<PAGE> 1
As filed with the Securities and Exchange Commission on October 7, 1996
Registration No. 333-
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
/ / Pre-Effective Amendment No. ________
/ / Post-Effective Amendment No. ________
(Check appropriate box or boxes)
NASL SERIES TRUST
(Exact Name of Registrant as Specified in Charter)
(617) 266-6008
(Area Code and Telephone Number)
116 Huntington Avenue
Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Name and Address of Agent for Service:
James D. Gallagher, Esq.
NASL Series Trust
116 Huntington Avenue
Boston, Massachusetts 02116
Copies to:
Sarah E. Cogan, Esq. J. Sumner Jones, Esq.
Simpson Thacher & Bartlett Jones & Blouch L.L.P.
425 Lexington Avenue Suite 405 West
New York, New York 10017 1025 Thomas Jefferson Street, N.W.
Washington, D.C. 20007
Approximate Date of Proposed Public Offering: As soon after the
effective date of this registration statement as is practicable.
It is proposed that this filing will become effective on November 6,
1996 pursuant to Rule 488.
The Registrant has previously registered an indefinite number or amount
of its shares pursuant to Rule 24f-2 under the Investment Company Act of 1940 on
November 5, 1984; accordingly, no fee is payable herewith. A Rule 24f-2 Notice
for Registrant's fiscal year ended December 31, 1995 was filed on February 28,
1996.
Page 1 of ____ Pages
Index to Exhibits on Page ____
<PAGE> 2
NASL SERIES TRUST
Cross Reference Sheet
Pursuant to Rule 481(a) Under the Securities Act of 1933
<TABLE>
<CAPTION>
Form N-14 Item No. Location
- ------------------ --------
Prospectus/Proxy
Statement Caption
-----------------
<S> <C> <C>
Part A
- ------
Item 1. Beginning of Registration Statement and Outside Front Cover Page
Cover Page of Prospectus
Item 2. Beginning and Outside Back Cover Page of Table of Contents
Prospectus
Item 3. Synopsis Information and Risk Factors Summary
Item 4. Information About the Transaction Summary; Reasons for the Reorganization;
Information About the Reorganization;
Comparative Information on Shareholder
Rights; Agreement and Plan of
Reorganization
Item 5. Information About the Registrant Summary; Comparison of Investment
Objectives and Policies; Additional
Information About NASL
Item 6. Information About the Company Being Acquired Summary; Comparison of Investment
Objectives and Policies; Information About
MSF
Item 7. Voting Information Voting Information
Item 8. Interest of Certain Persons and Experts Financial Statements and Experts
Item 9. Additional Information Required for Reoffering by Not Applicable
Persons Deemed to be Underwriters
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Statement of Additional
Information Caption
Part B -----------------------
- ------
<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Cover Page
Item 12. Additional Information About the Statement of Additional Information
Registrant
Item 13. Additional Information About the Not Applicable
Company Being Acquired
Item 14. Financial Statements Historical Financial Statements; Pro
Forma Financial Statements; The caption
"Information about MSF" in the
Prospectus
</TABLE>
Part C
- ------
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
2
<PAGE> 4
PART A
<PAGE> 5
PRELIMINARY COPY--For the Information of the
Securities and Exchange Commission Only
MANULIFE SERIES FUND, INC.
200 Bloor Street East
Toronto, Ontario, Canada M4W 1E5
November __, 1996
TO OUR VARIABLE ANNUITY AND VARIABLE LIFE CONTRACT OWNERS:
A Special Meeting of Shareholders of the Manulife Series Fund, Inc.
("MSF") will be held at the offices of NASL Series Trust at 116 Huntington
Avenue, Boston, Massachusetts 02116, on December 20, 1996, at 10:00 a.m.,
Eastern Standard Time, for the purpose of considering a reorganization proposal
that will combine each of the nine MSF funds, which are managed by an investment
adviser controlled by The Manufacturers Life Insurance Company ("Manulife"),
with an existing or newly-created fund in NASL Series Trust ("NASL"), a mutual
fund group that is advised by another investment adviser controlled by Manulife.
There are certain differences between the investment objectives, policies and
restrictions of the MSF funds and the corresponding NASL funds, as summarized in
the tables beginning on page six and included under the caption "Comparison of
Investment Objectives and Policies" in the enclosed Prospectus/Proxy Statement.
Although you are not a shareholder of MSF, your purchase payments and
the earnings on such purchase payments under your variable annuity or variable
life contract issued by The Manufacturers Life Insurance Company of America
("Manufacturers Life of America") are invested in shares of one or more of the
MSF funds through sub-accounts of separate accounts established by Manufacturers
Life of America for such purpose. Since the value of your contract depends in
part on the investment performance of MSF shares, you have the right to instruct
Manufacturers Life of America as to the manner in which MSF shares attributable
to your contract are voted. The number of votes as to each MSF fund for which
you may give instructions is determined by dividing your contract value (or the
reserve for a contract after its maturity date) allocated to the sub-account in
which such MSF fund shares are held by the value per share of that MSF fund.
Fractional votes are counted. MSF shares held in each sub-account as to which no
instructions are received, including shares not attributable to contractholders,
will be voted in the same proportion as shares in that sub-account for which
instructions are received from contractholders.
The reorganization will provide contractholders a multiple manager
approach of portfolio management under which NASL's investment adviser monitors
and evaluates subadviser performance, investment compliance and capabilities
with the goal of maintaining high quality and an appropriate balance of
investment alternatives for investors. This includes the introduction of
high-profile money managers such as Founders Asset Management, Inc.,
Price-Fleming International, Inc. and Warburg, Pincus Counsellors, Inc.
The reorganization also will enable contractholders to take advantage of
an investment management approach known as managing to the "Efficient Frontier"
in which investors allocate their assets among a broad mix of investment choices
consistent with their risk tolerance levels with the goal of maximizing their
risk adjusted investment return. In connection with this approach, it is
anticipated that, within 1997, most of the funds in the NASL family will be made
available as investment options in most of the variable contracts issued by
Manufacturers Life of America prior to the reorganization, providing
contractholders with direct access to a wide range of investment alternatives.
NASL intends, in early 1997, to add several asset allocation portfolios to its
fund family in connection with the expansion of the "Efficient Frontier"
investment management approach.
Furthermore, as a result of the reorganization, contractholders invested
in the Manulife Money-Market Fund will be able to pursue substantially the same
investment goals in a larger NASL fund immediately, and it is anticipated that
each of the combined MSF and NASL funds will experience more rapid asset growth
in the future than would have been the case for the MSF funds standing alone,
resulting in larger funds. Such larger funds should enhance the ability of
portfolio managers to effect portfolio transactions on more favorable terms and
give portfolio managers greater investment flexibility and the ability to select
a larger number of portfolio securities, with the attendant benefits of
increased diversification.
As part of this proposal, some of the fees will go up, others down. The
Board has determined that the benefits provided by the reorganization justify
the changes in fees. With respect to certain other NASL funds, NASL's adviser
has agreed to limit the total expenses of such funds for a period of one year
following the reorganization to a level no higher than the total expenses borne
by the corresponding MSF funds. These arrangements are discussed in the enclosed
Prospectus/Proxy Statement. For these reasons and the additional reasons
discussed in the enclosed Prospectus/Proxy Statement, the Board of Directors of
MSF unanimously recommends that you vote FOR approval of the reorganization
proposal.
<PAGE> 6
The value of your investment will not be affected in the reorganization
transaction. Furthermore, in the opinion of legal counsel, the transaction will
not be subject to federal income taxes. NASL's adviser and its affiliates have
agreed to bear the expenses of the reorganization (other than registration fees
payable for the registration of shares of the NASL funds in connection with the
reorganization).
Enclosed you will find a Notice of Special Meeting of Shareholders, a
Prospectus/Proxy Statement for MSF and a Voting Instructions Form for each MSF
fund in which your contract values were invested as of October 23, 1996 (the
record date for the Meeting). The number of shares of each MSF fund which
represent your voting interest determined as explained above appears on each
enclosed Voting Instructions Form. The Prospectus/Proxy Statement provides
background information and explains the matters to be voted on at the Meeting.
We urge you to read it and then complete and return each Voting Instructions
Form on or before December 19, 1996.
If you have any questions regarding the reorganization, please call
1-800-827-4546.
Sincerely yours,
Donald A. Guloien
President
Manulife Series Fund, Inc.
2
<PAGE> 7
<TABLE>
<S> <C>
VOTING INSTRUCTIONS FORM
THE MANUFACTURERS LIFE INSURANCE VOTING PURSUANT TO THESE INSTRUCTIONS WILL BE AS SPECIFIED.
COMPANY OF AMERICA IF NO SPECIFICATION IS MADE AS TO AN ITEM, VOTING WILL BE FOR SUCH ITEM.
A SEPARATE VOTING INSTRUCTION FORM IS PROVIDED FOR EACH MANULIFE
SERIES FUND, INC. PORTFOLIO IN WHICH YOUR CONTRACT VALUES WERE
INVESTED AS OF OCTOBER 23, 1996. PLEASE SIGN, DATE AND RETURN ALL VOTING
INSTRUCTION FORMS RECEIVED IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
VOTING INSTRUCTIONS MUST BE RECEIVED BY DECEMBER 19, 1996 TO BE VOTED
FOR THE MEETING TO BE HELD ON DECEMBER 20, 1996.
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
THESE VOTING INSTRUCTIONS ARE SOLICITED BY THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA IN CONNECTION WITH A SOLICITATION OF
PROXIES BY THE BOARD OF DIRECTORS OF MANULIFE SERIES FUND, INC.
THE UNDERSIGNED HEREBY INSTRUCTS THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA TO VOTE THE SHARES OF MANULIFE SERIES FUND,
INC. ("MSF") ATTRIBUTABLE TO HIS OR HER VARIABLE ANNUITY CONTRACT AT THE MEETING OF SHAREHOLDERS TO BE HELD AT 116 HUNTINGTON
AVENUE, BOSTON, MASSACHUSETTS AT 10:00 A.M., DECEMBER 20, 1996, AND ANY ADJOURNMENTS THEREOF, AS INDICATED BELOW.
<S> <C>
DATE:_____________________
PLEASE SIGN IN BOX BELOW
If a contract is held jointly, each contract owner
should sign. If only one signs, his or her signature
will be binding. If the contract owner is a
corporation, the President or a Vice President should
sign in his or her own name, indicating title. If the
contract owner is a partnership, a partner should
sign in his or her own name, indicating that he or
she is a "Partner." If the contract owner is a trust,
the trustee should sign in his or her own name,
indicating that he or she is a "Trustee."
----------------------------------------------------
----------------------------------------------------
Signature(s) Title(s), if applicable
</TABLE>
<PAGE> 8
<TABLE>
<S> <C>
INDICATE YOUR VOTE BELOW BY FILLING IN THE APPROPRIATE BOXES IN THIS MANNER /X/ USING BLUE OR BLACK INK OR DARK PENCIL.
PLEASE DO NOT USE RED INK
- -------------------------------------------------------------------------------------------------------------------------------
THIS VOTING INSTRUCTION, IF PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE CONTRACTHOLDER. IF NO DIRECTION IS
MADE, THIS VOTING INSTRUCTION WILL BE VOTED FOR ALL PROPOSALS. PLEASE REFER TO THE PROSPECTUS/PROXY STATEMENT FOR A DISCUSSION
OF THE PROPOSALS.
FOR AGAINST ABSTAIN
1. The approval of Agreement and Plan of Reorganization / / / / / /
2. To transact such other business as may properly come before the meeting.
- ------------------------------------------------------------------------------------------------------------------------------
PLEASE MARK YOUR VOTING INSTRUCTION FORM, DATE AND SIGN IT ON THE REVERSE SIDE, AND RETURN IT PROMPTLY IN THE ACCOMPANYING
ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
</TABLE>
<PAGE> 9
PRELIMINARY COPY--For the Information of the
Securities and Exchange Commission Only
MANULIFE SERIES FUND, INC.
200 Bloor Street East
Toronto, Ontario, Canada M4W 1E5
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
November __, 1996
To the Shareholders of
MANULIFE SERIES FUND, INC.:
Notice is hereby given that a Special Meeting of Shareholders (the "Meeting") of
Manulife Series Fund, Inc. ("MSF") will be held on December 20, 1996 at the
offices of NASL Series Trust ("NASL") at 116 Huntington Avenue, Boston,
Massachusetts 02116 at 10:00 a.m., Eastern Standard Time. A Prospectus/Proxy
Statement which provides information about the purpose of the Meeting is
included with this notice. The Meeting will be held for the following purposes:
Item 1 To consider and act upon a proposal to approve an Agreement and Plan
of Reorganization (the "Agreement") between MSF on behalf of its
portfolios listed below (the "Manulife Portfolios") and NASL on behalf
of its portfolios listed below (the "NASL Portfolios") providing for
the transfer of all of the assets of each Manulife Portfolio to the
corresponding NASL Portfolio in exchange solely for shares of
beneficial interest of such NASL Portfolio ("NASL Portfolio Shares")
and the assumption by such NASL Portfolio of the liabilities of such
Manulife Portfolio, and the distribution of such NASL Portfolio Shares
to the shareholders of such Manulife Portfolio in liquidation of such
Manulife Portfolio. The Manulife Portfolios and the corresponding NASL
Portfolios are as follows:
<TABLE>
<CAPTION>
Manulife Portfolios Corresponding NASL Portfolios
- ------------------- -----------------------------
<S> <C>
Money-Market Fund Money Market Trust
International Fund International Stock Trust (a newly organized NASL
Portfolio)
Emerging Growth Equity Fund Emerging Growth Trust (a newly organized NASL
Portfolio)
Balanced Assets Fund Balanced Trust (a newly organized NASL Portfolio)
Common Stock Fund Common Stock Trust (a newly organized NASL
Portfolio)
Pacific Rim Emerging Markets Fund Pacific Rim Emerging Markets Trust (a newly
organized NASL Portfolio)
Real Estate Securities Fund Real Estate Securities Trust (a newly organized
NASL Portfolio)
Capital Growth Bond Fund Capital Growth Bond Trust (a newly organized
NASL Portfolio)
Equity Index Fund Equity Index Trust (a newly organized NASL
Portfolio)
</TABLE>
<PAGE> 10
Shareholders of each Manulife Portfolio will vote separately on Item 1.
Item 2 Transaction of any other business that may properly come before the
Meeting.
The Board of Directors of MSF has recently reviewed and unanimously
endorsed the proposals set forth in the accompanying Prospectus/Proxy Statement.
THE BOARD OF DIRECTORS OF MSF RECOMMENDS THAT SHAREHOLDERS VOTE FOR ITEM 1.
Approval of the Agreement will require the affirmative vote of the
holders of at least a majority of the outstanding shares of each of the Manulife
Portfolios. By approving the Agreement, MSF shareholders will be deemed to have
waived certain of MSF's investment limitations solely insofar as they might be
deemed to apply to the transactions provided for in the Prospectus/Proxy
Statement. The Board of Directors knows of no other business that will be acted
upon at the Meeting.
Each shareholder of record at the close of business on October 23, 1996
is entitled to receive notice of and to vote at the Meeting.
Sincerely yours,
Sheri L. Kocen
Secretary
November __, 1996
Toronto, Canada
2
<PAGE> 11
PRELIMINARY COPY--For the Information of the
Securities and Exchange Commission Only
PROSPECTUS/PROXY STATEMENT DATED NOVEMBER __, 1996
Acquisition of the assets of
MANULIFE SERIES FUND, INC.
200 Bloor Street East
Toronto, Ontario, Canada M4W 1E5
1-800-827-4546
By and in exchange for shares of
NASL SERIES TRUST
116 Huntington Avenue
Boston, Massachusetts 02166
1-800-827-8037
This Prospectus/Proxy Statement relates to the proposed transfer of all
of the assets and liabilities of the portfolios (the "Manulife Portfolios") of
Manulife Series Fund, Inc. ("MSF") to corresponding portfolios (the "NASL
Portfolios") of NASL Series Trust ("NASL") in exchange for shares of such NASL
Portfolios (the "Reorganization"). NASL is a no-load, open-end management
investment company, commonly known as a mutual fund, offering shares in several
portfolios. As a result of the Reorganization, each shareholder of a Manulife
Portfolio will receive that number of shares of the corresponding NASL Portfolio
equal in value at the time of the exchange to the value of such shareholder's
shares of the Manulife Portfolio at such date. The terms and conditions of the
Reorganization are more fully described in this Prospectus/Proxy Statement and
in the Agreement and Plan of Reorganization between MSF and NASL attached hereto
as Exhibit A.
Shares of NASL are not offered directly to the public but are sold only
to insurance companies and their separate accounts as the underlying investment
medium for variable life and annuity contracts ("contracts"). As of the record
date for the Special Meeting of Shareholders, 100% of the Manulife Portfolio
shares were legally owned by The Manufacturers Life Insurance Company of America
("Manufacturers Life of America"), a stock life insurance company organized
under the laws of Pennsylvania and redomesticated under the laws of Michigan.
Manufacturers Life of America holds Manulife Portfolio shares attributable to
variable life contracts in Separate Accounts One, Three and Four and variable
annuity contracts in Separate Account Two, each a separate account registered
under the Investment Company Act of 1940, as amended (the "Separate Accounts").
However, Manufacturers Life of America has agreed to vote all shares of MSF in
proportion to the timely instructions received from holders of the contracts
issued by Manufacturers Life of America ("contractholders"). As a result, this
Prospectus/Proxy Statement is being furnished in connection with the
solicitation of voting instructions from such contractholders regarding the
proposal to shareholders of MSF to approve the Reorganization. The ultimate
parent of Manufacturers Life of America is The Manufacturers Life Insurance
Company ("Manulife"), a Canadian mutual life insurance company whose principal
address is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5.
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about NASL and the NASL
Portfolios that a shareholder should know in considering the Reorganization. A
statement of additional information dated November __, 1996 (the "Statement of
Additional Information") containing additional information about NASL has been
filed with the Securities and Exchange Commission (the "Commission") and is
incorporated by reference into this Prospectus/Proxy Statement. A copy of the
Statement of Additional Information may be obtained without charge by writing to
NASL at the address noted above or by calling 1-800-827-8037. A copy of MSF's
current prospectus and statement of additional information may be obtained
without charge by writing to MSF at its address noted above or by calling
1-800-827-4546.
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/PROXY STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 12
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS/PROXY STATEMENT AND IN THE MATERIALS EXPRESSLY
INCORPORATED HEREIN BY REFERENCE, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY NASL, MSF, THEIR ADVISERS OR SUBADVISERS OR
THE PRINCIPAL UNDERWRITER OF THE CONTRACTS. THIS PROSPECTUS/
PROXY STATEMENT DOES NOT CONSTITUTE AN OFFERING IN ANY
STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
THERE CAN BE NO ASSURANCE THAT THE NASL MONEY MARKET TRUST WILL BE ABLE
TO MAINTAIN A STABLE NET ASSET VALUE OF $10.00 PER SHARE. SHARES
OF NASL ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY
INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
2
<PAGE> 13
TABLE OF CONTENTS
Page
SUMMARY..................................................... 4
REASONS FOR THE REORGANIZATION.............................. 12
INFORMATION ABOUT THE REORGANIZATION........................ 14
VOTING INFORMATION.......................................... 18
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES............ 19
COMPARATIVE INFORMATION ON SHAREHOLDER RIGHTS............... 42
ADDITIONAL INFORMATION ABOUT NASL........................... 44
INFORMATION ABOUT MSF....................................... 60
FINANCIAL STATEMENTS AND EXPERTS............................ 61
LEGAL MATTERS............................................... 61
Exhibit
A -- Agreement and Plan of Reorganization between Manulife Series Fund,
Inc. and NASL Series Trust.
3
<PAGE> 14
SUMMARY
This summary is qualified by reference to the more complete information
contained in this Prospectus/Proxy Statement, the prospectus of MSF and the
Agreement and Plan of Reorganization attached to this Prospectus/Proxy Statement
as Exhibit A. The information concerning MSF contained or incorporated by
reference into this Prospectus/Proxy Statement has been furnished by MSF, and
the information concerning NASL contained or incorporated by reference into this
Prospectus/Proxy Statement has been furnished by NASL.
Proposed Transaction. The Board of Directors of MSF (the "MSF Board"),
including the Directors who are not "interested persons" of MSF (the
"Independent Directors"), has unanimously approved an Agreement and Plan of
Reorganization (the "Agreement") providing for the transfer of all of the assets
and liabilities of each Manulife Portfolio to a corresponding NASL Portfolio in
exchange for shares of such NASL Portfolio. The total value of all shares of
each NASL Portfolio issued in the Reorganization shall equal the total value of
the net assets of the corresponding Manulife Portfolio being acquired by such
NASL Portfolio.
As a result of the Reorganization, each holder of shares of each
Manulife Portfolio specified in the table below will become a holder of shares
of the NASL Portfolio listed opposite such Manulife Portfolio (each Manulife or
NASL Portfolio being referred to herein as the "corresponding" Manulife or NASL
Portfolio to the respective NASL or Manulife Portfolio listed opposite its
name). As a result, shareholders should carefully consider the information about
NASL and the NASL Portfolios presented in this Prospectus/Proxy Statement in
connection with voting on the Reorganization.
- -------------------------------------------------------------------------------
Manulife Portfolio NASL Portfolio
- -------------------------------------------------------------------------------
Money-Market Fund Money Market Trust
- -------------------------------------------------------------------------------
International Fund International Stock Trust*
- -------------------------------------------------------------------------------
Emerging Growth Equity Fund Emerging Growth Trust*
- -------------------------------------------------------------------------------
Balanced Assets Fund Balanced Trust*
- -------------------------------------------------------------------------------
Common Stock Fund Common Stock Trust**
- -------------------------------------------------------------------------------
Pacific Rim Emerging Markets Fund Pacific Rim Emerging Markets Trust**
- -------------------------------------------------------------------------------
Real Estate Securities Fund Real Estate Securities Trust**
- -------------------------------------------------------------------------------
Capital Growth Bond Fund Capital Growth Bond Trust**
- -------------------------------------------------------------------------------
Equity Index Fund Equity Index Trust**
- -------------------------------------------------------------------------------
- -----------------
* A newly organized portfolio of NASL.
** A newly organized portfolio of NASL created as a successor to the
corresponding Manulife Portfolio in connection with the Reorganization.
There are certain differences between the investment objectives,
policies and restrictions of the NASL Portfolios and the corresponding Manulife
Portfolios, as discussed below. See "Comparison of Investment Objectives and
Policies." The fee structure of the Manulife Portfolios will also change, as
discussed below. The existing purchase, redemption and dividend policies of the
Manulife Portfolios will remain substantially unchanged, except in the case of
the dividend policies of the Manulife Money-Market Fund, as discussed below.
The consummation of the Reorganization is contingent on the
satisfaction of the conditions described below under "Information About the
Reorganization." Prior to or effective upon the consummation of the
Reorganization, it is anticipated that NASL will effect changes to the
composition of NASL's Board of Trustees (the "NASL Board") and obtain approval
from NASL shareholders with respect to a "manager of managers" proposal and
changes in subadvisory arrangements discussed under "Additional Information
about NASL--C. Management of NASL" (collectively, the "Related Changes").
However, the failure of the NASL shareholders to effect any or all of the
Related Changes prior to the Reorganization will
4
<PAGE> 15
not prevent the Reorganization from occurring. Information contained herein with
respect to NASL and the NASL Portfolios describes the Related Changes where so
indicated.
If the Reorganization were to have been consummated as of June 30,
1996, the approximate resulting aggregate net assets of the NASL Money Market
Trust would be $376,724,266; all other Manulife Portfolios would have merged
into newly created NASL Portfolios, with resulting net assets of approximately
(1) $26,477,252 in the case of the NASL International Stock Trust, (2)
$191,192,652 in the case of the NASL Emerging Growth Trust, (3) $122,018,344 in
the case of the NASL Balanced Trust, (4) $76,032,098 in the case of the NASL
Common Stock Trust, (5) $19,626,583 in the case of the NASL Pacific Rim Emerging
Markets Trust, (6) $56,860,363 in the case of the NASL Real Estate Securities
Trust, (7) $41,329,264 in the case of the NASL Capital Growth Bond Trust, and
(8) $2,493,027 in the case of the NASL Equity Index Trust.
If the Reorganization were to have been consummated as of December 31,
1995, the approximate resulting aggregate net assets of the NASL Money Market
Trust would be $294,108,962; all other Manulife Portfolios would have merged
into newly created NASL Portfolios with resulting net assets of approximately
(1) $19,047,538 in the case of the NASL International Stock Trust, (2)
$162,426,467 in the case of the NASL Emerging Growth Trust, (3) $110,760,739 in
the case of the NASL Balanced Trust, (4) $60,995,928 in the case of the NASL
Common Stock Trust, (5) $13,057,099 in the case of the NASL Pacific Rim Emerging
Markets Trust, (6) $52,440,117 in the case of the NASL Real Estate Securities
Trust and (7) $42,693,786 in the case of the NASL Capital Growth Bond Trust.
No gain or loss will be recognized by the NASL Portfolios or the
Manulife Portfolios or shareholders of the Manulife Portfolios for federal
income tax purposes as a result of the Reorganization. For further information
about the tax consequences of the Reorganization, see "Information about the
Reorganization--Federal Income Tax Consequences."
NASL Overview. NASL is a series trust, which means that it has several
portfolios, each with a stated investment objective which it pursues through
separate investment policies. NASL is a no-load, open-end management investment
company organized as a Massachusetts business trust and registered with the
Commission under the Investment Company Act of 1940, as amended (the "1940
Act"), and each of the NASL Portfolios other than the NASL Emerging Growth Trust
is diversified for purposes of the 1940 Act.
NASL currently serves as the underlying investment medium for sums
invested in variable annuity and variable life contracts issued by North
American Security Life Insurance Company ("Security Life"), First North American
Life Assurance Company ("FNAL") and Manufacturers Life of America. Seven
portfolios of NASL currently are made available for investment by Manufacturers
Life of America contractholders, but such portfolios do not include any of the
NASL Portfolios involved in the proposed Reorganization. NASL may in the future
fund annuity contracts issued by other insurance companies, among other things.
Currently, NASL has three shareholders, Security Life, FNAL and Manufacturers
Life of America. As is the case for MSF shares, NASL shares are not offered
directly to and may not be purchased directly by members of the public.
Consequently, as of the date of this Prospectus/Proxy Statement, the terms
"shareholder" and "shareholders" of NASL in this Prospectus/Proxy Statement
refer to Security Life, FNAL and Manufacturers Life of America.
Under Massachusetts law, shareholders of NASL could, under certain
circumstances, be held personally liable for the obligations of NASL. However,
the Declaration of Trust disclaims shareholder liability for acts or obligations
of NASL, and requires that notice of such disclaimer be given in each agreement,
obligation, or instrument entered into or executed by NASL or the Trustees.
Moreover, the Declaration of Trust provides for indemnification out of NASL
property for all losses and expenses of any shareholder held personally liable
for the obligations of NASL. Thus, the risk of a shareholder's incurring
financial loss on account of shareholder liability is considered by NASL to be
remote, since it is limited to circumstances in which the disclaimer is
inoperative, inadequate insurance existed (e.g., fidelity bonding and errors and
omissions insurance) and NASL itself is unable to meet its obligations. Under
Maryland law, MSF shareholders have no personal liability for MSF's acts or
obligations.
