . . . . . . . . . . . . . 108.45
May 1985 . . . . . . . . . . . . . . . . . . . . . 114.21
May 1986 . . . . . . . . . . . . . . . . . . . . . 117.81
May 1987 . . . . . . . . . . . . . . . . . . . . . 119.65
May 1988 . . . . . . . . . . . . . . . . . . . . . 122.42
May 1989 . . . . . . . . . . . . . . . . . . . . . 127.07
May 1990 . . . . . . . . . . . . . . . . . . . . . 132.40
May 1991 . . . . . . . . . . . . . . . . . . . . . 136.49
May 1992 . . . . . . . . . . . . . . . . . . . . . 137.10
May 1993 . . . . . . . . . . . . . . . . . . . . . 135.53
May 1994 . . . . . . . . . . . . . . . . . . . . . 133.62
May 1995 . . . . . . . . . . . . . . . . . . . . . 134.22
May 1996 . . . . . . . . . . . . . . . . . . . . . 135.58
May 1997 . . . . . . . . . . . . . . . . . . . . . 136.62
</TABLE>
The amounts shown are based on the investment performance of the Money Market
Subaccount and its predecessors. All amounts reflect the provisions of the
contracts described in this prospectus, including annuity tables based on the
standard assumed investment rate of3 1/2% per annum. The amounts shown do not
reflect the deduction for any applicable premium tax. See text preceding these
Tables.
MANAGED SUBACCOUNT
TABLE I--ACCUMULATION PERIOD--ILLUSTRATIVE ACCUMULATED VALUES WHICH WOULD HAVE
RESULTED IF A $10,000 NET PURCHASE PAYMENT HAD BEEN ISSUED NOVEMBER 9, 1987
<TABLE>
<CAPTION>
Accumulation
Value on December
31 of the same
Contract Year Commencing year
- ------------------------ -----------------
<S> <C>
November 1987 . . . . . . . . . . . . . . . . . 10,232.70
November 1988 . . . . . . . . . . . . . . . . . 11,334.40
November 1989 . . . . . . . . . . . . . . . . . 13,393.61
November 1990 . . . . . . . . . . . . . . . . . 13,801.73
November 1991 . . . . . . . . . . . . . . . . . 16,668.31
November 1992 . . . . . . . . . . . . . . . . . 17,775.86
November 1993 . . . . . . . . . . . . . . . . . 19,642.61
November 1994 . . . . . . . . . . . . . . . . . 19,013.90
November 1995 . . . . . . . . . . . . . . . . . 23,925.00
November 1996 . . . . . . . . . . . . . . . . . 26,225.50
November 1997 . . . . . . . . . . . . . . . . . 30,829.41
</TABLE>
TABLE II--ANNUITY PERIOD--ILLUSTRATIVE MONTHLY VARIABLE ANNUITY PAYMENTS AN
ANNUITANT WOULD HAVE RECEIVED ASSUMING A FIRST ANNUITY PAYMENT OF $100 IN
NOVEMBER 1987.
<TABLE>
<CAPTION>
Payment For
Month Month
- ----- -----------
<S> <C>
November 1987. . . . . . . . . . . . . . . . . . . 100.00
November 1988. . . . . . . . . . . . . . . . . . . 110.31
November 1989. . . . . . . . . . . . . . . . . . . 122.50
November 1990. . . . . . . . . . . . . . . . . . . 116.05
November 1991. . . . . . . . . . . . . . . . . . . 138.17
November 1992. . . . . . . . . . . . . . . . . . . 144.89
November 1993. . . . . . . . . . . . . . . . . . . 159.95
November 1994. . . . . . . . . . . . . . . . . . . 150.56
November 1995. . . . . . . . . . . . . . . . . . . 174.25
November 1996. . . . . . . . . . . . . . . . . . . 187.53
November 1997. . . . . . . . . . . . . . . . . . . 210.06
</TABLE>
<PAGE>
The amounts shown are based on the investment performance of the Managed
Subaccount and the Managed Portfolio. All amounts reflect the provisions of the
Contracts described in this Prospectus, including annuity tables based on the
standard assumed investment rate of3 1/2% per annum. The amounts shown do not
reflect the deduction for any applicable premium tax. See text preceding the
Tables.
LARGE CAP GROWTH SUBACCOUNT
TABLE I--ACCUMULATION PERIOD--ILLUSTRATIVE ACCUMULATED VALUES WHICH WOULD HAVE
RESULTED IF A $10,000 NET PURCHASE PAYMENT HAD BEEN ISSUED NOVEMBER 24, 1987
<TABLE>
<CAPTION>
Accumulation
Value on December
31 of the same
Contract Year Commencing year
- ------------------------ -----------------
<S> <C>
November 1987 . . . . . . . . . . . . . . . . . 10,243.86
November 1988 . . . . . . . . . . . . . . . . . 11,672.16
November 1989 . . . . . . . . . . . . . . . . . 14,984.57
November 1990 . . . . . . . . . . . . . . . . . 15,863.60
November 1991 . . . . . . . . . . . . . . . . . 19,703.88
November 1992 . . . . . . . . . . . . . . . . . 21,447.52
November 1993 . . . . . . . . . . . . . . . . . 24,167.30
November 1994 . . . . . . . . . . . . . . . . . 23,693.18
November 1995 . . . . . . . . . . . . . . . . . 30,879.50
November 1996 . . . . . . . . . . . . . . . . . 36,157.66
November 1997 . . . . . . . . . . . . . . . . . 46,879.34
</TABLE>
TABLE II--ANNUITY PERIOD--ILLUSTRATIVE MONTHLY VARIABLE ANNUITY PAYMENTS AN
ANNUITANT WOULD HAVE RECEIVED ASSUMING A FIRST ANNUITY PAYMENT OF $100 IN
NOVEMBER 1987.
<TABLE>
<CAPTION>
Payment For
Month Month
- ----- -----------
<S> <C>
November 1987. . . . . . . . . . . . . . . . . . . 100.00
November 1988. . . . . . . . . . . . . . . . . . . 110.03
November 1989. . . . . . . . . . . . . . . . . . . 136.28
November 1990. . . . . . . . . . . . . . . . . . . 137.37
November 1991. . . . . . . . . . . . . . . . . . . 142.37
November 1992. . . . . . . . . . . . . . . . . . . 172.31
November 1993. . . . . . . . . . . . . . . . . . . 194.04
November 1994. . . . . . . . . . . . . . . . . . . 187.98
November 1995. . . . . . . . . . . . . . . . . . . 225.72
November 1996. . . . . . . . . . . . . . . . . . . 262.63
November 1997. . . . . . . . . . . . . . . . . . . 322.95
</TABLE>
<PAGE>
The amounts shown are based on the investment performance of the Large Cap
Growth Subaccount and the Large Cap Growth Portfolio. All amounts reflect the
provisions of the Contracts described in this Prospectus, including annuity
tables based on the standard assumed investment rate of3 1/2% per annum. The
amounts shown do not reflect the deduction for any applicable premium tax. See
text preceding the Tables.
REAL ESTATE EQUITY SUBACCOUNT
TABLE I--ACCUMULATION PERIOD--ILLUSTRATIVE ACCUMULATED VALUES WHICH WOULD HAVE
RESULTED IF A $10,000 NET PURCHASE PAYMENT HAD BEEN ISSUED FEBRUARY 14, 1989
<TABLE>
<CAPTION>
Accumulation
Value on December
31 of the same
Contract Year Commencing year
- ------------------------ -----------------
<S> <C>
February 1989 . . . . . . . . . . . . . . . . . 10,411.79
February 1990 . . . . . . . . . . . . . . . . . 8,096.26
February 1991 . . . . . . . . . . . . . . . . . 10,702.17
February 1992 . . . . . . . . . . . . . . . . . 12,292.77
February 1993 . . . . . . . . . . . . . . . . . 14,276.57
February 1994 . . . . . . . . . . . . . . . . . 14,539.51
February 1995 . . . . . . . . . . . . . . . . . 16,166.74
February 1996 . . . . . . . . . . . . . . . . . 21,298.75
February 1997 . . . . . . . . . . . . . . . . . 24,717.57
</TABLE>
TABLE II--ANNUITY PERIOD--ILLUSTRATIVE MONTHLY VARIABLE ANNUITY PAYMENTS AN
ANNUITANT WOULD HAVE RECEIVED ASSUMING A FIRST ANNUITY PAYMENT OF $100 IN
FEBRUARY 1989.
<TABLE>
<CAPTION>
Payment For
Month Month
- ----- -----------
<S> <C>
February 1989. . . . . . . . . . . . . . . . . . . 100.00
February 1990. . . . . . . . . . . . . . . . . . . 96.30
February 1991. . . . . . . . . . . . . . . . . . . 86.16
February 1992. . . . . . . . . . . . . . . . . . . 101.00
February 1993. . . . . . . . . . . . . . . . . . . 117.29
February 1994. . . . . . . . . . . . . . . . . . . 121.19
February 1995. . . . . . . . . . . . . . . . . . . 115.20
February 1996. . . . . . . . . . . . . . . . . . . 128.27
February 1997. . . . . . . . . . . . . . . . . . . 163.25
February 1998. . . . . . . . . . . . . . . . . . . 175.99
</TABLE>
The amounts shown are based on the investment performance of the Real Estate
Equity Subaccount and the Real Estate Equity Portfolio. All amounts reflect the
provisions of the Contracts described in this Prospectus, including annuity
tables based on the standard assumed investment rate of3 1/2% per annum. The
amounts shown do not reflect the deduction for any applicable premium tax. See
text preceding the Tables.
45
<PAGE>
INTERNATIONAL EQUITY INDEX SUBACCOUNT
TABLE I--ACCUMULATION PERIOD--ILLUSTRATIVE ACCUMULATED VALUES WHICH WOULD HAVE
RESULTED IF A $10,000 NET PURCHASE PAYMENT HAD BEEN ISSUED FEBRUARY 10, 1989
<TABLE>
<CAPTION>
Accumulation
Value on December
31 of the same
Contract Year Commencing year
- ------------------------ -----------------
<S> <C>
February 1989 . . . . . . . . . . . . . . . . . 11,110.62
February 1990 . . . . . . . . . . . . . . . . . 10,127.48
February 1991 . . . . . . . . . . . . . . . . . 12,370.78
February 1992 . . . . . . . . . . . . . . . . . 12,046.28
February 1993 . . . . . . . . . . . . . . . . . 15,754.61
February 1994 . . . . . . . . . . . . . . . . . 14,645.35
February 1995 . . . . . . . . . . . . . . . . . 15,661.96
February 1996 . . . . . . . . . . . . . . . . . 16,931.02
February 1997 . . . . . . . . . . . . . . . . . 15,921.47
</TABLE>
TABLE II--ANNUITY PERIOD--ILLUSTRATIVE MONTHLY VARIABLE ANNUITY PAYMENTS AN
ANNUITANT WOULD HAVE RECEIVED ASSUMING A FIRST ANNUITY PAYMENT OF $100 IN
FEBRUARY 1989.
<TABLE>
<CAPTION>
Payment For
Month Month
- ----- -----------
<S> <C>
February 1989. . . . . . . . . . . . . . . . . . . 100.00
February 1990. . . . . . . . . . . . . . . . . . . 97.16
February 1991. . . . . . . . . . . . . . . . . . . 90.62
February 1992. . . . . . . . . . . . . . . . . . . 105.09
February 1993. . . . . . . . . . . . . . . . . . . 99.92
February 1994. . . . . . . . . . . . . . . . . . . 126.30
February 1995. . . . . . . . . . . . . . . . . . . 106.20
February 1996. . . . . . . . . . . . . . . . . . . 118.06
February 1997. . . . . . . . . . . . . . . . . . . 119.29
February 1998. . . . . . . . . . . . . . . . . . . 112.74
</TABLE>
The amounts shown are based on the investment performance of the International
Equity Index Subaccount and the International Equity Index Portfolio. All
amounts reflect the provisions of the Contracts described in this Prospectus,
including annuity tables based on the standard assumed investment rate of3 1/2%
per annum. The amounts shown do not reflect the deduction for any applicable
premium tax. See text preceding the Tables.
46
<PAGE>
[LOGO OF JOHN HANCOCK APPEARS HERE]
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
ANNUITY TRANSFERLINE
AUTHORIZATION FORM
INSTRUCTIONS: Please complete and sign where indicated. If your Contract will
be jointly owned, each Owner must sign. An acknowledgment letter will be sent
as soon as your Contract is issued.
THIS COMPLETED FORM MUST BE SUBMITTED WITH THE APPLICATION.
- -------------------------------------------------------------------------------
( ) Yes! I want TRANSFERLINE, John Hancock's telephone transfer program that
permits fast and toll-free transfers of funds within my Contract, as
conditions dictate.
As the applicant for a Contract funded by John Hancock Variable Series Trust I
(the "Fund"), I hereby authorize John Hancock, on behalf of the Fund, to act
upon my telephone instructions to:
(1) reallocate my then current value held in any one or more Subaccounts, and
(2) to change the allocation of future purchase payments to the Subaccounts.
I understand that John Hancock employs the following procedures reasonably
designed to confirm that the instructions received by telephone are genuine:
requiring disclosure of personal identification; tape recording calls; and
providing the Owner with a confirmation of the transfer. As long as John Hancock
follows such procedures, I will not hold John Hancock or the Fund (or any of
their successors) liable for any loss, expense, or cost resulting from any
unauthorized or fraudulent telephone instructions.
I further understand that this authorization is limited by the conditions and
procedures for telephone account transfers and investment option changes set
forth in the prospectus describing my contract.
I further understand that this authorization will continue in force unless and
until the earlier of (a) written revocation received by John Hancock at its
Servicing Office or (b) John Hancock discontinues this service.
Signature(s) of Prospective
Contract Owner(s)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Date: /s/ ____________________________
Date: /s/ ____________________________
Questions call: 1-800-REAL LIFE (732-5543)
Mail to: John Hancock Servicing Office
P.O. Box 111
Boston, MA 02117
</TABLE>
47
<PAGE>
[LOGO OF JOHN HANCOCK APPEARS HERE]
POLICIES ISSUED BY JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY JOHN HANCOCK
PLACE, BOSTON, MASSACHUSETTS 02117
S8136 5/98
48
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
<TABLE>
<C> <C> <S>
1. Condensed Financial Information (Part A)
2. Statement of Assets and Liabilities, John Hancock Variable
Annuity Account U, at December 31, 1997. (Part B)
3. Statement of Operations, John Hancock Variable Annuity Account
U, year ended December 31, 1997. (Part B)
4. Statement of Changes in Net Assets, John Hancock Variable
Annuity Account U, for each of the two years in the period ended
December 31, 1997. (Part B)
5. Notes to Financial Statements, John Hancock Variable Annuity
Account U. (Part B)
6. Statements of Financial Position, John Hancock Mutual Life
Insurance Company, at December 31, 1996, and December 31, 1997.
(Part B)
7. Summary of Operations and Changes in Policyholder's Contingency
Reserves, John Hancock Mutual Life Insurance Company, for each
of the two years in the period ended December 31, 1997. (Part B)
8. Statement of Cash Flows, John Hancock Mutual Life Insurance
Company, for each of the two years in the period ended December
31, 1997. (Part B)
9. Notes to Financial Statements, John Hancock Mutual Life
Insurance Company. (Part B)
(b) Exhibits:
1. John Hancock Board Resolution establishing the Continuing
Separate Account, dated January 14, 1985, included in Post-
Effective Amendment No. 37 to this File No. 2-38827, filed April
26, 1995.
2. Not Applicable.
3. Form of Distribution Agreement and Servicing by and among John
Hancock Distributors, Inc., John Hancock Mutual Life Insurance
Company, and John Hancock Variable Life Insurance Company,
incorporated by reference from Pre-Effective Amendment No. 2 to Form
S-6 Registration Statement for John Hancock Variable Life Account S
(File No. 333-15075) filed April 23, 1997.
4. (a) Form of periodic payment deferred annuity contract (80-70),
included in Post-Effective Amendment No. 17 to Form N-1
Registration Statement of John Hancock Variable Account A (File
No. 2-38827) filed in December, 1979.
(b) Form of single premium deferred annuity contract (78-71),
included in Post-Effective Amendment No. 14 to Form N-1
Registration Statement of John Hancock Variable Account A (File
No. 2-38827) filed in April, 1978.
(c) Form of single premium immediate annuity contract (80-72),
included in Post-Effective Amendment No. 17 to Form N-1
Registration Statement of John Hancock Variable Account A (File
No. 2-38827) filed in December, 1979.
(d) Forms of endorsement (92-8 and 92-9) for periodic premium
deferred annuity contracts to reflect separate account
restructuring, included in Post-Effective Amendment No. 37 to
this File No. 2-38827, filed April 26, 1995.
</TABLE>
C-1
<PAGE>
<TABLE>
<C> <C> <S>
(e) Form of endorsement (92-10) for single premium deferred annuity
contract to reflect separate account restructuring, included in
Post-Effective Amendment No. 37 to this File No. 2-38827, filed
April 26, 1996.
(f) Forms of endorsement (92-11, 92-12 and 92-13) for single premium
immediate annuity contracts to reflect separate account
restructuring, included in Post-Effective Amendment No. 37 to
this File No. 2-38827, filed April 26, 1996.
(g) Forms of endorsement (92-7) containing distribution provisions
applicable to certain plans, included in Post-Effective
Amendment No. 37 to this File No. 2-38827, filed April 26, 1996.
5. (a) Form of periodic premium deferred annuity contract application
(80-70), included in Post-Effective Amendment No. 17 to Form N-1
Registration Statement of John Hancock Variable Account A (File
No. 2-38827) filed in December, 1979.
(b) Form of single premium deferred annuity contract application
(78-71), included in Post-Effective Amendment No. 14 to Form N-1
Registration Statement of John Hancock Variable Account A (File
No. 2-38827) filed in April, 1978.