Investment Management. The following table illustrates the current
management arrangements for the Manulife Portfolios and the management
arrangements to be in effect for the corresponding NASL Portfolios upon
consummation of the Reorganization:
5
<PAGE> 16
<TABLE>
<CAPTION>
CURRENT MANAGEMENT ARRANGEMENTS MANAGEMENT ARRANGEMENTS UPON CONSUMMATION OF THE REORGANIZATION
- ----------------------------------------------------------------------------------------------------------------------
Investment NASL Portfolio Investment
Manulife Portfolio Manager Adviser Subadviser
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money-Market Fund MAC Money Market Trust NASL Financial MAC
International Fund MAC International Stock Trust NASL Financial Price-Fleming
Emerging Growth Equity Fund MAC Emerging Growth Trust NASL Financial Warburg Pincus
Balanced Assets Fund MAC Balanced Trust NASL Financial Founders
Common Stock Fund MAC Common Stock Trust NASL Financial MAC
Pacific Rim Emerging Markets Fund MAC Pacific Rim Emerging Markets Trust NASL Financial MAC
Real Estate Securities Fund MAC Real Estate Securities Trust NASL Financial MAC
Capital Growth Bond Fund MAC Capital Growth Bond Trust NASL Financial MAC
Equity Index Fund MAC Equity Index Trust NASL Financial MAC
</TABLE>
Manufacturers Adviser Corporation ("MAC") is an indirect wholly owned subsidiary
of Manulife. NASL Financial Services, Inc. ("NASL Financial") is an indirect
wholly owned subsidiary of Security Life, the ultimate parent of which is
Manulife. Since October 1, 1996 MAC has served as subadviser to the NASL Money
Market Trust pursuant to an agreement with NASL Financial and manages such NASL
Portfolio on a day-to-day basis, which arrangement is subject to NASL
shareholder ratification. If such shareholder ratification is not obtained, the
NASL Board will consider an appropriate course of action. MAC, Price-Fleming
International, Inc. ("Price-Fleming"), Warburg, Pincus Counsellors, Inc.
("Warburg Pincus") and Founders Asset Management, Inc. ("Founders") each will
serve as subadviser to the NASL Portfolios indicated in the table above
following consummation of the Reorganization pursuant to an agreement with NASL
Financial and will manage such NASL Portfolios on a day-to-day basis. See
"Additional Information About NASL--C. Management of NASL."
Investment Objectives and Approaches. The following table sets forth
the investment objective and approach of each Manulife Portfolio and its
corresponding NASL Portfolio. There are certain differences in the investment
objectives and approaches of the portfolios that should be considered. See
"Comparison of Investment Objectives and Policies."
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Manulife Portfolio and
Corresponding NASL Investment Objective and Approach
Portfolio
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Manulife Money-Market Seek to obtain maximum current income consistent with preservation of principal
Fund and NASL Money and liquidity by investing in high quality, U.S. dollar denominated money market
Market Trust instruments.
========================================================================================================================
Manulife International Seeks to achieve long-term growth of capital by investing primarily in common
Fund stocks and equity-related securities of companies in countries other than the
United States and Canada.
- ------------------------------------------------------------------------------------------------------------------------
NASL International Seeks to achieve long-term growth of capital by investing primarily in common
Stock Trust stocks of established, non-U.S. companies.
========================================================================================================================
Manulife Emerging Seeks to achieve growth of capital by investing primarily in
Growth Equity Fund equity securities of companies believed to offer growth potential over both the
intermediate and the long term.
- ------------------------------------------------------------------------------------------------------------------------
NASL Emerging Seeks to achieve maximum capital appreciation by investing
Growth Trust primarily in a non-diversified portfolio of equity securities of
emerging growth companies representing attractive capital appreciation
opportunities.
========================================================================================================================
</TABLE>
6
<PAGE> 17
<TABLE>
========================================================================================================================
<S> <C>
Manulife Balanced Seeks to achieve intermediate and long-term growth through
Assets Fund capital appreciation and income by investing in both debt and equity
securities, including common and preferred stocks and a variety of
fixed-income securities.
- ------------------------------------------------------------------------------------------------------------------------
NASL Balanced Trust Seeks to achieve current income and capital appreciation by investing in a
balanced portfolio of common stocks, U.S. and foreign government obligations
and a variety of corporate fixed-income securities.
========================================================================================================================
Manulife Common Seek to achieve intermediate and long-term growth through appreciation
Stock Fund and NASL and current income by investing in stocks and other equity securities of
Common Stock Trust well established with promising prospects for providing an above average
rate of return.
========================================================================================================================
Manulife Pacific Rim Seek to achieve long-term growth of capital by investing primarily in common
Emerging Markets Fund stocks and equity-related securities of the countries in the Pacific Rim region.
and NASL Pacific Rim
Emerging Markets Trust
========================================================================================================================
Manulife Real Estate Seek to achieve a combination of long-term capital appreciation and satisfactory
Securities Fund and current income by investing in real estate related equity and debt securities.
NASL Real Estate
Securities Trust
========================================================================================================================
Manulife Capital Seek to achieve growth of capital by investing in medium-grade or better debt
Growth Bond Fund and securities, with income as a secondary consideration.
NASL Capital Growth
Bond Trust
========================================================================================================================
Manulife Equity Index Seek to achieve investment results which approximate the total return of publicly
and NASL Equity Fund traded common stocks in the aggregate, as represented by the
Index Trust Standard & Poor's 500 Composite Stock Price Index.
========================================================================================================================
</TABLE>
Investment Policies and Restrictions. In addition to the differences
between the investment objectives and approaches of certain of the Manulife
Portfolios and their corresponding NASL Portfolios, as set forth in the table
above, there are important differences between the investment policies of the
Manulife Money-Market Fund, Manulife International Fund, Manulife Emerging
Growth Equity Fund and Manulife Balanced Assets Fund and their corresponding
NASL Portfolios, as set forth in the tables below under the caption "Comparison
of Investment Objectives and Policies." There also are certain differences
between the investment restrictions applicable to the Manulife Portfolios and
the NASL Portfolios in pursuing their investment objectives that are listed
below under the caption "Comparison of Investment Objectives and Policies-J.
Additional Information on Investment Policies and Techniques and Risk Factors."
A complete list of the investment restrictions applicable to the NASL Portfolios
is set forth in the Statement of Additional Information under the caption
"Investment Restrictions."
Additional Trust Portfolios. In addition to the NASL Portfolios
referred to above, NASL currently offers the following sixteen additional
portfolios:
NASL Small/Mid Cap Trust
NASL Blue Chip Growth Trust
NASL International Small Cap Trust
NASL Global Equity Trust
NASL Equity Trust
NASL Growth Trust
NASL Value Trust
NASL Growth and Income Trust
NASL International Growth and Income Trust
7
<PAGE> 18
NASL Strategic Bond Trust
NASL Global Government Bond Trust
NASL Investment Quality Bond Trust
NASL U.S. Government Securities Trust
NASL Aggressive Asset Allocation Trust
NASL Moderate Asset Allocation Trust
NASL Conservative Asset Allocation Trust
Commencing in January 1997, NASL expects to offer the following five additional
portfolios:
NASL Equity Income Trust
NASL High Yield Trust
NASL Science & Technology Trust
NASL Pilgrim Baxter Growth Trust
NASL Worldwide Growth Trust
In addition, commencing in early 1997, NASL intends to offer the following five
additional portfolios (subject to the approval of the NASL Board):
NASL Conservative Lifestyle Trust
NASL Moderate Lifestyle Trust
NASL Balanced Lifestyle Trust
NASL Growth Lifestyle Trust
NASL Aggressive Lifestyle Trust
Certain of the foregoing portfolios of NASL will not be available
immediately following the Reorganization as investment options under variable
contracts issued by Manufacturers Life of America. However, it is anticipated
that, within 1997, most of these funds will be made available as investment
options. See "Reasons for the Reorganization." NASL may add additional
portfolios from time to time in the future.
Fees and Expenses. The table which follows sets forth the ratios of
expenses to average net assets and expense examples for the Manulife Portfolios
for the fiscal year ended December 31, 1995, and the pro forma expense ratios
and expense examples for the shares of the corresponding NASL Portfolios as if
the Reorganization had occurred at the commencement of the fiscal year ended
December 31, 1995, based upon the fee arrangements that will be in place upon
the consummation of the Reorganization. As noted below, NASL Financial
voluntarily has agreed to limit the expense ratios of the NASL Common Stock
Trust, NASL Real Estate Securities Trust and NASL Capital Growth Bond Trust for
a period of one year following the consummation of the Reorganization to levels
no higher than the expense ratios of the corresponding Manulife Portfolios for
the year ended December 31, 1995.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
- -----------------------------------------------------------------------------------------------------------------------
NASL PRO FORMA COMBINED EXPENSE RATIOS
MSF EXPENSE RATIOS (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Advisory Fees
- -------------
Money-Market Fund 0.50% Money Market Trust .50%
International Fund 0.85* International Stock Trust 1.05
Emerging Growth Equity Fund 0.50 Emerging Growth Trust 1.05
Balanced Assets Fund 0.50 Balanced Trust .80
Common Stock Fund 0.50 Common Stock Trust .70**
Pacific Rim Emerging Markets Fund 0.85* Pacific Rim Emerging Markets Trust .85
Real Estate Securities Fund 0.50 Real Estate Securities Trust .70**
Capital Growth Bond Fund 0.50 Capital Growth Bond Trust .65**
Equity Index Fund 0.25 Equity Index Trust .25
Other Expenses***
- --------------
Money-Market Fund 0.00% Money Market Trust .04%
International Fund 0.50 International Stock Trust .20
Emerging Growth Equity Fund 0.00 Emerging Growth Trust .10
Balanced Assets Fund 0.00 Balanced Trust .15
Common Stock Fund 0.00 Common Stock Trust .06
Pacific Rim Emerging Markets Fund 0.65 Pacific Rim Emerging Markets Trust .30
</TABLE>
8
<PAGE> 19
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
- ---------------------------------------------------------------------------------------------------------------
MSF EXPENSE RATIOS NASL PRO FORMA COMBINED EXPENSE RATIOS
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real Estate Securities Fund 0.00 Real Estate Securities Trust .10
Capital Growth Bond Fund 0.00 Capital Growth Bond Trust .10
Equity Index Fund 0.15 Equity Index Trust .15
Total Fund Operating Expenses
- -----------------------------
Money-Market Fund 0.50% Money Market Trust .54%
International Fund 1.35 International Stock Trust 1.25
Emerging Growth Equity Fund 0.50 Emerging Growth Trust 1.15
Balanced Assets Fund 0.50 Balanced Trust .95
Common Stock Fund 0.50 Common Stock Trust .76**
Pacific Rim Emerging Markets Fund 1.50 Pacific Rim Emerging Markets Trust 1.15
Real Estate Securities Fund 0.50 Real Estate Securities Trust .80**
Capital Growth Bond Fund 0.50 Capital Growth Bond Trust .75**
Equity Index Fund 0.40 Equity Index Trust .40
</TABLE>
- ------------------
* Fee would drop to 0.70% on assets over $100 million.
** "Total Fund Operating Expenses" do not reflect an agreement by NASL
Financial voluntarily to waive fees payable to it and/or reimburse
expenses for a period of one year following the consummation of the
Reorganization to the extent necessary to prevent "Total Fund Operating
Expenses" for each indicated NASL Portfolio for such period from
exceeding .50% of average net assets. "Advisory Fees" for each
indicated NASL Portfolio do not reflect estimated fee waivers by NASL
Financial pursuant to such agreement; with such waivers reflected,
"Advisory Fees" would be .44%, .40% and .40% for the NASL Common Stock
Trust, NASL Real Estate Securities Trust and NASL Capital Growth Bond
Trust, respectively.
*** "Other Expenses" include custody fees, registration fees, legal fees,
audit fees, trustees' fees, insurance fees and other miscellaneous
expenses. With respect to the Manulife Portfolios, MAC has agreed to
pay all of such expenses (other than brokerage commissions on portfolio
transactions and other direct costs related to the acquisition,
disposition, lending or borrowing of portfolio investments, taxes,
interest and other costs related to borrowings, and any extraordinary
or non-recurring expenses such as legal claims and liabilities and
litigation costs and any indemnification related thereto) in excess of
the amounts set forth in the table above pursuant to its advisory
agreement with MSF. With respect to the NASL Portfolios, the amounts
set forth in the table above are expense estimates for the current
fiscal year based upon historical NASL new portfolio cash inflows. NASL
Financial has agreed pursuant to its advisory agreement with NASL to
reduce its advisory fee or reimburse NASL to the extent that such other
expenses (excluding taxes, portfolio brokerage commissions, interest,
litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of business) exceed .75%
in the case of the NASL International Stock Trust and NASL Pacific Rim
Emerging Markets Trust, .15% in the case of the NASL Equity Index Trust
and .50% in the case of each of the other NASL Portfolios of the
average annual net assets of such NASL Portfolio. Such expense
limitations with respect to the NASL Portfolios will continue in effect
from year to year unless otherwise terminated at any year end by NASL
Financial on 30 days' notice to NASL. See "Additional Information About
NASL-C. Management of NASL."
EXAMPLE: A shareholder would pay the following expenses on a $1,000 investment
based upon payment of operating expenses at the levels set forth in the table
above, assuming (1) 5% annual return and (2) redemption at the end of each time
period:
<TABLE>
<CAPTION>
CORRESPONDING NASL
PORTFOLIOS PRO FORMA
MSF EXPENSES COMBINED EXPENSES
(UNAUDITED) (UNAUDITED)
------------ ---------------------
<S> <C>
MANULIFE MONEY-MARKET FUND/NASL MONEY MARKET FUND
1 Year.............................................................. $ 5 $ 6
3 Years............................................................. 16 17
5 Years............................................................. 28 30
10 Years............................................................ 63 68
MANULIFE INTERNATIONAL FUND/NASL INTERNATIONAL STOCK TRUST
1 Year.............................................................. $ 14 $ 13
3 Years............................................................. 43 40
5 Years............................................................. 74 69
10 Years............................................................ 162 151
MANULIFE EMERGING GROWTH EQUITY FUND/NASL EMERGING GROWTH
TRUST
1 Year.............................................................. $ 5 $ 12
3 Years............................................................. 16 37
5 Years............................................................. 28 63
</TABLE>
9
<PAGE> 20
<TABLE>
<CAPTION>
CORRESPONDING NASL
PORTFOLIOS PRO FORMA
MSF EXPENSES COMBINED EXPENSES
(UNAUDITED) (UNAUDITED)
------------ --------------------
<S> <C> <C>
10 Years............................................................ 63 140
MANULIFE BALANCED ASSETS FUND/NASL BALANCED TRUST
1 Year.............................................................. $ 5 $ 10
3 Years............................................................. 16 30
5 Years............................................................. 28 53
10 Years............................................................ 63 117
MANULIFE COMMON STOCK FUND/NASL COMMON STOCK TRUST
1 Year.............................................................. $ 5 $ 8
3 Years............................................................. 16 24
5 Years............................................................. 28 42
10 Years............................................................ 63 94
MANULIFE PACIFIC RIM EMERGING MARKETS FUND/NASL PACIFIC RIM
EMERGING MARKETS TRUST
1 Year.............................................................. $ 15 $ 12
3 Years............................................................. 47 37
5 Years............................................................. 82 63
10 Years............................................................ 179 140
MANULIFE REAL ESTATE SECURITIES FUND/NASL REAL ESTATE SECURITIES
TRUST
1 Year.............................................................. $ 5 $ 8
3 Years............................................................. 16 26
5 Years............................................................. 28 44
10 Years............................................................ 63 99
MANULIFE CAPITAL GROWTH BOND FUND/NASL CAPITAL GROWTH BOND
TRUST
1 Year.............................................................. $ 5 $ 8
3 Years............................................................. 16 24
5 Years............................................................. 28 42
10 Years............................................................ 63 93
MANULIFE EQUITY INDEX FUND/NASL EQUITY INDEX TRUST
1 Year.............................................................. $ 4 $ 4
3 Years............................................................. 13 13
5 Years............................................................. 22 22
10 Years............................................................ 51 51
</TABLE>
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF FUTURE EXPENSES OR ANNUAL RETURN; ACTUAL EXPENSES AND ANNUAL RETURN MAY BE
GREATER OR LESS THAN THOSE SHOWN. There can be no assurance that the foregoing
pro forma expense ratios would have been the actual expense ratios for the
corresponding NASL Portfolios had the Reorganization been consummated when
assumed above, or that the foregoing pro forma expense ratios reflect the actual
expense ratios that will be incurred by the corresponding NASL Portfolios
indicated above if the Reorganization is consummated. The purpose of this table
is to assist investors in understanding the expenses an investor in each of the
Manulife Portfolios and NASL Portfolios will bear. The variable contracts issued
by Manufacturers Life of America provide for charges not reflected in the above
table.
Although the expense ratios of five of the NASL Portfolios are higher
than the expense ratios of the corresponding Manulife Portfolios, the MSF Board
believes that the higher expense ratios are consistent with current industry
standards.
10
<PAGE> 21
Furthermore, with respect to the NASL Emerging Growth Trust and NASL Balanced
Trust, the MSF Board believes that the higher expense ratios are justified in
light of the change in portfolio management of such portfolios. With respect to
the NASL Common Stock Trust, NASL Real Estate Securities Trust and NASL Capital
Growth Bond Trust, the MSF Board noted that NASL Financial voluntarily has
agreed to limit for a period of one year following the consummation of the
Reorganization the expense ratios of such NASL Portfolios to levels no higher
than the expense ratios of the corresponding Manulife Portfolios for their most
recently completed fiscal year, as noted above. The expense ratios of the NASL
Money Market Trust and NASL Equity Index Trust are substantially the same as
those of the corresponding Manulife Portfolios, while the expense ratios of the
NASL International Trust and NASL Pacific Rim Emerging Markets Trust are lower
than those of the corresponding Manulife Portfolios.
MAC currently is providing advisory services and bearing most of the
expenses of the Manulife Portfolios pursuant to an advisory agreement which it
can terminate without penalty on 60 days' notice. MAC recently has expressed to
the MSF Board its desire to eliminate its direct subsidization of the Manulife
Portfolios' expenses. Moreover, Manulife has indicated that new variable annuity
and variable life products it makes available in the future are likely to use
NASL as the underlying investment medium rather than MSF, thereby limiting MSF's
opportunities for growth and causing its potential stagnation or decline, and
MAC has indicated that this could make it more difficult for it to continue to
subsidize the expenses of the Manulife Portfolios as it has done in the past. If
shareholders do not approve the Reorganization and MAC terminates its current
advisory agreement, the MSF Board would be forced to consider alternative
advisory arrangements, and the MSF Board believes that the existing expense
ratios of most of the Manulife Portfolios would be difficult to maintain under
current market conditions in light of the higher total fees and expenses borne
by many mutual funds with similar investment objectives. In light of these
considerations, the MSF Board believes that the overall opportunities for MSF
shareholders presented by the proposed Reorganization outweigh the increases in
fees.
For the foregoing reasons and those set forth below under "Reasons for
the Reorganization," the MSF Board, including all of the Independent Directors,
has unanimously concluded that the Reorganization is in the best interests of
each Manulife Portfolio, as well as its shareholders and the contractholders
whose contract values are invested in shares thereof, and that the interests of
existing shareholders and contractholders will not be diluted as a result of the
Reorganization. The MSF Board has unanimously recommended to shareholders
approval of the Reorganization.
For more complete information regarding the historical and projected
expenses of the NASL Portfolios, see "Additional Information about NASL--A.
Expenses."
Purchase and Redemption. Like MSF, shares of NASL are offered
continuously, without sales charge, at prices equal to the respective net asset
values of the portfolio being purchased. Both MSF and NASL sell their shares
directly without the use of any underwriter. Shares of NASL are sold and
redeemed at their net asset value next computed after a purchase payment or
redemption request is received by the shareholder from the contract owner or
after any other purchase or redemption order is received by NASL. Depending upon
the net asset values at that time, the amount paid upon redemption may be more
or less than the cost of the shares when they were purchased. Payment for shares
redeemed will be made as soon as possible, but in any event within seven days
after receipt of a request for redemption. Unlike the Manulife Money- Market
Fund, the NASL Money Market Trust intends to maintain to the extent practicable
a constant per share net asset value of $10.00, although there is no assurance
that it will be able to do so.
Dividends and Distributions. Like MSF, NASL intends to declare as
dividends substantially all of the net investment income, if any, of each of the
NASL Portfolios. For dividend purposes, net investment income of each NASL
Portfolio, except the NASL Money Market Trust, will consist of all payments of
dividends (other than stock dividends) or interest received by such NASL
Portfolio less the estimated expenses of such NASL Portfolio (including fees
payable to NASL Financial). For the NASL Money Market Trust net investment
income will consist of the interest income earned on investments, plus or minus
amortized purchase discount or premium, plus or minus realized gains and losses,
less estimated expenses. Dividends from the net investment income and the net
realized short-term and long-term capital gains, if any, for each portfolio,
except the NASL Money Market Trust, will be declared not less frequently than
annually and reinvested in additional full and fractional shares of that NASL
Portfolio or paid in cash. Dividends from net investment income and net realized
short-term and long-term capital gains, if any, for the NASL Money Market Trust
will be declared and reinvested, or paid in cash, daily. In contrast, the
Manulife Money-Market Fund declares and pays dividends annually, and none of the
Manulife Portfolios offer a cash dividend option to shareholders.
Risk Factors. The risks associated with an investment in a NASL
Portfolio, in general, are those typically associated with investing in a
managed portfolio of the specific types of instruments in which that NASL
Portfolio invests. All of the NASL Portfolios may invest to varying degrees in
the securities of foreign issuers and certain of the portfolios may invest
11
<PAGE> 22
in derivatives, which entail certain additional risks. Further information
relating to these and other risks associated with an investment in the NASL
Portfolios is set forth below under "Comparison of Investment Objectives and
Policies."
Manulife Money-Market Fund and NASL Money Market Trust. Risks of
investment in these portfolios relate primarily to risks of investing in
obligations of U.S. banks and their foreign branches and investments in
dollar-denominated securities of Canadian issuers. Investment in the NASL Money
Market Trust includes the additional risks of investing in obligations of
foreign banks, dollar-denominated securities of foreign issuers other than
Canadian issuers and commercial paper rated in the second highest rating
category.
Manulife International Fund and NASL International Stock Trust. Risks
of investment in these portfolios relate primarily to fluctuations in stock
prices and risks associated with foreign investing. Investment in the NASL
International Stock Trust currently also includes the additional risks of
investing in certain emerging markets and risks associated with investments in
derivatives for purposes other than hedging portfolio risks.
Manulife Emerging Growth Equity Fund and NASL Emerging Growth Trust.
Risks of investment in these portfolios relate primarily to fluctuations in
stock prices and risks associated with investments in the securities of smaller,
less seasoned companies (which generally exhibit greater volatility and are
otherwise subject to greater risks than the securities of larger, more
established companies). Investment in the NASL Emerging Growth Trust includes
the additional risks of investing in a wider range of foreign securities. The
NASL Emerging Growth Trust also is a non-diversified portfolio, unlike the
Manulife Emerging Growth Equity Fund, and therefore bears risks associated with
investing in a smaller number of securities than a diversified portfolio.
Manulife Balanced Assets Fund and NASL Balanced Trust. Risks of
investment in these portfolios include fluctuations in stock prices as well as
exposure to interest rate and credit risks with respect to fixed-income
securities (including mortgage-related securities). Investment in the NASL
Balanced Trust also includes the additional risks associated with its ability to
invest up to 5% of its assets in junk bonds, including the greater risk of
default by the issuers of such bonds, and its ability to invest in a wider range
of securities of foreign issuers.
Manulife Common Stock Fund and NASL Common Stock Trust. Risks of
investment in these portfolios relate primarily to fluctuations in stock prices.
Manulife Pacific Rim Emerging Markets Fund and NASL Pacific Rim
Emerging Markets Trust. Risks of investment in these portfolios relate primarily
to fluctuations in stock prices and risks associated with foreign investing.
Manulife Real Estate Securities Fund and NASL Real Estate Securities
Trust. Risks of investment in these portfolios relate primarily to their ability
to concentrate their investments in the real estate industry, including risks of
fluctuations in real estate related stock prices and exposure to interest rate
and credit risks with respect to real estate related fixed-income securities.
Investment in the NASL Real Estate Securities Trust includes the additional
risks of investing in mortgage-related securities including the risk of early
principal repayments in a declining interest rate environment.
Manulife Capital Growth Bond Fund and NASL Capital Growth Bond Trust.
Risks of investment in these portfolios relate primarily to exposure to interest
rate and credit risks with respect to fixed-income securities. Investment in the
NASL Capital Growth Bond Trust includes the additional risks of investing in
mortgage-related securities.
Manulife Equity Index Fund and NASL Equity Index Trust. Risks of
investment in these portfolios relate to fluctuations in the values of the
common stocks comprising the Standard & Poor's 500 Composite Stock Price Index.
REASONS FOR THE REORGANIZATION
The MSF Board and the NASL Board have approved the Reorganization as a
means by which MSF and NASL may be combined into a single fund family following
the merger earlier this year of the companies that control each fund's
investment adviser. NASL Financial, the investment adviser to NASL, is a wholly
owned subsidiary of Security Life, the ultimate parent of which is Manulife.
Prior to January 1, 1996, Security Life was a wholly owned subsidiary of North
American Life Assurance Company ("NAL"), a Canadian mutual life insurance
company. On January 1, 1996 NAL and Manulife merged with the combined company
retaining the name Manulife. MAC, the investment manager of MSF, also is an
indirect wholly owned subsidiary of Manulife.
In determining whether to recommend approval of the Reorganization to
shareholders, the MSF Board (including the Independent Directors, with the
advice and assistance of independent legal counsel) made an inquiry into a
number of matters
12
<PAGE> 23
and considered the following factors, among others: (1) the advantages to
shareholders of investing in a series fund with a modern strategy of offering
investment opportunities that address investor needs at multiple risk/reward
levels; (2) the capability of NASL Financial to offer flexibility and the
potential for greater and more diverse investment opportunities; (3) the
multiple manager approach by which NASL Financial monitors and evaluates
subadviser performance, investment compliance and capabilities with the goal of
maintaining high quality and an appropriate balance of investment alternatives;
(4) expense ratios and available information regarding the fees and expenses of
each Manulife Portfolio and each corresponding NASL Portfolio (historical and
pro forma), as well as of similar funds; (5) the fact that NASL Financial has
agreed to limit the total expenses of certain of the NASL Portfolios for one
year following the Reorganization to a level no higher than the existing levels
of total expenses of the corresponding Manulife Portfolios; (6) the
sophistication and specialization of the new subadvisers for certain of the NASL
Portfolios; (7) the compatibility of the investment objectives, policies,
restrictions and portfolios (where applicable) of each Manulife Portfolio and
each corresponding NASL Portfolio; (8) the advantages to each Manulife Portfolio
of investing in potentially larger asset pools with greater diversification; (9)
the historical performance of the Manulife Portfolios and the NASL Money Market
Trust, as well as of each portfolio's respective investment adviser and
subadviser where relevant; (10) portfolio transaction policies of the Manulife
Portfolios and the NASL Portfolios; (11) the terms and conditions of the
Reorganization and whether the Reorganization would result in dilution of
shareholder or contractholder interests; (12) any direct and indirect costs
incurred by each Manulife Portfolio and each corresponding NASL Portfolio as a
result of the Reorganization; (13) tax consequences of the Reorganization; and
(14) possible alternatives to the Reorganization.
In reaching the decision to recommend approval of the Reorganization,
the MSF Board concluded that the participation of each Manulife Portfolio in the
Reorganization is in the best interests of such Manulife Portfolio, as well as
its shareholders and the contractholders whose contract values are invested in
shares thereof, and that the interests of existing shareholders and
contractholders will not be diluted as a result of such participation. Their
conclusion was based on a number of factors, including the following:
1. The Reorganization will enable contractholders to take
advantage of an investment management approach known as
managing to the "Efficient Frontier" in which investors
allocate their assets among a broad mix of investment choices
consistent with their risk tolerance levels with the goal of
maximizing their risk adjusted investment return. In
connection with this approach, it is anticipated that, within
1997, most of the other funds in the NASL family will be made
available as investment options in most of the variable
contracts issued by Manufacturers Life of America prior to the
Reorganization, providing contractholders with direct access
to a wide range of investment alternatives. NASL intends, in
early 1997, to add several asset allocation portfolios to its
fund family in connection with the expansion of the "Efficient
Frontier" investment management approach.
2. The Reorganization also will allow shareholders to receive the
investment advisory services of NASL Financial and its
multiple manager approach to portfolio management. NASL
Financial selects, contracts with and compensates subadvisers
to manage the NASL Portfolios on a day-to-day basis, monitors
the compliance of such subadvisers with the investment
objectives and policies of each NASL Portfolio, and reviews
the performance of such subadvisers and reports periodically
on such performance to the NASL Board. This multiple manager
approach is intended to help maintain high portfolio
management quality and an appropriate balance of investment
alternatives. This includes the introduction of high-profile
money managers such as Founders, Price-Fleming and Warburg
Pincus. Even those Manulife Portfolios that will continue to
receive the day-to-day management of MAC will have the
benefits of NASL Financial's oversight capabilities in the
context of a broader overall approach to investing. NASL
Financial currently is investment adviser to 30 mutual fund
portfolios, which invest in a broad array of assets and
include domestic as well as international funds.