(c) Form of single premium immediate annuity contract application
(80-72), included in Post-Effective Amendment No. 17 to Form N-1
Registration Statement of John Hancock Variable Account A (File
No. 2-38827) filed in December, 1979.
6. Charter and By-Laws of John Hancock Mutual Life Insurance
Company, included in Post-Effective Amendment No. 27 to Form N-4
Registration Statement of John Hancock Variable Annuity Account
U (File No. 2-38827) filed on December 11, 1986.
7. Not Applicable.
8. Not Applicable.
9. Opinion and Consent of Counsel as to legality of interests being
offered, included in Post-Effective Amendment No. 28 to the Form
N-4 Registration Statement of John Hancock Variable Annuity
Account U (File No. 2-38827) filed February 2, 1987.
10. (a) Consent of Independent Auditor.
(b) Representation of Counsel Pursuant to Rule 485(b).
11. Not Applicable
12. Not Applicable.
13. Diagram of Subsidiaries of John Hancock Mutual Life Insurance
Company, incorporated by reference from Post-Effective Amendment
No. 19 to the Form N-1A Registration Statement of John Hancock
Variable Series Trust I (File No. 33-2081) filed February 27, 1998.
14. Power of Attorney of Robert J. Tarr, Jr., incorporated by reference
from Post-Effective Amendment No. 4 to Registration Statement of John
Hancock Mutual Variable Life Account UV (File No. 33-63900) filed
April 23, 1997. Copy of Power of Attorney for Michael C. Hawley filed
on April 30, 1997. Copies of Powers of Attorney for all other
directors, included in Post-Effective Amendment No. 37 to this File
No. 2-38827, filed April 26, 1996.
</TABLE>
C-2
<PAGE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
DIRECTORS
<TABLE>
<CAPTION>
NAME POSITION WITH DEPOSITOR
- ---- -----------------------
<S> <C>
Samuel W. Bodman........... Director
Nelson S. Gifford.......... Director
Wayne A. Budd.............. Director
William L. Boyan........... Vice Chairman of the Board
E. James Morton............ Director
John F. Magee.............. Director
John M. Connors, Jr........ Director
Stephen L. Brown........... Chairman of the Board and Chief Executive Officer
Richard F. Syron........... Director
Michael C. Hawley.......... Director
I. MacAllister Booth....... Director
C. Vincent Vappi........... Director
Robert J. Tarr, Jr......... Director
David F. D'Alessandro...... President and Chief Operating Officer
Joan T. Bok................ Director
Robert E. Fast............. Director
Foster L. Aborn............ Vice Chairman of the Board
Lawrence K. Fish........... Director
Kathleen F. Feldstein...... Director
EXECUTIVE OFFICERS OTHER THAN DIRECTORS
Richard S. Scipione........ General Counsel
Thomas E. Moloney.......... Executive Vice President and Chief Financial Officer
Diane M. Capstaff.......... Executive Vice President
Barry J. Rubenstein........ Senior Vice President, Counsel and Secretary
</TABLE>
All of the above-named officers and directors can be contacted at the fol-
lowing business address: John Hancock Mutual Life Insurance Company, John Han-
cock Place, P.O. Box 111, Boston, MA 02117.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is a separate account of John Hancock, operated as a unit invest-
ment trust. Registrant supports benefits payable under John Hancock's variable
annuity contracts by investing in shares of John Hancock Variable Series Trust
I (the "Fund") a "series" type of mutual fund, registered under the Investment
Company Act of 1940 (the "Act") as an open-end management investment company.
The Registrant and other separate accounts of John Hancock and John Hancock
Variable Life Insurance Company ("JHVLICO") own all of the Fund's outstanding
shares of beneficial interest. The purchasers of variable annuity and variable
life insurance contracts, in connection with which the Fund is used, will have
the opportunity to instruct John Hancock and JHVLICO with respect to the vot-
ing of the shares of the Fund held by Registrant as to certain matters. Sub-
ject to the voting instructions, John Hancock directly controls Registrant.
A diagram of the subsidiaries John Hancock is incorporated by reference from
Exhibit 17 to Post Effective Amendment No. 19 to the Form N-1A Registration
Statement of John Hancock Variable Series Trust I (File No. 33-2081) filed
February 27, 1998. All such subsidiaries are included in John Hancock's consoli-
dated financial statements.
C-3
<PAGE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of March 30, 1998, the number of Contract Owners of variable annuity
contracts offered by Account was 93,199.
ITEM 28. INDEMNIFICATION
Article 9a of the By-Laws of John Hancock provides indemnification to each
present and former director, officer, and employee of John Hancock against
litigation expenses and liabilities incurred while acting as such, subject to
limitations of law, including under the Act. No indemnification shall be paid
if a director or officer is finally adjudicated not to have acted in good
faith in the reasonable belief that his action was in the best interest of
John Hancock. John Hancock may pay expenses incurred in defending an action or
claim in advance of its final disposition, but only upon receipt of an under-
taking by the person indemnified to repay such amounts if he or she should be
determined not be entitled to indemnification.
Reference is made to Article VI of the ByLaws of the Fund, filed as Exhibit
2 to Post Effective Amendment No. 2 to the Fund's Registration Statement (File
No. 33-2081) dated April 12, 1988, which provides that the Fund shall indem-
nify or advance any expenses to the trustees, shareholders, officers, or em-
ployees of the Fund to the extent set forth in the Declaration of Trust.
Sections 6.3 through 6.17 of the Declaration of Trust, included as Exhibit 1
to the Fund's Post Effective Amendment No. 2, relate to the indemnification of
trustees, shareholders, officers, and employees. It is provided that the Fund
shall indemnify any trustee made a party to any proceeding by reason of serv-
ice in that capacity if the trustee (a) acted in good faith and (b) reasonably
believed, (1) in the case of conduct in the trustee's official capacity with
the Fund, that the conduct was in the best interest of the Fund and (2) in all
other cases, that the conduct was at least not opposed to the best interests
of the Fund, and (c) in the case of any criminal proceeding, the Fund shall
indemnify the trustee if the trustee acted in good faith and had no reasonable
cause to believe that the conduct was unlawful. Indemnification may not be
made by the Fund unless authorized in each case by a determination by the
Board of Trustees or by special legal counsel or by the shareholders. Neither
indemnification nor advancement of expenses may be made if the trustee or of-
ficer has incurred liability by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of duties involved in the conduct of
his office ("Disabling Conduct"). The means for determining whether indemnifi-
cation shall be made shall be (1) a final decision on the merits by a court or
other body before whom the proceeding was brought that the person to be indem-
nified was not liable by reason of Disabling Conduct or (2) in the absence of
such a decision, a reasonable determination, based upon a review of the facts,
that such person was not liable by reason of Disabling Conduct. Such latter
determination may be made either (a) by the vote of a majority of a quorum of
Trustees of the Fund who are neither "interested" persons of the Fund (as de-
fined in the Act) nor parties to the proceeding or (b) by an independent legal
counsel in a written opinion. The advancement of legal expenses may not occur
unless the trustee or officer agrees to repay the advance (unless it is ulti-
mately determined that he is entitled to indemnification) and at least one of
three conditions is satisfied: (1) he provides security for his agreement to
repay, (2) the Fund is insured against loss by reason of lawful advances, or
(3) a majority of a quorum of the Trustees of the Fund who are not interested
persons and are not parties to the proceedings, or independent counsel in a
written opinion, determine that there is reason to believe that the trustee or
officer will be found entitled to indemnification.
Similar types of provisions dealing with the indemnification of the Fund's
officers and trustee are hereby incorporated by reference from documents pre-
viously filed with the Commission, specifically, Section 14 of the Investment
Management Agreement by and between John Hancock Variable Series Trust I and
John Hancock Mutual Life Insurance Company (Exhibit 5.f. to Post-Effective
Amendment No. 4 to the Registration Statement of the Fund (File No. 33-2081)
dated April, 1989), Section 14 of the Investment Management Agreement by and
between John Hancock Variable Series Trust I and John Hancock Mutual Life In-
surance Company (Exhibit 5.a. to the Registration Statement (File No. 33-2081)
C-4
<PAGE>
dated December 11, 1985), Section 14 of Investment Management Agreement by and
between John Hancock Variable Series Trust I and John Hancock Mutual Life In-
surance Company (Exhibit 5.g. to Post-Effective Amendment No. 9 to the Regis-
tration Statement of the Fund (File No. 33-2081) dated March 2, 1994), Section
14 of the Investment Management Agreement By and Between John Hancock Variable
Series Trust I and John Hancock Mutual Life Insurance Company (Exhibit 5.k. to
Post-Effective Amendment No. 13 to the Fund's Registration Statement (File No.
33-2081) dated April 30, 1996), Section 14 of the Investment Management
Agreement By and Between John Hancock Variable Series Trust I and John Hancock
Mutual Life Insurance Company (Exhibit 5.v. to Post-Effective Amendment No. 19
to the Fund's Registration Statement (File No. 3-2081) dated April __, 1998,
Section 7 of the Underwriting and Administrative Services Agreement by and
between John Hancock Variable Series Trust I and John Hancock Mutual Life
Insurance Company (Exhibit 6 to Post-Effective Amendment No. 4 to the
Registration Statement of the Fund (File No. 33-2081) dated April, 1989),
Section 15 of the Transfer Agency Agreement by and between John Hancock Variable
Series Trust I and John Hancock Mutual Life Insurance Company (Exhibit 9 to Pre-
Effective Amendment No. 1 to the Registration Statement of the Fund (File No.
33-2081) dated March 13, 1986), and Section 6 of the Underwriting and Indemnity
Agreement By and Among John Hancock Series Trust, John Hancock Distributors,
Inc., and John Hancock Mutual Life Insurance Company (Exhibit 6.b. to Post-
Effective Amendment No. 14 to Form N-1A Registration Statement of the Fund (File
No. 33-2081) filed February 28, 1997).
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions or otherwise, the Regis-
trant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in that
Act and is, therefore, unenforceable. In the event that a claim for indemnifi-
cation against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer, or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by a controlling precedent, submit to
a court of appropriate jurisdiction the question of whether indemnification by
it is against public policy as expressed in that Act and will be governed by
the final adjudication of such issue.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) John Hancock Distributors, Inc., is also the principal underwriter for the
Fund and John Hancock Variable Annuity Account V and I and John Hancock Variable
Life Ac-counts U, V, and S and John Hancock Mutual Variable Life Insurance
Account UV.
(b) Reference is made to the response to Item 25, above.
(c) The information under "Distribution Agreement and Other Services--Dis-
tribution Agreement" in the statement of additional information forming a part
of this registration statement is incorporated herein by reference.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The following entities prepare, maintain, and preserve the records required by
Section 31(a) of the Act for the Registrant and the Fund (as indicated below
through written agreements between the parties to the effect that such services
will be provided to the Registrant and/or the Fund for such periods prescribed
by the Rules and Regulations of the Commission under the Act and such records
will be surrendered promptly on request:
John Hancock Distributors, Inc., John Hancock Place, Boston, Massachusetts,
02117, serves as Registrant's distributor and principal underwriter, and in such
capacities, keeps records regarding shareholders account records and cancelled
stock certificates. John Hancock (at the same address), in its capacity as
Registrant's depositor, investment adviser, and transfer agent, keeps all other
records required by Section 31(a) of the Act.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS AND REPRESENTATIVES
(a) Registrant hereby undertakes to file a post-effective amendment to this
Registration Statement as frequently as is necessary to ensure that the au-
dited financial statements in the registration statement are never more than
16 months old for so long as payments under the variable annuity Contracts may
be accepted.
(b) Registrant hereby undertakes to include as part of any application to
purchase a Contract offered by the prospectus a space that an applicant can
check to request a Statement of Additional Information.
C-5
<PAGE>
(c) Registrant hereby undertakes to deliver any Statement of Additional In-
formation and any financial statements required to be made available under
Form N-4 promptly upon written or oral request.
(d) Registrant represents that, in connection with the sale of the Contracts
offered pursuant to this registration statement, it has complied with the con-
ditions of the SEC no-action letter regarding the purchase of variable annuity
contracts under retirement plans meeting the requirements of Section 403(b) of
the Internal Revenue Code (American Council of Life Insurance (pub. avail.
Nov. 28, 1988)). Specifically, Registrant has (1) included appropriate disclo-
sure regarding the redemption restrictions imposed by Section 403(b)(11) in
the prospectus; (b) included appropriate disclosure regarding the redemption
restrictions imposed by Section 403(b)(11) in any sales literature used in
connection with the offer of the Contracts; (3) instructed sales representa-
tives specifically to bring the redemption restrictions imposed by Section
403(b)(11) to the attention of potential plan participants; and (4) obtained
from each plan participant who purchases a Section 403(b) annuity contract,
prior to or at the time of such purchase, a signed statement acknowledging the
participant's understanding of (a) the restrictions on redemptions imposed by
Section 403(b)(11) and (b) the investment alternatives available under the em-
ployer's Section 403(b) arrangement to which the participant may elect to
transfer his contract value.
(e) John Hancock Mutual Life Insurance Company represents that the fees and
charges deducted under the Policies, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by the insurance company.
C-6
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, the Registrant certifies that it
meets all of the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has caused this
amended Registration Statement to be signed on its behalf, in the City of Bos-
ton and the Commonwealth of Massachusetts on this 29th day of April, 1998.
John Hancock Variable Annuity Account U
(Registrant)
By John Hancock Mutual Life Insurance
Company
/s/ Stephen L. Brown
By______________________________________
Stephen L. Brown
Chairman of the Board and Chief
Executive Officer
John Hancock Mutual Life Insurance
Company (Depositor)
/s/ Stephen L. Brown
By______________________________________
Stephen L. Brown
Chairman of the Board and Chief
Executive Officer
C-7
<PAGE>
As required by the Securities Act of 1933 and the Investment Company Act of
1940, this amended Registration Statement has been signed by the following
persons in their capacities with John Hancock Mutual Life Insurance Company
and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ Thomas E. Moloney Chief Financial Officer (Principal 4/29/98
________________________________________ Financial Officer and Principal
Thomas E. Moloney Accounting Officer)
/s/ Stephen L. Brown Chairman of the Board and Chief 4/29/98
________________________________________ Executive Officer (Principal Executive
Stephen L. Brown Officer)
for himself and as
Attorney-in-Fact
</TABLE>
<TABLE>
<C> <C> <S>
FOR: Foster L. Aborn.................. Vice Chairman of the Board
David F. D'Alessandro............ President and Chief Operating Officer
William L. Boyan................. Vice Chairman of the Board
</TABLE>
<TABLE>
<S> <C>
Nelson S. Gifford...................... Director
Richard F. Syron....................... Director
John F. Magee.......................... Director
John M. Connors, Jr.................... Director
Lawrence K. Fish....................... Director
Joan T. Bok............................ Director
Robert E. Fast......................... Director
I. MacAllister Booth................... Director
</TABLE>
<TABLE>
<S> <C>
E. James Morton........................ Director
Michael C. Hawley...................... Director
Samuel W. Bodman....................... Director
Robert J. Tarr, Jr..................... Director
C. Vincent Vappi....................... Director
Kathleen F. Feldstein.................. Director
</TABLE>
C-8
<PAGE>
[LOGO OF JOHN HANCOCK APPEARS HERE]
Mutual Life
Insurance Company
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
STATEMENT OF ADDITIONAL INFORMATION
This statement of additional information is not a prospectus. It is intended
that this statement of additional information be read in conjunction with the
prospectus of John Hancock Variable Annuity Account U, dated May 1, 1998. A
copy of the prospectus may be obtained from John Hancock Variable Annuity
Account U, John Hancock Servicing Office, P.O. Box 111, Boston Massachusetts,
02117, telephone number (800) REAL LIFE (732-5543), fax number (617-886-3048).
This statement of additional information is dated May 1, 1998.
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
CROSS REFERENCE SHEET
----------------
<TABLE>
<CAPTION>
SECTION IN STATEMENT OF
FORM N-4 ITEM NO. ADDITIONAL INFORMATION
----------------- -----------------------
<C> <S> <C>
15. Cover Page..................... Cover Page
16. Table of Contents.............. Table of Contents
17. General Information and
History....................... Business History
18. Services....................... Distribution Agreement and Other Services
19. Purchase of Securities Being Not Applicable (relevant information in
Offered....................... prospectus)
20. Underwriters................... Distribution Agreement and Other Services
21. Calculation of Yield Quotations
of Money Market Subaccounts... Calculation of Performance Data
22. Annuity Payments............... Calculation of Annuity Payments
23. Financial Statements........... Financial Statements
</TABLE>
<PAGE>
TABLE OF CONTENTS
----------------
<TABLE>
<CAPTION>
CROSS REFERENCE TO
PAGE PAGE IN PROSPECTUS
---- ------------------
<S> <C> <C>
Business History........................................ 1 15-16
Distribution Agreement and Other Services............... 1 18, 19-20, 34
Distribution Agreement................................ 1 19-20, 34
Investment Advisory Agreement......................... 2 18
Custodian Agreement................................... 3 --
Independent Auditors.................................. 3 34
Calculation of Performance Data......................... 3 32
Calculation of Annuity Payments......................... 5 25-27
Financial Statements.................................... 7 35
</TABLE>
<PAGE>
BUSINESS HISTORY
John Hancock Variable Annuity Account U (the "Account") is a separate
account of John Hancock Mutual Life Insurance Company ("John Hancock"),
established under the laws of the State of Massachusetts. The Account is
organized as a unit investment trust and registered with the Securities and
Exchange Commission under the Investment Company Act of 1940 (the "Act") and
the Securities Act of 1933. The Account currently has twenty-three separate
subaccounts (Managed, Growth & Income, Equity Index, Large Cap Value, Large
Cap Growth, Mid Cap Value, Mid Cap Growth, Diversified Mid Cap Growth
(formerly, Special Opportunities), Real Estate Equity, Small/Mid Cap CORE,
Small Cap Value, Small Cap Growth, Global Equity, International Balanced,
International Equity Index (formerly, International Equities), International
Opportunities, Emerging Markets Equity, Short-Term Bond (formerly, Short-Term
U.S. Government), Bond Index, Sovereign Bond, Strategic Bond, High Yield Bond,
and Money Market) through which John Hancock's individual variable annuity
contracts are funded, at the discretion of the individual contract owner (the
"Owner"). The assets of each subaccount are, in turn, invested in a
corresponding Portfolio of John Hancock Variable Series Trust I (the "Fund"),
a registered open-end diversified management investment company advised by
John Hancock.
The Account is the successor to six separate investment accounts of John
Hancock: John Hancock Variable Accounts A and C (the stock accounts), John
Hancock Variable Accounts A-1 and C-1 (the bond accounts), and John Hancock
Variable Accounts A-2 and C-2 (the money market accounts). These six accounts
(collectively, the "Variable Accounts") had investment objectives, policies,
and restrictions which were the same as those of the respective subaccounts of
the Account. On February 20, 1987, John Hancock, on behalf of the Variable
Accounts, combined the stock accounts to form the Account's newly-created
stock subaccount, combined the bond accounts to form the Account's newly-
created bond subaccount, and combined the money market accounts to form the
Account's newly-created money market subaccount. The newly created subaccounts
were established within John Hancock Variable Annuity Account A, the name of
which was changed to John Hancock Variable Annuity Account U.
Simultaneously with the transactions described above, John Hancock, on
behalf of the Variable Accounts, transferred all of the portfolio assets of
the newly-created stock, bond, and money market subaccounts of Account A to
the Fund's Stock (renamed Growth & Income), Bond (renamed Sovereign Bond), and
Money Market Portfolios, respectively, in exchange for shares of the
corresponding Fund Portfolio. In addition, the Fund assumed, in effect, any
unsatisfied liability incurred by the corresponding Variable Account.
All of these transactions are referred to as the "Reorganization." They were
effected pursuant to an Agreement and Plan of Reorganization, dated June 10,
1986, entered into by John Hancock, the Variable Accounts, and the Fund.
DISTRIBUTION AGREEMENT AND OTHER SERVICES
DISTRIBUTION AGREEMENT
Pursuant to a Distribution Agreement, dated May 1, 1997, John Hancock
Distributors, Inc. ("Distributors"), a registered broker-dealer, acts as
"principal underwriter" for the Account. Tables showing Distributors'
compensation for sales are included in the Account's Prospectus under "Charges
Under Variable Annuity Contracts." Distributors' major responsibility as
underwriter is to perform all sales and marketing functions relating to the
Contracts. The offering of the Account's interests is continuous, but
Distributors is not obligated to sell any particular amount of the Account's
interests.
1
<PAGE>
INVESTMENT ADVISORY AGREEMENT
The Fund, in which the Contracts are invested, has contracted with John
Hancock for investment advisory services. Pursuant to two Investment
Management Agreements, both dated as of April 12, 1988, one Investment
Management Agreement, dated as of April 15, 1994, and one Investment
Management Agreement dated as of March 14, 1996, John Hancock, a registered
investment adviser under the Act, advises the Fund in connection with policy
decisions; provides administration of day-to-day operations; negotiates the
quantity or price of its investments; provides personnel, office space,
equipment, and supplies for the Fund; maintains records required by the Act;
values assets and liabilities of the Fund; computes income, net asset value,
and yield of each Portfolio; and supervises activities of the sub-investment
managers referred to below.
John Hancock has day-to-day responsibility for making investment decisions
and placing investment orders for the Money Market Portfolio. However, with
respect to the other Portfolios, John Hancock has contracted with the
following registered investment advisors to perform these and certain other
recordkeeping functions as sub-investment manager pursuant to sub-investment
agreements dated as indicated:
<TABLE>
<C> <S> <C>
Growth & Income Independence Investment Associates, Inc. 4/15/88
Sovereign Bond John Hancock Advisers, Inc. 5/01/95
Large Cap Growth Independence Investment Associates, Inc. 4/15/88
Managed Independence Investment Associates, Inc. 4/15/88
Real Estate Equity Independence Investment Associates, Inc. 4/15/94
Independence International Associates,
International Equity Index Inc. 5/1/98
Diversified Mid Cap Growth John Hancock Advisers, Inc. 9/23/94
Short-Term Bond Independence Investment Associates, Inc. 4/15/94
Equity Index State Street Bank & Trust, N.A. 3/18/97
Large Cap Value T. Rowe Price Associates, Inc. 3/29/96
Mid Cap Growth Janus Capital Corporation 3/29/96
Mid Cap Value Neuberger & Berman, LLC 5/01/96
Small Cap Growth John Hancock Advisers, Inc. 3/29/96
Small Cap Value INVESCO Management & Research 3/22/96
Strategic Bond J.P. Morgan Investment Management, Inc. 3/29/96
International Opportunities T. Rowe Price Associates, Inc. 3/29/96
Rowe Price-Fleming International, Inc. 3/29/96
International Balanced Brinson Partners, Inc. 3/29/96
Small/Mid Cap CORE Goldman Sachs Asset Management 5/1/98
(a division of Goldman, Sachs & Co.)
High Yield Bond Wellington Management Company, LLP 4/20/98
Bond Index Mellon Bond Associates, LLP 4/20/98
Global Equity Scudder Kemper Investments, Inc. 4/24/98
Emerging Markets Equity Montgomery Asset Management, LLC 5/1/98
</TABLE>
John Hancock pays the sub-investment management fees pursuant to the
Agreements and, therefore, the sub-investment management arrangements result
in no additional charge or expense to the Fund or to contractholders. A more
complete description of the Fund's management and the investment advisory fees
is included under "Management of the Fund" in the Fund's Prospectus and under
"Investment Advisory and Other Services" in the Fund's Statement of Additional
Information.
2
<PAGE>
CUSTODIAN AGREEMENT
The Fund's custodian with respect to all the Portfolios is State Street Bank
and Trust, 225 Franklin Street, Boston, Massachusetts, pursuant to a Custodian
Agreement, dated January 30, 1995, and amended March 18, 1996, January 28,
1997, May 1, 1997, June 18, 1997, and April 14, 1998. The custodian's duties
include safeguarding and controlling the Fund's cash investments, handling the
receipt and delivery of securities, and collecting interest and dividends on
the Fund's investments.
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts, has been
selected as the independent auditors of the Account. The firm is responsible
for auditing the financial statements of the Account and JHMLICO.
CALCULATION OF PERFORMANCE DATA
The Account will show the average annual total return for each Subaccount,
according to the following formula prescribed by the Securities and Exchange
Commission:
P(1 + T)/n/ = ERV
where: 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 payment,
made at the beginning of a period (or fractional portion
thereof)
Average annual total return is the annual compounded rate of return that
would have produced the cash redemption value under a Contract had the
subaccount been invested in a specified Portfolio of the Fund (or its
predecessor) over the stated period had the performance remained constant
throughout. The calculation assumes a single $1,000 payment made at the
beginning of the period and full redemption at the end of the period. It
reflects a deduction for sales charges and all other Fund and Contract level
charges except premium taxes, if any.
3
<PAGE>
The following table shows the average annual total return for each
Subaccount for the period ended December 31, 1997:
<TABLE>
<CAPTION>
AVERAGE
ANNUALIZED
RETURNS
--------------------------
YEAR TO 1 5 10 DATE OF
SUBACCOUNT*** DATE YEAR YEAR* YEAR* INCEPTION**
------------- ------- ------ ----- ----- -----------
<S> <C> <C> <C> <C> <C>
Managed............................. 11.7% 11.7% 10.5% 11.1% 11/09/87
Growth & Income..................... 22.1% 22.1% 16.3% 15.8% 04/03/72
Equity Index........................ 24.9% 24.9% 23.2% NA 04/30/96
Large Cap Value..................... 20.9% 20.9% 20.6% NA 04/30/96
Large Cap Growth.................... 23.2% 23.2% 15.7% 15.8% 11/24/87
Mid Cap Value....................... 24.4% 24.4% 24.2% NA 04/30/96
Mid Cap Growth...................... 9.8% 9.8% 7.0% NA 04/30/96
Special Opportunities............... -2.6% -2.6% 17.1% NA 04/30/96
Real Estate Equity.................. 10.2% 10.2% 13.8% 10.1% 02/01/89
Small Cap Value..................... 18.2% 18.2% 16.7% NA 04/30/96
Small Cap Growth.................... 7.5% 7.5% 3.7% NA 04/30/96
International Balanced.............. -3.5% -3.5% 1.4% NA 04/30/96
International Equities.............. -10.7% -10.7% 4.7% 4.7% 02/01/89
International Opportunities......... -4.1% -4.1% 1.0% NA 04/30/96
Short-Term U.S. Gov't............... 0.1% -5.0% -1.6% NA 04/30/96
Sovereign Bond...................... 3.6% 3.6% 6.0% 7.6% 06/02/80
Strategic Bond...................... 2.6% 2.6% 5.1% NA 04/30/96
Money Market........................ -0.8% -0.8% 2.6% 4.2% 05/13/82
</TABLE>
- --------
* or since inception of the applicable Portfolio or its predecessor.
** of the Portfolio or its predecessor.
*** Absent reimbursement from John Hancock to certain Portfolios for some
periods, total return figures related to the subaccounts would have been
lower.
The Account will show current yield and effective yield figures for the
Money Market Subaccount. The current yield of the Money Market Subaccount for
a seven-day period (the "base period") will be computed by determining the
"net change in value" (calculated as set forth below) of a hypothetical
account having a balance of one share at the beginning of the period, dividing
the net change in account value by the value of the account at the beginning
of the base period to obtain the base period return, and multiplying the base
period return by 365/7 with the resulting yield figure carried to the nearest
hundredth of one percent. Net changes in value of a hypothetical account will
include net investment income of the account (accrued daily dividends as
declared by the Money Market Portfolio, less daily expense charges of the
account) for the period, but will not include realized gains or losses or
unrealized appreciation or depreciation on the underlying fund shares.
Mortality and expense risk and periodic charges are reflected, but charges for
premium taxes and charges deducted from premiums for sales expenses,
administrative expenses and minimum death benefit are not reflected.
The effective yield reflects the effects of compounding and represents an
annualization of the current return with all dividends reinvested. The formula
for effective yield, as prescribed by the SEC, is:
Effective yield [(Base period return + 1) /365/7/] - 1
4
<PAGE>
For the 7-day period ending December 31, 1997, the Money Market Subaccount's
current yield was 4.47% and its effective yield was 4.57%.
The Account will calculate current yield for each of the other Subaccounts
according to the following formula prescribed by the SEC:
Yield = 2[([(a-b)/cd]+1)/6/-1
where: a= dividends and interest earned during the period
b= expenses accrued for the period (net of reimbursement)
c= the average daily number of shares outstanding during the
period that were entitled to receive dividends
d= the maximum offering price per share on the last day of the
period.
According to this formula, yield is determined by dividing the net
investment income per Accumulation Shared earned during the period (minus the
deduction for mortality and expense risk charge, contract fee, administrative
services charge) by the Accumulation Share Value on the last day of the period
and annualizing the resulting figure. The calculation is based on specified
30-day period identified in the advertisement. No sales loads are assumed.
CALCULATION OF ANNUITY PAYMENTS
The variable monthly annuity payment to an Annuitant under a Contract is
equal to the sum of the products of the number of each subaccount's "Annuity
Units" credited to the Contract multiplied by the applicable "Annuity Unit
Value," as these terms are defined under "Special Terms" and "Variable Account
Valuation Procedures," respectively, in the Account's prospectus. The number
of each subaccount's Annuity Units credited to the Contract is multiplied by
the applicable Annuity Unit Value as of ten calendar days prior to the date
the payment is due. The value of the Annuity Units varies from day to day,
depending on the investment performance of the subaccount, the deductions made
against the subaccount, and the assumed investment rate used in computing
Annuity Unit Values. Thus, the variable monthly annuity payments vary in
amount from month to month.
The amount of the initial variable monthly payment is determined on the
assumption that the actual net investment rate of each subaccount used in
calculating the Net Investment Factor (as described under "Variable Account
Valuation Procedures--Net Investment Factor" in the Account's prospectus) will
be equal on an annual basis to the assumed investment rate. If the actual net
investment rate between the dates for determining two monthly annuity payments
is greater than the assumed investment rate, the latter monthly payment will
be larger in amount than the former. On the other hand, if the actual net
investment rate between the dates for determining two monthly annuity payments
is less than the assumed investment rate, the latter monthly payment will be
smaller in amount than the former.
The mortality table used as a basis for the annuity purchase rates of the
Contracts is the 1971 Individual Annuity Mortality Table, with a five-year
setback for females and with certain age adjustments based on the calendar
year of birth. The annuity purchase rates used in a Contract purchased in
connection with certain employer-related plans and used in all Contracts
issued in Montana and Massachusetts will be the annuity
5
<PAGE>
purchase rates for females. The impact of this change will be lower benefits
(5% to 15%) from a male's viewpoint than would otherwise be the case.
The following outline is an illustration of the method of calculating
variable monthly annuity payments and the number of Annuity Units under the
deferred Contracts.
A. GENERAL FORMULAE TO DETERMINE ACCUMULATION SHARE VALUES AND ANNUITY UNIT
VALUES
Net Investment Rate =
<TABLE>
<S> <C> <C> <C> <C>
Subaccount Charges (0.002740% per
Investment + Capital - Capital - Taxes - Day of the Value of the Subaccount at
Income Gains Losses (if any) the Beginning of the Valuation Period)
-------------------------------------------------------------------------------------------
Value of the Subaccount at the Beginning of the Valuation Period
</TABLE>
Net Investment Factor + 1.00000000 + Net Investment Rate
<TABLE>
<S> <C> <C>
Accumulation Share Value = Accumulation Share Value on X Net Investment
Preceding Valuation Date Factor
</TABLE>
<TABLE>
<S> <C> <C> <C>
Annuity Unit Annuity Unit Net Factor to Neutralize
Value = Value on Preceding X Investment X the Assumed
Valuation Date Factor Investment Rate
</TABLE>
B. HYPOTHETICAL EXAMPLE ILLUSTRATING THE CALCULATION OF ACCUMULATION SHARE
VALUES AND ANNUITY UNIT VALUES
Assume at the beginning of the Valuation Period being considered, the value
of the Subaccount was $4,000,000. Investment income during the Valuation
Period totaled $2000 while capital gains were $3000 and capital losses were
$1000. No taxes accrued. Charges against the beginning value of the Subaccount
amount to $109.60 assuming a one day Valuation Period. The $109.60 was
computed by multiplying the beginning Subaccount value of $4,000,000 by the
factor 0.00002740. By substituting in the first formula above, the net
investment rate is equal to $3890.40 ($2000 + $3000 - $1000 - $109.60) divided
by $4,000,000 or 0.0009726. The Net Investment Factor would then be 1.0009726.
Assume further that each Accumulation Share had a value of $11.250000 on the
previous Valuation Date, and the value of an Annuity Unit on such date was
$1.0850000. Based upon the experience of the Subaccount during the Valuation
Period, the value of an Accumulation Share at the end of the Valuation Period
would be $11.260942 ($11.250000 X 1.0009726). The value of an Annuity Unit at
the end of the Valuation Period would be $1.0859529
($1.0850000 X 1.0009726 X .99990575). The final figure, .99990575, neutralizes
the effect of a 3 1/2% assumed investment rate so that the Annuity Unit
recognizes only the actual investment experience.
6
<PAGE>
C. GENERAL FORMULAE TO DETERMINE AMOUNT OF MONTHLY VARIABLE ANNUITY PAYMENTS
AND NUMBER OF ANNUITY UNITS FOR DEFERRED CONTRACTS
Amount of the First Variable Annuity Payment =
Number of
Accumulation
Shares X Accumulation Share Value X First Monthly Annuity
Applied 10 Days Before Maturity Date Payment Factor
----------------------------------------------
$1,000
Number of Annuity Units = Amount of First Variable Annuity Payment
-----------------------------------------------
Annuity Unit Value 10 Days Before Maturity Date
Amount of Subsequent Number of Annuity Unit Value
Variable Annuity Payment = Annuity Units X 10 Days Before Payment Date
D. HYPOTHETICAL EXAMPLE ILLUSTRATING THE CALCULATION OF THE AMOUNT OF MONTHLY
VARIABLE ANNUITY PAYMENT FOR DEFERRED CONTRACTS
Assume that 10 days before the date of maturity a Contract has credited to
it 4000.000 Accumulation Shares each having a value of $12.000000. The
appropriate annuity purchase rate in the contract for an assumed investment
rate of 3 1/2% is $6.35 per $1000 of proceeds for the Annuity Option elected.
The Annuitant's first monthly payment would then be $304.80.
4000.000 X $12.00000 X $6.35
----------------------------
$1000
If the value of an Annuity Unit 10 days before the date of maturity was
$1.4000000, the number of Annuity Units represented by the first and
subsequent payments would be 217.714 ($304.80/$1.4000000). If the Annuity Unit
Value 10 days before the due date of the second monthly payment was $1.405000,
the amount of the second payment would be $305.89 (217.714 X $1.405000).