3. Although, as discussed above, the expense ratios of five of
the NASL Portfolios are higher than the expense ratios of the
corresponding Manulife Portfolios, the MSF Board believes that
the higher expense ratios are consistent with current industry
standards. Furthermore, with respect to the NASL Emerging
Growth Trust and NASL Balanced Trust, the MSF Board believes
that the higher expense ratios are justified in light of the
change in portfolio management of such portfolios, while, with
respect to the NASL Common Stock Trust, NASL Real Estate
Securities Trust and NASL Capital Growth Bond Trust, the MSF
Board noted that NASL Financial voluntarily has agreed to
limit for a period of one year following the consummation of
the Reorganization the expense ratios of such NASL Portfolios
to levels no higher than the expense ratios of the
corresponding Manulife Portfolios for their most recently
completed fiscal year. The expense ratios of the NASL Money
Market Trust and NASL Equity Index Trust are substantially the
same as those of the corresponding Manulife Portfolios, while
the expense ratios of the NASL International Trust and NASL
Pacific Rim Emerging Markets Trust are lower than those of the
corresponding Manulife Portfolios.
13
<PAGE> 24
4. MAC currently is providing advisory services and bearing most
of the expenses of the Manulife Portfolios pursuant to an
advisory agreement which it can terminate without penalty on
60 days' notice. MAC recently has expressed to the MSF Board
its desire to eliminate its direct subsidization of the
Manulife Portfolios' expenses. Moreover, Manulife has
indicated that new variable annuity and variable life products
it makes available in the future are likely to use NASL as the
underlying investment medium rather than MSF, thereby limiting
MSF's opportunities for growth and causing its potential
stagnation or decline, and MAC has indicated that this could
make it more difficult for it to continue to subsidize the
expenses of the Manulife Portfolios as it has done in the
past. If shareholders do not approve the Reorganization and
MAC terminates its current advisory agreement, the MSF Board
would be forced to consider alternative advisory arrangements,
and the MSF Board believes that the existing expense ratios of
most of the Manulife Portfolios would be difficult to maintain
under current market conditions in light of the higher total
fees and expenses borne by many mutual funds with similar
investment objectives.
5. The Reorganization will permit shareholders of the Manulife
Money-Market Fund to pursue substantially the same investment
goals in a larger fund immediately following consummation of
the Reorganization. While the other NASL Portfolios have been
newly organized, and therefore immediately following the
Reorganization will not be larger than the corresponding
Manulife Portfolios, all of the NASL Portfolios should benefit
from being part of a single combined fund family that is used
as the underlying investment medium for variable contracts
issued by Manufacturers Life of America, Security Life and
FNAL. It is anticipated that, as a result of the
Reorganization, the combined Manulife and NASL Portfolios will
experience more rapid asset growth in the future than would
have been the case for the Manulife Portfolios standing alone.
Such larger funds should enhance the ability of portfolio
managers to effect portfolio transactions on more favorable
terms and give portfolio managers greater investment
flexibility and the ability to select a larger number of
portfolio securities, with the attendant benefits of increased
diversification. In addition, larger aggregate net assets may
enable the combined entities to obtain the benefits of
economies of scale in the future.
INFORMATION ABOUT THE REORGANIZATION
Agreement and Plan of Reorganization. The following summary of the
Agreement is qualified in its entirety by reference to the form of the Agreement
attached to this Prospectus/Proxy Statement as Exhibit A. The Agreement, to
which MSF and NASL are parties, provides that each NASL Portfolio will acquire
all of the assets and liabilities of the corresponding Manulife Portfolio in
exchange for shares of such NASL Portfolio. Subject to the satisfaction of the
conditions described below, such acquisitions shall take place on December 31,
1996 or such later date as may be agreed upon by the parties (the "Closing
Date"). The net asset value per share for each NASL Portfolio will be determined
by dividing each NASL Portfolio's assets, less liabilities, by the total number
of its outstanding shares. NASL Portfolio assets will be valued in accordance
with the valuation practices of the NASL Portfolios, which are described below
under "Additional Information About NASL--F. Other Information Concerning Shares
of NASL." Manulife Portfolio assets will be valued in accordance with the
valuation practices of the Manulife Portfolios.
The number of full and fractional shares of a NASL Portfolio received
by a shareholder of the corresponding Manulife Portfolio will be equal in value
to the value of that shareholder's shares of the corresponding Manulife
Portfolio as of the close of regularly scheduled trading on the New York Stock
Exchange on the closing date of the Reorganization. As promptly as practicable
after the Closing Date, each Manulife Portfolio will liquidate and distribute
pro rata to its shareholders of record as of the close of regularly scheduled
trading on the New York Stock Exchange on the Closing Date the shares of the
corresponding NASL Portfolio received by that Manulife Portfolio in the
Reorganization. Such liquidation and distribution will be accomplished by the
establishment of accounts on the share records of the NASL Portfolios in the
names of the shareholders of the corresponding Manulife Portfolio, each account
representing the respective pro rata number of shares of such NASL Portfolio due
the shareholder. After such distribution and the winding up of its affairs, the
Manulife Portfolios will be terminated and MSF will be dissolved and
deregistered as an investment company under the 1940 Act and dissolved under
state law.
The NASL Board and the MSF Board have each determined, with respect to
their respective portfolios that are parties to the Reorganization, that the
interests of shareholders and of contractholders whose contract values are
invested in shares of such portfolios will not be diluted as a result of the
Reorganization and that participation in the Reorganization is in the best
interests of such portfolios and such shareholders and contractholders.
Certain of the existing investment limitations of the Manulife
Portfolios that require shareholder approval for amendment prohibit each
Manulife Portfolio from engaging in activities such as investing more than a
stated percentage of its assets in
14
<PAGE> 25
an issuer's securities. By approving the Agreement, the shareholders of the
Manulife Portfolios will be deemed to have agreed to waive any such limitations
solely insofar as they might be deemed to apply to the Reorganization.
The consummation of the Reorganization is subject to the conditions set
forth in the Agreement, including that the majority of the shareholders of each
Manulife Portfolio approve the Reorganization and that the Commission grant
exemptive relief from certain provisions of the 1940 Act that otherwise would
preclude consummation of the Reorganization. On September 19, 1996 MSF and NASL
filed an Application with the Commission requesting exemption from certain
provisions of the 1940 Act as they relate to the proposed Reorganization.
Manulife, Manufacturers Life of America, Security Life and FNAL also are parties
to the Application. Copies of the Application may be obtained from the
Commission in the manner explained below. See "Additional Information About
NASL--H. Additional Information." In addition, the proposal to approve the
Agreement will not be submitted to shareholders of the Manulife Portfolios, and
the Special Meeting of Shareholders therefore will not be held, until such time
as the Commission has granted the exemptive relief referred to in the preceding
sentence. There can be no assurance that the Commission will grant such
exemptive relief or that it will be granted in time for the Special Meeting of
Shareholders to be held on December 20, 1996 as scheduled.
The Agreement may be terminated and the Reorganization abandoned at any
time prior to the Closing Date, before or after approval by the shareholders of
the Manulife Portfolios, by either MSF or NASL if (i) any condition or covenant
set forth in the Agreement has not been fulfilled or waived by the party
entitled to its benefits, (ii) there has been a material breach by the other
party or (iii) the NASL Board or the MSF Board, as the case may be, determines
that proceeding with the Reorganization is not in the best interests of NASL or
MSF, respectively, or their respective shareholders or contractholders. The
Agreement provides that either party may waive compliance with any of the
covenants or conditions made therein for its benefit, except for certain
conditions regarding the receipt of regulatory approvals.
The expenses of the Reorganization (other than registration fees
payable for the registration of shares of the NASL Portfolios in connection with
the Reorganization, which will be payable by such NASL Portfolios), including
the cost of a proxy soliciting agent that has been retained (see "Voting
Information"), will be borne by NASL Financial or its affiliates (other than MSF
or NASL).
Approval of the Agreement will require the affirmative vote of the
holders of at least a majority of the outstanding shares of each Manulife
Portfolio entitled to vote on the matter. If the Reorganization is not approved
by the shareholders of each Manulife Portfolio or is not consummated for any
other reason, the MSF Board will consider other possible courses of action.
Approval of the Agreement by the shareholders of each Manulife Portfolio will
also constitute approval of MSF's dissolution and deregistration as an
investment company under the 1940 Act and termination under state law following
consummation of the Reorganization. See "Voting Information." THE MSF BOARD HAS
UNANIMOUSLY RECOMMENDED APPROVAL OF THE AGREEMENT.
Shareholders of each Manulife Portfolio will receive shares of the
corresponding NASL Portfolio in accordance with the procedures provided for in
the Agreement as described above. Each such share will be fully paid and
non-assessable when issued (except as noted under "Comparative Information on
Shareholder Rights--Shareholder Liability") and transferable without
restrictions and will have no preemptive or conversion rights.
Federal Income Tax Consequences. As a condition to the consummation of
the Reorganization, MSF and NASL will each receive an opinion from Simpson
Thacher & Bartlett (a partnership which includes professional corporations) to
the effect that, based on the facts and assumptions stated therein, for federal
income tax purposes: (1) the Reorganization will constitute a reorganization
within the meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code") with respect to each Manulife Portfolio and its
corresponding NASL Portfolio; (2) no gain or loss will be recognized by any of
the Manulife Portfolios or the corresponding NASL Portfolios upon the transfer
of all of the assets and liabilities, if any, of each Manulife Portfolio to its
corresponding NASL Portfolio solely in exchange for corresponding NASL Portfolio
shares or upon the distribution of the shares of the corresponding NASL
Portfolios to the shareholders of the Manulife Portfolios solely in exchange for
all of their shares of the Manulife Portfolios; (3) no gain or loss will be
recognized by shareholders of any of the Manulife Portfolios upon the exchange
of such Manulife Portfolio's shares solely for shares of its corresponding NASL
Portfolio; (4) the holding period and tax basis of the corresponding NASL
Portfolio shares received by each shareholder of each Manulife Portfolio
pursuant to the Reorganization will be the same as the holding period (provided
the shares of the Manulife Portfolios were held as a capital asset on the date
of the Reorganization) and tax basis of the shares of the Manulife Portfolio
held by the shareholder immediately prior to the Reorganization; and (5) the
holding period and tax basis of the assets of each of the Manulife Portfolios
acquired by its corresponding NASL Portfolio will be the same as the holding
period and tax basis of those assets to each of the Manulife Portfolios
immediately prior to the Reorganization. The payment by NASL Financial or its
affiliates of certain expenses of MSF and NASL which are directly related to the
15
<PAGE> 26
Reorganization will not affect such opinion. However, no opinion will be given
as to any other federal income tax consequences of the payment of such expenses.
Capitalization. The following tables show the capitalization of each
Manulife Portfolio and the corresponding NASL Portfolio as of June 30, 1996 and
December 31, 1995, and on a pro forma combined basis as of those dates for the
Reorganization giving effect to the proposed acquisition of assets at net asset
value.
<TABLE>
<CAPTION>
Manulife Money- NASL Money Pro Forma For
Market Fund Market Trust Reorganization
--------------- ------------ --------------
<S> <C> <C> <C>
JUNE 30, 1996
Net Assets............................ $38,289,498 $338,434,768 $376,724,266
Net Asset Value Per Share............. $ 11.11 $ 10.00 $ 10.00
Shares Outstanding.................... 3,447,615 33,843,477 37,672,427
DECEMBER 31, 1995
Net Assets............................ $35,991,999 $258,116,963 $294,108,962
Net Asset Value Per Share............. $ 10.84 $ 10.00 $ 10.00
Shares Outstanding.................... 3,320,455 25,811,696 29,410,896
<CAPTION>
Manulife International NASL International Pro Forma For
Fund Stock Trust(1) Reorganization
---------------------- ------------------ --------------
<S> <C> <C> <C>
JUNE 30, 1996
Net Assets............................ $26,477,252 -- $26,477,252
Net Asset Value Per Share............. $ 11.22 -- $ 11.22
Shares Outstanding ................... 2,359,525 -- 2,359,525
DECEMBER 31, 1995
Net Assets............................ $19,047,538 -- $19,047,538
Net Asset Value Per Share............. $ 10.67 -- $ 10.67
Shares Outstanding ................... 1,785,480 -- 1,785,480
<CAPTION>
Manulife Emerging NASL Emerging Pro Forma For
Growth Equity Fund Growth Trust(1) Reorganization
------------------- --------------- --------------
<S> <C> <C> <C>
JUNE 30, 1996
Net Assets............................ $191,192,652 -- $191,192,652
Net Asset Value Per Share............. $ 24.74 -- $ 24.74
Shares Outstanding.................... 7,729,562 -- 7,729,562
DECEMBER 31, 1995
Net Assets............................ $162,426,467 -- $162,426,467
Net Asset Value Per Share............. $ 23.10 -- $ 23.10
Shares Outstanding.................... 7,030,732 -- 7,030,732
</TABLE>
16
<PAGE> 27
<TABLE>
<CAPTION>
Manulife Balanced NASL Pro Forma For
Assets Fund Balanced Trust(1) Reorganization
----------------- ----------------- --------------
<S> <C> <C> <C>
JUNE 30, 1996
Net Assets............................ $122,018,344 -- $122,018,344
Net Asset Value Per Share............. $ 17.73 -- $ 17.73
Shares Outstanding.................... 6,882,224 -- 6,882,224
DECEMBER 31, 1995
Net Assets............................ $110,760,739 -- $110,760,739
Net Asset Value Per Share............. $ 17.15 -- $ 17.15
Shares Outstanding.................... 6,457,180 -- 6,457,180
<CAPTION>
Manulife Common NASL Common Pro Forma For
Stock Fund Stock Trust(1) Reorganization
--------------- -------------- --------------
<S> <C> <C> <C>
JUNE 30, 1996
Net Assets............................ $ 76,032,098 -- $76,032,098
Net Asset Value Per Share............. $ 18.73 -- $ 18.73
Shares Outstanding.................... 4,059,539 -- 4,059,539
DECEMBER 31, 1995
Net Assets............................ $ 60,995,928 -- $60,995,928
Net Asset Value Per Share............. $ 17.27 -- $ 17.27
Shares Outstanding.................... 3,532,074 -- 3,532,074
<CAPTION>
NASL Pacific Rim
Manulife Pacific Rim Emerging Pro Forma For
Emerging Markets Fund Markets Trust(1) Reorganization
--------------------- ------------------ --------------
<S> <C> <C> <C>
JUNE 30, 1996
Net Assets............................ $ 19,626,583 -- $19,626,583
Net Asset Value Per Share............. $ 11.08 -- $ 11.08
Shares Outstanding.................... 1,770,794 -- 1,770,794
DECEMBER 31, 1995
Net Assets............................ $ 13,057,099 -- $13,057,099
Net Asset Value Per Share............. $ 10.36 -- $ 10.36
Shares Outstanding.................... 1,260,885 -- 1,260,885
Manulife Real Estate NASL Real Estate Pro Forma For
Securities Fund Securities Trust(1) Reorganization
-------------------- ------------------- --------------
<S> <C> <C> <C>
JUNE 30, 1996
Net Assets............................ $ 56,860,363 -- $56,860,363
Net Asset Value Per Share............. $ 16.01 -- $ 16.01
Shares Outstanding.................... 3,550,678 -- 3,550,678
DECEMBER 31, 1995
Net Assets............................ $ 52,440,117 -- $52,440,117
Net Asset Value Per Share............. $ 15.10 -- $ 15.10
Shares Outstanding.................... 3,472,861 -- 3,472,861
</TABLE>
17
<PAGE> 28
<TABLE>
<CAPTION>
Manulife Capital NASL Capital Pro Forma For
Growth Bond Fund Growth Bond Trust(1) Reorganization
---------------- -------------------- --------------
<S> <C> <C> <C>
JUNE 30, 1996
Net Assets............................ $41,329,264 -- $41,329,264
Net Asset Value Per Share............. $ 11.04 -- $ 11.04
Shares Outstanding.................... 3,744,236 -- 3,744,236
DECEMBER 31, 1995
Net Assets............................ $42,693,786 -- $42,693,786
Net Asset Value Per Share............. $ 11.30 -- $ 11.30
Shares Outstanding.................... 3,779,382 -- 3,779,382
Manulife Equity NASL Equity Pro Forma For
Index Fund(2) Index Trust(1) Reorganization
--------------- -------------- --------------
<S> <C> <C> <C>
JUNE 30, 1996
Net Assets............................ $2,493,027 N/A $2,493,027
Net Asset Value Per Share............. $ 10.37 N/A $ 10.37
Shares Outstanding.................... 240,388 N/A 240,388
</TABLE>
- ------------------
(1) The indicated NASL Portfolios have been newly organized; no shares of
such portfolios are outstanding at June 30, 1996 or December 31, 1995.
(2) The Manulife Equity Index Fund commenced operations on February 14,
1996; accordingly, no shares of such portfolio are outstanding at
December 31, 1995.
VOTING INFORMATION
Proxies from the shareholders of each Manulife Portfolio are being
solicited by the MSF Board for the Special Meeting of Shareholders to be held on
December 20, 1996 at the offices of NASL, 116 Huntington Avenue, Boston,
Massachusetts 02116, at 10:00 a.m., Eastern Standard Time, or at such later time
as necessary by adjournment. All valid proxies will be voted in accordance with
the specification thereon, or in the absence of specification, for approval of
the Agreement. Approval of the Agreement will require the affirmative vote of
the holders of at least a majority of the outstanding shares of each portfolio
of MSF entitled to vote thereon. Approval of the Agreement by the shareholders
of each Manulife Portfolio will also constitute approval of MSF's dissolution
and deregistration as an investment company under the 1940 Act and termination
under state law following consummation of the Reorganization.
The cost of the preparation and distribution of these proxy materials
will be borne by NASL Financial or its affiliates (other than MSF or NASL). In
addition to the solicitation of proxies by the use of the mails, proxies may be
solicited by officers and employees of Manulife, or of its agents or affiliates,
personally or by telephone. Brokerage houses, banks and other fiduciaries may be
requested to forward soliciting materials to their principals and to obtain
authorization for the execution of proxies. For those services, they will be
reimbursed by NASL Financial or its affiliates (other than MSF or NASL) for
their out-of-pocket expenses.
Under the Agreement, shareholders of each Manulife Portfolio will
receive shares of the corresponding NASL Portfolio, as described above, with an
aggregate net asset value equal to the value of the shareholder's investment in
each Manulife Portfolio at the effective time of the transaction. This method of
valuation is also consistent with interpretations of Rule 22c-1 under the 1940
Act by the Commission's Division of Investment Management. Any shareholder of a
Manulife Portfolio may redeem shares at the then-current net asset value prior
to the Closing Date.
Shareholders of the Manulife Portfolios of record at the close of
business on October 23, 1996 will be entitled to vote at the Meeting or any
adjournment of the Meeting. The holders of a majority of the shares outstanding
of each such Manulife Portfolio at the close of business on that date present in
person or represented by proxy will constitute a quorum for the Meeting;
however, as noted above, the affirmative vote of at least a majority of the
shares outstanding of each such Manulife Portfolio at the close of business on
that date is required to approve the Reorganization. Shareholders are entitled
to one vote for each share held and fractional votes for fractional shares held.
Shares of the Manulife Portfolios are sold only to
18
<PAGE> 29
Manufacturers Life of America and to the Separate Accounts. Although
Manufacturers Life of America owns all shares of the Manulife Portfolios, shares
are attributed to, and will be voted in accordance with instructions received
from, the contractholders of variable life and variable annuity contracts issued
by Manufacturers Life of America. Accordingly, Manufacturers Life of America
will vote shares in accordance with instructions received from contractholders.
Contractholders have voting rights with respect to each of the Manulife
Portfolios in which they have an interest. Manulife Portfolio shares as to which
no voting instructions are received, including shares not attributable to
contractholders, will be voted by Manufacturers Life of America in the same
proportion as those for which voting instructions are received from
contractholders.
As of October 23, 1996, as shown on the books of MSF, there were issued
and outstanding ________ shares of Manulife Money-Market Fund, _____ shares of
Manulife International Fund, _____ shares of Manulife Emerging Growth Equity
Fund, _____ shares of Manulife Balanced Assets Fund, _____ shares of Manulife
Common Stock Fund, _____ shares of Manulife Pacific Rim Emerging Markets Fund,
_____ shares of Manulife Real Estate Securities Fund, _____ shares of Manulife
Capital Growth Fund and _____ shares of Manulife Equity Index Fund. At that
date, all of such MSF shares were held in sub- accounts of the Separate Accounts
and will be voted by Manufacturers Life of America.
The votes of the shareholders of the corresponding NASL Portfolios are
not being solicited to approve the Reorganization, since their approval or
consent is not required with respect to the Reorganization. Their votes are
being solicited, however, in connection with the approval of the Related
Changes.
The Agreement was approved for MSF by unanimous vote of the MSF Board
and for NASL by unanimous vote of the NASL Board, including in each case all of
the Directors and Trustees, respectively, then serving who were not interested
persons of MSF or NASL (other than in their capacity as Directors or Trustees of
MSF or NASL, as the case may be).
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of each of the NASL Portfolios
are set forth below, together with a discussion of the primary differences, if
any, from those of the respective corresponding Manulife Portfolios.
Each NASL Portfolio has a stated investment objective which it pursues
through separate investment policies. The differences in objectives and policies
among the portfolios can be expected to affect the return of each portfolio and
the degree of market and financial risk to which each NASL Portfolio is subject.
The investment objectives of each NASL Portfolio represent fundamental
policies of each such NASL Portfolio and may not be changed without the approval
of the holders of a majority of the outstanding shares of the NASL Portfolio.
Except for certain investment restrictions, the policies by which a NASL
Portfolio seeks to achieve its investment objectives may be changed by the NASL
Board without the approval of NASL shareholders.
The following is a description of the investment objectives and
policies of each NASL Portfolio. More complete descriptions of the money market
instruments in which the NASL Portfolios may invest and of the options, futures,
currency and other derivative transactions that certain NASL Portfolios may
engage in are set forth in the Statement of Additional Information. A more
complete description of the debt security ratings used by the NASL Portfolios
assigned by Moody's Investors Service, Inc. ("Moody's") or Standard and Poor's
Corporation ("S&P") is included in the Appendix to this Prospectus/Proxy
Statement.
Because the value of securities and the income derived therefrom may
fluctuate according to the earnings of the issuers and changes in economic and
market conditions, there can be no assurance that the investment objective of
any of the NASL Portfolios will be achieved.
A. NASL MONEY MARKET TRUST
The investment objective of the NASL Money Market Trust is to obtain
maximum current income consistent with preservation of principal and liquidity.
Since October 1, 1996, MAC has managed the NASL Money Market Trust and seeks to
achieve this objective by investing in high quality, U.S. dollar denominated
money market instruments of the following types:
(1) obligations issued or guaranteed as to principal and interest by
the United States Government, or any agency or authority controlled or
supervised by and acting as an instrumentality of the U.S. Government
pursuant to authority granted by Congress (hereinafter "U.S. Government
securities"), or obligations of foreign governments
19
<PAGE> 30
including those issued or guaranteed as to principal or interest by the
Government of Canada, the government of any province of Canada, or any
Canadian or provincial Crown agency (any foreign obligation acquired by
NASL will be payable in U.S. dollars);
(2) certificates of deposit, bank notes, time deposits, Eurodollars,
Yankee obligations and bankers' acceptances of U.S. banks, foreign
branches of U.S. banks, foreign banks and U.S. savings and loan
associations which at the date of investment have capital, surplus and
undivided profits as of the date of their most recent published
financial statements in excess of $100,000,000 (or less than
$100,000,000 if the principal amount of such bank obligations is
insured by the Federal Deposit Insurance Corporation or the Saving
Association Insurance Fund);
(3) commercial paper which at the date of investment is rated (or
guaranteed by a company whose commercial paper is rated) within the two
highest rating categories by any nationally recognized statistical
rating organization ("NRSRO") (such as "P-1" or "P-2" by Moody's or
"A-1" or "A-2" by S&P) or, if not rated, is issued by a company which
MAC acting pursuant to guidelines established by the NASL Board, has
determined to be of minimal credit risk and comparable quality;
(4) corporate obligations maturing in 397 days or less which at the
date of investment are rated within the two highest rating categories
by any NRSRO (such as "Aa" or higher by Moody's or "AA" or higher by
S&P);
(5) short-term obligations issued by state and local governmental
issuers;
(6) securities that have been structured to be eligible money market
instruments such as participation interests in special purpose trusts
that meet the quality and maturity requirements in whole or in part due
to arrangements for credit enhancement or for shortening effective
maturity; and
(7) repurchase agreements with respect to any of the foregoing
obligations.
Commercial paper may include variable amount master demand notes, which
are obligations that permit investment of fluctuating amounts at varying rates
of interest. Such notes are direct lending arrangements between the NASL Money
Market Trust and the note issuer, and MAC will monitor the creditworthiness of
the issuer and its earning power and cash flow, and will also consider
situations in which all holders of such notes would redeem at the same time.
Variable amount master demand notes are redeemable on demand.
All of the NASL Money Market Trust's investments will mature in 397
days or less and the portfolio will maintain a dollar-weighted average portfolio
maturity of 90 days or less. By limiting the maturity of its investments, the
NASL Money Market Trust seeks to lessen the changes in the value of its assets
caused by fluctuations in short-term interest rates. In addition, the NASL Money
Market Trust will invest only in securities the NASL Board determines present
minimal credit risks and which at the time of purchase are "eligible securities"
as defined by Rule 2a-7 under the 1940 Act. The NASL Money Market Trust also
intends to maintain, to the extent practicable, a constant per share net asset
value of $10.00, but there is no assurance that it will be able to do so.
The NASL Money Market Trust will be subject to certain risks as a
result of its ability to invest up to 20% of its assets in foreign securities.
These risks are described under "J. Additional Information on Investment
Policies and Techniques and Risk Factors--Foreign Securities."
USE OF HEDGING AND OTHER STRATEGIC TRANSACTIONS
The NASL Money Market Trust is not authorized to use any of the various
investment strategies referred to under "J. Additional Information on Investment
Policies and Techniques and Risk Factors--Hedging and Other Strategic
Transactions."
20
<PAGE> 31
DIFFERENCES BETWEEN THE NASL MONEY MARKET TRUST AND THE MANULIFE MONEY-MARKET
FUND
<TABLE>
<CAPTION>
========================================================================================================================
NASL MONEY MARKET TRUST MANULIFE MONEY-MARKET FUND COMMENT
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Authorized to invest in commercial paper Limits its investments in commercial The Manulife Money-Market Fund may
rated in the two highest rating categories paper to the single highest rating be subject to less risk of default by
by any NRSRO. category. commercial paper issuers.
- ------------------------------------------------------------------------------------------------------------------------
Authorized to invest up to 20% of its Authorized to invest up to 100% of its The Manulife Money-Market Fund is
assets in obligations of the government assets in government obligations, subject to fewer risks associated with
of any foreign country. Also authorized but limits such investments to Canadian foreign investing.
to invest in the obligations of foreign obligations. Limits its investments in
banks. bank obligations to those of U.S. banks
and their foreign branches and U.S.
savings and loan associations.
- -------------------------------------------------------------------------------------------------------------------------------
Authorized to invest in short-term Not authorized to make such investments. The NASL Money Market Trust is
obligations of state and local subject to additional risks of default by
governmental issuers. state and local government issuers.
- -------------------------------------------------------------------------------------------------------------------------------
Intends to maintain, to the extent Does not attempt to maintain a stable The NASL Money Market Trust
practicable, a constant per share net net asset value per share. attempts, to the extent practicable, to
asset value of $10.00. provide stability of principal.
===============================================================================================================================
</TABLE>
For a discussion of certain additional differences between the NASL
Money Market Trust and the Manulife Money- Market Fund, see "J. Additional
Information on Investment Policies and Techniques and Risk Factors."
B. NASL INTERNATIONAL STOCK TRUST
The investment objective of the NASL International Stock Trust is
long-term growth of capital. Rowe Price-Fleming International, Inc.
("Price-Fleming") manages the NASL International Stock Trust and seeks to attain
this objective by investing primarily in common stocks of established, non-U.S.
companies. The NASL International Stock Trust expects to invest substantially
all of its assets outside the U.S. and to diversify broadly among countries
throughout the world--developed, newly industrialized, and emerging. The NASL
International Stock Trust will invest in at least three countries outside the
United States.
The NASL International Stock Trust expects to invest substantially all
of its assets in common stocks. However, the NASL International Stock Trust may
also invest in a variety of other equity-related securities, such as preferred
stocks, warrants and convertible securities, as well as corporate and
governmental debt securities, when considered consistent with its investment
objectives and program. Under normal market conditions, the NASL International
Stock Trust's investment in securities other than common stocks is limited to no
more than 35% of total assets. However, for temporary defensive purposes, the
NASL International Stock Trust may invest all or a significant portion of its
assets in U.S. Government and corporate debt obligations. The NASL International
Stock Trust will not purchase any debt security which at the time of purchase is
rated below investment grade. This would not prevent the NASL International
Stock Trust from retaining a security downgraded to below investment grade after
purchase.
The NASL International Stock Trust will hold a certain portion of its
assets in U.S. and foreign dollar-denominated money market securities, including
repurchase agreements, in the two highest rating categories, maturing in one
year or less. For temporary, defensive purposes, the portfolio may invest
without limitation in such securities. This reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new investments
and serves as a short-term defense during periods of unusual market volatility.
Price-Fleming uses a "bottom-up" approach to stock selection based on
fundamental research. A company's prospects for achieving and sustaining
above-average, long-term earnings growth is generally the subadviser's primary
focus. However, valuation factors, such as price/earnings, price/cash flow, and
price/book value are also important considerations. In conjunction with
identifying potential stocks for investment, external factors are also reviewed.
For example, a country's or
21
<PAGE> 32
region's political, economic, and financial status help shape the outlook for
individual stocks and also affect decisions regarding the prudent level of
overall exposure to particular areas.
It is the present intention of Price-Fleming to invest in companies
based in (or governments of or within) the Far East (for example, Japan, Hong
Kong, Singapore, and Malaysia), Europe (for example, United Kingdom, Germany,
Hungary, Poland, Netherlands, France, Spain, and Switzerland), South Africa,
Australia, Canada, Latin America, and such other areas and countries as
Price-Fleming may determine from time to time.
In determining the appropriate distribution of investments among
various countries and geographic regions, Price-Fleming ordinarily considers the
following factors: prospects for relative economic growth between foreign
countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors. In
analyzing companies for investment, Price-Fleming ordinarily looks for one or
more of the following characteristics: an above-average earnings growth per
share; high return on invested capital; a healthy balance sheet; sound financial
and accounting policies and overall financial strength; strong competitive
advantages; effective research and product development and marketing; efficient
service; pricing flexibility; strength of management; and general operating
characteristics which will enable the companies to compete successfully in their
market place.
While current dividend income is not a prerequisite in the selection of
NASL International Stock Trust companies, the companies in which the NASL
International Stock Trust invests normally will have a record of paying
dividends, and will generally be expected to increase the amounts of such
dividends in future years as earnings increase. It is expected that the NASL
International Stock Trust's investments will ordinarily be traded on exchanges
located at least in the respective countries in which the various issuers of
such securities are principally based.
The NASL International Stock Trust may purchase the securities of
certain foreign investment portfolios or trusts called passive foreign
investment companies. Such trusts have been the only or primary way to invest in
certain countries. In addition to bearing their proportionate share of the
trust's expenses (management fees and operating expenses), shareholders will
also indirectly bear similar expenses of such trusts. Capital gains on the sale
of such holdings are considered ordinary income regardless of how long the NASL
International Stock Trust held its investment. In addition, the NASL
International Stock Trust may be subject to corporate income tax and an interest
charge on certain dividends and capital gains earned from these investments,
regardless of whether such income and gains are distributed to shareholders. To
avoid such tax and interest, the NASL International Stock Trust intends to treat
these securities as sold on the last day of its fiscal year and recognize any
gains for tax purposes at that time; losses will not be recognized. Such gains
will be considered ordinary income, which the NASL International Stock Trust
will be required to distribute even though it has not sold the security.
The NASL International Stock Trust may also engage in a variety of
investment management practices, such as buying and selling futures and options
and engaging in foreign currency exchange contracts. The NASL International
Stock Trust may invest up to 10% of its total assets in hybrid instruments,
which are a type of high-risk derivative which can combine the characteristics
of securities, futures and options. For example, the principal amount,
redemption or conversion terms of a security could be related to the market
price of some commodity, currency or securities index. Such securities may bear
interest or pay dividends at below market (or even relatively nominal) rates.
The Statement of Additional Information contains a fuller description of such
instruments and the risks associated therewith.
The NASL International Stock Trust will be subject to special risks as
a result of its ability to invest up to 100% of its total assets in foreign
securities. These include non-dollar-denominated securities traded outside of
the U.S. and dollar-denominated securities of foreign issuers traded in the U.S.
(such as ADRs). These risks are described under the caption "J. Additional
Information on Investment Policies and Techniques and Risk Factors--Foreign
Securities." Moreover, substantial investments in foreign securities may have
adverse tax implications as described under "Additional Information About
NASL--E. Tax Matters."
USE OF HEDGING AND OTHER STRATEGIC TRANSACTIONS
The NASL International Stock Trust is currently authorized to use all
of the various investment strategies referred to under "J. Additional
Information on Investment Policies and Techniques and Risk Factors--Hedging and
Other Strategic Transactions." The Statement of Additional Information contains
a description of these strategies and of certain risks associated therewith.
22
<PAGE> 33
DIFFERENCES BETWEEN THE NASL INTERNATIONAL STOCK TRUST AND THE MANULIFE
INTERNATIONAL FUND
<TABLE>
<CAPTION>
===============================================================================================================================
NASL INTERNATIONAL STOCK TRUST MANULIFE INTERNATIONAL FUND COMMENT
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Authorized to invest in any country Although authorized to invest in any The NASL International Stock Trust may be
other than the United States; country other than the United States subject to additional risks associated with
presently intends to invest in and Canada, does not have a present investments in South Africa and central
countries including South Africa and intention to invest in South Africa or European countries.
central European countries. central European countries.
- -------------------------------------------------------------------------------------------------------------------------------
Authorized to invest in derivatives to Authorized to invest in derivatives Investment in derivatives by the NASL
attempt to increase its income or only for the purpose of hedging International Stock Trust for purposes
gains; can invest up to 10% of its portfolio risks. other than hedging involves additional
total assets in hybrid instruments. risks, as discussed below under "J.
Additional Information on Investment
Policies and Techniques and Risk
Factors-Hedging and Other Strategic
Transactions" and in the Statement of
Additional Information.
- -------------------------------------------------------------------------------------------------------------------------------
Expects to invest substantially all of Invests at least 65% of its total asset The NASL International Stock Trust may be
its assets in common stocks, and in common stocks and other types of subject to additional risks as a result of
limits any investments in other equity-related securities; invests investments in the securities of smaller
equity-related securities to 35% of its primarily in larger-capitalization companies, such as greater fluctuations in
total assets; has no capitalization companies. the values of its portfolio securities.
requirement for the companies in
which it invests.
- -------------------------------------------------------------------------------------------------------------------------------
Normally invests in companies States that current income from Return on an investment in the NASL
having a record of paying dividends; dividends and interest is not an International Stock Trust is more likely to
can invest up to 35% of its total important consideration in selecting include a current income component.
assets in corporate and governmental investments. In addition, only invests
debt securities in seeking capital in non-convertible debt securities for
growth. defensive purposes or pending the
selection of long-term investments.
===============================================================================================================================
</TABLE>
For a discussion of certain additional differences between the NASL
International Stock Trust and the Manulife International Fund, see "J.
Additional Information on Investment Policies and Techniques and Risk Factors."
C. NASL EMERGING GROWTH TRUST
The investment objective of the NASL Emerging Growth Trust is maximum
capital appreciation. Warburg Pincus manages the NASL Emerging Growth Trust and
will pursue this objective by investing primarily in a portfolio of equity
securities of domestic companies.
The NASL Emerging Growth Trust ordinarily will invest at least 65% of
its total assets in common stocks or warrants of emerging growth companies that
represent attractive opportunities for maximum capital appreciation. Emerging
growth companies are small- or medium-sized companies that have passed their
start-up phase and that show positive earnings and prospects of achieving
significant profit and gain in a relatively short period of time.
The NASL Emerging Growth Trust is classified as a non-diversified
investment company under the 1940 Act, which means that portfolio is not limited
by the 1940 Act in the proportion of its assets that it may invest in the
obligations of a single issuer. As a non-diversified investment company, the
NASL Emerging Growth Trust may invest a greater proportion of its assets in the
obligations of a small number of issuers and, as a result, may be subject to
greater risk with respect to portfolio securities. To the extent that the NASL
Emerging Growth Trust assumes large positions in the securities of a small
number of issuers, its return may fluctuate to a greater extent than that of a
diversified company as a result of changes in the financial condition or in the
market's assessment of the issuers.
23
<PAGE> 34
Although under current market conditions the NASL Emerging Growth Trust
expects to invest in companies having stock market capitalizations of up to
approximately $500 million, the NASL Emerging Growth Trust may invest in
emerging growth companies without regard to their market capitalization.
Emerging growth companies generally stand to benefit from new products or
services, technological developments or changes in management and other factors
and include smaller companies experiencing unusual developments affecting their
market value. These "special situation companies" include companies that are
involved in the following: an acquisition or consolidation; a reorganization; a
recapitalization; a merger, liquidation, or distribution of cash, securities or
other assets; a tender or exchange offer; a breakup or workout of a holding
company; litigation which, if resolved favorably, would improve the value of the
company's stock; or a change in corporate control.
The NASL Emerging Growth Trust may invest up to 20% of its total assets
in investment grade debt securities (other than money market obligations) and
preferred stocks that are not convertible into common stock for the purpose of
seeking capital appreciation. The interest income to be derived may be
considered as one factor in selecting debt securities for investment by Warburg
Pincus. Because the market value of debt obligations can be expected to vary
inversely to changes in prevailing interest rates, investing in debt obligations
may provide an opportunity for capital appreciation when interest rates are
expected to decline. The success of such a strategy is dependent upon Warburg
Pincus' ability to accurately forecast changes in interest rates. The market
value of debt obligations may also be expected to vary depending upon, among
other factors, the ability of the issuer to repay principal and interest, any
change in investment rating and general economic conditions.
A security will be deemed to be investment grade if it is rated within
the four highest grades by Moody's or S&P or, if unrated, is determined to be of
comparable quality by Warburg Pincus. Bonds rated in the fourth highest grade
may have speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. Subsequent to
its purchase by the NASL Emerging Growth Trust, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the NASL Emerging Growth Trust. Neither event will require sale of such
securities, although Warburg Pincus will consider such event in its
determination of whether the portfolio should continue to hold the securities.
When Warburg Pincus believes that a defensive posture is warranted, the
NASL Emerging Growth Trust may invest temporarily without limit in investment
grade debt obligations and in domestic and foreign money market obligations,
including repurchase agreements.
The NASL Emerging Growth Trust is authorized to invest, under normal
market conditions, up to 20% of its total assets in domestic and foreign
short-term (one year or less remaining to maturity) and medium-term (five years
or less remaining to maturity) money market obligations and for temporary
defensive purposes may invest in these securities without limit. These
instruments consist of obligations issued or guaranteed by the U.S. government
or a foreign government, their agencies or instrumentalities; bank obligations
(including certificates of deposit, time deposits and bankers' acceptances of
domestic or foreign banks, domestic savings and loans and similar institutions)
that are high quality investments or, if unrated, deemed by Warburg Pincus to be
high quality investments; commercial paper rated no lower than A-2 by S&P or
Prime-2 by Moody's or the equivalent from another major rating service or, if
unrated, of an issuer having an outstanding, unsecured debt issue then rated
within the three highest rating categories; and repurchase agreements with
respect to the foregoing.
Investing in securities of emerging growth and small-sized companies
may involve greater risks since these securities may have limited marketability
and, thus, may be more volatile. Because small- and medium-sized companies
normally have fewer shares outstanding than larger companies, it may be more
difficult for the NASL Emerging Growth Trust to buy or sell significant amounts
of such shares without an unfavorable impact on prevailing prices. In addition,
small- and medium-sized companies are typically subject to a greater degree of
changes in earnings and business prospects than are larger, more established
companies. There is typically less publicly available information concerning
small- and medium-sized companies than for larger, more established ones.
Securities of issuers in "special situations" also may be more volatile, since
the market value of these securities may decline in value if the anticipated
benefits do not materialize. Although investing in securities of emerging growth
companies or "special situations" offers potential for above-average returns if
the companies are successful, the risk exists that the companies will not
succeed and the prices of the companies' shares could significantly decline in
value. Therefore, an investment in the NASL Emerging Growth Trust may involve a
greater degree of risk than an investment in other mutual funds that seek
capital appreciation by investing in better-known, larger companies.
The NASL Emerging Growth Trust will be subject to certain risks as a
result of its ability to invest up to 20% of its total assets in the securities
of foreign issuers. These risks are described under the caption "J. Additional
Information on Investment Policies and Techniques and Risk Factors--Foreign
Securities." Moreover, substantial investments in foreign securities may have
adverse tax implications as described under "Additional Information About
NASL--E. Tax Matters."
24
<PAGE> 35
USE OF HEDGING AND OTHER STRATEGIC TRANSACTIONS
The NASL Emerging Growth Trust is currently authorized to use all of
the investment strategies referred to under "J. Additional Information on
Investment Policies and Techniques and Risk Factors--Hedging and Other Strategic
Transactions." However, it is not presently contemplated that any of these
strategies will be used to a significant degree by the NASL Emerging Growth
Trust.
DIFFERENCES BETWEEN THE NASL EMERGING GROWTH TRUST AND THE MANULIFE EMERGING
GROWTH EQUITY FUND
<TABLE>
<CAPTION>
===============================================================================================================================----
NASL EMERGING GROWTH TRUST MANULIFE EMERGING GROWTH EQUITY FUND COMMENT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Stated fundamental investment Stated fundamental investment objective is to Because the NASL Emerging Growth
objective is maximum capital achieve growth of capital by investing primarily Trust's description of the types of
appreciation. A description of the in equity securities of companies believed to securities in which it will invest is not
types of securities in which the offer growth potential over both the contained in its objective, it is non-
NASL Emerging Growth Trust intermediate and the long term. Objective fundamental and can be changed by the
will invest therefore is not therefore includes a description of the types of NASL Board without shareholder
contained in its objective. securities in which the Manulife Emerging approval, unlike the description of the
Growth Trust will invest. types of securities in which the Manulife
Emerging Growth Equity Fund invests.
- -----------------------------------------------------------------------------------------------------------------------------------
The NASL Emerging Growth The Manulife Emerging Growth Equity Fund is The NASL Emerging Growth Trust may
Trust is non-diversified. diversified, and therefore is subject to a have a larger position in a single issuer,
fundamental investment limitation that, and its investment return may be
with respect to 75% of its total assets, no dependent upon the performance of a
more than 5% may be invested in the securities smaller number of securities, than is the
of any one issuer, subject to certain case with a diversified portfolio like the
exceptions. Manulife Emerging Growth Equity Fund. The
NASL Emerging Growth Trust therefore may
be more susceptible to any single economic,
political or regulatory occurrence than the
Manulife Emerging Growth Equity Fund.
- -----------------------------------------------------------------------------------------------------------------------------------
Authorized to invest up to 20% of Authorized to invest without limitation in a The NASL Emerging Growth Trust may
its total assets in a wide variety much narrower range of securities of foreign be subject to additional risks associated
of foreign securities. issuers. with foreign investing. See "J.
Additional Information on Investment
Policies and Techniques and Risk
Factors--Foreign Securities."
- -----------------------------------------------------------------------------------------------------------------------------------
Invests primarily in common Invests primarily in common stocks and The NASL Emerging Growth Trust may
stocks and warrants, but is securities convertible into or carrying be exposed to interest rate and credit
authorized to invest up to 20% of rights or warrants to purchase common stock quality risks not applicable to the
its total assets in investment or participate in earnings, and does not Manulife Emerging Growth Equity Fund. In
grade debt securities and invest in investment grade debt securities addition, the return on an investment in the
non-convertible preferred stock in or non-convertible preferred stock under NASL Emerging Growth Trust is more likely to
seeking capital appreciation and normal market conditions. Current income is include a current income component.
may consider income as a factor in not a significant consideration in making
making such investments. investments.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 36
<TABLE>
<CAPTION>
NASL EMERGING GROWTH TRUST MANULIFE EMERGING GROWTH EQUITY FUND COMMENT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Authorized to invest in derivatives Not authorized to invest in derivatives. To the extent the NASL Emerging
for the purpose of hedging Growth Trust invests in derivatives for
portfolio risks, but does not hedging purposes, it will be subject to
presently contemplate that it will the risks discussed below under "J.
do so to a significant degree. Additional Information on Investment
Policies and Techniques and Risk
Factors-Hedging and Other Strategic
Transactions" and in the Statement of
Additional Information.
===============================================================================================================================
</TABLE>
For a discussion of certain additional differences between the NASL
Emerging Growth Trust and the Manulife Emerging Growth Fund, see "J. Additional
Information on Investment Policies and Techniques and Risk Factors."
D. NASL BALANCED TRUST
The investment objective of the NASL Balanced Trust is current income
and capital appreciation. Founders is the manager of the NASL Balanced Trust and
seeks to attain this objective by investing in a balanced portfolio of common
stocks, U.S. and foreign government obligations and a variety of corporate
fixed-income securities.
Normally, the NASL Balanced Trust will invest a significant percentage
(up to 75%) of its total assets in common stocks, convertible corporate
obligations, and preferred stocks. The NASL Balanced Trust emphasizes investment
in dividend-paying common stocks with the potential for increased dividends, as
well as capital appreciation. The NASL Balanced Trust also may invest in
non-dividend paying companies if, in Founders' opinion, they offer better
prospects for capital appreciation.
The NASL Balanced Trust may invest in convertible securities, preferred
stocks, bonds, debentures, and other corporate obligations when Founders
believes that these investments offer opportunities for capital appreciation.
Current income is also a factor in the selection of these securities.
The NASL Balanced Trust will maintain a minimum of 25% of its total
assets in fixed-income, investment-grade securities rated Baa or higher by
Moody's or BBB or higher by S&P. There is, however, no limit on the amount of
straight debt securities in which the NASL Balanced Trust may invest. Up to 5%
of the NASL Balanced Trust's total assets may be invested in lower-grade (Ba or
less by Moody's, BB or less by S&P) or unrated straight debt securities,
generally referred to as junk bonds, where Founders determines that such
securities present attractive opportunities. The NASL Balanced Trust will not
invest in securities rated lower than B. Securities rated B generally lack
characteristics of a desirable investment and are deemed speculative with
respect to the issuer's capacity to pay interest and repay principal over a long
period of time.
The NASL Balanced Trust may also invest in convertible corporate
obligations and preferred stocks. Convertible securities and preferred stocks
purchased by the NASL Balanced Trust may be rated in medium and lower categories
by Moody's or S&P (Ba or lower by Moody's and BB or lower by S&P) but will not
be rated lower than B. The NASL Balanced Trust may also invest in unrated
convertible securities and preferred stocks in instances in which Founders
believes that the financial condition of the issuer or the protection afforded
by the terms of the securities limits risk to a level similar to that of
securities eligible for purchase by the NASL Balanced Trust rated in categories
no lower than B. At no time will the NASL Balanced Trust have more than 5% of
its total assets invested in any fixed-income securities which are unrated or
are rated below investment grade either at the time of purchase or as a result
of a reduction in rating after purchase. The NASL Balanced Trust is not required
to dispose of debt securities whose ratings are downgraded below these ratings
subsequent to the NASL Balanced Trust's purchase of the securities, unless such
a disposition is necessary to reduce the NASL Balanced Trust's holdings of such
securities to less than 5% of its total assets. See "J. Additional Information
on Investment Policies and Techniques and Risk Factors--High Yield (High Risk)
Securities." A description of the ratings used by Moody's and S&P is set forth
in the Appendix to this Prospectus/Proxy Statement.
Up to 100% of the assets of the NASL Balanced Trust may be invested
temporarily in U.S. Government obligations, commercial paper, bank obligations,
repurchase agreements, and negotiable U.S. dollar-denominated obligations of
domestic and foreign branches of U.S. depository institutions, U.S. branches of
foreign depository institutions, and foreign depository institutions, in cash,
or in other cash equivalents, if Founders determines it to be appropriate for
purposes of enhancing
26
<PAGE> 37
liquidity or preserving capital in light of prevailing market or economic
conditions. The NASL Balanced Trust may also acquire certificates of deposit and
bankers' acceptances of banks which meet criteria established by the NASL Board.
While the NASL Balanced Trust is in a defensive position, the opportunity to
achieve capital growth will be limited, and, to the extent that this assessment
of market conditions is incorrect, the NASL Balanced Trust will be foregoing the
opportunity to benefit from capital growth resulting from increases in the value
of equity investments.
The NASL Balanced Trust may invest without limit in ADRs and up to 30%
of its total assets in foreign securities (other than ADRs). The NASL Balanced
Trust will not invest more than 25% of its total assets in the securities of any
one country.
The NASL Balanced Trust will be subject to special risks as a result of
its ability to invest up to 30% of its total assets in foreign securities,
excluding ADRs. These risks are described under the caption "J. Additional
Information on Investment Policies and Techniques and Risk Factors --Foreign
Securities." Moreover, substantial investments in foreign securities may have
adverse tax implications as described under "Additional Information About
NASL--E. Tax Matters" in this Prospectus/Proxy Statement.
USE OF HEDGING AND OTHER STRATEGIC TRANSACTIONS
The NASL Balanced Trust is currently authorized to use all of the
various investment strategies referred to under "Hedging and Other Strategic
Transactions." The Statement of Additional Information contains a description of
these strategies and of certain risks associated therewith.
DIFFERENCES BETWEEN THE NASL BALANCED TRUST AND THE MANULIFE BALANCED ASSETS
FUND
<TABLE>
<CAPTION>
===============================================================================================================================----
NASL BALANCED TRUST MANULIFE BALANCED ASSETS FUND COMMENT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Stated fundamental investment Stated fundamental investment Because the NASL Balanced Trust's
objective is current income and capital objective is to achieve intermediate investment approach is not contained
appreciation. A description of the and long-term growth through capital in its objective, it is non-fundamental
NASL Balanced Trust's investment appreciation and income by investing and can be changed by the NASL
approach therefore is not contained in in both debt and equity securities. Board without shareholder approval,
its objective. Objective therefore includes the unlike the investment approach of the
investment horizon of the Manulife Manulife Balanced Assets Fund.
Balanced Assets Fund and the general
categories of securities in which it will
invest.
- -----------------------------------------------------------------------------------------------------------------------------------
Authorized to invest up to 5% of its Does not invest in debt securities rated The NASL Balanced Trust will be
total assets in debt securities rated as below investment grade (BBB). subject to greater risk of default by
low as B and unrated securities of the issuers of junk bonds to the extent
similar quality. that it makes such investments. See
"J. Additional Information on
Investment Policies and Techniques
and Risk Factors-High Yield (High
Risk) Securities."
- -----------------------------------------------------------------------------------------------------------------------------------
Authorized to invest up to 30% of its Authorized to invest without limitation The NASL Balanced Trust may be
total assets in a wide variety of in a much narrower range of securities subject to additional risks associated
foreign securities. of foreign issuers. with foreign investing. See "J.
Additional Information on Investment
Policies and Techniques and Risk
Factors-Foreign Securities."
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 38
<TABLE>
<CAPTION>
NASL BALANCED TRUST MANULIFE BALANCED ASSETS FUND COMMENT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Normally will invest up to 75% of its Will at all times invest at least 25% of The NASL Balanced Trust is required
total assets in common stocks, its assets in debt securities and to invest at least 25% of its total
convertible corporate obligations and preferred stocks and at least 25% of its assets in fixed-income securities at all
preferred stocks, and will maintain a assets in common stocks. times, and therefore may have greater
minimum of 25% of its total assets in exposure to interest rate and credit
fixed-income securities. quality risks in adverse market conditions.
- -------------------------------------------------------------------------------------------------------------------------------
Authorized to invest in derivatives for Not authorized to invest in derivatives. To the extent the NASL Balanced
the purpose of hedging portfolio risks. Trust invests in derivatives for
hedging purposes, it will be subject to the
risks discussed below under "J. Additional
Information on Investment Policies and
Techniques and Risk Factors--Hedging and Other
Strategic Transactions" and in the Statement of
Additional Information.
===============================================================================================================================
</TABLE>
For a discussion of certain additional differences between the NASL
Real Balanced Trust and the Manulife Balanced Assets Fund, see "J. Additional
Information on Investment Policies and Techniques and Risk Factors."
E. NASL COMMON STOCK TRUST
The investment objective of the NASL Common Stock Trust is to achieve
intermediate and long-term growth through capital appreciation and current
income by investing in common stocks and other equity securities of well
established companies with promising prospects for providing an above average
rate of return. MAC manages the NASL Common Stock Trust.
In pursuit of its objective, the NASL Common Stock Trust will invest
principally in common stocks or in securities convertible into common stocks or
carrying rights or warrants to purchase common stock or to participate in
earnings. In selecting investments, emphasis will be placed on companies with
good financial resources, strong balance sheets, satisfactory rates of return on
capital, good industry positions, superior management skills, and earnings that
tend to grow consistently. The NASL Common Stock Trust's investments are not
limited to any particular type or size of company, but high-quality growth
stocks are emphasized.
Investments will be made primarily in securities listed on national
securities exchanges, but the NASL Common Stock Trust may purchase securities
traded in the United States over-the-counter market. When, in the opinion of
management, market or economic conditions warrant a defensive posture, the NASL
Common Stock Trust may place all or a portion of its assets in fixed-income
securities. The NASL Common Stock Trust may also maintain a portion of its
assets in cash or short-term debt securities pending selection of particular
long-term investments. The NASL Common Stock Trust may purchase securities on a
forward-commitment, when-issued or delayed-delivery basis.
The NASL Common Stock Trust will be subject to certain risks as a
result of its ability to invest up to 100% of its total assets in the following
types of foreign securities: (i) U.S. dollar denominated obligations of foreign
branches of U.S. banks, (ii) securities represented by ADRs listed on a national
securities exchange or traded in the U.S. over-the-counter market, (iii)
securities of a corporation organized in a jurisdiction other than the U.S. and
listed on the New York Stock Exchange or NASDAQ or (iv) securities denominated
in U.S. dollars but issued by non U.S. issuers and issued under U.S. federal
securities regulations (for example, U.S. dollar denominated obligations issued
or guaranteed as to principal or interest by the Government of Canada or any
Canadian Crown agency). These risks are described under "J. Additional
Information on Investment Policies and Techniques and Risk Factors--Foreign
Securities." Moreover, substantial investments in foreign securities may have
adverse tax implications as described under "Additional Information About
NASL--E. Tax Matters."
28
<PAGE> 39
USE OF HEDGING AND OTHER STRATEGIC TRANSACTIONS
The NASL Common Stock Trust does not presently use any of the
investment strategies referred to under "J. Additional Information on Investment
Policies and Techniques and Risk Factors--Hedging and Other Strategic
Transactions."
DIFFERENCES BETWEEN THE NASL COMMON STOCK TRUST AND THE MANULIFE COMMON STOCK
FUND
Because the NASL Common Stock Trust has been created for the purpose of
operating as a successor to the Manulife Common Stock Fund in connection with
the Reorganization, the investment policies and restrictions of the NASL Common
Stock Trust and the Manulife Common Stock Fund are substantially identical,
except for certain differences discussed below under "J. Additional Information
on Investment Policies and Techniques and Risk Factors."
F. NASL PACIFIC RIM EMERGING MARKETS TRUST
The investment objective of the NASL Pacific Rim Emerging Markets Trust
is to achieve long-term growth of capital. MAC manages the NASL Pacific Rim
Emerging Markets Trust and seeks to achieve this investment objective by
investing in a diversified portfolio that is comprised primarily of common
stocks and equity-related securities of corporations domiciled in countries in
the Pacific Rim region. Current income from dividends and interest will not be
an important consideration in the selection of portfolio securities.