FINANCIAL STATEMENTS
(SEE NEXT PAGE)
7
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
LARGE CAP SOVEREIGN INTERNATIONAL SMALL CAP INTERNATIONAL MID CAP LARGE CAP MONEY MID CAP
GROWTH BOND EQUITIES GROWTH BALANCED GROWTH VALUE MARKET VALUE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ------------ ------------- ----------- ------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investment in
shares of
portfolios of
John Hancock
Variable Series
Trust I, at
value........... $240,567,271 $284,138,042 $53,903,189 $10,274,715 $1,830,853 $5,301,436 $8,576,779 $59,200,386 $10,258,116
Receivable from
John Hancock
Variable Series
Trust I......... 59,821 225,702 101,066 21,049 386 18,023 7,549 88,512 20,874
------------ ------------ ----------- ----------- ---------- ---------- ---------- ----------- -----------
Total assets.... 240,627,092 284,363,744 54,004,255 10,295,764 1,831,239 5,319,459 8,584,328 59,288,898 10,278,990
LIABILITIES
Payable to John
Hancock Variable
Series Trust I.. 50,704 215,779 99,016 20,668 316 17,824 7,224 86,444 20,490
Asset charges
payable......... 9,117 9,923 2,050 381 70 199 325 2,068 384
------------ ------------ ----------- ----------- ---------- ---------- ---------- ----------- -----------
Total
liabilities..... 59,821 225,702 101,066 21,049 386 18,023 7,549 88,512 20,874
------------ ------------ ----------- ----------- ---------- ---------- ---------- ----------- -----------
Net assets...... 240,567,271 284,138,042 53,903,189 10,274,715 1,830,853 5,301,436 8,576,779 59,200,386 10,258,116
============ ============ =========== =========== ========== ========== ========== =========== ===========
NET ASSETS:
Attributable to
John Hancock
Mutual Life
Insurance
Company......... -- 650,509 -- -- -- -- -- 335,862 --
Attributable to
contractowners.. 240,567,271 283,487,533 53,903,189 10,274,715 1,830,853 5,301,436 8,576,779 58,864,524 10,258,116
------------ ------------ ----------- ----------- ---------- ---------- ---------- ----------- -----------
$240,567,271 $284,138,042 $53,903,189 $10,274,715 $1,830,853 $5,301,436 $8,576,779 $59,200,386 $10,258,116
============ ============ =========== =========== ========== ========== ========== =========== ===========
</TABLE>
See accompanying notes.
8
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT-TERM
SPECIAL REAL ESTATE GROWTH & U.S. SMALL CAP INTERNATIONAL EQUITY STRATEGIC
OPPORTUNITIES EQUITY INCOME MANAGED GOVERNMENT VALUE OPPORTUNITIES INDEX BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ----------- ------------ -------------- ---------- ---------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investment in
shares of
portfolios of
John Hancock
Variable Series
Trust I,
atvalue......... $37,824,519 $97,563,113 $845,376,480 $1,261,048,372 $6,508,724 $7,238,641 $3,420,865 $17,026,523 $3,138,971
Receivable from
John Hancock
Variable Series
Trust I......... 23,833 84,147 577,766 499,657 24,426 37,955 510 22,964 9,743
----------- ----------- ------------ -------------- ---------- ---------- ---------- ----------- ----------
Total assets.... 37,848,352 97,647,260 845,954,246 1,261,548,029 6,533,150 7,276,596 3,421,375 17,049,487 3,148,714
LIABILITIES
Payable to John
Hancock Variable
Series Trust I.. 22,403 80,431 548,507 451,669 24,178 37,683 380 22,321 9,626
Asset charges
payable......... 1,430 3,716 29,259 47,988 248 272 130 643 117
----------- ----------- ------------ -------------- ---------- ---------- ---------- ----------- ----------
Total
liabilities..... 23,833 84,147 577,766 499,657 24,426 37,955 510 22,964 9,743
----------- ----------- ------------ -------------- ---------- ---------- ---------- ----------- ----------
Net assets...... 37,824,519 97,563,113 845,376,480 1,261,048,372 6,508,724 7,238,641 3,420,865 17,026,523 3,138,971
=========== =========== ============ ============== ========== ========== ========== =========== ==========
NET ASSETS:
Attributable to
John Hancock
Mutual Life
Insurance
Company......... -- -- 2,148,367 -- -- -- -- -- --
Attributable to
contractowners.. 37,824,519 97,563,113 843,228,113 1,261,048,372 6,508,724 7,238,641 3,420,865 17,026,523 3,138,971
----------- ----------- ------------ -------------- ---------- ---------- ---------- ----------- ----------
$37,824,519 $97,563,113 $845,376,480 $1,261,048,372 $6,508,724 $7,238,641 $3,420,865 $17,026,523 $3,138,971
=========== =========== ============ ============== ========== ========== ========== =========== ==========
</TABLE>
See accompanying notes.
9
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
LARGE CAP SOVEREIGN INTERNATIONAL SMALL CAP INTERNATIONAL MID CAP LARGE CAP MONEY MID CAP
GROWTH BOND EQUITIES GROWTH BALANCED GROWTH VALUE MARKET VALUE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------- ----------- ------------- ---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
income:
Distributions
received from
the portfolios
of John Hancock
Variable Series
Trust I......... $21,835,728 $22,130,670 $ 2,759,991 $ 4,608 $ 89,074 $ -- $ 363,356 $3,229,468 $760,391
Expenses:
Mortality and
expense risks... 3,053,389 3,623,709 882,708 107,829 20,911 55,403 83,008 773,163 64,889
----------- ----------- ----------- ---------- -------- -------- ---------- ---------- --------
Net investment
income (loss).... 18,782,339 18,506,961 1,877,283 (103,221) 68,163 (55,403) 280,348 2,456,305 695,502
Net realized and
unrealized gain
(loss) on
investments:
Net realized
gain............ 4,209,410 1,989,278 710,358 416,721 15,353 85,944 169,949 -- 263,646
Net unrealized
appreciation
(depreciation)
during the
period.......... 31,899,270 3,166,027 (6,373,131) 620,276 (69,707) 647,694 935,367 -- (78,941)
----------- ----------- ----------- ---------- -------- -------- ---------- ---------- --------
Net realized and
unrealized gain
(loss) on
investments...... 36,108,680 5,155,305 (5,662,773) 1,036,997 (54,354) 733,638 1,105,316 -- 184,705
----------- ----------- ----------- ---------- -------- -------- ---------- ---------- --------
Net increase
(decrease) in net
assets resulting
from operations.. $54,891,019 $23,662,266 $(3,785,490) $ 933,776 $ 13,809 $678,235 $1,385,664 $2,456,305 $880,207
=========== =========== =========== ========== ======== ======== ========== ========== ========
</TABLE>
- -----
See accompanying notes.
10
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT-TERM
SPECIAL REAL ESTATE GROWTH & U.S. SMALL CAP INTERNATIONAL EQUITY STRATEGIC
OPPORTUNITIES EQUITY INCOME MANAGED GOVERNMENT VALUE OPPORTUNITIES INDEX BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ----------- ------------ ------------ ---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
income:
Distributions
received from
the portfolios
of John Hancock
Variable Series
Trust I......... $ 3,777,662 $ 6,991,473 $107,751,940 $121,339,681 $374,739 $559,763 $ 55,262 $ 503,489 $226,369
Expenses:
Mortality and
expense risks... 580,819 1,254,411 9,844,006 16,880,108 89,504 61,933 47,803 148,483 38,193
----------- ----------- ------------ ------------ -------- -------- --------- ---------- --------
Net investment
income.......... 3,196,843 5,737,062 97,907,934 104,459,573 285,235 497,830 7,459 355,006 188,176
Net realized and
unrealized gain
(loss) on
investments:
Net realized
gain (loss)..... 2,847,237 2,540,134 15,083,611 16,803,491 (28,515) 217,881 150,970 326,109 26,836
Net unrealized
appreciation
(depreciation)
during the
period.......... (5,553,611) 5,019,854 77,168,094 70,181,655 50,859 142,670 (185,289) 1,818,762 (25,510)
----------- ----------- ------------ ------------ -------- -------- --------- ---------- --------
Net realized and
unrealized gain
(loss) on
investments..... (2,706,374) 7,559,988 92,251,705 86,985,146 22,344 360,551 (34,319) 2,144,871 1,326
----------- ----------- ------------ ------------ -------- -------- --------- ---------- --------
Net increase
(decrease) in
net assets
resulting from
operations...... $ 490,469 $13,297,050 $190,159,639 $191,444,719 $307,579 $858,381 $ (26,860) $2,499,877 $189,502
=========== =========== ============ ============ ======== ======== ========= ========== ========
</TABLE>
See accompanying notes.
11
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS AND PERIODS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
LARGE CAP SOVEREIGN INTERNATIONAL SMALL CAP
GROWTH BOND EQUITIES GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
-------------------------- -------------------------- ------------------------ -----------------------
1997 1996 1997 1996 1997 1996 1997 1996*
------------ ------------ ------------ ------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
(decrease) in net
assets
from operations:
Net investment
income (loss)... $ 18,782,339 $ 25,765,724 $ 18,506,961 $ 18,618,651 $ 1,877,283 $ (72,055) $ (103,221) $ (19,712)
Net realized
gain (loss)..... 4,209,410 2,715,920 1,989,278 1,605,801 710,358 618,460 416,721 (38,209)
Net unrealized
appreciation
(depreciation)
during the
period.......... 31,899,270 (1,342,699) 3,166,027 (12,616,007) (6,373,131) 4,480,521 620,276 (116,446)
------------ ------------ ------------ ------------ ----------- ----------- ----------- ----------
Net increase
(decrease) in net
assets resulting
from operations.. 54,891,019 27,138,945 23,662,266 7,608,445 (3,785,490) 5,026,926 933,776 (174,367)
From
contractowner
transactions:
Net premiums
from
contractowners.. 19,578,896 17,826,148 11,697,439 13,004,399 5,183,180 9,354,294 9,176,028 5,472,927
Net benefits to
contractowners.. (22,890,208) (20,197,834) (41,724,868) (45,346,956) (15,196,264) (14,672,328) (4,223,919) (909,730)
------------ ------------ ------------ ------------ ----------- ----------- ----------- ----------
Net increase
(decrease) in net
assets from
contractowner
transactions..... (3,311,312) (2,371,686) (30,027,429) (32,342,557) (10,013,084) (5,318,034) 4,952,109 4,563,197
------------ ------------ ------------ ------------ ----------- ----------- ----------- ----------
Net increase
(decrease) in
net assets....... 51,579,707 24,767,259 (6,365,163) (24,734,112) (13,798,574) (291,108) 5,885,885 4,388,830
Net assets at
beginning of
period........... 188,987,564 164,220,305 290,503,205 315,237,317 67,701,763 67,992,871 4,388,830 --
------------ ------------ ------------ ------------ ----------- ----------- ----------- ----------
Net assets at end
of period........ $240,567,271 $188,987,564 $284,138,042 $290,503,205 $53,903,189 $67,701,763 $10,274,715 $4,388,830
<CAPTION>
INTERNATIONAL MID CAP
BALANCED GROWTH
SUBACCOUNT SUBACCOUNT
--------------------- -----------------------
1997 1996* 1997 1996*
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Increase
(decrease) in net
assets
from operations:
Net investment
income (loss)... $ 68,163 $ 9,372 $ (55,403) $ (3,940)
Net realized
gain (loss)..... 15,353 601 85,944 (2,933)
Net unrealized
appreciation
(depreciation)
during the
period.......... (69,707) 22,914 647,694 53,641
----------- --------- ----------- -----------
Net increase
(decrease) in net
assets resulting
from operations.. 13,809 32,887 678,235 46,768
From
contractowner
transactions:
Net premiums
from
contractowners.. 1,237,961 793,707 3,001,006 3,061,875
Net benefits to
contractowners.. (218,031) (29,480) (1,237,471) (248,977)
----------- --------- ----------- -----------
Net increase
(decrease) in net
assets from
contractowner
transactions..... 1,019,930 764,227 1,763,535 2,812,898
----------- --------- ----------- -----------
Net increase
(decrease) in
net assets....... 1,033,739 797,114 2,441,770 2,859,666
Net assets at
beginning of
period........... 797,114 -- 2,859,666 --
----------- --------- ----------- -----------
Net assets at end
of period........ $1,830,853 $797,114 $5,301,436 $2,859,666
=========== ========= =========== ===========
</TABLE>
- -----
* From May 1, 1996 (commencement of operations).
See accompanying notes.
12
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEARS AND PERIODS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
LARGE CAP VALUE MONEY MARKET MID CAP VALUE SPECIAL OPPORTUNITIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------------------- ------------------------ ----------------------- ------------------------
1997 1996* 1997 1996 1997 1996* 1997 1996
---------- ---------- ----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase in net
assets from
operations:
Net investment
income.......... $ 280,348 $ 48,202 $ 2,456,305 $ 2,497,217 $ 695,502 $ 19,144 $ 3,196,843 $ 1,326,618
Net realized
gain............ 169,949 5,943 -- -- 263,646 272 2,847,237 810,991
Net unrealized
appreciation
(depreciation)
during the
period........... 935,367 155,009 -- -- (78,941) 75,961 (5,553,611) 4,973,647
---------- ---------- ----------- ----------- ----------- ---------- ----------- -----------
Net increase in
net assets re-
sulting from op-
erations......... 1,385,664 209,154 2,456,305 2,497,217 880,207 95,377 490,469 7,111,256
From
contractowner
transactions:
Net premiums
from
contractowners.. 5,113,182 2,921,725 44,946,257 43,824,428 9,849,138 1,145,532 9,378,682 31,891,420
Net benefits to
contractowners.. (926,878) (126,068) (52,298,954) (47,278,734) (1,612,655) (99,483) (17,891,851) (6,960,327)
---------- ---------- ----------- ----------- ----------- ---------- ----------- -----------
Net increase
(decrease) in net
assets from
contractowner
transactions..... 4,186,304 2,795,657 (7,352,697) (3,454,306) 8,236,483 1,046,049 (8,513,169) 24,931,093
---------- ---------- ----------- ----------- ----------- ---------- ----------- -----------
Net increase
(decrease) in net
assets........... 5,571,968 3,004,811 (4,896,392) (957,089) 9,116,690 1,141,426 (8,022,700) 32,042,349
Net assets at
beginning of
period........... 3,004,811 -- 64,096,778 65,053,867 1,141,426 -- 45,847,219 13,804,870
---------- ---------- ----------- ----------- ----------- ---------- ----------- -----------
Net assets at end
of period........ $8,576,779 $3,004,811 $59,200,386 $64,096,778 $10,258,116 $1,141,426 $37,824,519 $45,847,219
========== ========== =========== =========== =========== ========== =========== ===========
<CAPTION>
REAL ESTATE EQUITY GROWTH & INCOME
SUBACCOUNT SUBACCOUNT
------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Increase in net
assets from
operations:
Net investment
income.......... $ 5,737,062 $ 3,484,256 $ 97,907,934 $ 77,691,397
Net realized
gain............ 2,540,134 517,169 15,083,611 7,392,263
Net unrealized
appreciation
(depreciation)
during the
period........... 5,019,854 16,386,139 77,168,094 22,898,637
------------ ------------ ------------- -------------
Net increase in
net assets re-
sulting from op-
erations......... 13,297,050 20,387,564 190,159,639 107,982,297
From
contractowner
transactions:
Net premiums
from
contractowners.. 13,495,907 7,381,816 56,381,596 50,653,091
Net benefits to
contractowners.. (15,223,931) (10,368,714) (83,349,459) (63,828,426)
------------ ------------ ------------- -------------
Net increase
(decrease) in net
assets from
contractowner
transactions..... (1,728,024) (2,986,898) (26,967,863) (13,175,335)
------------ ------------ ------------- -------------
Net increase
(decrease) in net
assets........... 11,569,026 17,400,666 163,191,776 94,806,962
Net assets at
beginning of
period........... 85,994,087 68,593,421 682,184,704 587,377,742
------------ ------------ ------------- -------------
Net assets at end
of period........ $97,563,113 $85,994,087 $845,376,480 $682,184,704
============ ============ ============= =============
</TABLE>
- -----
* From May 1, 1996 (commencement of operations)
See accompanying notes.
13
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEARS AND PERIODS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
SHORT-TERM U.S. INTERNATIONAL
MANAGED GOVERNMENT SMALL CAP VALUE OPPORTUNITIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------------ ---------------------- ---------------------- ----------------------
1997 1996 1997 1996 1997 1996* 1997 1996*
-------------- -------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
(decrease) in net
assets from
operations:
Net investment
income (loss).... $ 104,459,573 $ 129,087,578 $ 285,235 $ 254,336 $ 497,830 $ 36,273 $ 7,459 $ (2,708)
Net realized gain
(loss).......... 16,803,491 12,361,012 (28,515) (9,939) 217,881 5,580 150,970 (1,023)
Net unrealized
appreciation
(depreciation)
during the
period........... 70,181,655 (41,260,217) 50,859 (104,619) 142,670 89,251 (185,289) 99,796
-------------- -------------- ---------- ---------- ---------- ---------- ---------- ----------
Net increase
(decrease) in net
assets resulting
from operations.. 191,444,719 100,188,373 307,579 139,778 858,381 131,104 (26,860) 96,065
From
contractowner
transactions:
Net premiums
from
contractowners.. 38,902,658 56,201,877 1,859,772 4,338,920 6,113,599 1,838,183 3,587,133 2,715,936
Net benefits to
contractowners.. (133,155,425) (118,947,868) (2,348,008) (3,599,065) (1,522,285) (180,341) (2,524,506) (426,903)
-------------- -------------- ---------- ---------- ---------- ---------- ---------- ----------
Net increase
(decrease) in net
assets from
contractowner
transactions..... (94,252,767) (62,745,991) (488,236) 739,855 4,591,314 1,657,842 1,062,627 2,289,033
-------------- -------------- ---------- ---------- ---------- ---------- ---------- ----------
Net increase
(decrease) in net
assets........... 97,191,952 37,442,382 (180,657) 879,633 5,449,695 1,788,946 1,035,767 2,385,098
Net assets at
beginning of
period........... 1,163,856,420 1,126,414,038 6,689,381 5,809,748 1,788,946 -- 2,385,098 --
-------------- -------------- ---------- ---------- ---------- ---------- ---------- ----------
Net assets at end
of period........ $1,261,048,372 $1,163,856,420 $6,508,724 $6,689,381 $7,238,641 $1,788,946 $3,420,865 $2,385,098
============== ============== ========== ========== ========== ========== ========== ==========
<CAPTION>
EQUITY INDEX STRATEGIC BOND
SUBACCOUNT SUBACCOUNT
------------------------ -----------------------
1997 1996* 1997 1996*
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Increase
(decrease) in net
assets from
operations:
Net investment
income (loss).... $ 355,006 $ 83,944 $ 188,176 $ 92,197
Net realized gain
(loss).......... 326,109 518 26,836 317
Net unrealized
appreciation
(depreciation)
during the
period........... 1,818,762 289,361 (25,510) 16,022
------------ ----------- ----------- -----------
Net increase
(decrease) in net
assets resulting
from operations.. 2,499,877 373,823 189,502 108,536
From
contractowner
transactions:
Net premiums
from
contractowners.. 12,934,274 4,265,069 2,335,426 2,870,583
Net benefits to
contractowners.. (2,877,735) (168,785) (2,001,205) (363,871)
------------ ----------- ----------- -----------
Net increase
(decrease) in net
assets from
contractowner
transactions..... 10,056,539 4,096,284 334,221 2,506,712
------------ ----------- ----------- -----------
Net increase
(decrease) in net
assets........... 12,556,416 4,470,107 523,723 2,615,248
Net assets at
beginning of
period........... 4,470,107 -- 2,615,248 --
------------ ----------- ----------- -----------
Net assets at end
of period........ $17,026,523 $4,470,107 $3,138,971 $2,615,248
============ =========== =========== ===========
</TABLE>
- -----
* From May 1, 1996 (commencement of operations).