In pursuit of its investment objective, the NASL Pacific Rim Emerging
Markets Trust will vary the geographical distribution of its investments based
upon the continuous evaluation of political, economic and market trends
throughout the world. Investments will be shifted among the world's capital
markets in accordance with the ongoing analyses of trends and developments
affecting such markets and securities. The NASL Pacific Rim Emerging Markets
Trust will invest primarily in companies domiciled in potentially all countries
of the Pacific Rim region. As used herein, the countries of the Pacific Rim
region are India, Pakistan, Japan, Hong Kong, Singapore, Malaysia, Thailand,
Indonesia, Australia, South Korea, Taiwan, Philippines, New Zealand and China.
The NASL Pacific Rim Emerging Markets Trust will, under normal
conditions, invest at least 65% of its net assets in common stocks and
equity-related securities of established larger-capitalization non-U.S.
companies that have attractive long-term prospects for growth of capital.
Equity-related securities in which the NASL Pacific Rim Emerging Markets Trust
may invest include: preferred stocks, warrants and securities convertible into
or exchangeable into common stocks.
The NASL Pacific Rim Emerging Markets Trust will invest in the
securities of issuers domiciled or primarily traded in at least five foreign
countries if it has invested at least 80% of its net assets in foreign issuers.
If the NASL Pacific Rim Emerging Markets Trust has less than 20% of its net
assets in foreign issuers, then all of such investment may be in issuers
domiciled or primarily traded in one country. If the NASL Pacific Rim Emerging
Markets Trust has at least 20% but less than 40% of its net assets in foreign
issuers, then such investment must be allocated to issuers domiciled or
primarily traded in at least two foreign countries. Similarly, if the NASL
Pacific Rim Emerging Markets Trust has at least 40% but less than 60% of its net
assets invested in foreign issuers, such investment must be allocated to at
least three foreign countries. Foreign investments must be allocated to at least
four foreign countries if such investments comprise at least 60% but less than
80% of the NASL Pacific Rim Emerging Markets Trust's net assets.
The NASL Pacific Rim Emerging Markets Trust will not invest more than
20% of its net assets in securities of issuers domiciled or primarily traded in
any one country, except that it may invest up to 35% of its net assets in
issuers domiciled or primarily traded in any one of the following countries:
Australia, France, Japan, the United Kingdom, or Germany.
The NASL Pacific Rim Emerging Markets Trust may, for defensive
purposes, invest all or a portion of its assets in non-convertible fixed income
securities denominated in U.S. and non-U.S. dollars. These non-convertible fixed
income securities will include debt of corporations, foreign governments and
supranational organizations. The NASL Pacific Rim Emerging Markets Trust may
also maintain a portion of its assets in cash or short term debt securities
pending the selection of certain long-term investments.
The NASL Pacific Rim Emerging Markets Trust will be subject to special
risks as a result of its ability to invest up to 100% of its total assets in
foreign securities. These risks are described under the caption "J. Additional
Information on Investment Policies and Techniques and Risk Factors --Foreign
Securities." Moreover, substantial investments in foreign securities may have
adverse tax implications as described under "Additional Information About
NASL--E. Tax Matters."
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USE OF HEDGING AND OTHER STRATEGIC TRANSACTIONS
The NASL Pacific Rim Emerging Markets Trust may also purchase and sell
the following equity-related financial instruments: exchange-listed call and put
options on equity indices, over-the-counter ("OTC") and exchange-listed equity
index futures, OTC and exchange-listed call and put options on various
currencies in the portfolio, and OTC foreign currency futures contracts on
various currencies in the NASL Pacific Rim Emerging Markets Trust. The Statement
of Additional Information contains a description of these strategies and of
certain risks associated therewith.
DIFFERENCES BETWEEN THE NASL PACIFIC RIM EMERGING MARKETS TRUST AND THE MANULIFE
PACIFIC RIM EMERGING MARKETS FUND
Because the NASL Pacific Rim Emerging Markets Trust has been created
for the purpose of operating as a successor to the Manulife Pacific Rim Emerging
Markets Fund in connection with the Reorganization, the investment policies and
restrictions of the NASL Pacific Rim Emerging Markets Trust and the Manulife
Pacific Rim Emerging Markets Fund are substantially identical, except for
certain differences discussed below under "J. Additional Information on
Investment Policies and Techniques and Risk Factors."
G. NASL REAL ESTATE SECURITIES TRUST
The investment objective of the NASL Real Estate Securities Trust is to
achieve a combination of long-term capital appreciation and satisfactory current
income by investing in real estate related equity and debt securities. MAC
manages the NASL Real Estate Securities Trust and seeks to attain this objective
by investing principally in real estate investment trust equity and debt
securities and other securities issued by companies which invest in real estate
or interests therein.
The NASL Real Estate Securities Trust may also purchase the common
stocks, preferred stocks, convertible securities and bonds of companies
operating in industry groups relating to the real estate industry. This would
include companies engaged in the development of real estate, building and
construction, and other market segments related to real estate. The NASL Real
Estate Securities Trust will not invest directly in real property nor will it
purchase mortgage notes directly.
Under normal circumstances, at least 65% of the value of the NASL Real
Estate Securities Trust's total assets will be invested in real estate related
equity and debt securities. When, in the opinion of MAC, market or economic
conditions warrant a defensive posture, the NASL Real Estate Securities Trust
may place all or a portion of its assets in fixed-income securities which may or
may not be real estate debt related securities. The NASL Real Estate Securities
Trust may also maintain a portion of its assets in cash or short-term debt
securities pending selection of particular long-term investments. The NASL Real
Estate Securities Trust may purchase securities on a forward-commitment,
when-issued or delayed-delivery basis. For a discussion of these securities, see
the discussion under "J. Additional Information on Investments Policies and
Techniques and Risk Factors--When-Issued Securities" ("Forward Commitments").
The NASL Real Estate Securities Trust will be subject to certain risks
as a result of its ability to invest up to 100% of its total assets in the
following types of foreign securities: (i) U.S. dollar denominated obligations
of foreign branches of U.S. banks, (ii) securities represented by ADRs listed on
a national securities exchange or traded in the U.S. over-the-counter market,
(iii) securities of a corporation organized in a jurisdiction other than the
U.S. and listed on the New York Stock Exchange or NASDAQ or (iv) securities
denominated in U.S. dollars but issued by non U.S. issuers and issued under U.S.
federal securities regulations (for example, U.S. dollar denominated obligations
issued or guaranteed as to principal or interest by the Government of Canada or
any Canadian Crown agency). These risks are described under the caption "J.
Additional Information on Investment Policies and Techniques and Risk
Factors--Foreign Securities" in this Prospectus/Proxy Statement. Moreover,
substantial investments in foreign securities may have adverse tax implications
as described under "Additional Information About NASL-E. Tax Matters."
USE OF HEDGING AND OTHER STRATEGIC TRANSACTIONS
The NASL Real Estate Securities Trust does not presently use any of the
investment strategies referred to under "J. Additional Information on Investment
Policies and Techniques and Risk Factors--Hedging and Other Strategic
Transactions."
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DIFFERENCES BETWEEN THE NASL ESTATE SECURITIES TRUST AND THE MANULIFE REAL
ESTATE SECURITIES FUND
Because the NASL Real Estate Securities Trust has been created for the
purpose of operating as a successor to the Manulife Real Estate Securities Fund
in connection with the Reorganization, the investment policies and restrictions
of the NASL Real Estate Securities Trust and the Manulife Real Estate Securities
Fund are substantially identical, except for certain differences discussed below
under "J. Additional Information on Investment Policies and Techniques and Risk
Factors."
H. NASL CAPITAL GROWTH BOND TRUST
The investment objective of the NASL Capital Growth Bond Trust is to
achieve growth of capital by investing in medium-grade or better debt
securities, with income as a secondary consideration. MAC manages the NASL
Capital Growth Bond Trust.
The NASL Capital Growth Bond Trust differs from most "bond" funds in
that its primary objective is capital appreciation, not income. Opportunities
for capital appreciation will usually exist only when the levels of prevailing
interest rates are falling. During periods when MAC expects interest rates to
decline, the portfolio will invest primarily in intermediate-term and long-term
corporate and government debt securities. However, during periods when MAC
expects interest rates to rise or believes that market or economic conditions
otherwise warrant such action, the portfolio may invest substantially all of its
assets in short-term debt securities to preserve capital and maintain income.
The portfolio may also maintain a portion of its assets temporarily in cash or
short-term debt securities pending selection of particular long-term
investments.
The NASL Capital Growth Bond Trust will be carefully positioned in
relation to the term of debt obligations and the anticipated movement of
interest rates. It is contemplated that at least 75% of the value of the NASL
Capital Growth Bond Trust's total investment in corporate debt securities,
excluding commercial paper, will be represented by debt securities which have,
at the time of purchase, a rating within the four highest grades as determined
by Moody's (Aaa, Aa, A or Baa), S&P's (AAA, AA, A or BBB), or Fitch's Investors
Service ("Fitch's") (AAA, AA, A or BBB) and debt securities of banks and other
issuers which, although not rated as a matter of policy by either Moody's,
S&P's, or Fitch's, are considered by MAC to have investment quality comparable
to securities receiving ratings within such four highest grades. Although the
portfolio does not intend to acquire or hold debt securities of below
investment-grade quality, shareholders should note that even bonds of the lowest
categories of investment-grade quality may have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case
with higher-grade bonds. It should be further noted that should an obligation in
the NASL Capital Growth Bond Trust drop below investment grade, the NASL Capital
Growth Bond Trust will make every effort to dispose of it promptly so long as to
do so would not be detrimental to the NASL Capital Growth Bond Trust.
Government obligations in which the NASL Capital Growth Bond Trust may
invest will be limited to those issued or guaranteed as to principal or interest
by the United States Government or its agencies or instrumentalities or by the
Government of Canada or any Canadian Crown agency. Any Canadian obligation
acquired by the NASL Capital Growth Bond Trust will be payable in U.S. dollars.
The NASL Capital Growth Bond Trust may purchase securities on a forward-
commitment, when-issued or delayed-delivery basis.
The NASL Capital Growth Bond Trust may purchase corporate debt
securities which carry certain equity features, such as conversion or exchange
rights or warrants for the acquisition of stock of the same or a different
issuer or participations based on revenues, sales, or profits. The NASL Capital
Growth Bond Trust will not exercise any such conversion, exchange or purchase
rights if, at the time, the value of all equity interests so owned would exceed
10% of the value of the NASL Capital Growth Bond Trust's total assets.
The NASL Capital Growth Bond Trust will be subject to certain risks as
a result of its ability to invest up to 100% of its total assets in the
following types of foreign securities: (i) U.S. dollar denominated obligations
of foreign branches of U.S. banks, (ii) securities represented by American
Depositary Receipts listed on a national securities exchange or traded in the
U.S. over-the-counter market, (iii) securities of a corporation organized in a
jurisdiction other than the U.S. and listed on the New York Stock Exchange or
NASDAQ ("Interlisted Securities") or (iv) securities denominated in U.S. dollars
but issued by non U.S. issuers and issued under U.S. federal securities
regulations (for example, U.S. dollar denominated obligations issued or
guaranteed as to principal or interest by the Government of Canada or any
Canadian Crown agency). These risks are described under the caption "J.
Additional Information on Investment Policies and Techniques--Foreign
Securities." Moreover, substantial investments in foreign securities may have
adverse tax implications as described under "Additional Information About
NASL--E. Tax Matters."
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USE OF HEDGING AND OTHER STRATEGIC TRANSACTIONS
The NASL Capital Growth Bond Trust does not presently use any of the
investment strategies referred to under "J. Additional Information on Investment
Policies and Techniques--Hedging and Other Strategic Transactions."
DIFFERENCES BETWEEN THE NASL CAPITAL GROWTH BOND TRUST AND THE MANULIFE CAPITAL
GROWTH BOND FUND
Because the NASL Capital Growth Bond Trust has been created for the
purpose of operating as a successor to the Manulife Capital Growth Bond Fund in
connection with the Reorganization, the investment policies and restrictions of
the NASL Capital Growth Bond Trust and the Manulife Capital Growth Bond Fund are
substantially identical, except for certain differences discussed below under
"J. Additional Information on Investment Policies and Techniques and Risk
Factors."
I. NASL EQUITY INDEX TRUST
The investment objective of the NASL Equity Index Trust is to achieve
investment results which approximate the total return of publicly traded common
stocks in the aggregate, as represented by the Standard & Poor's 500 Composite
Stock Price Index (the "Index"). MAC manages the NASL Equity Index Trust.
The NASL Equity Index Trust is designed to provide an economical and
convenient means of maintaining a widely diversified investment in the United
States equity market as part of an overall investment strategy. The NASL Equity
Index Trust uses the Index as its standard performance comparison because it
represents more than 70% of the total market value of all publicly traded common
stocks in the United States and is widely viewed among investors as
representative of the performance of publicly traded common stocks in the United
States.
The Index is composed of 500 selected common stocks, over 95% of which
are listed on the New York Stock Exchange. The Index is an unmanaged index of
common stock prices. The performance of the Index is based on changes in the
prices of stocks comprising the Index and assumes the reinvestment of all
dividends paid on such stocks. Taxes, brokerage, commissions and other fees are
disregarded in computing the level of the Index. Standard & Poor's selects the
stocks to be included in the Index on a proprietary basis but does incorporate
such factors as the market capitalization and trading activity of each stock and
its adequacy as representative of stocks in a particular industry group. Stocks
in the Index are weighted according to their market capitalization (i.e., the
number of shares outstanding multiplied by the stock's current price).1
The Index fluctuates in value with changes in the market value of the
500 stocks included in the Index at any point in time. An investment in the NASL
Equity-Index Trust involves risks similar to the risks of investing directly in
the stocks included in the Index.
MAC will not attempt to "manage" the NASL Equity Index Trust in the
traditional portfolio management sense which generally involves the buying and
selling of securities based upon investment analysis of economic, financial and
market factors. Instead, the NASL Equity Index Trust, utilizing a "passive" or
"indexing" investment approach, attempts to duplicate the performance of the
Index. The adverse financial situation of a company will not directly result in
its elimination from the NASL Equity Index Trust unless, of course, the company
in question is removed from the Index. Conversely, the projected superior
financial performance of a company would not normally lead to an increase in the
NASL Equity Index Trust's holdings of the company. Under normal circumstances,
the net assets of the NASL Equity Index Trust will be invested in any
combination of the following investments: 1) representative common stocks, 2)
Standard & Poor's 500 Futures Contracts and 3) Standard & Poor's Depository
Receipts (R).
With regard to the portion of the NASL Equity Index Trust invested in
common stocks, the method used to select investments for the NASL Equity Index
Trust involves investing in common stocks in approximately the order of their
respective market value weightings in the Index, beginning with those having the
highest weightings. For diversification purposes, the NASL Equity Index Trust
can purchase stocks with smaller weightings in order to represent other sectors
of the Index. The NASL Equity Index Trust will invest only in those stocks, and
in such amounts, as MAC deems necessary and appropriate in order for the NASL
Equity Index Trust to approximate the performance of the Index.
There is no minimum or maximum number of stocks included in the Index
which the NASL Equity Index Trust must hold. Under normal circumstances, it is
expected that the portion of the NASL Equity Index Trust invested in stocks
would
- --------
(1) "Standard & Poor's (R)", "S&P 500 (R)", "S&P (R)", "Standard & Poor's
500 (R)" and "500" are trademark's of McGraw-Hill, Inc.
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hold between 300 and 500 different stocks included in the Index. The NASL Equity
Index Trust may compensate for the omission of a stock that is included in the
Index, or for purchasing stocks in other than the same proportion that they are
represented in the Index, by purchasing stocks that are believed to have
characteristics that correspond to those of the omitted stocks. The NASL Equity
Index Trust may invest in short-term debt securities to maintain liquidity or
pending investment in stocks or Standard & Poor's Stock Index Futures Contracts
(S&P 500 Futures Contracts).
Tracking error is measured by the difference between the total return
for the Index and the total return for the NASL Equity Index Trust after
deductions of fees and expenses. All tracking error deviations are reviewed to
determine the effectiveness of investment policies and techniques. Tracking
error is reviewed at least weekly and more frequently if such a review is
indicated by significant cash balance changes, market conditions or changes in
the composition of the Index. If deviation accuracy is not maintained, the NASL
Equity Index Trust will rebalance its composition by selecting securities which,
in the opinion of MAC, will provide a more representative sampling of the
capitalization of the securities in the Index as a whole or a more
representative sampling of the sector diversification in the Index.
S&P licenses certain trademarks and trade names to NASL but disclaims
any responsibility or liability to NASL and its shareholders.
The NASL Equity Index Trust is not sponsored, endorsed, sold or
promoted by S&P. S&P makes no representation or warranty, express or implied, to
the shareholders of the NASL Equity Index Trust or any member of the public
regarding the advisability of investing in securities generally or in the NASL
Equity Index Trust particularly or the ability of the S&P 500 Index to track
general stock market performance. S&P's only relationship to NASL is the
licensing of certain trademarks and trade names of S&P and of the S&P 500 Index
which is determined, composed and calculated by S&P without regard to NASL or
the NASL Equity Index Trust. S&P has no obligation to take the needs of NASL or
the shareholders of the NASL Equity Index Trust into consideration in
determining, composing or calculating the S&P 500 Index. S&P is not responsible
for and has not participated in the determination of the prices and amount of
shares of the NASL Equity Index Trust or the timing of the issuance or sale of
the shares of the NASL Equity Index Trust or in the determination or calculation
of the equation by which shares of the NASL Equity Index Trust are to be
converted into cash. S&P has no obligation or liability in connection with the
administration, marketing or trading of the NASL Equity Index Trust.
S&P does not guarantee the accuracy and/or the completeness of the S&P
500 Index or any data included therein and S&P shall have no liability for any
errors, omissions, or interruptions therein. S&P makes no warranty, express or
implied, as to results to be obtained by NASL, shareholders of the NASL Equity
Index Trust, or any other person or entity from the use of the S&P 500 Index or
any data included therein. S&P makes no express or implied warranties, and
expressly disclaims all warranties of merchantability or fitness for a
particular purpose or use with respect to the S&P 500 Index or any data included
therein. Without limiting any of the foregoing, in no event shall S&P have any
liability for any special, punitive, indirect, or consequential damages
(including lost profits), even if notified of the possibility of such damages.
USE OF HEDGING AND OTHER STRATEGIC TRANSACTIONS
The NASL Equity Index Trust may (i) invest any portion of its net
assets in S&P 500 Futures Contracts until the NASL Equity Index Trust reaches
$25 million in net assets and (ii) once the NASL Equity Index Trust reaches $25
million in net assets, invest no more than 20% of its net assets in S&P 500
Futures Contracts. A description of this investment strategy appears under "J.
Additional Information on Investment Policies and Techniques and Risk
Factors--Hedging and Other Strategic Transactions" below in this
Prospectus/Proxy Statement and under "Hedging and Other Strategic Transactions"
in the Statement of Additional Information.
DIFFERENCES BETWEEN THE NASL EQUITY INDEX TRUST AND THE MANULIFE EQUITY INDEX
FUND
Because the NASL Equity Index Trust has been created for the purpose of
operating as a successor to the Manulife Equity Index Fund in connection with
the Reorganization, the investment policies and restrictions of the NASL Equity
Index Trust and the Manulife Equity Index Fund are substantially identical,
except for certain differences discussed below under "J. Additional Information
on Investment Policies and Techniques and Risk Factors."
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J. ADDITIONAL INFORMATION ON INVESTMENT POLICIES AND TECHNIQUES AND RISK
FACTORS
INVESTMENT RESTRICTIONS GENERALLY
NASL is subject to a number of restrictions in pursuing its investment
objectives and policies. Except as noted, the Manulife Portfolios are subject to
similar restrictions. The following is a brief summary of certain restrictions
that may be of interest to contractholders. Some of these restrictions are
subject to exceptions not stated here. Such exceptions and a complete list of
the investment restrictions applicable to the individual NASL Portfolios and to
NASL are set forth in the Statement of Additional Information under the caption
"Investment Restrictions." Except for the restrictions specifically identified
as fundamental, all investment restrictions described in this Prospectus/Proxy
Statement and in the Statement of Additional Information are not fundamental, so
that the NASL Board may change them without shareholder approval. Fundamental
policies may not be changed without the affirmative vote of a majority of the
outstanding voting securities.
There are also diversification and other requirements for all of the
NASL Portfolios imposed by the federal tax laws, as described under "Additional
Information about NASL--E. Tax Matters." The Manulife Portfolios are subject to
the same requirements.
INDUSTRY CONCENTRATION
NASL Portfolios. As a matter of fundamental policy, each NASL Portfolio
other than the NASL Real Estate Securities Trust is prohibited from investing
more than 25% of its total assets in the securities of issuers having their
principal activities in any particular industry (with exceptions for U.S.
Government securities and obligations of domestic branches of U.S. banks and
savings and loan associations).
Manulife Portfolios. While the corresponding Manulife Portfolios are
subject to a similar fundamental policy, NASL, unlike MSF, has determined to
forego the exclusion with respect to obligations of domestic branches of U.S.
savings and loan associations and to limit the exclusion with respect to
obligations of domestic branches of U.S. banks to the NASL Money Market Trust.
BORROWING
NASL Portfolios. Each NASL Portfolio, as a matter of fundamental
policy, is prohibited from borrowing money, except for temporary or emergency
purposes (but not for leveraging) and then not in excess of 33 1/3% of the value
of the total assets of a NASL Portfolio at the time the borrowing is made. In
addition, each NASL Portfolio, as a matter of fundamental policy, may borrow in
connection with reverse repurchase agreements, mortgage dollar rolls and other
similar transactions. Reverse repurchase agreements and mortgage dollar rolls
may be considered a form of borrowing and will be treated as a borrowing for
purposes of the restriction on borrowing in excess of 33 1/3% of the value of
the total assets of a NASL Portfolio. A NASL Portfolio will not purchase
securities while borrowings (other than reverse repurchase agreements, mortgage
dollar rolls and similar transactions) exceed 5% of total assets.
Manulife Portfolios. In contrast, each Manulife Portfolio, as a matter
of fundamental policy, is prohibited from borrowing money except from banks for
temporary or emergency purposes. As a matter of fundamental policy, borrowing by
a Manulife Portfolio may not exceed 10% of the value of such Manulife
Portfolio's total assets at the time the borrowing is made. In addition, each
Manulife Portfolio other than the Manulife International Fund and Manulife
Pacific Rim Emerging Markets Fund is subject to a fundamental investment
restriction which prohibits additional investments during any period that its
borrowings exceed 5% of the value of its total assets.
ISSUER DIVERSIFICATION
NASL Portfolios. Each of the NASL Portfolios other than the NASL
Emerging Growth Trust is prohibited as a matter of fundamental policy from
purchasing securities of any issuer if the purchase would cause more than 5% of
the value of a NASL Portfolio's total assets to be invested in the securities of
any one issuer (excluding U.S. Government securities and bank obligations) or
cause more than 10% of the voting securities of the issuer to be held by a NASL
Portfolio, except that up to 25% of the value of each NASL Portfolio's total
assets (except the NASL Money Market Trust) may be invested without regard to
this restriction.
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Manulife Portfolios. A similar fundamental investment restriction
applies to each of the Manulife Portfolios, including the Manulife Emerging
Growth Fund.
INVESTMENTS IN REAL ESTATE-RELATED SECURITIES
NASL Portfolios. As a matter of fundamental policy, each NASL Portfolio
may not purchase or sell real estate, except that each NASL Portfolio may invest
in securities issued by companies which invest in real estate or interests
therein and each of the NASL Portfolios other than the NASL Money Market Trust
may invest in mortgages and mortgage backed securities.
Manulife Portfolios. Each Manulife Portfolio is subject to a similar
fundamental investment restriction, except that only the Manulife Balanced
Assets Fund may invest in mortgage backed securities.
INVESTMENTS IN COMMODITIES
NASL Portfolios. Each NASL Portfolio is subject to a fundamental
investment restriction which prohibits the purchase and sale of commodities or
commodity contracts, except that each NASL Portfolio other than the NASL Money
Market Trust may purchase and sell futures contracts on financial indices and
options on such futures contracts and may purchase and sell futures contracts on
foreign currencies and options on such futures contracts, and the NASL Equity
Index Trust may purchase and sell S&P 500 Stock Index Futures Contracts.
Manulife Portfolios. The corresponding Manulife Portfolios are
similarly restricted as a matter of fundamental policy, but only the Manulife
International Fund and Manulife Pacific Rim Emerging Markets Fund are provided
with similar exceptions from such restriction.
INVESTMENTS IN ILLIQUID SECURITIES
NASL Portfolios. Restrictions that apply to all NASL Portfolios and
that are not fundamental include a prohibition on knowingly investing more than
15% of the net assets of a NASL Portfolio (10% in the case of the Money Market
Trust) in "illiquid" securities (including repurchase agreements maturing in
more than seven days but excluding master demand notes).
Manulife Portfolios. In contrast, each of the Manulife Portfolios other
than the Manulife International Fund and Manulife Pacific Rim Emerging Markets
Fund is prohibited as a matter of nonfundamental policy from knowingly investing
in securities or other investments, including repurchase agreements maturing in
more than seven days, that are subject to legal or contractual restrictions upon
resale or are otherwise not readily marketable.
PLEDGING ASSETS
NASL Portfolios. Each NASL Portfolio is prohibited as a matter of
nonfundamental policy from pledging, hypothecating, mortgaging or transferring
more than 10% of its total assets as security for indebtedness (except that the
applicable percent is 33 1/3% in the case of the NASL International Stock Trust
and 15% in the case of the NASL Balanced Trust).
Manulife Portfolios. Each Manulife Portfolio is subject to a similar
nonfundamental investment restriction, except that the applicable percent
limitation is 10% for every Manulife Portfolio.
INVESTMENTS IN OTHER FUNDS
NASL Portfolios. As a matter of nonfundamental policy, each NASL
Portfolio may not purchase securities of other investment companies, other than
in connection with a merger, consolidation or reorganization, if the purchase
would cause more than 10% of the value of a NASL Portfolio's total assets to be
invested in investment company securities.
Manulife Portfolios. In contrast, each Manulife Portfolio other than
the Manulife Equity Index Fund is subject to a nonfundamental restriction
prohibiting it from purchasing securities of other investment companies except
in connection with a merger, consolidation or reorganization, and the Manulife
Equity Index Fund is permitted to invest up to 5% of its assets in Standard &
Poor's Depositary Receipts.
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MONEY MARKET TRUST RESTRICTIONS
NASL Portfolios. Finally, the NASL Money Market Trust is subject to
certain restrictions required by Rule 2a-7 under the 1940 Act. In order to
comply with such restrictions, the NASL Money Market Trust will, inter alia, not
purchase the securities of any issuer if it would cause (i) more than 5% of its
total assets to be invested in the securities of any one issuer (excluding U.S.
Government securities and repurchase agreements fully collateralized by U.S.
Government securities), except as permitted by the Rule for certain securities
for a period of up to three business days after purchase, (ii) more than 5% of
its total assets to be invested in "second tier securities," as defined by the
Rule, or (iii) more than the greater of $1 million or 1% of its total net assets
to be invested in the second tier securities of that issuer.
Manulife Portfolios. The Manulife Money-Market Fund is subject to the
same restrictions under Rule 2a-7.
* * *
The following is a description of certain investment policies subject
to investment restrictions that may be of particular interest to
contractholders.
ADDITIONAL INVESTMENT RESTRICTIONS ON BORROWING AND FOREIGN INVESTING
In order to comply with limitations imposed by the State of California
Insurance Department, each of the NASL Portfolios, like the corresponding
Manulife Portfolios, is subject to the following restrictions on borrowing and
foreign investments. These restrictions are nonfundamental and may be changed
without shareholder approval.
Borrowing. Each NASL Portfolio will not borrow money except that each
NASL Portfolio may borrow in an amount (i) up to 25% of the NASL Portfolio's net
assets for temporary purposes to facilitate redemptions (not for leveraging) and
(ii) up to 10% of the NASL Portfolio's net assets in connection with reverse
repurchase agreements, mortgage dollar rolls and other similar transactions.
This limitation is more restrictive than NASL's fundamental restriction on
borrowing.
Foreign Securities. Each NASL Portfolio will comply with the following
restrictions:
(i) A NASL Portfolio will be invested in a minimum of five different
foreign countries at all times. However, this minimum is reduced to
four when foreign country investments comprise less than 80% of the
NASL Portfolio's net asset value; to three when less than 60% of such
value; to two when less than 40%; and to one when less than 20%.
(ii) Except as set forth in items (iii) and (iv) below, a NASL
Portfolio will have no more than 20% of its net asset value invested in
securities of issuers located in any one country.
(iii) A NASL Portfolio may have an additional 15% of its net asset
value invested in securities of issuers located in any one of the
following countries (to the extent such investment is consistent with
the investment policies of the NASL Portfolio): Australia, Canada,
France, Japan, the United Kingdom or West Germany.
(iv) A NASL Portfolio's investments in United States issuers are not
subject to these foreign country diversification restrictions.
HIGH YIELD (HIGH RISK) SECURITIES
General. The NASL Balanced Trust, unlike the Manulife Balanced Assets
Fund, may invest up to 5% of its assets, in "high yield" (high risk) securities.
Securities rated below investment grade and comparable unrated securities offer
yields that fluctuate over time, but generally are superior to the yields
offered by higher rated securities. However, securities rated below investment
grade also involve greater risks than higher rated securities. Under rating
agency guidelines, medium- and lower- rated securities and comparable unrated
securities will likely have some quality and protective characteristics that are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Such securities are considered speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. Accordingly, it is possible that these types of factors could, in
certain instances, reduce the value of securities held by the NASL Balanced
Trust with a commensurate effect on the value of the NASL Balanced Trust's
shares.
The secondary markets for high yield corporate and sovereign debt
securities are not as liquid as the secondary markets for higher rated
securities. The secondary markets for high yield debt securities are
concentrated in relatively few market makers and participants in the market are
mostly institutional investors, including insurance companies, banks, other
financial
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institutions and mutual funds. In addition, the trading volume for high yield
debt securities is generally lower than that for higher-rated securities and the
secondary markets could contract under adverse market or economic conditions
independent of any specific adverse changes in the condition of a particular
issuer. These factors may have an adverse effect on the ability of the NASL
Balanced Trust to dispose of particular portfolio investments and may limit its
ability to obtain accurate market quotations for purposes of valuing securities
and calculating net asset value. If the NASL Balanced Trust is not able to
obtain precise or accurate market quotations for a particular security, it will
become more difficult for the NASL Board to value its investment portfolio and
the NASL Board may have to use a greater degree of judgment in making such
valuations. Less liquid secondary markets may also affect the NASL Balanced
Trust's ability to sell securities at their fair value. In addition, the NASL
Balanced Trust may invest up to 15% of its net assets, measured at the time of
investment, in illiquid securities, which may be more difficult to value and to
sell at fair value. If the secondary markets for high yield debt securities are
affected by adverse economic conditions, the proportion of the NASL Balanced
Trust's assets invested in illiquid securities may increase.
Because the NASL Capital Growth Bond Trust will invest primarily in
fixed-income securities, the net asset value of its shares can be expected to
change as general levels of interest rates fluctuate, although the market values
of securities rated below investment grade and comparable unrated securities
tend to react less to fluctuations in interest rate levels than do those of
higher-rated securities. Except to the extent that values are affected
independently by other factors such as developments relating to a specific
issuer, when interest rates decline, the value of a fixed-income portfolio can
generally be expected to rise. Conversely, when interest rates rise, the value
of a fixed-income portfolio can generally be expected to decline.
Corporate Debt Securities. While the market values of securities rated
below investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, such securities generally present a higher
degree of credit risk. Issuers of these securities are often highly leveraged
and may not have more traditional methods of financing available to them, so
that their ability to service their debt obligations during an economic downturn
or during sustained periods of rising interest rates may be impaired. The risk
of loss due to default by such issuers is significantly greater than with
investment grade securities because such securities generally are unsecured and
frequently are subordinated to the prior payment of senior indebtedness.
Foreign Sovereign Debt Securities. Investing in foreign sovereign debt
securities will expose the NASL Balanced Trust to the direct or indirect
consequences of political, social or economic changes in the developing and
emerging countries that issue the securities. The ability and willingness of
sovereign obligors in developing and emerging countries or the governmental
authorities that control repayment of their external debt to pay principal and
interest on such debt when due may depend on general economic and political
conditions within the relevant country. Countries such as those in which these
portfolios may invest have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate trade
difficulties and extreme poverty and unemployment. Many of these countries are
also characterized by political uncertainty or instability. Additional factors
which may influence the ability or willingness to service debt include, but are
not limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, and its government's policy towards
the International Monetary Fund, the World Bank and other international
agencies.
The ability of a foreign sovereign obligor to make timely payments on
its external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
dollars, its ability to make debt payments denominated in dollars could be
adversely affected. If a foreign sovereign obligor cannot generate sufficient
earnings from foreign trade to service its external debt, it may need to depend
on continuing loans and aid from foreign governments, commercial banks, and
multilateral organizations, and inflows of foreign investment. The commitment on
the part of these foreign governments, multilateral organizations and others to
make such disbursements may be conditioned on the government's implementation of
economic reforms and/or economic performance and the timely service of its
obligations. Failure to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds, which may further
impair the obligor's ability or willingness to timely service its debts. The
cost of servicing external debt will also generally be adversely affected by
rising international interest rates, because many external debt obligations bear
interest at rates which are adjusted based upon international interest rates.
The ability to service external debt will also depend on the level of the
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relevant government's international currency reserves and its access to foreign
exchange. Currency devaluations may affect the ability of a sovereign obligor to
obtain sufficient foreign exchange to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, a NASL Portfolio may have limited legal
recourse against the issuer and/or guarantor. Remedies must, in some cases, be
pursued in the courts of the defaulting party itself, and the ability of the
holder of foreign sovereign debt securities to obtain recourse may be subject to
the political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Sovereign obligors in developing and emerging countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have in
the past experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady Bonds and other
foreign sovereign debt securities in which the NASL Portfolios may invest will
not be subject to similar restructuring arrangements or to requests for new
credit which may adversely affect a NASL Portfolio's holdings. Furthermore,
certain participants in the secondary market for such debt may be directly
involved in negotiating the terms of these arrangements and may therefore have
access to information not available to other market participants.
In addition to the NASL Balanced Trust's ability to invest in high
yield foreign sovereign debt securities, many of the NASL Portfolios may invest
in investment grade foreign securities. For a discussion of such securities and
their associated risks, see "Foreign Securities" below.
FOREIGN SECURITIES
Each NASL Portfolio, other than the NASL Equity Index Trust, may invest
in securities of foreign issuers to the extent stated above under the
description of such NASL Portfolio. Such foreign securities may be denominated
in foreign currencies, except with respect to the NASL Money Market Trust which
may only invest in U.S. dollar-denominated securities of foreign issuers. In the
case of the NASL Balanced Trust, ADRs and U.S. dollar denominated securities are
not included in its percentage limitation on foreign investments.
Securities of foreign issuers include obligations of foreign branches
of U.S. banks and of foreign banks, common and preferred stocks, debt securities
issued by foreign governments, corporations and supranational organizations, and
American Depository Receipts, European Depository Receipts and Global Depository
Receipts ("ADRs", "EDRs" and "GDRs"). ADRs are U.S. dollar-denominated
securities backed by foreign securities deposited in a U.S. securities
depository. ADRs are created for trading in the U.S. markets. The value of an
ADR will fluctuate with the value of the underlying security, reflect any
changes in exchange rates and otherwise involve risks associated with investing
in foreign securities. ADRs in which the NASL Portfolios may invest may be
sponsored or unsponsored. There may be less information available about foreign
issuers of unsponsored ADRs.
Securities of foreign issuers also include EDRs and GDRs, which are
receipts evidencing an arrangement with a non-U.S. bank similar to that for ADRs
and are designed for use in non-U.S. securities markets. EDRs and GDRs are not
necessarily quoted in the same currency as the underlying security.
Foreign securities may be subject to foreign government taxes which
reduce their attractiveness. See "Additional Information about NASL--E. Tax
Matters." In addition, investing in securities denominated in foreign currencies
and in the securities of foreign issuers, particularly non-governmental issuers,
involves risks which are not ordinarily associated with investing in domestic
issuers. These risks include political or economic instability in the country
involved and the possibility of imposition of currency controls. Since certain
NASL Portfolios may invest in securities denominated or quoted in currencies
other than the United States dollar, changes in foreign currency exchange rates
may affect the value of investments in the portfolio and the unrealized
appreciation or depreciation of investments insofar as United States investors
are concerned. Foreign currency exchange rates are determined by forces of
supply and demand on the foreign exchange markets. These forces are, in turn,
affected by the international balance of payments and other economic and
financial conditions, government
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intervention, speculation and other factors. The NASL Portfolios may incur
transaction charges in exchanging foreign currencies.
There may be less publicly available information about a foreign issuer
than about a domestic issuer. Foreign issuers, including foreign branches of
U.S. banks, are subject to different accounting and reporting requirements which
are generally less extensive than the requirements applicable to domestic
issuers. Foreign stock markets (other than Japan) have substantially less volume
than the United States exchanges and securities of foreign issuers are generally
less liquid and more volatile than those of comparable domestic issuers. There
is frequently less governmental regulation of exchanges, broker-dealers and
issuers than in the United States, and brokerage costs may be higher. In
addition, investments in foreign companies may be subject to the possibility of
nationalization, withholding of dividends at the source, expropriation or
confiscatory taxation, currency blockage, political or economic instability or
diplomatic developments that could adversely affect the value of those
investments. Finally, in the event of a default on any foreign obligation, it
may be difficult for NASL to obtain or to enforce a judgment against the issuer.
Foreign markets, especially emerging markets, may have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of a NASL Portfolio is uninvested and no return is earned thereon. The
inability of a NASL Portfolio to make intended security purchases due to
settlement problems could cause the NASL Portfolio to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result in losses to a NASL Portfolio due to subsequent declines
in values of the portfolio securities or, if the NASL Portfolio has entered into
a contract to sell the security, possible liability to the purchaser. Certain
foreign markets, especially emerging markets, may require governmental approval
for the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. A NASL Portfolio could be adversely affected by
delays in, or a refusal to grant, any required governmental approval for
repatriation of capital, as well as by the application to the NASL Portfolio of
any restrictions on investments.
In addition to the foreign securities listed above, the NASL Balanced
Trust also may invest in foreign sovereign debt securities, which involve
certain additional risks. See "High Yield (High Risk) Securities-Foreign
Sovereign Debt Securities" above.
In contrast, each of the Manulife Portfolios may invest without
limitation in securities of foreign issuers, but, with respect to all of the
Manulife Portfolios except the Manulife International Fund and Manulife Pacific
Rim Emerging Markets Fund, such investments are restricted as a matter of
nonfundamental policy to securities of the following types: (i) U.S. dollar
denominated obligations of foreign branches of U.S. banks, (ii) securities
represented by ADRs listed on a national securities exchange or traded in the
U.S. over-the-counter market, (iii) securities of a corporation organized in a
jurisdiction other than the U.S. and listed on the New York Stock Exchange or
NASDAQ or (iv) securities denominated in U.S. dollars but issued by non-U.S.
issuers and issued under U.S. federal securities regulations (for example, U.S.
dollar denominated obligations issued or guaranteed as to principal or interest
by the Government of Canada or any Canadian Crown agency). The Manulife Equity
Index Fund presently does not invest in foreign securities because none are
included in the Standard & Poor's 500 Composite Stock Price Index.
WARRANTS
Subject to certain restrictions, each of the NASL Portfolios except the
NASL Money Market Trust may purchase warrants, including warrants traded
independently of the underlying securities. Similarly, the Manulife
International Fund, Manulife Common Stock Fund, Manulife Pacific Rim Emerging
Markets Fund and Manulife Emerging Growth Fund may purchase warrants.
LENDING SECURITIES
Each NASL Portfolio may lend its securities so long as such loans do
not represent in excess of 33 1/3% of a NASL Portfolio's total assets. This is a
fundamental policy. In contrast, as a matter of fundamental policy, each
Manulife Portfolio may lend its securities so long as such loans do not
represent in excess of 20% of a Manulife Portfolio's total assets. The procedure
for lending securities is for the borrower to give the lending NASL Portfolio
collateral consisting of cash, cash equivalents or securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities. The
lending NASL Portfolio may invest the cash collateral and earn additional income
or receive an agreed upon fee from a borrower which has delivered cash
equivalent collateral. NASL anticipates that its securities will be loaned only
under the following conditions:
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(1) the borrower must furnish collateral equal at all times to the market value
of the securities loaned and the borrower must agree to increase the collateral
on a daily basis if the securities increase in value; (2) the loan will be made
in accordance with New York Stock Exchange rules, which presently require the
borrower, after notice, to redeliver the securities within five business days;
and (3) the NASL Portfolio making the loan may pay reasonable service,
placement, custodian or other fees in connection with loans of securities and
share a portion of the interest from these investments with the borrower of the
securities. As with other extensions of credit there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially.
WHEN-ISSUED SECURITIES ("FORWARD COMMITMENTS")
In order to help ensure the availability of suitable securities, each
of the NASL Portfolios, like the corresponding Manulife Portfolios, may purchase
debt securities on a "when-issued" or on a "forward delivery" basis, which means
that the obligations will be delivered to the NASL Portfolio at a future date,
which may be a month or more after the date of commitment (referred to as
"forward commitments"). It is expected that, under normal circumstances, a NASL
Portfolio purchasing securities on a when-issued or forward delivery basis will
take delivery of the securities, but the NASL Portfolio may sell the securities
before the settlement date, if such action is deemed advisable. In general, a
NASL Portfolio does not pay for the securities or start earning interest on them
until the obligations are scheduled to be settled, but it does, in the meantime,
record the transaction and reflect the value each day of the securities in
determining its net asset value. At the time delivery is made, the value of
when-issued or forward delivery securities may be more or less than the
transaction price, and the yields then available in the market may be higher
than those obtained in the transaction. While awaiting delivery of the
obligations purchased on such bases, a NASL Portfolio will establish a
segregated account consisting of cash or high quality debt securities equal to
the amount of the commitments to purchase when-issued or forward delivery
securities. The availability of liquid assets for this purpose and the effect of
asset segregation on a NASL Portfolio's ability to meet its current obligations,
to honor requests for redemption and to have its investment portfolio managed
properly will limit the extent to which the NASL Portfolio may purchase
when-issued or forward delivery securities. Except as may be imposed by these
factors, there is no limit on the percent of a NASL Portfolio's total assets
that may be committed to such transactions.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Each of the NASL Portfolios, like the corresponding Manulife
Portfolios, may enter into repurchase agreements. Repurchase agreements involve
the acquisition by a NASL Portfolio of debt securities subject to an agreement
to resell them at an agreed-upon price. Under a repurchase agreement, at the
time a NASL Portfolio acquires a security, it agrees to resell it to the
original seller (a financial institution or broker/dealer which meets the
guidelines established by the NASL Board) and must deliver the security (and/or
securities that may be added to or substituted for it under the repurchase
agreement) to the original seller on an agreed-upon date in the future. The
repurchase price is in excess of the purchase price. The arrangement is in
economic effect a loan collateralized by securities.
The NASL Board has adopted procedures that establish certain
creditworthiness, asset and collateralization requirements for the
counterparties to a NASL Portfolio's repurchase agreements. The NASL Board will
regularly monitor the use of repurchase agreements and the NASL subadvisers
will, pursuant to procedures adopted by the NASL Board, continuously monitor the
amount of collateral held with respect to a repurchase transaction so that it
equals or exceeds the amount of the obligation.
A NASL Portfolio's risk in a repurchase transaction is limited to the
ability of the seller to pay the agreed-upon sum on the delivery date. In the
event of bankruptcy or other default by the seller, there may be possible delays
and expenses in liquidating the instrument purchased, decline in its value and
loss of interest. Securities subject to repurchase agreements will be valued
every business day and additional collateral will be requested if necessary so
that the value of the collateral is at least equal to the value of the
repurchase obligation, including the interest accrued thereon.
Each of the NASL Portfolios, unlike the corresponding Manulife
Portfolios, may enter into "reverse" repurchase agreements. Under a reverse
repurchase agreement, a NASL Portfolio may sell a debt security and agree to
repurchase it at an agreed upon time and at an agreed upon price. The NASL
Portfolio retains record ownership of the security and the right to receive
interest and principal payments thereon. At an agreed upon future date, the NASL
Portfolio repurchases the security by remitting the proceeds previously
received, plus interest. The difference between the amount the NASL Portfolio
receives for the security and the amount it pays on repurchase is deemed to be
payment of interest. The NASL Portfolio will maintain in a segregated custodial
account cash, Treasury bills or other U.S. Government securities having an
aggregate value equal to the amount of such commitment to repurchase including
accrued interest, until payment is made. In certain types of
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agreements, there is no agreed-upon repurchase date and interest payments are
calculated daily, often based on the prevailing overnight repurchase rate. While
a reverse repurchase agreement may be considered a form of leveraging and may,
therefore, increase fluctuations in a NASL Portfolio's net asset value per
share, each NASL Portfolio will cover the transaction as described above.
MORTGAGE DOLLAR ROLLS
Each of the NASL Portfolios (except the NASL Money Market Trust),
unlike the corresponding Manulife Portfolios, may enter into mortgage dollar
rolls. Under a mortgage dollar roll, a NASL Portfolio sells mortgage-backed
securities for delivery in the future (generally within 30 days) and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
NASL Portfolio forgoes principal and interest paid on the mortgage-backed
securities. A NASL Portfolio is compensated by the difference between the
current sale price and the lower forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. A NASL Portfolio may also be compensated by
receipt of a commitment fee. A portfolio may only enter into covered rolls. A
"covered roll" is a specific type of dollar roll for which there is an
offsetting cash or cash equivalent security position which matures on or before
the forward settlement date of the dollar roll transaction. Dollar roll
transactions involve the risk that the market value of the securities sold by
the portfolio may decline below the repurchase price of those securities. While
a mortgage dollar roll may be considered a form of leveraging, and may,
therefore, increase fluctuations in a NASL Portfolio's net asset value per
share, each NASL Portfolio will cover the transaction as described above.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
Individual NASL Portfolios may be authorized to use a variety of
investment strategies described below for hedging purposes only, including
hedging various market risks (such as interest rates, currency exchange rates
and broad or specific market movements) and managing the effective maturity or
duration of debt instruments held by the NASL Portfolio. The description in this
Prospectus/Proxy Statement of each NASL Portfolio indicates which, if any, of
these types of transactions may be used by such NASL Portfolio, and the
discussion of differences from the corresponding Manulife Portfolio following
each such description indicates if there are differences regarding the use of
these types of transactions. Although these strategies are regularly used by
some investment companies and other institutional investors, it is not presently
anticipated that any of these strategies will be used to a significant degree by
any NASL Portfolio unless otherwise specifically indicated in the description of
the NASL Portfolio contained in this Prospectus/Proxy Statement. Limitations on
the portion of a NASL Portfolio's assets that may be used in connection with the
investment strategies described below are set out in the Statement of Additional
Information.
Subject to the constraints described above, an individual NASL
Portfolio may (if and to the extent so authorized) purchase and sell (or write)
exchange-listed and over-the-counter put and call options on securities,
financial futures contracts and fixed income indices and other financial
instruments, enter into financial futures contracts, enter into interest rate
transactions, and enter into currency transactions (collectively, these
transactions are referred to in this Prospectus/Proxy Statement as "Hedging and
Other Strategic Transactions"). A NASL Portfolio's interest rate transactions
may take the form of swaps, caps, floors and collars, and a NASL Portfolio's
currency transactions may take the form of currency forward contracts, currency
futures contracts, currency swaps and options on currencies or currency futures
contracts.
Hedging and Other Strategic Transactions may be used to attempt to
protect against possible changes in the market value of securities held or to be
purchased by a NASL Portfolio resulting from securities markets or currency
exchange rate fluctuations, to protect a NASL Portfolio's unrealized gains in
the value of its securities, to facilitate the sale of those securities for
investment purposes, to manage the effective maturity or duration of a NASL
Portfolio's securities or to establish a position in the derivatives markets as
a temporary substitute for purchasing or selling particular securities. A NASL
Portfolio may use any or all types of Hedging and Other Strategic Transactions
which it is authorized to use at any time; no particular strategy will dictate
the use of one type of transaction rather than another, as use of any authorized
Hedging and Other Strategic Transaction will be a function of numerous
variables, including market conditions. The ability of a NASL Portfolio to
utilize Hedging and Other Strategic Transactions successfully will depend on, in
addition to the factors described above, its subadviser's ability to predict
pertinent market movements, which cannot be assured. These skills are different
from those needed to select a NASL Portfolio's securities. None of the NASL
Portfolios is a "commodity pool" (i.e., a pooled investment vehicle which trades
in commodity futures contracts and options thereon and the operator of which is
registered with the Commodity Futures Trading Commission (the "CFTC")) and
Hedging and Other Strategic Transactions involving futures contracts and options
on futures contracts will be purchased, sold or entered into only for bona fide
hedging, risk management
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or appropriate portfolio management purposes and not for speculative purposes.
The use of certain Hedging and Other Strategic Transactions will require that a
NASL Portfolio segregate cash, liquid high grade debt obligations or other
assets to the extent a NASL Portfolio's obligations are not otherwise "covered"
through ownership of the underlying security, financial instrument or currency.
Risks associated with Hedging and Other Strategic Transactions are described in
"Hedging and Other Strategic Transactions--Risk Factors" in the Statement of
Additional Information. A detailed discussion of various Hedging and Other
Strategic Transactions, including applicable regulations of the CFTC and the
requirement to segregate assets with respect to these transactions, also appears
in the Statement of Additional Information.
ILLIQUID SECURITIES
Each of the NASL Portfolios is precluded as a matter of nonfundamental
policy from investing in excess of 15% of its net assets in securities that are
not readily marketable, except that the NASL Money Market Trust may not invest
in excess of 10% of its net assets in such securities. Excluded from the 10% and
15% limitation are securities that are restricted as to resale but for which a
ready market is available pursuant to exemption provided by Rule 144A adopted
pursuant to the Securities Act of 1933 ("1933 Act") or other exemptions from the
registration requirements of the 1933 Act. Whether securities sold pursuant to
Rule 144A are readily marketable for purposes of NASL's investment restriction
is a determination to be made by the NASL subadvisers subject to the NASL
Board's oversight and for which the NASL Board is ultimately responsible. The
NASL subadvisers will also monitor the liquidity of Rule 144A securities held by
the NASL Portfolios for which they are responsible. To the extent Rule 144A
securities held by a NASL Portfolio should become illiquid because of a lack of
interest on the part of qualified institutional investors, the overall liquidity
of the NASL Portfolio could be adversely affected. In addition, the NASL Money
Market Trust may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the 1933 Act. Section 4(2)
commercial paper is restricted as to its disposition under federal securities
law, and is generally sold to institutional investors, such as NASL, who agree
that they are purchasing the paper for investment purposes and not with a view
to public distribution. Any resale by the purchaser must be made in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the NASL Money Market Trust through or with the
assistance of the issuer or investment dealers who make a market in Section 4(2)
commercial paper, thus providing liquidity. The NASL Money Market Trust's
subadviser believes that Section 4(2) commercial paper meets its criteria for
liquidity and is quite liquid. The NASL Money Market Trust intends, therefore,
to treat Section 4(2) commercial paper as liquid and not subject to the
investment limitation applicable to illiquid securities. The NASL Money Market
Trust's subadviser will monitor the liquidity of 4(2) commercial paper held by
the NASL Money Market Trust, subject to the NASL Board's oversight and for which
the NASL Board is ultimately responsible.
In contrast, each of the Manulife Portfolios other than the Manulife
International Fund and Manulife Pacific Rim Emerging Markets Fund is prohibited
as a matter of nonfundamental policy from knowingly investing in securities or
other investments, including repurchase agreements maturing in more than seven
days, that are subject to legal or contractual restrictions upon resale or are
otherwise not readily marketable. While such restriction does not apply with
respect to the Manulife International Fund and Manulife Pacific Rim Emerging
Markets Fund, such Manulife Portfolios are not authorized to treat Rule 144A
securities or Section 4(2) commercial paper as liquid.
COMPARATIVE INFORMATION ON SHAREHOLDER RIGHTS
NASL is a Massachusetts business trust and is therefore governed by its
declaration of trust ("Declaration of Trust") and By-laws and by Massachusetts
law whereas MSF is a Maryland corporation and is therefore governed by its
articles of incorporation ("Articles"), By-laws and Maryland law. Certain
differences between the two forms of organization and governing corporate
documents are summarized below. Both MSF and NASL are, and following the
Reorganization NASL will continue to be, governed by the 1940 Act.
Shareholder Liability. Under Maryland law, MSF shareholders have no
personal liability for MSF's acts or obligations. Under Massachusetts law,
shareholders of NASL could, under certain circumstances, be held personally
liable for the obligations of NASL. However, the Declaration of Trust disclaims
shareholder liability for acts or obligations of NASL, and requires that notice
of such disclaimer be given in each agreement, obligation, or instrument entered
into or executed by NASL or the Trustees. Moreover, the Declaration of Trust
provides for indemnification out of NASL property for all losses and expenses of
any shareholder held personally liable for the obligations of NASL. Thus, the
risk of a shareholder's incurring financial loss on account of shareholder
liability is considered by NASL to be remote, since it is limited to
circumstances in which the disclaimer is inoperative, inadequate insurance
existed (e.g., fidelity bonding and errors and omissions insurance) and NASL
itself is unable to meet its obligations.
42
<PAGE> 53
Shares. Interests in MSF are represented by transferable shares of
common stock, par value $.01 per share. The Articles authorize MSF to issue
1,000,000,000 shares of common stock. The MSF Board may, without shareholder
approval, increase or decrease the number of authorized shares and divide
authorized but unissued stock into an unlimited number of separate portfolios or
series, and classes thereof. Currently, all the authorized stock of MSF is
divided into nine separate series (corresponding to the nine Manulife
Portfolios, and none of these series is further subdivided into classes). Each
share of a Manulife Portfolio represents an equal proportionate interest in that
Manulife Portfolio's investment portfolio with the other shares of the same
Manulife Portfolio. Each share of a Manulife Portfolio is entitled to dividends
and distributions out of the assets of that Manulife Portfolio, as declared by
the MSF Board in its discretion. Fractional shares have proportionate rights to
full shares. Generally, shares will be voted in the aggregate without reference
to a particular Manulife Portfolio, except if the matter affects only one
portfolio or voting by portfolio is required by law, in which case shares will
be voted separately by portfolio. Maryland law does not require a registered
investment company to hold annual meetings of shareholders in any year in which
the election of directors is not required under the 1940 Act, and it is
anticipated that annual shareholder meetings will be held only when specifically
required by the 1940 Act. There are no conversion or preemptive rights in
connection with shares of MSF.
NASL has an unlimited number of authorized shares of beneficial
interest, par value $.01 per share, which may be divided into series and classes
thereof. The Declaration of Trust authorizes the issuance of shares in different
series, and authorizes the NASL Board, without further shareholder action, to
establish and create additional series and to designate the rights and
preferences of the shareholders of each of the respective series. Each NASL
Portfolio is one series of NASL, and may in the future issue multiple classes of
shares. Currently none of the NASL Portfolios issues multiple classes of shares.
Each share of a series of NASL represents an equal proportionate interest in
that series with each other share of that series. The shares of each series of
NASL participate equally in the earnings, dividends and assets of the particular
series. Fractional shares have proportionate rights to full shares. Expenses of
NASL which are not attributable to a specific series are allocated to all the
series of NASL in a manner believed by management of NASL to be fair and
equitable. Generally, shares of each series will be voted separately, for
example to approve an investment advisory agreement, but shares of all series
vote together, to the extent required by the 1940 Act, including the election or
selection of trustees and independent accountants. Under Massachusetts law, NASL
is not required to hold regular annual meetings of shareholders, but may hold
special meetings from time to time. There are no conversion or preemptive rights
in connection with shares of NASL.