See accompanying notes.
14
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION
John Hancock Variable Annuity Account U (the Account) is a separate
investment account of John Hancock Mutual Life Insurance Company (JHMLICO or
John Hancock). The Account was formed to fund variable annuity contracts
(Contracts) issued by JHMLICO. Currently, the Account funds the Accommodator
and Independence Annuity Contracts. The Account is operated as a unit
investment trust registered under the Investment Company Act of 1940, as
amended, and currently consists of eighteen subaccounts. The assets of each
subaccount are invested exclusively in shares of a corresponding Portfolio of
John Hancock Variable Series Trust I (the Fund). New subaccounts may be added
as new Portfolios are added to the Fund or as other investment options are
developed and made available to contractowners. The eighteen Portfolios of the
Fund which are currently available are the Large Cap Growth, Sovereign Bond,
International Equities, Small Cap Growth, International Balanced, Mid Cap
Growth, Large Cap Value, Money Market, Mid Cap Value, Special Opportunities,
Real Estate Equity, Growth & Income, Managed, Short-Term U.S. Government,
Small Cap Value, International Opportunities, Equity Index and Strategic Bond
Portfolios. Each Portfolio has a different investment objective.
The assets of the Account are the property of JHMLICO. The portion of the
Account's assets applicable to the Contracts may not be charged with
liabilities arising out of any other business JHMLICO may conduct.
2. SIGNIFICANT ACCOUNTING POLICIES
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Valuation of Investments
Investment in shares of the Fund are valued at the reported net asset value
of the respective Portfolios. Investment transactions are recorded on the
trade date. Dividend income is recognized on the ex-dividend date. Realized
gains and losses on sales of Fund shares are determined on the basis of
identified cost.
Federal Income Taxes
The operations of the Account are included in the federal income tax return
of JHMLICO, which is taxed as a life insurance company under the Internal
Revenue Code. JHMLICO has the right to charge the Account any federal income
taxes, or provisions for federal income taxes, attributable to the operations
of the Account or to the Contracts funded in the Account. Currently, John
Hancock does not make a charge for income or other taxes. JHMLICO retains the
right to charge the Account for any federal income taxes arising from changes
in the tax law. Charges for state and local taxes, if any, attributable to the
Account may also be made.
15
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Expenses
JHMLICO assumes mortality and expense risks of the Contracts and provides
administrative services to the Account for which asset charges are deducted at
an annual rate of 1.00% and 1.40% of net assets of the Accommodator and
Independence Contracts, respectively.
JHMLICO makes certain other deductions from contractowner payments for
premium taxes, guaranteed minimum death benefit, sales charges on purchases
(Accommodator only) and the surrender fee and annual contract fee
(Independence only), which are accounted for as a reduction of net assets
resulting from contractowner transactions.
3. DETAILS OF INVESTMENTS
The details of the shares owned and cost and value of investments in the
Portfolios of the Fund at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNT SHARES OWNED COST VALUE
---------- ------------ -------------- --------------
<S> <C> <C> <C>
Large Cap Growth................ 11,555,234 $ 189,821,369 $ 240,567,271
Sovereign Bond.................. 28,559,516 281,727,985 284,138,042
International Equities.......... 3,546,300 54,934,607 53,903,189
Small Cap Growth................ 905,746 9,770,884 10,274,715
International Balanced.......... 181,089 1,877,651 1,830,853
Mid Cap Growth.................. 444,545 4,600,101 5,301,436
Large Cap Value................. 632,057 7,486,403 8,576,779
Money Market.................... 5,920,039 59,200,359 59,200,386
Mid Cap Value................... 739,799 10,261,096 10,258,116
Special Opportunities........... 2,458,514 37,468,160 37,824,519
Real Estate Equity.............. 6,131,999 75,969,559 97,563,113
Growth & Income................. 50,909,403 663,711,917 845,376,480
Managed......................... 87,881,678 1,146,284,121 1,261,048,372
Short-Term U.S. Government...... 645,492 6,512,909 6,508,724
Small Cap Value................. 583,700 7,006,720 7,238,641
International Opportunities..... 321,898 3,506,358 3,420,865
Equity Index.................... 1,197,939 14,918,400 17,026,523
Strategic Bond.................. 306,460 3,148,459 3,138,971
</TABLE>
16
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Purchases, including reinvestment of dividend distributions and proceeds
from sales of shares in the Portfolios of the Fund during 1997, were as
follows:
<TABLE>
<CAPTION>
SUBACCOUNT PURCHASES SALES
---------- ------------ -----------
<S> <C> <C>
Large Cap Growth................................. $ 28,376,144 $ 8,695,708
Sovereign Bond................................... 23,428,294 32,873,992
International Equities........................... 4,281,322 11,605,567
Small Cap Growth................................. 8,515,209 3,230,598
International Balanced........................... 1,374,893 271,102
Mid Cap Growth................................... 2,722,417 928,341
Large Cap Value.................................. 5,316,202 679,601
Money Market..................................... 27,005,086 31,847,137
Mid Cap Value.................................... 9,992,772 779,742
Special Opportunities............................ 7,671,700 10,124,458
Real Estate Equity............................... 14,941,245 8,392,073
Growth & Income.................................. 116,679,798 30,579,505
Managed.......................................... 122,430,470 95,140,648
Short-Term U.S. Government....................... 2,034,257 2,245,928
Small Cap Value.................................. 6,144,817 837,788
International Opportunities...................... 3,426,300 2,205,173
Equity Index..................................... 12,124,766 1,387,112
Strategic Bond................................... 2,445,068 1,895,835
</TABLE>
17
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. NET ASSETS
Accumulation shares attributable to net assets of contractowners and
accumulation share values for each subaccount at December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
ACCOMMODATOR INDEPENDENCE
------------------------- -------------------------
ACCUMULATION ACCUMULATION ACCUMULATION ACCUMULATION
SUBACCOUNT SHARES SHARE VALUES SHARES SHARE VALUES
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Large Cap Growth........... 160,590 $32.329 8,116,652 $28.999
Sovereign Bond............. 1,749,513 48.526 11,346,956 17.502
International Equities..... 102,698 15.277 3,879,212 13.491
Small Cap Growth........... 35,818 11.181 889,006 11.107
International Balanced..... 7,961 10.773 163,070 10.701
Mid Cap Growth............. 16,957 11.785 435,918 11.707
Large Cap Value............ 23,612 14.401 575,770 14.306
Money Market............... 743,856 23.548 3,202,804 12.910
Mid Cap Value.............. 37,067 15.112 646,027 15.012
Special Opportunities...... 84,779 11.330 2,114,374 17.435
Real Estate Equity......... 99,634 25.424 3,777,452 25.157
Growth & Income............ 1,901,446 143.253 19,890,513 28.815
Managed.................... 984,740 24.039 56,556,644 21.878
Short-Term U.S. Government. 21,481 10.904 536,972 11.685
Small Cap Value............ 17,720 13.634 516,651 13.543
International
Opportunities............. 8,683 10.700 313,120 10.628
Equity Index............... 54,198 14.918 1,094,405 14.819
Strategic Bond............. 23,759 11.445 252,183 11.369
</TABLE>
The net assets attributable to JHMLICO represent JHMLICO's funds deposited
in the Account. At its discretion, these amounts may be transferred by JHMLICO
to its general account.
5. TRANSACTIONS WITH AFFILIATES
John Hancock acts as the distributor, principal underwriter and investment
advisor for the Fund.
Certain officers of the Account are officers and directors of JHMLICO or the
Fund.
6. IMPACT OF YEAR 2000 (UNAUDITED)
John Hancock Variable Annuity Account U, along with John Hancock Mutual Life
Insurance Company, its ultimate parent (together, John Hancock), have
developed a plan to modify or replace significant portions of the Account's
computer information and automated technologies so that its systems will
function properly with respect to the dates in the year 2000 and thereafter.
The Account presently believes that with modifications to existing systems and
conversions to new technologies, the year 2000 will not pose significant
operational problems for its computer systems. However, if certain
modifications and conversions are not made, or are not completed timely, the
year 2000 issue could have an adverse impact on the operations of the Account.
18
<PAGE>
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
John Hancock as early as 1994 had begun assessing, modifying and converting
the software related to its significant systems and has initiated formal
communications with its significant business partners and customers to
determine the extent to which John Hancock's interface systems are vulnerable
to those third parties' failure to remediate their own year 2000 issues. While
John Hancock is developing alternative third party processing arrangements as
it deems appropriate, there is no guarantee that the systems of other
companies on which the Account's systems rely will be converted timely or will
not have an adverse effect on the Account's systems.
The Account expects the project to be substantially complete by early 1999.
This completion target was derived utilizing numerous assumptions of future
events, including availability of certain resources and other factors.
However, there can be no guarantee that this completion target will be
achieved.
19
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Contractowners
John Hancock Variable Annuity Account U
of John Hancock Mutual Life Insurance Company
We have audited the accompanying statement of assets and liabilities of John
Hancock Variable Annuity Account U (the Account) (comprising, respectively,
the Large Cap Growth, Sovereign Bond, International Equities, Small Cap
Growth, International Balanced, Mid Cap Growth, Large Cap Value, Money Market,
Mid Cap Value, Special Opportunities, Real Estate Equity, Growth & Income,
Managed, Short-Term U.S. Government, Small Cap Value, International
Opportunities, Equity Index and Strategic Bond Subaccounts) as of December 31,
1997, and the related statements of operations for the year then ended, and
statements of changes in net assets for each of the periods indicated therein.
These financial statements are the responsibility of the Account's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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 referred to above present fairly,
in all material respects, the financial position of each of the respective
subaccounts constituting John Hancock Variable Annuity Account U at December
31, 1997, and the results of their operations for the year then ended and the
changes in their net assets for each of the periods indicated, in conformity
with generally accepted accounting principles.
Boston, Massachusetts
February 6, 1998
ERNST & YOUNG LLP
20
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Directors and Policyholders
John Hancock Mutual Life Insurance Company
We have audited the accompanying statutory-basis statements of financial
position of John Hancock Mutual Life Insurance Company as of December 31, 1997
and 1996, and the related statutory-basis statements of operations and changes
in policyholders' contingency reserves and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Commonwealth of Massachusetts Division of Insurance, which
practices differ from generally accepted accounting principles. The variances
between such practices and generally accepted accounting principles also are
described in Note 1. The effects on the financial statements of these
variances are not reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matter described in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of John Hancock Mutual Life Insurance Company at December
31, 1997 and 1996, or the results of its operations or its cash flows for the
year ended December 31, 1997.
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of John Hancock
Mutual Life Insurance Company at December 31, 1997 and 1996, and the results
of its operations and its cash flows for the years then ended in conformity
with accounting practices prescribed or permitted by the Commonwealth of
Massachusetts Division of Insurance.
ERNST & YOUNG LLP
Boston, Massachusetts
February 18, 1998
21
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
STATUTORY-BASIS STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31
-------------------
1997 1996
--------- ---------
(In millions)
<S> <C> <C>
ASSETS
Bonds--Note 6............................................... $22,986.0 $22,467.0
Stocks:
Preferred................................................. 640.6 416.2
Common.................................................... 256.9 249.8
Investments in affiliates................................. 1,442.0 1,268.9
--------- ---------
2,339.5 1,934.9
Mortgage loans on real estate--Note 6....................... 7,851.2 7,964.0
Real estate:
Company occupied.......................................... 375.1 372.1
Investment properties..................................... 1,893.4 2,042.3
--------- ---------
2,268.5 2,414.4
Policy loans................................................ 1,577.3 1,589.3
Cash items:
Cash in banks and offices................................. 176.0 348.4
Temporary cash investments................................ 548.8 1,068.3
--------- ---------
724.8 1,416.7
Premiums due and deferred................................... 222.3 278.4
Investment income due and accrued........................... 505.8 547.8
Other general account assets................................ 948.6 1,009.9
Assets held in separate accounts............................ 16,021.7 13,969.1
--------- ---------
TOTAL ASSETS................................................ $55,445.7 $53,591.5
========= =========
Obligations and Policyholders' Contingency Reserves
OBLIGATIONS
Policy reserves........................................... $19,206.6 $18,544.0
Policyholders' and beneficiaries' funds................... 13,985.1 14,679.3
Dividends payable to policyholders........................ 399.7 395.5
Policy benefits in process of payment..................... 115.5 236.3
Other policy obligations.................................. 214.8 210.5
Asset valuation reserve--Note 1........................... 1,165.7 1,064.8
Federal income and other accrued taxes--Note 1............ 96.9 125.1
Other general account obligations......................... 1,084.5 1,521.7
Obligations related to separate accounts.................. 16,019.1 13,958.2
--------- ---------
TOTAL OBLIGATIONS........................................... 52,287.9 50,735.4
Policyholders' Contingency Reserves
Surplus notes--Note 2..................................... 450.0 450.0
Special contingency reserve for group insurance........... 151.8 194.8
General contingency reserve............................... 2,556.0 2,211.3
--------- ---------
TOTAL POLICYHOLDERS' CONTINGENCY RESERVES................... 3,157.8 2,856.1
--------- ---------
TOTAL OBLIGATIONS AND POLICYHOLDERS' CONTINGENCY RESERVES... $55,445.7 $53,591.5
========= =========
</TABLE>
The accompanying notes are an integral part of the statutory-basis financial
statements.
22
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
STATUTORY-BASIS STATEMENTS OF OPERATIONS AND CHANGES IN POLICYHOLDERS'
CONTINGENCY RESERVES
<TABLE>
<CAPTION>
Year ended December 31
------------------------
1997 1996
----------- -----------
(In millions)
<S> <C> <C>
INCOME
Premiums, annuity considerations and pension fund
contributions..................................... $ 7,371.6 $ 8,003.1
Net investment income--Note 4...................... 2,856.1 2,803.1
Other, net......................................... 119.0 68.6
----------- -----------
10,346.7 10,874.8
BENEFITS AND EXPENSES
Payments to policyholders and beneficiaries:
Death benefits................................... 737.4 886.8
Accident and health benefits..................... 121.4 300.9
Annuity benefits................................. 1,668.2 1,539.4
Surrender benefits and annuity fund withdrawals.. 6,293.1 5,565.4
Matured endowments............................... 21.0 20.6
----------- -----------
8,841.1 8,313.1
Additions to reserves to provide for future
payments to policyholders and beneficiaries....... (186.7) 880.5
Expenses of providing service to policyholders and
obtaining new insurance:
Field sales compensation and expenses............ 278.3 275.0
Home office and general expenses................. 479.7 514.8
Payroll, state premium and miscellaneous taxes..... 49.9 70.9
----------- -----------
9,462.3 10,054.3
----------- -----------
GAIN FROM OPERATIONS BEFORE DIVIDENDS TO
POLICYHOLDERS, FEDERAL INCOME TAXES AND NET
REALIZED CAPITAL LOSSES....................... 884.4 820.5
Dividends to policyholders........................... 398.2 399.4
Federal income taxes--Note 1......................... 18.9 107.1
----------- -----------
417.1 506.5
----------- -----------
GAIN FROM OPERATIONS BEFORE NET REALIZED
CAPITAL LOSSES................................ 467.3 314.0
Net realized capital losses--Note 5.................. (89.8) (43.6)
----------- -----------
NET INCOME..................................... 377.5 270.4
Other increases (decreases) in policyholders'
contingency reserves:
Net unrealized capital gains and other
adjustments--Note 5............................... $ 58.6 $ 191.7
Valuation reserve changes--Note 1.................. 1.4 (27.5)
Prior years' federal income taxes.................. (35.6) (28.9)
Other reserves and adjustments, net................ (100.2) (83.1)
----------- -----------
NET INCREASE IN POLICYHOLDERS' CONTINGENCY
RESERVES...................................... 301.7 322.6
Policyholders' contingency reserves at beginning of
year................................................ 2,856.1 2,533.5
----------- -----------
POLICYHOLDERS' CONTINGENCY RESERVES AT END OF YEAR... $ 3,157.8 $ 2,856.1
=========== ===========
</TABLE>
The accompanying notes are an integral part of the statutory-basis financial
statements.
23
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
NOTE 1--NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING PRACTICES
John Hancock Mutual Life Insurance Company (the Company) provides a broad
range of financial services and insurance products. The Company's insurance
operations focus principally in three segments: the Retail Sector, which
encompasses the Company's individual life, annuity, and long-term care
operations; Group Pension, which offers single premium annuity and guaranteed
investment contracts through both the general and separate accounts; and
Business Insurance, its group life, health, and long-term care operations
including administrative services provided to group customers. In addition,
through its subsidiaries and affiliates, the Company also offers a wide range
of investment management and advisory services and other related products
including life insurance products for the Canadian market, sponsorship and
distribution of mutual funds, real estate financing and management, and
various other financial services. Investments in these subsidiaries and other
affiliates are recorded on the statutory equity method.