Shareholder Voting Rights. Each Director of MSF holds office, unless
sooner removed, until his successor is elected and qualified. Any Director may
be removed, with or without cause, by the affirmative vote of a majority of the
votes entitled to be cast on the matter at any meeting of the shareholders duly
called at which a quorum is present. A quorum for MSF is a majority of the
shares entitled to be voted on a matter. A vacancy in the MSF Board resulting
from the death, resignation, removal, increase in the number of Directors or any
other cause may be filled by a vote of a majority of the remaining Directors
then in office even though such majority is less than a quorum. However, under
the 1940 Act, no vacancy may be filled by Directors unless immediately
thereafter at least two-thirds of the Directors holding office shall have been
elected to such office by the shareholders. Special meetings of shareholders,
unless otherwise provided by law or the Articles, for any purpose or purposes
may be called by MSF's president or a majority of the MSF Board, and upon the
written request of the shareholders holding at least 25% of the shares of MSF
outstanding and entitled to vote at such meeting. The By-laws of MSF permit
removal of a Director by the holders of a majority of the shares entitled to
vote on the matter.
Under Massachusetts law, NASL is not required to hold annual
shareholder meetings. Under the Declaration of Trust and the 1940 Act, however,
shareholder meetings are required to be called for various purposes, such as
electing or removing Trustees of NASL (although Trustees may be elected to fill
vacancies or be removed by the NASL Board without a vote of shareholders,
subject to certain restrictions in the 1940 Act), changing fundamental
investment policies and approving or disapproving an investment advisory
contract. Any matters submitted to a vote of shareholders is voted by series
unless otherwise required by the 1940 Act or as determined by the NASL Board.
The Declaration of Trust provides that a meeting of shareholders shall be
allowed upon the written request of the holders of at least 25% of the
outstanding shares of NASL, if shareholders of all series are required to vote
in the aggregate, or of any series if shareholders of such series are entitled
to vote by series. The Declaration of Trust provides that 30% of the shares
entitled to be voted on a matter shall constitute a quorum. Therefore, a meeting
of shareholders of NASL could take place even if less than a majority of the
shares were represented at the meeting. Matters under the Declaration of Trust
requiring approval by a majority or greater percentage of the shares entitled to
vote would not be affected by this provision, nor would matters that under the
1940 Act require the vote of a "majority" of the outstanding shares. Under the
Declaration of Trust, each Trustee of NASL serves until the next meeting of
shareholders, if any, called for the purpose of re-electing Trustees or electing
successors to such Trustees and until the election and qualification of his
successor, or until he sooner dies, resigns, becomes incapacitated or is removed
for cause by a vote of shareholders of NASL holding not less than two-thirds of
the shares then outstanding or by a vote of two-thirds
43
<PAGE> 54
of the Trustees then in office. The Declaration of Trust authorizes the NASL
Board to terminate NASL (or any series thereof) by notice to the shareholders
without shareholder approval. In contrast, the dissolution of MSF is subject to
shareholder approval under applicable Maryland law.
Liability of Directors and Trustees. Under Maryland law, Directors and
officers of MSF are not liable to MSF or its stockholders for money damages,
except to the extent that (1) it is proved that such person actually received an
improper benefit, or (2) a judgment or other final adjudication adverse to such
person is entered in a proceeding based on a finding that the person's action,
or failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated. However, a Director or officer of
MSF is only liable to the extent his actions are the result of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office. In the event of any litigation against
the directors of officers of MSF, Maryland law permits MSF to indemnify a
director or officer for certain expenses only if he acted in good faith and
reasonably believed that his conduct was in the best interest of MSF. Maryland
law permits MSF to advance expenses to a director or officer if the facts then
known do not preclude indemnification based on the foregoing standard and on
receipt of an undertaking similar to the undertaking that would be required by
NASL (as described below).
Under the Declaration of Trust, the Trustees of NASL are personally
liable only for willful misfeasance, bad faith or gross negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties as Trustees and not for errors of judgment or mistakes of
fact or law. Under the Declaration of Trust, Trustees and officers will be
indemnified against liabilities and expenses incurred in connection with the
defense or disposition of any proceeding in which they are involved by reason of
their position with NASL, except that they are not indemnified against
liabilities or expenses arising from conduct adjudicated to constitute willful
misfeasance, bad faith, gross negligence or reckless disregard of their duties.
NASL may also advance money for these expenses, provided that the Trustee or
officer undertakes to repay NASL if his conduct is later adjudicated to preclude
indemnification and certain other conditions are met.
The foregoing is only a summary of certain of the major differences
between MSF, its Articles and By-Laws and Maryland law and NASL, its Declaration
of Trust and By-Laws and Massachusetts law. Shareholders may wish to refer
directly to the provisions of MSF's Articles and By-Laws, Maryland law and
NASL's Declaration of Trust and By-Laws and Massachusetts law for a more
thorough comparison.
ADDITIONAL INFORMATION ABOUT NASL
A. EXPENSES
The following expense tables are provided to assist investors in
understanding the various costs and expenses that a shareholder will indirectly
incur as an owner of shares of each of the NASL Portfolios. The table reflects
information for the twelve months ended December 31, 1995 for the NASL Money
Market Trust, restated to reflect the fee arrangements that will be in effect
commencing on the Closing Date as if these arrangements had been in effect
during that period and assuming that the Reorganization had occurred at the
beginning of that period. Because the remaining NASL Portfolios will not
commence operations until the Closing Date, information for those portfolios
reflects estimated annual expenses for the 1997 fiscal year, as noted below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
NASL
PACIFIC NASL NASL
NASL NASL NASL RIM REAL CAPITAL NASL
MONEY INTERNATIONAL EMERGING NASL NASL EMERGING ESTATE GROWTH EQUITY
MARKET STOCK GROWTH BALANCED COMMON STOCK MARKETS SECURITIES BOND INDEX
TRUST TRUST TRUST TRUST TRUST TRUST TRUST TRUST TRUST
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory Fee......... .50% 1.05% 1.05% .80% .70%* .85% .70%* .65%* .25%
Other Expenses**..... .04 .20 .10 .15 .06 .30 .10 .10 .15
TOTAL FUND OPERATING
EXPENSES........... .54% 1.25% 1.15% .95% .76%* 1.15% .80%* .75%* .40%
</TABLE>
- ------------------
* "Total Fund Operating Expenses" do not reflect an agreement by NASL
Financial voluntarily to waive fees payable to it and/or reimburse
expenses for a period of one year following the consummation of the
Reorganization to the extent necessary to prevent "Total Fund
Operating Expenses" for each indicated NASL Portfolio for such period
from exceeding .50% of average net assets. "Advisory Fees" for each
indicated NASL Portfolio do not reflect estimated fee waivers by NASL
Financial pursuant to such agreement; with such waivers reflected,
"Advisory Fees" would
44
<PAGE> 55
be .44%, .40% and .40% for the NASL Common Stock Trust, NASL Real
Estate Securities Trust and NASL Capital Growth Bond Trust,
respectively.
** "Other Expenses" include custody fees, registration fees, legal fees,
audit fees, trustees' fees, insurance fees and other miscellaneous
expenses. The amounts set forth in the table above are expense
estimates for the current fiscal year based upon historical NASL new
portfolio cash inflows, and NASL Financial has agreed pursuant to its
advisory agreement with NASL to reduce its advisory fee or reimburse
NASL to the extent that such expenses (excluding taxes, portfolio
brokerage commissions, interest, litigation and indemnification
expenses and other extraordinary expenses not incurred in the ordinary
course of business) exceed .75% in the case of the NASL International
Stock Trust and NASL Pacific Rim Emerging Markets Trust, .15% in the
case of the NASL Equity Index Trust and .50% in the case of each of the
other NASL Portfolios of the average annual net assets of such NASL
Portfolio. Such expense limitations will continue in effect from year
to year unless otherwise terminated at any year end by NASL Financial
on 30 days' notice to NASL. See "Additional Information About NASL-C.
Management of NASL."
EXAMPLE: A shareholder would pay the following expenses on a $1,000 investment
in the shares of the NASL Portfolio indicated based upon payment by the NASL
Portfolios of operating expenses at the levels set forth in the table above,
assuming (1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
NASL
PACIFIC NASL NASL
NASL NASL NASL RIM REAL CAPITAL NASL
MONEY INTERNATIONAL EMERGING NASL NASL EMERGING ESTATE GROWTH EQUITY
MARKET STOCK GROWTH BALANCED COMMON MARKETS SECURITIES BOND INDEX
TRUST TRUST TRUST TRUST STOCK TRUST TRUST TRUST TRUST TRUST
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year.............. $ 6 $ 13 $ 12 $10 $ 8 $ 12 $ 8 $ 8 $ 4
3 Years............. 17 40 37 30 24 37 26 24 13
5 Years............. 30 69 63 53 42 63 44 42 22
10 Years............ 68 151 140 117 94 140 99 93 51
</TABLE>
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF FUTURE EXPENSES OR ANNUAL RETURN OF SHARES OF A NASL PORTFOLIO; ACTUAL
EXPENSES AND ANNUAL RETURN MAY BE GREATER OR LESS THAN THOSE SHOWN.
B. FINANCIAL HIGHLIGHTS
The following financial highlights for each of the fiscal years
indicated in the period ended December 31, 1995 for the NASL Money Market Trust,
and the related financial statements incorporated by reference into the
Statement of Additional Information, have been audited by Coopers & Lybrand
L.L.P., independent auditors, whose reports expressed an unqualified opinion
thereon.
The following financial highlights for each of the fiscal years
indicated in the period ended December 31, 1995 for the Manulife Common Stock
Fund, Manulife Pacific Rim Emerging Markets Fund, Manulife Real Estate
Securities Fund, Manulife Capital Growth Bond Fund and Manulife Equity Index
Fund, and the related financial statements incorporated by reference into the
Statement of Additional Information, have been audited by Ernst & Young LLP,
independent auditors, whose report expressed an unqualified opinion
thereon.
The following information should be read in conjunction with the
financial statements and notes thereto which are incorporated by reference into
the Statement of Additional Information.
45
<PAGE> 56
<TABLE>
<CAPTION>
NASL MONEY MARKET TRUST
SIX MONTHS --------------------------------------------
ENDED YEARS ENDED DECEMBER 31,
06/30/96 --------------------------------------------
(UNAUDITED) 1995 1994 1993
---------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning
period........................ $10.00 $10.00 $10.00 $10.00
Income from investment
operations:
Net investment income (B).... 0.40 0.55 0.38 0.27
Less distributions:
Dividends from net
investment income.......... (0.40) (0.55) (0.38) (0.27)
------- ------- ------- -------
Net asset value, end of
period..................... $10.00 $10.00 $10.00 $10.00
======= ======= ======= =======
Total return................. 2.47% 5.62% 3.78% 2.69%
Net assets, end of period
(000's).................... $338,435 $258,117 $276,674 $132,274
Ratio of operating expenses
to average net assets (C)... 0.54% (A) 0.54% 0.57% 0.59%
Ratio of net investment
income to average net
assets..................... 4.76% (A) 5.48% 3.93% 2.66%
Average commission rate
per share (D).............. N/A N/A N/A N/A
</TABLE>
<PAGE> 57
<TABLE>
<CAPTION>
6/18/85*
TO
1992 1991 1990 1989 1988 1987 1986 12/31/85
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
period................. $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
Income from investment
operations:
Net investment
income (B)............ 0.33 0.56 0.75 0.72 0.57 0.60 0.56 0.36
Less distributions:
Dividends from net
investment income... (.033) (0.56) (0.75) (0.72) (0.57) (0.60) (0.56) (0.36)
------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end of
period.............. $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
======= ======= ======= ======= ====== ====== ====== ======
Total return.......... 3.36% 5.71% 7.76% 8.56% 6.77% 6.13% 5.74% 3.61%
Net assets, end of period
(000's)............. $89,535 $79,069 $85,040 $19,403 $12,268 $7,147 $1,046 $1,001
Ratio of operating expenses
to average net
assets (C).......... 0.60% 0.60% 0.57% 0.79% 0.99% 0.78% 1.11% 1.21%(A)
Ratio of net investment
income to average net
assets.............. 3.28% 5.65% 7.27% 8.26% 6.68% 5.86% 6.84% 6.84%(A)
Average commission rate
per share (D)....... N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
* Commencement of Operations.
(A) Annualized.
(B) After expense reimbursement per share of $0.08, $0.23 and $0.12 in
1987, 1986 and 1985, respectively.
(C) The ratio of operating expenses, before reimbursement from the
investment adviser, was 1.57%, 3.43% and 3.50% in 1987, 1986 and 1985,
respectively.
(D) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share of all
security trades on which commissions are charged. In certain foreign
markets the relationship between the translated U.S. dollar price per
share and commission paid per share may vary from that of domestic
markets.
-46-
<PAGE> 58
<TABLE>
<CAPTION>
MANULIFE COMMON STOCK FUND
SIX MONTHS
ENDED YEAR YEAR YEAR
JUNE 30/96 ENDED ENDED ENDED
(UNAUDITED) 12/31/95 12/31/94 12/31/93
<S> <C> <C> <C> <C>
Net asset value beginning of period.... $17.27 $13.36 $14.68 $13.73
Income from investment operations:
Net investment income (loss)........... 0.12 0.24 0.20 0.19
Net realized and unrealized gain (loss)
on investments....................... 1.34 3.67 (0.81) 1.64
------ ------ ------ ------
Total from investment operations....... 1.46 3.91 (0.61) 1.83
------ ------ ------ ------
Dividend Distributions:
Net investment income.................. -- -- (0.20) (0.19)
Net realized gain...................... -- -- (0.51) (0.69)
------ ------ ------ ------
Total dividend distributions........... 0.00 -- (0.71) (0.88)
------ ------ ------ ------
Net asset value end of period.......... $18.73 $17.27 $13.36 $14.68
====== ====== ====== ======
Net assets end of period (000's)....... $76,032 $60,996 $34,829 $21,651
Aggregate return on share outstanding
during entire period................. 8.45% 29.23% (4.19)% 13.39%
Significant ratios:
Portfolio turnover..................... 85.74%(A) 109.03% 84.78% 88.23%
Ratio of expenses to average
net assets........................... 0.50%(A) 0.50% 0.50% 0.50%
Ratio of net investment income to
net assets........................... 1.77%(A) 1.76% 1.53% 1.39%
Ratio of net investment income and
realized and unrealized gains
(loss) to average net assets......... 15.76%(A) 25.70% (4.49)% 11.50%
Average commission rate per share(B)... $0.060 N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED 04/03/87 -
12/31/92 12/31/91 12/31/90 12/31/89 12/31/88 12/31/87 *
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of period.. $13.33 $10.48 $11.25 $8.91 $8.36 $9.97
Income from investment operations:
Net investment income (loss)......... 0.18 0.21 0.32 0.36 0.28 0.15
Net realized and unrealized gain (loss)
on investments..................... 0.61 2.94 (0.77) 2.34 0.56 (1.63)
------ ------ ------ ------ ------ ------
Total from investment operations..... 0.79 3.15 (0.45) 2.70 0.84 (1.48)
------ ------ ------ ------ ------ ------
Dividend Distributions:
Net investment income................ (0.18) (0.21) (0.32) (0.36) (0.29) (0.13)
Net realized gain.................... (0.21) (0.09) -- -- -- --
------ ------ ------ ------ ------ ------
Total dividend distributions......... (0.39) (0.30) (0.32) (0.36) (0.29) (0.13)
------ ------ ------ ------ ------ ------
Net asset value end of period........ $13.73 $13.33 $10.48 $11.25 $8.91 $8.36
====== ====== ====== ====== ====== ======
Net assets end of period (000's)..... $9,708 $5,480 $2,873 $2,140 $1,173 $942
Aggregate return on share
outstanding during entire
period............................. 6.07% 30.18% (4.06)% 30.66% 9.86% (14.98)%
Significant ratios:
Portfolio turnover................... 47.60% 53.01% 120.84% 120.92% 172.13% 54.87%
Ratio of expenses to average net
assets............................. 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%(A)
Ratio of net investment income to
net assets......................... 1.51% 1.78% 3.06% 3.48% 3.16% 2.28%(A)
Ratio of net investment income and
realized and unrealized gains (loss)
to average net assets............... 7.94% 25.41% (3.40)% 23.77% 9.13% (24.73)%
Average commission rate per share(B).. N/A N/A N/A N/A N/A N/A
</TABLE>
* Commencement of Operations.
(A) Annualized.
(B) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share of all
security trades on which commissions are charged. In certain foreign
markets, the relationship between the translated U.S. dollar price per
share and commissions paid per share may vary from that of domestic
markets.
-47-
<PAGE> 59
<TABLE>
<CAPTION>
MANULIFE PACIFIC RIM
EMERGING MARKETS FUND
SIX MONTHS
ENDED
JUNE 30/96 YEAR ENDED
(UNAUDITED) 12/31/95 PERIOD 10/04/94*-12/31/94
<S> <C> <C> <C>
Net asset value beginning of period.................. $10.36 $9.41 $10.00
------ ----- ------
Income from investment operations:
Net investment income (loss)......................... 0.06 0.12 0.04
Net realized and unrealized gain (loss) on
investments......................................... 0.66 0.96 (0.59)
------ ----- ------
Total from investment operations..................... 0.72 1.08 (0.55)
------ ----- ------
Dividend Distributions:
Net investment income................................ -- (0.09) (0.04)
Net realized gain.................................... -- (0.04) 0.00
------ ----- ------
0.00 (0.13) (0.04)
------ ----- ------
Net asset value of period............................ $11.08 $10.36 $9.41
====== ====== =====
Net assets end of period (000's)..................... $19,627 $13,057 $7,657
Aggregate return on share outstanding during entire
period............................................. 7.03% 11.47% (5.63%)
Significant ratios:
Portfolio turnover................................... 56.53%(A) 54.85% 0.00%
Ratio of expenses to average net assets.............. 1.50%(A) 1.50% 1.50%(A)
Ratio of net investment income to average net assets. 1.22%(A) 1.01% 1.84%(A)
Ratio of net investment income and realized and
unrealized gain (loss) to average net assets...... 11.14%(A) 11.86% (23.41)% (A)
Average commission rate per share (B)................ $0.021 N/A N/A
</TABLE>
* Commencement of Operations.
(A) Annualized.
(B) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share of all
security trades on which commissions are charged. In certain foreign
markets, the relationship between the translated U.S. dollar price
per share and commissions paid per share may vary from that of
domestic markets.
-48-
<PAGE> 60
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
MANULIFE REAL ESTATE SECURITIES FUND
- ---------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
JUNE 30/96 YEAR ENDED YEAR ENDED YEAR ENDED
(UNAUDITED) 12/31/95 12/31/94 12/31/93
<S> <C> <C> <C> <C>
Net asset value, beginning period.. $15.10 $13.34 $14.07 $12.75
------ ------ ------ ------
Income from investment operations:
Net investment income (loss)....... 0.36 0.67 0.55 0.47
Net realized and unrealized gain
(loss) on investments.............. 0.55 1.35 (0.93) 2.38
------ ------ ------ ------
Total from investment operations... 0.91 2.02 (0.38) 2.85
------ ------ ------ ------
Dividend Distributions:
Net investment income ............. 0.00 (0.26) (0.27) (0.47)
Net realized gain.................. 0.00 -- (0.08) (1.06)
------ ------ ------ ------
Total dividend distributions....... 0.00 (0.26) (0.35) (1.53)
------ ------ ------ ------
Net asset value end of period...... $16.01 $15.10 $13.34 $14.07
====== ====== ====== ======
Net assets end of period (000's)... $56,860 $52,440 $42,571 $24,106
Aggregate return on share
outstanding during entire period.. 6.03% 15.14% (2.76)% 22.61%
Significant ratios:
Portfolio turnover................. 169.22%(A) 136.05% 35.60% 143.00%
Ratio of expenses to average net
assets.......................... 0.50%(A) 0.50% 0.50% 0.50%
Ratio of net investment income to
average net assets.............. 4.88%(A) 5.06% 4.26% 3.93%
Ratio of net investment income and
realized and unrealized gains
(loss) to average net assets.... 11.81%(A) 14.51% (4.48)% 15.23%
Average commission rate per
share (B)....................... $0.060 N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 04/30/87*-
12/31/92 12/31/91 12/31/90 12/31/89 12/31/88 12/31/87
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning period..... $10.92 $8.16 $9.24 $9.12 $8.76 $10.02
------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income (loss).......... 0.45 0.53 0.67 0.68 0.70 0.48
Net realized and unrealized gain
(loss) on investments................. 1.83 2.76 (1.09) 0.15 0.37 (1.30)
------ ------ ------ ------ ------ ------
Total from investment operations...... 2.28 3.29 (0.42) 0.83 1.07 (0.82)
------ ------ ------ ------ ------ ------
Dividend Distributions:
Net investment income ................ (0.45) (0.53) (0.66) (0.71) (0.71) (0.44)
Net realized gain..................... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total dividend distributions.......... (0.45) (0.53) (0.66) (0.71) (0.71) (0.44)
------ ------ ------ ------ ------ ------
Net asset value end of period......... $12.75 $10.92 $8.16 $9.24 $9.12 $8.76
====== ====== ====== ====== ====== ======
Net assets end of period (000's....... $7,273 $4,120 $2,771 $2,875 $2,488 $2,007
Aggregate return on share
outstanding during entire period.... 21.29% 41.10% (4.53)% 9.23% 11.72% (8.42)%
Significant ratios:
Portfolio turnover.................... 70.71% 40.29% 24.37% 15.09% 23.15% 10.27%
Ratio of expenses to average net
assets............................. 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%(A)
Ratio of net investment income to
average net assets................. 4.13% 5.40% 7.74% 7.29% 7.18% 7.34%(A)
Ratio of net investment income and
realized and unrealized gains
(loss) to average net assets....... 20.29% 33.48% (4.73)% 8.53% 10.52% (13.19)%(A)
Average commission rate per
share (B).......................... N/A N/A N/A N/A N/A N/A
</TABLE>
* Commencement of Operations.
(A) Annualized.
(B) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share of all
security trades on which commissions are charged. In certain foreign
markets, the relationship between the translated U.S. dollar price per
share and commissions paid per share may vary from that of domestic
markets.
-49-
<PAGE> 61
MANULIFE CAPITAL GROWTH BOND FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR
JUNE 30/96 ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
(UNAUDITED) 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value beginning of
period......................... $ 11.30 $ 10.10 $ 11.33 $ 11.12 $ 11.47 $ 10.62 $ 10.82 $ 10.32
------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment income (loss).... 0.35 0.72 0.72 0.65 0.77 0.83 0.88 0.90
Net realized and unrealized
gain (loss) on investments..... (0.61) 1.32 (1.22) 0.51 (0.11) 0.85 (0.21) 0.50
------- ------- ------- ------- ------- ------- ------- -------
Total from investment operations (0.26) 2.04 (0.50) 1.16 0.66 1.68 0.67 1.40
------- ------- ------- ------- ------- ------- ------- -------
Dividend Distributions:
Net investment income .......... -- 0.72 (0.72) (0.65) (0.78) (0.83) (0.87) (0.90)
Net realized gain............... -- 0.12 (0.01) (0.30) (0.23) -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total dividend distributions.... 0.00 (0.84) (0.73) (0.95) (1.01) (0.83) (0.87) (0.90)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value end of period... $ 11.04 $ 11.30 $ 10.10 $ 11.33 $ 11.12 $ 11.47 $ 10.62 $ 10.82
======= ======= ======= ======= ======= ======= ======= =======
Net assets value end of period
(000's)........................ $41,329 $42,694 $33,618 $41,183 $30,695 $29,326 $24,818 $22,768
Aggregate return on share
outstanding during entire period (2.29)% 20.24% (4.49)% 10.56% 5.89% 16.38% 6.58% 13.88%
Significant ratios:
Portfolio turnover.............. 100.85%(A) 84.74% 79.04% 94.75% 153.05% 19.60% 40.73% 68.61%
Ratio of expenses to average
net assets.................... 0.50%(A) 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of net investment
income to average net assets.. 6.14%(A) 6.36% 6.29% 5.69% 6.76% 7.54% 8.25% 8.34%
Ratio of net investment
income and realized and
unrealized gains (loss) to
average net assets............ (4.71)%(A) 18.11% (5.23)% 9.28% 5.78% 15.35% 6.51% 12.83%
Average commission rate per
share (B)..................... N/A N/A N/A N/A N/A N/A N/A N/A
<CAPTION>
- -------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/88 12/31/87 12/31/86 12/31/85
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value beginning of
period......................... $ 10.53 $ 13.09 $ 12.62 $ 11.53
------- ------- ------- -------
Income from investment
operations:
Net investment income (loss).... 0.92 0.99 1.04 1.15
Net realized and unrealized
gain (loss) on investments..... (0.17) (1.12) 1.46 1.48
------- ------- ------- -------
Total from investment
operations..................... 0.75 (0.13) 2.50 2.63
------- ------- ------- -------
Dividend Distributions:
Net investment income .......... (0.93) (1.20) (1.03) (1.53)
Net realized gain............... (0.03) (1.23) (1.00) (0.01)
------- ------- ------- -------
Total dividend distributions.... (0.96) (2.43) (2.03) (1.54)
------- ------- ------- -------
Net asset value end of period... $ 10.32 $ 10.53 $ 13.09 $ 12.62
======= ======= ======= =======
Net assets value end of period
(000's)........................ $19,722 $18,095 $17,674 $14,481
Aggregate return on share
outstanding during entire period 7.14% (1.69)% 22.37% 26.13%
Significant ratios:
Portfolio turnover.............. 29.36% 55.80% 42.57% 286.36%
Ratio of expenses to average
net assets.................... 0.50% 0.50% 0.20% 0.20%
Ratio of net investment
income to average net assets.. 8.48% 8.13% 8.10% 9.96%
Ratio of net investment
income and realized and
unrealized gains (loss) to
average net assets............ 6.88% (1.68)% 19.72% 23.91%
Average commission rate per
share (B)..................... N/A N/A N/A N/A
</TABLE>
(A) Annualized.
(B) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share of all security
trades on which commissions are charged. In certain foreign markets, the
relationship between the translated U.S. dollar price per share and
commissions paid per share may vary from that of domestic markets.
-50-
<PAGE> 62
MANULIFE EQUITY INDEX FUND
<TABLE>
<CAPTION>
PERIOD 2/14/96*-6/30/96
(UNAUDITED)
-----------------------
<S> <C>
Net asset value beginning of period......................... $10.00
------
Income from investment operations:
Net investment income (loss)................................ 0.09
Net realized and unrealized gain (loss) on investments...... 0.28
------
Total from investment operations............................ 0.37
------
Dividend Distributions:
Net investment income....................................... --
Net realized gain........................................... --
Total dividend distributions................................ (0.00)
------
Net asset value of period................................... $10.37
======
Net assets end of period (000's)............................ $2,493
Aggregate return on share outstanding during entire period.. 3.71%
Significant ratios:
Portfolio turnover.......................................... 0.00%
Ratio of expenses to average net assets..................... 0.40% (A)
Ratio of net investment income to average net assets........ 3.75% (A)
Ratio of net investment income and realized and unrealized gain
(loss) to average net assets......................................... 7.79% (A)
Average commission rate per share (B).................................. $0.040
</TABLE>
* Commencement of Operations.
(A) Annualized.
(B) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share of all security
trades on which commissions are charged in certain foreign markets, the
relationship between the translated U.S. dollar price per share and
commissions paid per share may vary from that of domestic markets.
-51-
<PAGE> 63
C. MANAGEMENT OF NASL
Under Massachusetts law and NASL's Declaration of Trust and By-Laws,
the management of the business and affairs of NASL is the responsibility of the
NASL Board. NASL was originally organized on August 3, 1984 as "NASL Series
Fund, Inc.", a Maryland corporation. Pursuant to an Agreement and Plan of
Reorganization and Liquidation approved at a Special Meeting of Shareholders
held on December 2, 1988, NASL Series Fund, Inc. was reorganized as a
Massachusetts business trust established pursuant to an Agreement and
Declaration of Trust dated September 29, 1988. The reorganization became
effective on December 31, 1988. At that time, the assets and liabilities of each
of the NASL Series Fund, Inc.'s separate investment portfolios were assumed by
the corresponding portfolios of NASL and NASL carried on the business and
operations of NASL Series Fund, Inc. with the same investment management
arrangements as were in effect for NASL Series Fund, Inc. immediately prior to
such reorganization.