On February 28, 1997, the Company sold its group accident and health business
and related group life business to UNICARE Life & Health Insurance Company
(UNICARE), a wholly-owned subsidiary of WellPoint Health Networks Inc. The
Company retained its group long-term care operations. Assets equal to
liabilities of approximately $562.4 million at February 28, 1997, subject to
the completion of a closing audit, were transferred to UNICARE in connection
with the sale. The corresponding amount of assets and liabilities at December
31, 1996 was $559.4 million. The gain from operations in both periods was not
significant. The insurance business sold was transferred to UNICARE through a
100% coinsurance agreement. The Company remains liable to its policyholders to
the extent that UNICARE does not meet its contractual obligations under the
coinsurance agreement. As a result, the Company has secured a $397 million
letter of credit facility with a group of banks led by Morgan Guaranty Trust
Company of New York. The banks have agreed to issue a letter of credit to the
Company pursuant to which the Company may draw up to $397 million for any
claims not satisfied by UNICARE under the coinsurance agreement after the
Company has incurred the first $113 million of losses from such claims. The
amount available pursuant to the letter of credit agreement and any letter of
credit issued thereunder will be automatically reduced on a scheduled basis
consistent with the anticipated runoff of liabilities related to the business
reinsured under the coinsurance agreement. The letter of credit agreement and
any letter of credit issued thereunder are scheduled to expire on March 1,
2002.
The Company is domiciled in the Commonwealth of Massachusetts and licensed in
all fifty of the United States, the District of Columbia, Puerto Rico, Guam,
the US Virgin Islands, and Canada. The Company distributes its individual
products in North America primarily through a career agency system. The career
agency system is composed of company-owned, unionized branch offices and
independent general agencies. The Company also distributes its individual
products through several alternative distribution channels, including banks,
brokers/dealers and direct marketing efforts.
The Company markets pension and other investment-related products primarily to
sponsors of retirement and savings plans covering employees of private sector
companies, and plans covering public employees and collective bargaining
unions and non-profit organizations. Products are marketed and sold through a
combination of group pension field employee representatives, as well as
marketing personnel and investment professionals employed by the Company.
The Company distributes its group benefit products through group
representatives, who are John Hancock employees or through intermediaries, in
key markets nationwide.
25
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions could change in the future
as more information becomes known, which could impact the amounts reported and
disclosed herein.
Basis of Presentation: The financial statements have been prepared using
accounting practices prescribed or permitted by the Commonwealth of
Massachusetts Division of Insurance and in conformity with the practices of
the National Association of Insurance Commissioners (NAIC), which practices
differ from generally accepted accounting principles (GAAP).
The significant differences from GAAP include: (1) policy acquisition costs
are charged to expense as incurred rather than deferred and amortized over the
related premium-paying period; (2) policy reserves are based on statutory
mortality, morbidity, and interest requirements without consideration of
withdrawals and Company experience; (3) certain assets designated as
"nonadmitted assets" are excluded from the balance sheet by direct charges to
surplus; (4) reinsurance recoverables are netted against reserves and claim
liabilities rather than reflected as an asset; (5) bonds held as available for
sale are recorded at amortized cost or market value as determined by the NAIC
rather than at fair value; (6) an Asset Valuation Reserve and Interest
Maintenance Reserve as prescribed by the NAIC are not calculated under GAAP.
Under GAAP, realized capital gains and losses are reported in the income
statement on a pretax basis as incurred and investment valuation allowances
are provided when there has been a decline in value deemed other than
temporary; (7) investments in affiliates are carried at their net equity value
with changes in value being recorded directly to policyholders' contingency
reserves rather than consolidated in the financial statements; (8) no
provision is made for the deferred income tax effects of temporary differences
between book and tax basis reporting; (9) certain items, including
modifications to required policy reserves resulting from changes in actuarial
assumptions or increased benefits, are recorded directly to policyholders'
contingency reserves rather than being reflected in income; and (10) surplus
notes are reported as surplus rather than as liabilities. The effects of the
foregoing variances from GAAP have not been determined, but are presumed to be
material.
The significant accounting practices of the Company are as follows:
Pending Statutory Standards: The NAIC currently is in the process of
recodifying statutory accounting practices, the result of which is expected to
constitute the only source of prescribed statutory accounting practices.
Accordingly, that project, which is expected to be approved by the NAIC in
1998 will likely change, to some extent, prescribed statutory accounting
practices, and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements. The impact
of any such changes on the Company's statutory surplus is not expected to be
material.
Revenues and Expenses: Premium revenues are recognized over the premium-paying
period of the policies whereas expenses, including the acquisition costs of
new business, are charged to operations as incurred and policyholder dividends
are provided as paid or accrued.
Cash and Temporary Cash Investments: Cash includes currency on hand and demand
deposits with financial institutions. Temporary cash investments are short-
term, highly-liquid investments both readily convertible to known amounts of
cash and so near maturity that there is insignificant risk of changes in value
because of changes in interest rates.
26
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
Valuation of Assets: General account investments are carried at amounts
determined on the following bases:
Bond and stock values are carried as prescribed by the NAIC; bonds
generally at amortized amounts or cost, preferred stocks generally at cost
and common stocks at fair value. The discount or premium on bonds is
amortized using the interest method.
Investments in affiliates are included on the statutory equity method.
Loan-backed bonds and structured securities are valued at amortized cost
using the interest method including anticipated prepayments. Prepayment
assumptions are obtained from broker dealer surveys or internal estimates
and are based on the current interest rate and economic environment. The
retrospective adjustment method is used to value all such securities except
for interest-only securities, which are valued using the prospective
method.
The net interest effect of interest rate and currency rate swap
transactions is recorded as an adjustment of interest income as incurred.
The initial cost of interest rate cap and floor agreements is amortized to
net investment income over the life of the related agreement. Gains and
losses on financial futures contracts used as hedges against interest rate
fluctuations are deferred and recognized in income over the period being
hedged.
Mortgage loans are carried at outstanding principal balance or amortized
cost.
Investment and company-occupied real estate is carried at depreciated cost,
less encumbrances. Depreciation on investment and company-occupied real
estate is recorded on a straight-line basis. Accumulated depreciation
amounted to $470.5 million and $393.5 million at December 31, 1997 and
1996, respectively.
Real estate acquired in satisfaction of debt and held for sale, which is
classified with investment properties, is carried at the lower of cost or
fair value as of the date of foreclosure.
Policy loans are carried at outstanding principal balance, not in excess of
policy cash surrender value.
Other invested assets, which are classified with other general account
assets, include real estate and energy joint ventures and limited
partnerships and generally are valued based on the Company's equity in the
underlying net assets.
Asset Valuation and Interest Maintenance Reserves: The Asset Valuation Reserve
(AVR) is computed in accordance with the prescribed NAIC formula and
represents a provision for possible fluctuations in the value of bonds, equity
securities, mortgage loans, real estate and other invested assets. The Company
makes additional contributions to the AVR in excess of the required amounts to
account for potential losses and risks in the investment portfolio when the
Company believes such provisions are prudent. Changes to the AVR are charged
or credited directly to policyholders' contingency reserves.
The Company also records the NAIC prescribed Interest Maintenance Reserve
(IMR) that represents that portion of the after tax net accumulated
unamortized realized capital gains and losses on sales of fixed income
securities, principally bonds and mortgage loans, attributable to changes in
the general level of interest rates. Such gains and losses are deferred and
amortized into income over the remaining expected lives of the investments
sold. At December 31, 1997, the IMR, net of 1997 amortization of $25.2
million, amounted to $165.6 million which is included in other policy
obligations. The corresponding 1996 amounts were $18.9 million and $121.7
million, respectively.
27
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment: Data processing equipment, which amounted to $30.0
million in 1997 and $41.6 million in 1996 and is included in other general
account assets, is reported at depreciated cost, with depreciation recorded on
a straight-line basis. Nonadmitted furniture and equipment also is depreciated
on a straight-line basis. The useful lives of these assets range from three to
twenty years. Depreciation expense was $21.8 million in 1997 and $31.0 million
in 1996.
Separate Accounts: Separate account assets and liabilities reported in the
accompanying statements of financial position represent funds that are
separately administered, principally for annuity contracts and variable life
insurance policies, and for which the contractholder, rather than the Company,
generally bears the investment risk. Separate account obligations are intended
to be satisfied from separate account assets and not from assets of the
general account. Separate accounts generally are reported at fair value. The
operations of the separate accounts are not included in the statement of
operations; however, income earned on amounts initially invested by the
Company in the formation of new separate accounts is included in other income.
Fair Value Disclosure of Financial Instruments: Statement of Financial
Accounting Standards (SFAS) No. 107, "Disclosure about Fair Value of Financial
Instruments," requires disclosure of fair value information about certain
financial instruments, whether or not recognized in the statement of financial
position, for which it is practicable to estimate the value. In situations
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Therefore, the aggregate fair value amounts
presented do not represent the underlying value of the Company. See Note 15.
The methods and assumptions utilized by the Company in estimating its fair
value disclosures for financial instruments are as follows:
The carrying amounts reported in the statement of financial position for
cash and temporary cash investments approximate their fair values.
Fair values for public bonds are obtained from an independent pricing
service. Fair values for private placement securities and publicly traded
bonds not provided by the independent pricing service are estimated by the
Company by discounting expected future cash flows using current market
rates applicable to the yield, credit quality and maturity of the
investments.
The fair values for common and preferred stocks, other than subsidiary
investments which are carried at equity values, are based on quoted market
prices.
The fair value for mortgage loans is estimated using discounted cash flow
analyses using interest rates adjusted to reflect the credit
characteristics of the underlying loans. Mortgage loans with similar
characteristics and credit risks are aggregated into qualitative categories
for purposes of the fair value calculations.
The carrying amounts in the statement of financial position for policy
loans approximates their fair value.
The fair value of interest rate swaps and currency rate swaps is estimated
using a discounted cash flow method adjusted for the difference between the
rate of the existing swap and the current swap market rate. Discounted cash
flows in foreign currencies are converted to U.S. dollars using current
exchange rates.
28
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
The fair value for outstanding commitments to purchase long-term bonds and
issue real estate mortgages is estimated using a discounted cash flow
method incorporating adjustments for the difference in the level of
interest rates between the dates the commitments were made and December 31,
1997. The fair value for commitments to purchase real estate approximates
the amount of the initial commitment.
Fair values for the Company's guaranteed investment contracts are estimated
using discounted cash flow calculations, based on interest rates currently
being offered for similar contracts with maturities consistent with those
remaining for the contracts being valued. The fair value for fixed-rate
deferred annuities is the cash surrender value, which represents the
account value less applicable surrender charges. Fair values for immediate
annuities without life contingencies and supplementary contracts without
life contingencies are estimated based on discounted cash flow calculations
using current market rates.
Capital Gains and Losses: Realized capital gains and losses are determined
using the specific identification basis. Realized capital gains and losses,
net of taxes and amounts transferred to the IMR, are included in net income.
Unrealized gains and losses, which consist of market value and book value
adjustments, are shown as adjustments to policyholders' contingency reserves.
Foreign Exchange Gains and Losses: Foreign exchange gains and losses are
reflected as direct credits or charges to policyholders' contingency reserves
through unrealized capital gains and losses.
Policy Reserves: Life, annuity, and accident and health benefit reserves are
developed by actuarial methods and are determined based on published tables
using statutorily specified interest rates and valuation methods that will
provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed policy cash values or the amounts required by the
Commonwealth of Massachusetts Division of Insurance. Reserves for traditional
individual life insurance policies are maintained using the 1941, 1958 and
1980 Commissioner's Standard Ordinary and American Experience Mortality
Tables, with assumed interest rates ranging from 2 1/2% to 6%, and using
principally the net level premium method for policies issued prior to 1978 and
a modified preliminary term method for policies issued in 1979 and later.
Annuity and supplementary contracts with life contingency reserves are based
principally on modifications of the 1937 Standard Annuity Table, the Group
Annuity Mortality Tables for 1951, 1971 and 1983, the 1971 Individual Annuity
Mortality Table and the a-1983 Individual Annuity Mortality Table, with
interest rates generally ranging from 2% to 8 3/4%.
Reserves for deposit administration funds and immediate participation
guarantee funds are based on accepted actuarial methods at various interest
rates. Accident and health policy reserves generally are calculated using
either the two-year preliminary term or the net level premium method based on
various morbidity tables.
The statement value and fair value for investment-type insurance contracts are
as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------- -------------------
Statement Fair Statement Fair
Value Value Value Value
--------- --------- --------- ---------
(In millions)
<S> <C> <C> <C> <C>
Guaranteed investment contracts........ $11,499.4 $11,516.8 $11,921.6 $11,943.2
Fixed-rate deferred and immediate
annuities............................. 4,289.1 4,290.4 3,909.3 3,886.1
Supplementary contracts without life
contingencies......................... 40.9 42.1 45.6 46.0
--------- --------- --------- ---------
$15,829.4 $15,849.3 $15,876.5 $15,875.3
========= ========= ========= =========
</TABLE>
29
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
Federal Income Taxes: Federal income taxes are reported in the financial
statements based on amounts determined to be payable as a result of operations
within the current accounting period. The operations of the Company and its
subsidiaries and affiliates are combined in filing a consolidated federal
income tax return for the group. The federal income taxes of the Company are
determined on a separate return basis with certain adjustments.
Income before taxes differs from taxable income principally due to tax-exempt
investment income, dividends-received tax deductions, the limitation placed on
the tax deductibility of mutual companies' policyholder dividends, accelerated
depreciation, differences in policy and contract liabilities for tax return
and financial statement purposes, capitalization of policy acquisition
expenses for tax purposes and other adjustments prescribed by the Internal
Revenue Code.
When determining its consolidated federal income tax expense, the Company uses
a number of estimated amounts that may change when the actual tax return is
completed. In addition, the Company must also use an estimated differential
earnings rate (DER) to compute the equity tax portion of its federal income
tax expense. Because the DER is set by the Internal Revenue Service after
completion of the financial statements, a true-up adjustment (i.e., effect of
the difference between the estimated and final DER) is necessary.
Amounts for disputed tax issues relating to prior years are charged or
credited directly to policyholders' contingency reserves.
Certain subsidiaries acquired by the Company have potential tax loss
carryforwards of $14.3 million expiring in 1998. These amounts may be used in
the consolidated tax return, but only to offset future taxable income related
to those subsidiaries. The Company made federal tax payments of $146.4 million
in 1997 and $309.9 million in 1996.
Adjustments to Policy Reserves and Policyholders' and Beneficiaries'
Funds: From time to time, the Company finds it appropriate to modify certain
required policy reserves because of changes in actuarial assumptions or
increased benefits. Reserve modifications resulting from such determinations
are recorded directly to policyholders' contingency reserves. During 1997, the
Company refined certain actuarial assumptions inherent in the calculation of
reserves related to guaranteed investment contracts and AIDS claims under
individual insurance policies resulting in a net $1.4 million increase in
policyholders' contingency reserves at December 31, 1997. Similar refinements
to the actuarial assumptions inherent in the calculation of reserves related
to guaranteed investment contracts were made in 1996 resulting in a $27.5
million decrease in policyholders' contingency reserves at December 31, 1996.
Reinsurance: Premiums, commissions, expense reimbursements, benefits and
reserves related to reinsured business are accounted for on bases consistent
with those used in accounting for the original policies issued and the terms
of the reinsurance contracts. Premiums ceded to other companies have been
reported as a reduction of premium income. Amounts applicable to reinsurance
ceded for future policy benefits, unearned premium reserves and claim
liabilities have been reported as reductions of these items.
Guaranty Fund Assessments: Guaranty fund assessments are accrued when the
Company receives notice that an amount is payable to a guaranty fund.
30
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--SURPLUS NOTES
On February 25, 1994, the Company issued $450 million of surplus notes that
bear interest at 7 3/8% and are scheduled to mature on February 15, 2024. The
issuance of the surplus notes was approved by the Commonwealth of
Massachusetts Division of Insurance and any payment of interest on and
principal of the notes may be made only with the prior approval of the
Commissioner of the Commonwealth of Massachusetts Division of Insurance.
Surplus notes are reported as part of policyholders' contingency reserves
rather than liabilities. Interest of $33.2 million was paid on the notes
during each of 1997 and 1996.
NOTE 3--BORROWED MONEY
At December 31, 1997, the Company had a $500 million syndicated line of
credit. There are 26 banks who are part of the syndicate which is under the
leadership of Morgan Guaranty Trust Company of New York. The banks will
commit, when requested, to loan funds at prevailing interest rates as
determined in accordance with the line of credit agreement, which terminates
on June 30, 2001. The agreement does not contain a material adverse change
clause. Under the terms of the agreement, the Company is required to maintain
certain minimum levels of net worth and comply with certain other covenants.
As of December 31, 1997, these covenants were met; however, no amounts had
been borrowed under this agreement.
In 1995, the Company issued $213.1 million of debt through a Real Estate
Mortgage Investment Conduit (REMIC). As collateral to the debt, the Company
pledged $1,065.8 million of commercial mortgages to the REMIC Trust. In
addition, the Company has guaranteed the timely payment of principal and
interest on the debt. The debt was issued in two notes of equal amounts. The
interest rates on the class A1 and A2 notes are calculated on a floating
basis, based on the monthly LIBOR rates plus 22 and 27 basis points,
respectively. The LIBOR rates were 5.72% and 5.50%, respectively, at December
31, 1997 and 1996. The class A1 notes were fully repaid on March 25, 1997 and
the class A2 notes have a last scheduled payment date of June 25, 1998. The
outstanding balances of the notes totaled $42.6 million and $127.9 million at
December 31, 1997 and 1996, respectively, and are included in other general
account obligations.
In 1996, the Company issued $292.0 million of additional debt through a REMIC
(REMIC II). As collateral to the debt, the Company pledged $1,455.4 million of
commercial mortgages to the REMIC II Trust. The debt was issued in two notes.
The interest rates on the class A1 and A2 notes are calculated on a floating
basis, based on the monthly LIBOR rate plus 5 and 19 basis points,
respectively. The class A1 notes were fully repaid on December 26, 1997 and
the class A2 notes have a last scheduled payment date of July 26, 1999. The
outstanding balances of the notes totaled $161.0 million and $292.0 million at
December 31, 1997 and 1996, respectively, and are included in other general
account obligations.
On December 31, 1997, the Company had outstanding a short-term note of $75.0
million payable to an affiliate at a variable rate of interest. The note,
which is included in other general account obligations, was repaid on January
5, 1998.
Interest paid on borrowed money was $19.3 million and $10.4 million during
1997 and 1996, respectively.
31
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--NET INVESTMENT INCOME
Investment income has been reduced by the following amounts:
<TABLE>
<CAPTION>
1997 1996
------ ------
(In millions)
<S> <C> <C>
Investment expenses.............................................. $339.6 $333.8
Interest expense................................................. 57.9 48.1
Depreciation on real estate and other invested assets............ 76.6 73.3
Real estate and other investment taxes........................... 61.5 65.2
------ ------
$535.6 $520.4
====== ======
</TABLE>
NOTE 5--NET CAPITAL GAINS (LOSSES) AND OTHER ADJUSTMENTS
Net realized capital losses consist of the following items:
<TABLE>
<CAPTION>
1997 1996
------ ------
(In millions)
<S> <C> <C>
Net gains from asset sales and foreclosures.................... $ 63.4 $ 81.2
Capital gains tax.............................................. (84.1) (53.7)
Net capital gains transferred to the IMR....................... (69.1) (71.1)
------ ------
Net Realized Capital Losses.................................. $(89.8) $(43.6)
====== ======
</TABLE>
Net unrealized capital gains and other adjustments consist of the following
items:
<TABLE>
<CAPTION>
1997 1996
------- ------
(In millions)
<S> <C> <C>
Net gains from changes in security values and book value
adjustments................................................... $ 159.5 $242.2
Increase in asset valuation reserve............................ (100.9) (50.5)
------- ------
Net Unrealized Capital Gains and Other Adjustments........... $ 58.6 $191.7
======= ======
</TABLE>
32
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--INVESTMENTS
The statement value and fair value of bonds are shown below:
<TABLE>
<CAPTION>
Gross Gross
Statement Unrealized Unrealized Fair
Value Gains Losses Value
--------- ---------- ---------- ---------
(In millions)
Year ended December 31, 1997
----------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies........... $ 258.9 $ 9.3 $ 0.0 $ 268.2
Obligations of states and political
subdivisions........................ 149.6 16.3 0.0 165.9
Debt securities issued by foreign
governments......................... 259.7 53.2 0.1 312.8
Corporate securities................. 17,336.1 1,485.9 113.4 18,708.6
Mortgage-backed securities........... 4,981.7 115.9 28.3 5,069.3
--------- -------- ------ ---------
Total bonds........................ $22,986.0 $1,680.6 $141.8 $24,524.8
========= ======== ====== =========
<CAPTION>
Year ended December 31, 1996
----------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
Corporations and Agencies........... $ 430.2 $ 8.8 $ 4.2 $ 434.8
Obligations of states and political
subdivisions........................ 175.2 8.8 3.9 180.1
Debt securities issued by foreign
governments......................... 203.5 30.1 0.0 233.6
Corporate securities................. 16,902.1 1,083.2 112.6 17,872.7
Mortgage-backed securities........... 4,756.0 116.3 54.5 4,817.8
--------- -------- ------ ---------
Total bonds........................ $22,467.0 $1,247.2 $175.2 $23,539.0
========= ======== ====== =========
</TABLE>
The statement value and fair value of bonds at December 31, 1997, by
contractual maturity, are shown below. Maturities will differ from contractual
maturities because eligible borrowers may exercise their right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Statement Fair
Value Value
--------- ---------
(In millions)
<S> <C> <C>
Due in one year or less............................... $ 1,386.4 $ 1,426.6
Due after one year through five years................. 5,809.6 6,079.2
Due after five years through ten years................ 5,465.5 5,867.1
Due after ten years................................... 5,342.8 6,082.6
--------- ---------
18,004.3 19,455.5
Mortgage-backed securities............................ 4,981.7 5,069.3
--------- ---------
$22,986.0 $24,524.8
========= =========
</TABLE>
Gross gains of $61.5 million in 1997 and $43.8 million in 1996 and gross
losses of $86.6 million in 1997 and $27.6 million in 1996 were realized from
the sale of bonds.
33
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1997, bonds with an admitted asset value of $19.2 million were
on deposit with state insurance departments to satisfy regulatory
requirements.
The cost of common stocks was $148.0 million and $136.1 million at December
31, 1997 and 1996, respectively. At December 31, 1997, gross unrealized
appreciation on common stocks totaled $139.3 million, and gross unrealized
depreciation totaled $30.4 million. The fair value of preferred stock totaled
$695.8 million at December 31, 1997 and $451.0 million at December 31, 1996.
The Company participates in a security lending program for the purpose of
enhancing income on securities held. At December 31, 1997 and 1996, $217.0
million and $540.5 million, respectively, of the Company's bonds and stocks
were on loan to various brokers/dealers, but were fully collateralized by cash
and U.S. government securities in an account held in trust for the Company.
Such assets reflect the extent of the Company's involvement in securities
lending, not the Company's risk of loss.
Mortgage loans with outstanding principal balances of $71.7 million, bonds
with amortized cost of $98.9 million and real estate with depreciated cost of
$18.0 million were nonincome producing for the twelve months ended December
31, 1997.
Restructured commercial mortgage loans aggregated $314.3 million and $385.8
million as of December 31, 1997 and 1996, respectively. The expected gross
interest income that would have been recorded had the loans been current in
accordance with the original loan agreements and the actual interest income
recorded were as follows:
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1997 1996
------ ------
(In millions)
<S> <C> <C>
Expected....................................................... $33.8 $46.3
Actual......................................................... 24.9 29.1
</TABLE>
Generally, the terms of the restructured mortgage loans call for the Company
to receive some form or combination of an equity participation in the
underlying collateral, excess cash flows or an effective yield at the maturity
of the loans sufficient to meet the original terms of the loans.
At December 31, 1997, the mortgage loan portfolio was diversified by
geographic region and specific collateral property type as displayed below.
The Company controls credit risk through credit approvals, limits and
monitoring procedures.
<TABLE>
<CAPTION>
Property
Type Statement Value
-------- ---------------
(In millions)
<S> <C>
Apartments................ $1,677.7
Hotels.................... 186.7
Industrial................ 858.1
Office buildings.......... 1,748.7
Retail.................... 1,609.4
1-4 Family................ 6.0
Agricultural.............. 1,426.5
Other..................... 338.1
--------
$7,851.2
========
</TABLE>
<TABLE>
<CAPTION>
Geographic
Concentration Statement Value
------------- ---------------
(In millions)
<S> <C>
East North Central..................... $ 891.5
East South Central..................... 163.4
Middle Atlantic........................ 1,410.2
Mountain............................... 362.2
New England............................ 836.9
Pacific................................ 1,770.6
South Atlantic......................... 1,475.4
West North Central..................... 260.1
West South Central..................... 613.1
Other.................................. 67.8
--------
$7,851.2
========
</TABLE>
34
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1997, the fair values of the commercial and agricultural
mortgage loan portfolios were $6.7 billion and $1.5 billion, respectively. The
corresponding amounts as of December 31, 1996 were approximately $6.6 billion
and $1.8 billion, respectively.
The maximum and minimum lending rates for mortgage loans during 1997 were
18.0% and 7.66% for agricultural loans, 10.0% and 7.19% for other properties,
and 7.27% and 7.25% for purchase money mortgages. Generally, the percentage of
any loan to the value of security at the time of the loan, exclusive of
insured, guaranteed or purchase money mortgages, is 75%. For city mortgages,
fire insurance is carried on all commercial and residential properties at
least equal to the excess of the loan over the maximum loan which would be
permitted by law on the land without the building, except as permitted by
regulations of the Federal Housing Commission on loans fully insured under the
provisions of the National Housing Act. For agricultural mortgage loans, fire
insurance is not normally required on land based loans except in those
instances where a building is critical to the farming operation. Fire
insurance is required on all agri-business facilities in an aggregate amount
equal to the loan balance.
NOTE 7--REINSURANCE
Premiums, benefits and reserves associated with reinsurance assumed in 1997
were $787.1 million, $386.6 million, and $7.5 million, respectively. The
corresponding amounts in 1996 were $742.0 million, $317.8 million, and $14.2
million, respectively.
The Company cedes business to reinsurers to share risks under life, health and
annuity contracts for the purpose of reducing exposure to large losses.
Premiums, benefits and reserves ceded to reinsurers in 1997 were $801.8
million, $767.9 million and $594.9 million, respectively. The corresponding
amounts in 1996 were $304.0 million, $217.0 million and $251.2 million,
respectively.
Premiums, benefits, and reserves ceded related to the business sold in 1997,
included in the amounts above, were $487.4 million, $503.3 million, and $247.9
million, respectively, at December 31, 1997.
Amounts recoverable on paid claims and funds withheld from reinsurers were as
follows:
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1997 1996
------ ------
(In millions)
<S> <C> <C>
Reinsurance recoverables...................................... $12.5 $26.5
Funds withheld from reinsurers................................ 35.1 23.4
</TABLE>
The Company has a coinsurance agreement with another insurer to cede 100% of
its individual disability business. Reserves ceded under this agreement,
included in the amount shown above, were $236.3 million at December 31, 1997
and $226.4 million at December 31, 1996.
John Hancock Variable Life Insurance Company (Variable Life, a wholly-owned
affiliate) has a modified coinsurance agreement with the Company to reinsure
50% of Variable Life's 1994 through 1997 issues of flexible premium variable
life insurance and scheduled premium variable life insurance policies. In
connection
35
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
with this agreement, the Company transferred $22.0 million and $24.5 million
of cash for tax, commission, and expense allowances to Variable Life, which
decreased the Company's net gain from operations by $10.1 million and $15.7
million in 1997 and 1996, respectively.
Variable Life has a modified coinsurance agreement with the Company to
reinsure 50% of Variable Life's 1995 through 1997 issues of certain retail
annuity contracts (Independence Preferred and Declaration). In connection with
this agreement, the Company received $1.1 million in 1997 and transferred
$35.0 million in 1996 of cash for surrender benefits, tax, reserve increase,
commission, expense allowances and premium. This agreement decreased the
Company's net gain from operations by $9.8 million and $15.1 million in 1997
and 1996, respectively.
Effective January 1, 1997, Variable Life entered into a stop-loss agreement
with the Company to reinsure mortality claims in excess of 110% of expected
mortality claims in 1997 for all policies that are not reinsured under any
other indemnity agreement. In connection with the agreement, the Company
transferred $2.4 million of cash for mortality claims to Variable Life, which
decreased the Company's net gain from operations by $1.3 million in 1997.
Reinsurance ceded contracts do not relieve the Company from its obligations to
policyholders. The Company remains liable to its policyholders for the portion
reinsured to the extent that any reinsurer does not meet its obligations for
reinsurance ceded to it under the reinsurance agreements. Failure of the
reinsurers to honor their obligations could result in losses to the Company;
consequently, estimates are established for amounts deemed or estimated to be
uncollectible. To minimize its exposure to significant losses from reinsurance
insolvencies, the Company evaluates the financial condition of its reinsurers
and monitors concentration of credit risk arising from similar characteristics
of the insurer.
Neither the Company, nor any of its related parties, control, either directly
or indirectly, any external reinsurers with which the Company conducts
business. No policies issued by the Company have been reinsured with a foreign
company which is controlled, either directly or indirectly, by a party not
primarily engaged in the business of insurance.
The Company has not entered into any reinsurance agreements in which the
reinsurer may unilaterally cancel any reinsurance for reasons other than
nonpayment of premiums or other similar credits. The Company does not have any
reinsurance agreements in effect in which the amount of losses paid or accrued
through December 31, 1997 would result in a payment to the reinsurer of
amounts which, in the aggregate and allowing for offset of mutual credits from
other reinsurance agreements with the same reinsurer, exceed the total direct
premiums collected under the reinsured policies.
NOTE 8--BENEFIT PLANS
The Company provides retirement benefits to substantially all employees and
general agency personnel. These benefits are provided through both defined
benefit and defined contribution pension plans. Pension benefits under the
defined benefit plans are based on years of service and average compensation
generally during the five years prior to retirement. Benefits related to the
Company's defined benefit pension plans paid to employees and
36
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
retirees covered by annuity contracts issued by the Company amounted to $89.7
million in 1997 and $84.4 million in 1996. The Company's funding policy for
qualified defined benefit plans is to contribute annually an amount in excess
of the minimum annual contribution required under the Employee Retirement
Income Security Act (ERISA). This amount is limited by the maximum amount that
can be deducted for federal income tax purposes. The funding policy for
nonqualified defined benefit plans is to contribute the amount of the benefit
payments made during the year. Plan assets consist principally of listed
equity securities, corporate obligations and U.S. government securities.
Defined contribution plans include The Investment Incentive Plan (TIP) and the
Savings and Investment Plan (SIP). Employees are eligible to participate in
TIP after one year of service and may contribute up to the lesser of 15% of
their salary or $9,500 annually to the plan. The Company matches the first 2%
of pre-tax contributions and makes an additional annual profit sharing
contribution for employees who have completed at least two years of service.
Through SIP, marketing representatives, sales managers and agency managers are
eligible to contribute up to the lesser of 13% of their salary or $9,500. The
Company matches the first 3% of pretax contributions for marketing
representatives and the first 2% of pretax contributions for sales managers
and agency managers. The Company makes an annual profit sharing contribution
of up to 1% for sales managers and agency managers who have completed at least
two years of service.
The Company provides additional compensation to employees based on achievement
of annual and long-term corporate financial objectives.
Pension (benefit) expense is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31
------------------------
1997 1996
------ ------
(In millions)
<S> <C> <C>
Defined benefit plans:
Service cost--benefits earned during the period........ $ 30.7 $ 32.4
Interest cost on the projected benefit obligation...... 109.3 107.4
Actual return on plan assets........................... (177.7) (225.1)
Net amortization and deferral.......................... 23.7 85.0
------- -------
(14.0) (0.3)
Defined contribution plans............................... 6.2 21.4
------- -------
Total pension (benefit) expense.......................... $ (7.8) $ 21.1
======= =======
</TABLE>
Assumptions used in accounting for the defined benefit pension plans were as
follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Discount rate.................................................. 7.00% 7.25%
Weighted rate of increase in compensation levels............... 4.80% 4.80%
Expected long-term rate of return on assets.................... 8.50% 8.50%
</TABLE>
37
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the funded status and actuarially determined
amounts related to the Company's defined benefit pension plans:
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1997 1996
---------- ----------
(In millions)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation......................... $(1,462.2) $(1,344.8)
========= =========
Accumulated benefit obligation.................... $(1,507.6) $(1,387.7)
========= =========
Projected benefit obligation........................ $(1,704.0) $(1,582.4)
Plan assets fair value.............................. 1,877.7 1,787.6
--------- ---------
Excess of plan assets over projected benefit
obligation......................................... 173.7 205.2
Unrecognized net gain............................... (101.7) (176.1)
Prior service cost not yet recognized in net
periodic pension cost.............................. 29.6 42.8
Unrecognized net asset, net of amortization......... (93.2) (95.9)
--------- ---------
Net pension asset (liability)....................... $ 8.4 $ (24.0)
========= =========
</TABLE>
Since 1988, the Massachusetts Division of Insurance has provided the Company
with approval to recognize the pension plan prepaid expense, if any, in
accordance with the requirements of SFAS No. 87, "Employers' Accounting for
Pensions." The Company furnishes the Division of Insurance with an actuarial
certification of the prepaid expense computation on an annual basis.
NOTE 9--OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the Company's defined benefit pension plans, the Company has
employee welfare plans for medical, dental, and life insurance covering most
of its retired employees and general agency personnel. Substantially all
employees may become eligible for these benefits if they reach retirement age
while employed by the Company. The postretirement health care and dental
coverages are contributory based on service for post January 1, 1992 non-union
retirees. A small portion of pre-January 1, 1992 non-union retirees also
contribute. The applicable contributions are based on service.
In 1993, the Company changed its method of accounting for the costs of its
retiree benefit plans to the accrual method and elected to amortize its
transition liability for retirees and fully eligible or vested employees over
twenty years.
Since 1993, the Company funded a portion of the postretirement obligation. The
Company's policy is to fund postretirement benefits for non-union employees to
the maximum amount that can be deducted for federal income tax purposes and to
fund the benefits for union employees, which are fully tax qualified, at
sufficient amounts so that the total accrued liability related to
postretirement benefits is zero. As of December 31, 1997, plan assets related
to non-union employees were comprised of an irrevocable health insurance
contract to provide future health benefits to retirees while plan assets
related to union employees were comprised of approximately 70% equity
securities and 30% fixed income investments.
38
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
The following table shows the plans' combined funding status for vested
benefits reconciled with the amounts recognized in the Company's statements of
financial position.
<TABLE>
<CAPTION>
December 31
-------------------------------------
1997 1996
------------------ ------------------
Medical Medical
And Life and Life
Dental Insurance Dental Insurance
Plans Plans Plans Plans
------- --------- ------- ---------
(In millions)
<S> <C> <C> <C> <C>
Accumulated postretirement benefit
obligation:
Retirees............................... $(228.8) $ (95.7) $(234.2) $(100.6)
Fully eligible active plan
participants.......................... (38.7) (17.9) (46.4) (19.4)
------- ------- ------- -------
(267.5) (113.6) (280.6) (120.0)
Plan assets at fair value................ 172.7 0.0 132.4 0.0
------- ------- ------- -------
Accumulated postretirement benefit
obligation in excess of plan assets..... (94.8) (113.6) (148.2) (120.0)
Unrecognized prior service cost.......... 14.9 4.8 16.7 5.3
Unrecognized prior net gain.............. (122.8) (4.2) (93.0) 4.0
Unrecognized transition obligation....... 240.7 75.0 256.8 78.4
------- ------- ------- -------
Accrued postretirement benefit cost...... $ 38.0 $ (38.0) $ 32.3 $ (32.3)
======= ======= ======= =======
</TABLE>
Net postretirement benefits costs for the years ended December 31, 1997 and
1996 were $40.8 million and $47.4 million, respectively, and include the
expected cost of such benefits for newly eligible or vested employees,
interest cost, and amortization of the transition liability.
Net periodic postretirement benefits cost included the following components:
<TABLE>
<CAPTION>
December 31
-------------------------------------
1997 1996
------------------ ------------------
Medical Medical
And Life and Life
Dental Insurance Dental Insurance
Plans Plans Plans Plans
------- --------- ------- ---------
(In millions)
<S> <C> <C> <C> <C>
Eligibility cost...................... $ 6.9 $ 1.6 $ 7.1 $ 1.8
Interest cost......................... 17.8 7.6 19.8 8.3
Actual return on plan assets.......... (31.0) 0.0 (15.9) 0.0
Net amortization and deferral......... 32.8 5.1 20.9 5.4
------ ----- ------ -----
Net periodic postretirement benefit
cost................................. $ 26.5 $14.3 $ 31.9 $15.5
====== ===== ====== =====
</TABLE>
The discount rate used in determining the accumulated postretirement benefit
obligation at December 31, 1997 was 7.0% (7.25% for 1996). The expected long-
term rates of return on plan assets were 8.5% and 7.0% at December 31, 1997
and 1996, respectively. The annual assumed rate of increase in the health care
cost trend
39
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
rate for the medical coverages is 5.75% for 1998 (8.0% was assumed for 1997)
and is assumed to decrease gradually to 5.00% in 2001 and remain at that level
thereafter. The health care cost trend rate assumption has a significant
effect on the amounts reported. For example, increasing the assumed health
care cost trend rates by one percentage point in each year would increase the
accumulated post retirement benefit obligation for the medical coverages as of
December 31, 1997 by $26.2 million and the aggregate of the eligibility and
interest cost components of net periodic postretirement benefit cost by $3.0
million for 1997 and $2.9 million for 1996.
Postretirement welfare benefits for non-vested employees are not reflected in
the above expenses or accumulated postretirement benefit obligations. As of
December 31, 1997, the accumulated postretirement benefit obligations for non-
vested employees amounted to $49.5 million for medical and dental plans and
$10.4 million for life insurance plans. The corresponding amounts as of
December 31, 1996 were $69.4 million and $10.7 million, respectively.
NOTE 10--AFFILIATES
The Company has subsidiaries and affiliates in a variety of industries
including domestic and foreign life insurance and domestic property casualty
insurance, real estate, mutual funds, investment brokerage and various other
financial services entities.
Total assets of unconsolidated affiliates amounted to $12.4 billion at
December 31, 1997 and $9.6 billion at December 31, 1996; total liabilities
amounted to $11.1 billion at December 31, 1997 and $8.5 billion at December
31, 1996; and total net income was $184.8 million in 1997 and $193.0 million
in 1996.
During 1996, the Company sold certain of its affiliates including its ongoing
property and casualty business and its broker-dealer operations to realign its
business objectives.
The Company customarily engages in transactions with its unconsolidated
affiliates, including the cession and assumption of certain insurance business
under the terms of established reinsurance agreements. Various services are
performed by the Company for certain affiliates for which the Company is
reimbursed on the basis of cost. Certain affiliates have entered into various
financial arrangements relating to borrowings and capital maintenance under
which agreements the Company would be obligated in the event of nonperformance
by an affiliate (see Note 14).
The Company received dividends of $65.9 million and $9.4 million in 1997 and
1996, respectively, from unconsolidated affiliates.
NOTE 11--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company utilizes a variety of off-balance sheet financial instruments as
part of its efforts to hedge and manage fluctuations in the market value of
its investment portfolio attributable to changes in general interest rate
levels and to manage duration mismatch of assets and liabilities. Those
instruments include swaps, caps, floors, and future contracts.
The Company enters into interest rate swap contracts for the purpose of
converting the interest rate characteristics (fixed or variable) of certain
investments to match those of related insurance liabilities. Maturities of
current
40
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
agreements range from 1998 to 2026. These swaps involve, to varying degrees,
interest rate risk in excess of amounts recognized in the statements of
financial position.
The Company enters into interest rate cap and floor contracts to manage
exposure on underlying security values due to a rise in interest rates.
Maturities of current agreements range through 2007.
The Company also uses financial futures contracts to hedge risks associated
with interest rate fluctuations on sales of guaranteed investment contracts.
The Company is subject to the risks associated with changes in the value of
the underlying securities; however, such changes in value generally are offset
by opposite changes in the value of the hedged items. The contract or notional
amounts of the contracts represent the extent of the Company's involvement but
not the future cash requirements, as the Company intends to close the open
positions prior to settlement. Net deferred losses on future contracts were
$6.4 million and $0.5 million at December 31, 1997 and 1996, respectively.
The Company enters into currency rate swap agreements to manage exposure to
foreign exchange rate fluctuations. Maturities of current agreements range
through 2009. Should the counterparty fail to meet the terms of the contract,
the Company's market risk is limited to the currency rate differential.
The contract or notional amount of the foregoing financial instruments, which
indicates the Company's involvement and, in certain instances, maximum credit
risk related to those instruments, is as follows:
<TABLE>
<CAPTION>
December 31
-----------------
1997 1996
-------- --------
(In millions)
<S> <C> <C>
Futures contracts to purchase securities.................... $ 154.0 $ 117.6
======== ========
Futures contracts to sell securities........................ $ 414.2 $ 136.4
======== ========
Notional amount of interest rate swaps, interest rate
swaptions, currency rate swaps, interest rate caps and
interest rate floors to:
Receive variable rates.................................... $5,043.7 $3,822.8
======== ========
Receive fixed rates....................................... $2,596.7 $2,912.5
======== ========
</TABLE>
The Company's exposure to credit risk is the risk of loss from a counterparty
failing to perform according to the terms of the contract. The Company
continually monitors its positions and the credit ratings of the
counterparties to these financial instruments. To limit exposure associated
with counterparty nonperformance on interest rate and currency agreements, the
Company enters into master netting agreements with its counterparties. The
Company believes the risk of incurring losses due to nonperformance by its
counterparties is remote and that such losses, if any, would not be material.
Based on market rates in effect at December 31, 1997, the Company's interest
rate swaps, currency rate swaps, interest rate caps, and interest rate floors
represented (assets) liabilities to the Company with fair values of $58.3
million, $9.7 million, $(0.6) million and $(0.4) million, respectively. The
corresponding amounts as of December 31, 1996 were $16.4 million, $41.1
million, $(0.6) million and $(0.1) million, respectively. The fair values of
the swap agreements are not recognized in the financial statements.
41
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--LEASES
The Company leases office space and furniture and equipment under various
operating leases including furniture and equipment leased under a series of
sales-leaseback agreements with a nonaffiliated organization. Rental expense
for all operating leases totaled $27.4 million in 1997 and $32.1 million in
1996. Future minimum rental commitments under noncancellable operating leases
for office space and furniture and equipment are as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
(In millions)
<S> <C>
1998..................................................... $19.5
1999..................................................... 17.0
2000..................................................... 14.5
2001..................................................... 11.5
2002..................................................... 8.1
Thereafter............................................... 12.2
-----
Total minimum payments................................... $82.8
=====
</TABLE>
NOTE 13--POLICY RESERVES, POLICYHOLDERS' AND BENEFICIARIES' FUNDS AND
OBLIGATIONS RELATED TO SEPARATE ACCOUNTS
The Company's annuity reserves and deposit fund liabilities and related
separate account liabilities that are subject to discretionary withdrawal
(with adjustment), subject to discretionary withdrawal (without adjustment),
and not subject to discretionary withdrawal provisions are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1997 Percent
----------------- -------
(In millions)
<S> <C> <C>
Subject to discretionary withdrawal (with adjust-
ment):
With market value adjustment....................... $ 3,881.6 10.5%
At book value less surrender charge................ 2,881.4 7.8
--------- -----
Total with adjustment.............................. 6,763.0 18.3
Subject to discretionary withdrawal (without ad-
justment) at book value........................... 3,574.2 9.6
Subject to discretionary withdrawal--separate ac-
counts............................................ 13,455.3 36.3
Not subject to discretionary withdrawal:
General account.................................... 11,996.1 32.4
Separate accounts.................................. 1,274.1 3.4
--------- -----
Total annuity reserves, deposit fund liabilities and
separate accounts--before reinsurance............... 37,062.7 100.0%
=====
Less reinsurance ceded............................... 0.0
---------
Net annuity reserves, deposit fund liabilities and
separate accounts................................... $37,062.7
=========
</TABLE>
Any liquidation costs associated with the $13.5 billion of separate accounts
subject to discretionary withdrawal are sustained by the separate account
contractholders and not by the general account.
42
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--COMMITMENTS AND CONTINGENCIES
The Company has extended commitments to purchase long-term bonds, preferred
and common stocks, and real estate and issue real estate mortgages totaling
$693.6 million, $27.6 million, $122.3 million and $467.2 million,
respectively, at December 31, 1997. If funded, loans related to real estate
mortgages would be fully collateralized by related properties. The Company
monitors the credit worthiness of borrowers under long-term bond commitments
and requires collateral as deemed necessary. The estimated fair value of the
commitments described above is $1.3 billion at December 31, 1997. The majority
of these commitments expire in 1998.
The Company has contingent liabilities, pursuant to guarantee agreements
issued in connection with real estate joint ventures, in the amount of $43.3
million.
During 1996, the Company entered into a credit support and collateral pledge
agreement with the Federal National Mortgage Association (FNMA). Under the
agreement, the Company sold $532.8 million of commercial mortgage loans and
acquired an equivalent amount of FNMA securities. The Company completed
similar transactions with FNMA in 1991 for $1.042 billion and in 1993 for
$71.9 million. FNMA is guarantying the full face value of the bonds of the
three transactions to the bondholders. However, the Company has agreed to
absorb the first 12.25% of the principal and interest losses (less buy-backs)
for the pools of loans involved in the three transactions, based on the total
outstanding principal balance of $1.036 billion as of July 1, 1996, but is not
required to commit collateral to support this loss contingency. At December
31, 1997, the aggregate outstanding principal balance of all the remaining
pools of loans from 1991, 1993, and 1996 is $672.0 million.
Historically, the Company has experienced losses of less than one percent on
its multi-family mortgage portfolio. Mortgage loan buy-backs required by the
FNMA in 1997 and 1996 amounted to $4.1 million and $3.4 million, respectively.
During 1996, the Company entered into a credit support and collateral pledge
agreement with the Federal Home Loan Mortgage Corporation (FHLMC). Under the
agreement, the Company sold $535.3 million of multi-family loans and acquired
an equivalent amount of FHLMC securities. FHLMC is guarantying the full face
value of the bonds to the bondholders. However, the Company has agreed to
absorb the first 10.5% of original principal and interest losses (less buy-
backs) for the pool of loans involved but is not required to commit collateral
to support this loss contingency. Historically, the Company has experienced
total losses of less than one percent on its multi-family loan portfolio. At
December 31, 1997, the aggregate outstanding principal balance of the pools of
loans was $500.8 million. There were no mortgage loans buy-backs in 1997 and
1996.
The Company has a support agreement with Variable Life under which the Company
agrees to continue directly or indirectly to own all of Variable Life's common
stock and maintain Variable Life's net worth at not less than $1 million.
The Company has a support agreement with John Hancock Capital Corporation
(JHCC), a non-consolidated wholly-owned subsidiary, under which the Company
agrees to continue directly or indirectly to own all of JHCC's common stock
and maintain JHCC's net worth at not less than $1 million. JHCC's outstanding
borrowings as of December 31, 1997 were $351.1 million for short-term
borrowings and $163.2 million for notes payable.
43
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
The Company is subject to insurance guaranty fund laws in the states in which
it does business. These laws assess insurance companies amounts to be used to
pay benefits to policyholders and claimants of insolvent insurance companies.
Many states allow these assessments to be credited against future premium
taxes. The Company believes such assessments in excess of amounts accrued will
not materially affect its financial position.
In the normal course of its business operations, the Company is involved with
litigation from time to time with claimants, beneficiaries and others, and a
number of litigation matters were pending as of December 31, 1997. It is the
opinion of management, after consultation with counsel, that the ultimate
liability with respect to these claims, if any, will not materially affect the
financial position or results of operations of the Company.
During 1997, the Company entered into a court approved settlement relating to
a class action lawsuit involving certain individual life insurance policies
sold from 1979 through 1996. In entering into the settlement, the Company
specifically denied any wrongdoing. The Company has established a litigation
reserve in connection with the settlement to provide for relief to class
members and for legal and administrative costs associated with the settlement.
The reserve has been charged, net of the related tax effect, directly to
policyholders' contingency reserves of the Company. Given the uncertainties
associated with estimating the reserve, it is possible that the final cost of
the settlement could be different from the amounts presently provided for by
the Company. However, the Company does not believe that the ultimate
resolution of the settlement will have a material adverse effect on the
Company's financial position.
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments:
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------
1997 1996
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
(In millions)
<S> <C> <C> <C> <C>
Assets
Bonds--Note 6...................... $22,986.0 $24,524.8 $22,467.0 $23,539.0
Preferred stocks--Note 6........... 640.6 695.8 416.2 451.0
Common stocks--Note 6.............. 256.9 256.9 249.8 249.8
Mortgage loans on real estate--Note
6................................. 7,851.2 8,215.9 7,964.0 8,400.2
Policy loans--Note 1............... 1,577.3 1,577.3 1,589.3 1,589.3
Cash and cash equivalents--Note 1.. 724.8 724.8 1,416.7 1,416.7
Liabilities
Guaranteed investment contracts--
Note 1............................ 11,499.4 11,516.8 11,921.6 11,943.2
Fixed rate deferred and immediate
annuities--Note 1................. 4,289.1 4,290.4 3,909.3 3,886.1
Supplementary contracts without
life contingencies--Note 1........ 40.9 42.1 45.6 46.0
Derivatives liabilities relating
to:--Note 11
Interest rate swaps.................. -- 58.3 -- 16.4
Currency rate swaps.................. -- 9.7 -- 41.1
Interest rate caps................... -- (0.6) -- (0.6)
Interest rate floors................. -- (0.4) -- (0.1)
--
Commitments--Note 14................. -- 1,332.3 -- 1,095.7
</TABLE>
44
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(CONTINUED)
The carrying amounts in the table are included in the statutory-basis
statements of financial position. The methods and assumptions utilized by the
Company in estimating its fair value disclosures are described in Note 1.
NOTE 16--IMPACT OF YEAR 2000 (UNAUDITED)
The Company has developed a plan to modify or replace significant portions of
its computer information and automated technologies so that its systems will
function properly with respect to the dates in the year 2000 and thereafter.
The Company presently believes that with modifications to existing systems and
conversions to new technologies, the year 2000 will not pose significant
operational problems for its computer systems. However, if certain
modifications and conversions are not made, or are not completed timely, the
year 2000 issue could have an adverse impact on the operations of the Company.
The Company as early as 1994 had begun assessing, modifying and converting the
software related to its significant systems and has initiated formal
communications with its significant business partners and customers to
determine the extent to which the Company's interface systems are vulnerable
to those third parties' failure to remediate their own year 2000 issues. While
the Company is developing alternative third party processing arrangements as
it deems appropriate, there is no guarantee that the systems of other
companies on which the Company's systems rely will be converted timely or will
not have an adverse effect on the Company's systems.
The Company expects the project to be substantially complete by early 1999 and
expects the incremental cost to be between $35 million and $45 million. The
cost of the project and the date on which the Company believes it will
complete the year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
availability of certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results may differ
materially from those anticipated.
45
<PAGE>
LIST OF EXHIBITS
FORM N-4
JOHN HANCOCK VARIABLE ANNUITY ACCOUNT U
EXHIBITS
10.(a) Consent of Independent Auditors
10.(b) Representation of Counsel pursuant to Rule 485(b)
27. Financial Data Schedule
<PAGE>
EXHIBIT 10(A)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Experts" in the
Prospectus and "Independent Auditors" in the Statement of Additional Informa-
tion in Post-Effective Amendment Number 40 to the Registration Statement (Form
N-4, No. 2-38827) of John Hancock Variable Annuity Account U.
We also consent to the inclusion of our reports dated February 6, 1998 on the
financial statements included in the Annual Report of the John Hancock Variable
Annuity Account U, and dated February 18, 1998 on financial statements included
in the Annual Report of the John Hancock Mutual Life Insurance Company for the
year ended December 31, 1997.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
April 29, 1998
<PAGE>
EXHIBIT 10(B)
[JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY LETTERHEAD]
April 20, 1998
SECURITIES & EXCHANGE COMMISSION
450 FIFTH STREET, N.W.
WASHINGTON, DC 20549
RE: John Hancock Variable Annuity Account U
File Nos. 2-38827 and 811-2143
Dear Commissioners:
This opinion is being furnished with respect to the filing of Post-Effective
Amendment No. 40 under the Securities Act of 1933 (Post-Effective Amendment
No. 23 under the Investment Company Act of 1940) of the Form N-4 Registration
Statement of John Hancock Variable Annuity Account U as required by Rule 485
under the 1933 Act.
I have acted as counsel to Registrant for the purpose of preparing this
Post-Effective Amendment which is being filed pursuant to paragraph (b) of
Rule 485 and hereby represent to the Commission that in my opinion this Post-
Effective Amendment does not contain disclosures which would render it ineli-
gible to become effective pursuant to paragraph (b).
We hereby consent to the filing of this opinion with and as a part of this
Post-Effective Amendment to Registrant's Registration Statement with the Com-
mission.
Very truly yours,
/s/ SANDRA M. DADALT
Sandra DaDalt
Counsel
SD0103.DOC (Acct U)