ADVISORY ARRANGEMENTS
NASL Financial, a Massachusetts corporation whose principal offices are
located at 116 Huntington Avenue, Boston, Massachusetts 02116, is a wholly owned
subsidiary of Security Life, the ultimate parent of which is Manulife. NASL
Financial is registered as an investment adviser under the 1940 Act and as a
broker-dealer under the Securities Exchange Act of 1934, and it is a member of
the NASD. In addition, NASL Financial serves as principal underwriter of certain
contracts issued by Security Life and as investment adviser to one other
investment company, North American Funds.
Under the terms of the Advisory Agreement (as defined below), NASL
Financial administers the business and affairs of NASL. NASL Financial is
responsible for performing or paying for various administrative services for
NASL, including providing at NASL Financial's expense, (i) office space and all
necessary office facilities and equipment, (ii) necessary executive and other
personnel for managing the affairs of NASL and for performing certain clerical,
accounting and other office functions, and (iii) all other information and
services, other than services of counsel, independent accountants or investment
subadvisory services provided by any subadviser under a subadvisory agreement,
required in connection with the preparation of all tax returns and documents
required to comply with the federal securities laws. NASL Financial pays the
cost of (i) any advertising or sales literature relating solely to NASL, (ii)
the cost of printing and mailing prospectuses to persons other than current
holders of NASL shares or of variable contracts funded by NASL shares and (iii)
the compensation of NASL's officers and Trustees that are officers, directors or
employees of NASL Financial or its affiliates. In addition, advisory fees are
reduced or NASL Financial reimburses NASL if the total of all expenses
(excluding advisory fees, taxes, portfolio brokerage commissions, interest,
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of NASL's business) applicable to a NASL
Portfolio exceeds an annual rate of .75% in the case of the NASL International
Stock Trust and NASL Pacific Rim Emerging Markets Trust, .15% in the case of the
NASL Equity Index Trust or .50% in the case of all other NASL Portfolios of the
average annual net assets of such NASL Portfolio. The expense limitations will
continue in effect from year to year unless otherwise terminated at any year end
by NASL Financial on 30 days' notice to NASL. For the prior fiscal year, NASL
Financial did not reimburse NASL for any expenses since expenses were below the
expense limitations. However, if expenses were to increase above the expense
limits and the reimbursements were terminated, NASL expenses would increase.
In addition to providing the services and expense limitations described
above, NASL Financial selects, contracts with and compensates subadvisers to
manage the investment and reinvestment of the assets of the NASL Portfolios.
NASL Financial monitors the compliance of such subadvisers with the investment
objectives and related policies of each NASL Portfolio and reviews the
performance of such subadvisers and reports periodically on such performance to
the NASL Board. Agreements with NASL's subadvisers have heretofore been approved
by the vote of a majority of the then outstanding shares of the portfolios of
NASL to be managed by the subadviser. NASL has filed an application with the
Commission seeking exemptive relief to permit the appointment of a subadviser
pursuant to an agreement that is not approved by shareholders, and has submitted
to shareholders of record of the portfolios of NASL as of October 23, 1996 a
proposal to authorize NASL to make such subadviser appointments in the future
(the "manager of managers" proposal). If such exemptive relief is granted and
such shareholder approval is obtained, NASL would be able to change subadvisers
from time to time without the expense and delays associated with obtaining
shareholder approval of the new subadviser. There is no assurance that the
requested relief will be granted or shareholder approval obtained.
As compensation for its services, NASL Financial receives a fee from
NASL computed separately for each NASL Portfolio. The fee for each NASL
Portfolio is stated as an annual percentage of the current value of the net
assets of the
-52-
<PAGE> 64
NASL Portfolio. The fee, which is accrued daily and payable monthly, is
calculated for each day by multiplying the daily equivalent of the annual
percentage prescribed for a NASL Portfolio by the value of the net assets of the
NASL Portfolio at the close of business on the previous business day of NASL.
The following is a schedule of the management fees each NASL Portfolio is
contractually obligated to pay NASL Financial:
<TABLE>
<CAPTION>
NASL PORTFOLIO
- --------------------------------------------------------------------------------
<S> <C>
Money Market Trust...................................................... .50%
International Stock Trust............................................... 1.05%
Emerging Growth Trust................................................... 1.05%
Balanced Trust.......................................................... .80%
Common Stock Trust...................................................... .70%
Pacific Rim Emerging Markets Trust...................................... .85%
Real Estate Securities Trust............................................ .70%
Capital Growth Bond Trust............................................... .65%
Equity Index Trust...................................................... .25%
</TABLE>
- ------------------
The fees shown above for the NASL Pacific Rim Emerging Markets Trust, NASL
Emerging Growth Trust and NASL Balanced Trust are higher than those paid by most
funds to their advisers, but are not higher than the fees paid by many funds
with similar investment objectives and policies.
For the year ended December 31, 1995 the aggregate investment advisory
fees paid by NASL was $33,808,255. Of that amount, $1,318,573 was paid with
respect to the NASL Money Market Trust, with the balance paid with respect to
the other portfolios of NASL that were in existence during the year ended
December 31, 1995.
SUBADVISORY ARRANGEMENTS
MAC
Each of the subadvisers to the NASL Portfolios is registered as an
investment adviser under the Investment Advisers Act of 1940.
Investment decisions for the NASL Money Market Trust are made, and
following consummation of the Reorganization investment decisions for the NASL
Common Stock Trust, NASL Pacific Rim Emerging Markets Trust, NASL Real Estate
Securities Trust, NASL Capital Growth Bond Trust and NASL Equity Index Trust
will be made, by their subadviser, MAC, the current investment manager of MSF.
MAC's service as subadviser to the NASL Money Market Trust commenced on October
1, 1996, and has been submitted for shareholder ratification prior to
consummation of the Reorganization. As noted above, MAC's service as subadviser
to the NASL Money Market Trust has been submitted for ratification by the
shareholders of such NASL Portfolio prior to consummation of the Reorganization.
The 1940 Act and regulations thereunder require that shareholder ratification of
MAC's service as subadviser to the NASL Money Market Trust be obtained within
120 days of the commencement of such service if such service is to continue
thereafter. The proposal for such ratification had been submitted to the
shareholders of record of the NASL Money Market Trust as of October 23, 1996. In
the event that the shareholders of the NASL Money Market Trust fail to ratify
MAC's service as subadviser, the NASL Board will consider an appropriate course
of action with respect to the day-to-day management of such NASL Portfolio. MAC
is a Colorado corporation whose principal business at the present time is to
provide investment management services to MSF and NASL and comparable portfolios
of North American Funds.
MAC is an indirect wholly-owned subsidiary of Manulife. The address of
MAC is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5.
Management of the above NASL Portfolios will be provided by a team of
investment professionals each of whom will play an important role in the
management process of each NASL Portfolio. Team members will work together to
develop investment strategies and select securities for a NASL Portfolio. They
will be supported by research analysts, traders and other investment specialists
who will work alongside the investment professionals in an effort to utilize all
available resources to benefit the shareholders.
-53-
<PAGE> 65
The persons with primary responsibility for the day to day management
of the NASL Real Estate Securities Trust will be Mark Schmeer and Leslie Grober.
Mr. Schmeer joined MAC in 1995. He is an investment manager of U.S. Equities at
Manulife. Prior to 1995 he was a Vice President of Sun Life Investment
Management, where he served from 1993 to 1995. Mr. Schmeer was a manager of U.S.
Investments for Ontario Hydro Corporation from 1986 to 1993. Ms. Grober also
joined MAC in 1995. She has been an investment manager of U.S. Equities at
Manulife since 1994. Ms. Grober was an investment representative of
Toronto-Dominion Bank from 1991 to 1993. Prior to that she was employed by the
Bank of Montreal.
The persons with primary responsibility for the day to day management
of the NASL Common Stock Trust will be Mark Schmeer and Rhonda Chang. Ms. Chang
joined MAC in 1995. She has been an investment manager at Manulife since 1994.
From 1990 to 1994, Ms. Chang was an investment analyst with American
International Group.
Catherine Addison will have primary responsibility for the day to day
management of the NASL Capital Growth Bond Trust. She has had such
responsibility for the predecessor portfolio of Manulife Series Fund, Inc.,
since 1988. She has been an investment manager of U.S. Fixed Income at Manulife
since 1985.
The persons with primary responsibility for the day to day management
of the NASL Pacific Rim Emerging Markets Trust will be Steven Hill, Richard
James Crook and Emilia Panadero Perez. Mr. Hill joined MAC in 1995. He is also
an investment manager at Manulife. Prior to 1995, Mr. Hill was a director of
INVESCO Asset Management, where he served in 1993 and 1994. Mr. Hill was a
director of Yasuda Trust Europe from 1989 to 1992. Richard James Crook joined
MAC in 1994. He has been an investment manager of Manulife since 1975. Amelia
Panadero Perez joined MAC in 1995. She has been an investment manager at
Manulife since 1989.
PRICE-FLEMING
Following consummation of the Reorganization investment decisions for
the NASL International Stock Trust will be made by its subadviser,
Price-Fleming. Price-Fleming's U.S. office is located at 100 East Pratt Street,
Baltimore, Maryland 21202. Price-Fleming has offices in Baltimore, London,
Tokyo, and Hong Kong. Price-Fleming was incorporated in Maryland in 1979 as a
joint venture between T. Rowe Price and Robert Fleming Holdings Limited
(Flemings).
T. Rowe Price, Flemings, and Jardine Fleming are owners of
Price-Fleming. The common stock of Price-Fleming is 50% owned by a wholly owned
subsidiary of T. Rowe Price, 25% by a subsidiary of Flemings, and 25% by Jardine
Fleming Group Limited (Jardine Fleming). (Half of Jardine Fleming is owned by
Flemings and half by Jardine Matheson Holdings Limited). T. Rowe Price has the
right to elect a majority of the Board of Directors of Price-Fleming, and
Flemings has the right to elect the remaining directors, one of whom will be
nominated by Jardine Fleming.
An investment advisory group will have day to day responsibility for
managing the portfolio and developing and executing its investment program. The
members of the advisory group will be as follows: Martin G. Wade, Christopher D.
Alderson, Peter B. Askew, Richard J. Bruce, Mark J.T. Edwards, John R. Ford,
Robert C. Howe, James B.M. Seddon, Benedict R.F. Thomas, and David J.L. Warren.
Martin Wade joined Price-Fleming in 1979 and has 26 years of experience
with the Fleming Group in research, client service, and investment management.
(Fleming Group included Robert Fleming and/or Jardine Fleming.) Christopher
Alderson joined Price-Fleming in 1988 and has nine years of experience with the
Fleming Group in research and portfolio management. Peter Askew joined
Price-Fleming in 1988 and has 20 years of experience managing multi-currency
fixed income portfolios. Richard Bruce joined Price-Fleming in 1991 and has
seven years of experience in investment management with the Fleming Group in
Tokyo. Mark Edwards joined Price-Fleming in 1986 and has 14 years of experience
in financial analysis. John Ford joined Price-Fleming in 1982 and has 15 years
of experience with the Fleming Group in research and portfolio management.
Robert Howe joined Price-Fleming in 1986 and has 14 years of experience in
economic research, company research, and portfolio management. James Seddon
joined Price-Fleming in 1987 and has 10 years of experience in portfolio
management. Benedict Thomas joined Price-Fleming in 1988 and has six years of
portfolio management experience. David Warren joined Price-Fleming in 1984 and
has 15 years of experience in equity research, fixed income research, and
portfolio management.
WARBURG PINCUS
Investment decisions for the NASL Emerging Growth Trust will be made by
its subadviser, Warburg Pincus. Warburg Pincus is a professional investment
counselling firm which provides investment services to investment companies,
employee benefit plans, endowment funds, foundations and other institutions and
individuals. Incorporated in 1970, Warburg Pincus is a wholly owned subsidiary
of Warburg, Pincus Counsellors G.P.
-54-
<PAGE> 66
("Warburg G.P."), a New York general partnership. E.M. Warburg, Pincus & Co.,
Inc. ("EMW") controls Warburg Pincus through its ownership of a class of voting
preferred stock of Warburg Pincus. Warburg G.P. has no business other than being
a holding company of Warburg Pincus and its subsidiaries. Warburg Pincus'
address of 466 Lexington Avenue, New York, New York 10017-3147.
The co-portfolio managers of the NASL Emerging Growth Trust are
Elizabeth B. Dater and Stephen J. Lurito. Ms. Dater has been portfolio manager
of the Warburg Pincus Emerging Growth Fund since its inception on January 21,
1988. She is a managing director of EMW and has been a portfolio manager of
Warburg Pincus since 1978. Mr. Lurito has been a portfolio manager of the NASL
Emerging Growth Trust since 1990. He is a managing director of EMW and has been
with Warburg Pincus since 1987.
FOUNDERS
Investment decisions for the NASL Balanced Trust are made by its
subadviser, Founders, located at 2930 East Third Avenue, Denver, Colorado 80206,
a registered investment adviser first established as an asset manager in 1938.
Bjorn K. Borgen, Chairman, Chief Executive Officer and Chief Investment Officer
of Founders, owns 100% of the voting stock of Founders. Founders also is
subadviser to the NASL Growth Trust, NASL International Small Cap Trust, and
NASL Worldwide Growth Trust.
Founders is a "growth-style" manager of equity portfolios and gives
priority to the selection of individual securities that have the potential to
provide superior results over time, despite short-term volatility. Under normal
circumstances, Founders' approach to investment management gives greater
emphasis to the fundamental financial, marketing and operating strengths of the
companies whose securities it buys, and is less concerned with the short-term
impact of changes in macroeconomic and market conditions. Founders focuses on
purchasing the stocks of companies with strong management and market positions
that have earnings prospects that are significantly above the average for their
market sectors.
To facilitate the day-to-day investment management of the NASL Balanced
Trust, Founders will employ a unique team-and-lead-manager system. The
management team will be composed of several members of the Investment
Department, including Founders' Chief Investment Officer, lead portfolio
managers, assistant portfolio managers, portfolio traders and research analysts.
Team members will share responsibility for providing ideas, information,
knowledge and expertise in the management of the portfolios. Each team member
has one or more areas of expertise that will be applied to the management of the
NASL Balanced Trust. Daily decisions on portfolio selection for the NASL
Balanced Test will rest with a lead portfolio manager assigned to the NASL
Balanced Trust.
Brian F. Kelly, Portfolio Manager, will be the lead portfolio manager
for the Balanced Trust. Mr. Kelly joined Founders in 1996. Prior to joining
Founders, Mr. Kelly served as portfolio manager for Invesco Trust Company
(1993-1996) and as a senior investment analyst for Sears Investment Management
Company (1986-1993). A graduate of the University of Notre Dame, Mr. Kelly
received his MBA and JD from the University of Iowa. He is also a Certified
Public Accountant.
Under the terms of each of the Subadvisory Agreements (as defined
below), the subadviser manages the investment and reinvestment of the assets of
the assigned NASL Portfolios, subject to the supervision of the NASL Board. The
subadviser formulates a continuous investment program for each such NASL
Portfolio consistent with its investment objectives and policies outlined in
this Prospectus/Proxy Statement. Each subadviser implements such programs by
purchases and sales of securities and regularly reports to NASL Financial and
the NASL Board with respect to the implementation of such programs.
As compensation for their services, the subadvisers receive fees from
NASL Financial computed separately for each NASL Portfolio. The fee for each
NASL Portfolio is stated as an annual percentage of the current value of the net
assets of such NASL Portfolio. The fees are calculated on the basis of the
average of all valuations of net assets of each NASL Portfolio made at the close
of business on each business day of NASL during the period for which such fees
are paid. Once the average net assets of a NASL Portfolio exceed specified
amounts, the fee is reduced with respect to such excess. The following is a
schedule of the management fees NASL Financial currently is obligated to pay the
subadvisers out of the advisory fee it receives from each NASL Portfolio as
specified above:
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<PAGE> 67
<TABLE>
<CAPTION>
BETWEEN BETWEEN
$50,000,000 $200,000,000
FIRST AND AND EXCESS OVER
NASL PORTFOLIO $50,000,000 $200,000,000 $500,000,000 $500,000,000
- -------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Money Market Trust................................ .075% .075% .075% .020%
International Stock Trust......................... .750%* .500% .500% .450%
Emerging Growth Trust............................. .550% .550% .550% .550%
Balanced Trust.................................... .375% .325% .275% .225%
Common Stock Trust................................ .275% .225% .175% .150%
Pacific Rim Emerging Markets Trust................ .400% .350% .275% .225%
Real Estate Securities Trust...................... .275% .225% .175% .150%
Capital Growth Bond Trust......................... .225% .225% .150% .100%
Equity Index Trust................................ .100% .100% .100% .100%
</TABLE>
- ------------------
* With respect to this NASL Portfolio, the applicable subadvisory fee is
.75% on the first $20,000,000 and .60% between $20,000,000 and
$50,000,000.
For the year ended December 31, 1995, NASL Financial paid aggregate
subadvisory fees of $12,007,940. Of that amount, $197,786 was paid with respect
to the NASL Money Market Trust (such amount was paid to such NASL Portfolio's
previous subadviser), with the balance paid with respect to the other portfolios
of NASL that were in existence during the year ended December 31, 1995.
Above are brief summaries of the advisory agreement with NASL Financial
("Advisory Agreement") and the subadvisory agreements with the subadvisers
("Subadvisory Agreements"). A more comprehensive statement of the terms of such
agreements appears in the Statement of Additional Information under the caption
"Investment Management Arrangements".
All or a portion of NASL brokerage commissions may be paid to
affiliates of Price-Fleming.
EXPENSES
Subject to the expense limitations discussed above, NASL is responsible
for the payment of all expenses of its organization, operations and business,
except for those expenses NASL Financial or the NASL subadvisers have agreed to
pay pursuant to the Advisory or Subadvisory Agreements. Among the expenses to be
borne by NASL are charges and expenses of the custodian, independent accountants
and transfer, bookkeeping and dividend disbursing agents appointed by NASL,
brokers' commissions and issue and transfer taxes on securities transactions to
which NASL is a party, taxes payable by NASL, and legal fees and expenses in
connection with the affairs of NASL, including registering and qualifying its
shares with regulatory authorities and in connection with any litigation.
For the year ended December 31, 1995, the expenses, including NASL
Financial's fee but excluding portfolio brokerage commissions, expressed as a
percentage of average net assets, was .54% for the NASL Money Market Trust.
For the year ended December 31, 1995, the expenses, excluding NASL
Financial's fee and portfolio brokerage commissions, expressed as a percentage
of average net assets, .04% for the NASL Money Market Trust.
Each of the NASL Portfolios anticipates that its annual portfolio
turnover rate will exceed 100%. A high portfolio turnover rate
generally involves correspondingly greater brokerage commission expenses, which
must be borne directly by the NASL Portfolio. The portfolio turnover rate of
each of the NASL Portfolios may vary from year to year, as well as within a
year. See "Portfolio Turnover" in the Statement of Additional Information.
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<PAGE> 68
PERFORMANCE DATA
From time to time NASL may publish advertisements containing
performance data relating to the NASL Portfolios. Performance data will consist
of total return quotations which will always include quotations for recent
one-year and, when applicable, five-year and ten-year periods and where less
than five or ten years, for the period since the date the NASL Portfolio
(including, in the case of the NASL Money Market Trust, its predecessor prior to
the reorganization of NASL on December 31, 1988) became available for
investment. In the case of the NASL Pacific Rim Emerging Markets Trust, NASL
Real Estate Securities Trust, NASL Common Stock Trust, NASL Capital Growth Bond
Trust and NASL Equity Index Trust, such quotations will be for periods that
include the performance of the corresponding Manulife Portfolios. Such
quotations for such periods will be the average annual rates of return required
for an initial investment of $1,000 to equal the market value of such investment
on the last day of the period, after reflection of all NASL charges and expenses
and assuming reinvestment of all dividends and distributions. Performance
figures used by NASL are based on the actual historical performance of its
portfolios for specified periods, and the figures are not intended to indicate
future performance. Moreover, NASL's performance figures are not comparable to
those for public mutual funds. Trust shares are only available as the underlying
investment medium for contracts which provide for certain charges, as described
in the prospectus offering such contracts. The impact of such charges is not
reflected in NASL's performance figures. More detailed information on the
computations is set forth in the Statement of Additional Information. NASL's
annual report, which is available without charge upon request, contains further
discussions of NASL Portfolio performance.
NASL may also from time to time advertise the performance of certain
NASL Portfolios relative to that of unmanaged indices, including but not limited
to the Dow Jones Industrial Average, the Lehman Brothers Bond, Government
Corporate, Corporate and Aggregate Indices, the Standard and Poor's 500, the
Value Line Composite and the Morgan Stanley Capital International Europe,
Australia and Far East ("EAFE") and World Indices. NASL may also advertise the
performance rankings assigned certain portfolios or their investment subadvisers
by various statistical services, including but not limited to SEI, Lipper
Analytical Services, Inc.'s Mutual Fund Performance Analysis and Variable
Insurance Products Performance Analysis, Variable Annuity Research and Data
Service, Interesec Research Survey of Non-U.S. Equity Fund Returns and Frank
Russell International Universe, and any other data which may be presented from
time to time by such analysts as Dow Jones, Morning Star, Chase International
Performance, Wilson Associates, Stranger, CDA Investment Technology, the
Consumer Price Index ("CPI"), The Bank Rate Monitor National Index,
IBC/Donaghue's Average U.S. Government and Agency, or as they appear in various
publications, including The Wall Street Journal, The New York Times, Forbes,
Barrons, Fortune, Money Magazine, Financial World and Financial Services Week.
D. PURCHASE AND REDEMPTION OF SHARES
Like MSF, shares of NASL are offered continuously, without sales
charge, at prices equal to the respective net asset values of the portfolio
being purchased. Both MSF and NASL sell their shares directly without the use of
any underwriter. Shares of NASL are sold and redeemed at their net asset value
next computed after a purchase payment or redemption request is received by the
shareholder from the contract owner or after any other purchase or redemption
order is received by NASL. Depending upon the net asset values at that time, the
amount paid upon redemption may be more or less than the cost of the shares
redeemed. Payment for shares redeemed will be made as soon as possible, but in
any event within seven days after receipt of a request for redemption.
The net asset value of the shares of each NASL Portfolio is determined
once daily as of the close of regularly scheduled trading on the New York Stock
Exchange, Monday through Friday, except that no determination is required on (i)
days on which changes in the value of such NASL Portfolio's portfolio securities
will not materially affect the current net asset value of the shares of the NASL
Portfolio, (ii) days during which no shares of such NASL Portfolio are tendered
for redemption and no order to purchase or sell such shares is received by NASL,
or (iii) the following business holidays or the days on which such holidays are
observed by the New York Stock Exchange: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Generally, trading in non-U.S. securities, as well as U.S.
Government securities and money market instruments, is substantially completed
each day at various times prior to the close of regularly scheduled trading of
the New York Stock Exchange. The values of such securities used in computing the
net asset value of a NASL Portfolio's shares are generally determined as of such
times. Occasionally, events which affect the values of such securities may occur
between the times at which they are generally determined and the close of the
New York Stock Exchange and would therefore not be reflected in the computation
of a NASL Portfolio's net asset value. If events materially affecting the value
of such securities occur during such period, then these securities will be
valued at their fair value as determined in good faith by the NASL subadvisers
under procedures established and regularly reviewed by the NASL Board.
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The net asset values per share of all NASL Portfolios other than the
NASL Money Market Trust are computed by adding the sum of the value of the
securities held by each NASL Portfolio plus any cash or other assets it holds,
subtracting all its liabilities, and dividing the result by the total number of
shares outstanding of that NASL Portfolio at such time. Securities held by each
of the NASL Portfolios other than the NASL Money Market Trust, except for money
market instruments with remaining maturities of 60 days or less, are valued at
their market value if market quotations are readily available. Otherwise, such
securities are valued at fair value as determined in good faith by the NASL
Board although the actual calculations may be made by persons acting pursuant to
the direction of the NASL Board.
All instruments held by the NASL Money Market Trust and money market
instruments with a remaining maturity of 60 days or less held by the other NASL
Portfolios are valued on an amortized cost basis.
E. TAX MATTERS
TAX STATUS. NASL believes that each NASL Portfolio will qualify as a
regulated investment company under Subchapter M, Chapter 1, Subtitle A of the
Code, and NASL intends to take the steps necessary to so qualify each NASL
Portfolio. As a result of qualifying as a regulated investment company, each
NASL Portfolio will not be subject to federal income tax to the extent that the
NASL Portfolio distributes its net income, including its net realized capital
gains, to its shareholders. Accordingly, each NASL Portfolio intends to
distribute substantially all of its net income, including all of its net
realized capital gains, to its shareholders. Under current law, net income,
including net realized capital gain, is not taxed to a life insurance company to
the extent that it is applied to increase the reserves for the company's
variable annuity and life insurance contracts.
SOURCES OF GROSS INCOME. To qualify for treatment as a regulated
investment company, a NASL Portfolio must, among other things, derive its income
from certain sources. Specifically, in each taxable year a NASL Portfolio must
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (including, but not limited
to, gains from options, futures or forward contracts) derived with respect to
its business of investing in stock, securities, or currencies. A NASL Portfolio
must also derive less than 30% of its gross income from the sale or other
disposition of any of the following which was held for less than three months:
(1) stock or securities, (2) options, futures, or forward contracts (other than
options, futures, or forward contracts on foreign currencies), or (3) foreign
currencies (or options, futures, or forward contracts on foreign currencies) but
only if such currencies (or options, futures, or forward contracts) are not
directly related to the NASL Portfolio's principal business of investing in
stock or securities (or options and futures with respect to stocks or
securities). For purposes of these tests, gross income generally is determined
without regard to losses from the sale or other disposition of stock or
securities or other portfolio assets. Compliance with these requirements may
prevent a NASL Portfolio from utilizing options, futures, and forward contracts
as much as the subadviser might otherwise believe to be desirable.
DIVERSIFICATION OF ASSETS. To qualify for treatment as a regulated
investment company, a NASL Portfolio must also satisfy certain requirements with
respect to the diversification of its assets. A NASL Portfolio must have, at the
close of each quarter of the taxable year, at least 50% of the value of its
total assets represented by cash, cash items, United States Government
securities, securities of other regulated investment companies, and other
securities which, in respect of any one issuer, do not represent more than 5% of
the value of the assets of the NASL Portfolio nor more than 10% of the voting
securities of that issuer. In addition, at those times not more than 25% of the
value of the NASL Portfolio's assets may be invested in securities (other than
United States Government securities or the securities of other regulated
investment companies) of any one issuer, or of two or more issuers which the
NASL Portfolio controls and which are engaged in the same or similar trades or
businesses or related trades or businesses.
Because NASL is established as an investment medium for insurance
company separate accounts, regulations under Subchapter L of the Code impose
additional diversification requirements on each NASL Portfolio. These
requirements generally are that no more than 55% of the value of the assets of a
NASL Portfolio may be represented by any one investment; no more than 70% by any
two investments; no more than 80% by any three investments; and no more than 90%
by any four investments. For these purposes, all securities of the same issuer
are treated as a single investment and each United States government agency or
instrumentality is treated as a separate issuer.
FOREIGN INVESTMENTS. NASL Portfolios investing in foreign securities or
currencies may be required to pay withholding or other taxes to foreign
governments. Foreign tax withholding from dividends and interest, if any, is
generally at a rate between 10% and 35%. The investment yield of any NASL
Portfolio that invests in foreign securities or currencies will be reduced by
these foreign taxes. Shareholders will bear the cost of any foreign tax
withholding, but may not be able to claim a foreign tax credit or deduction for
these foreign taxes. NASL Portfolios investing in securities of passive foreign
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investment companies may be subject to U.S. federal income taxes and interest
charges (and investment yield of the NASL Portfolios making such investments
will be reduced by these taxes and interest charges). Shareholders will bear the
cost of these taxes and interest charges, but will not be able to claim a
deduction for these amounts.
ADDITIONAL TAX CONSIDERATIONS. If a NASL Portfolio failed to qualify as
a regulated investment company, owners of contracts based on such NASL Portfolio
(1) might be taxed currently on the investment earnings under their contracts
and thereby lose the benefit of tax deferral, and (2) such NASL Portfolio might
incur additional taxes. In addition, if a NASL Portfolio failed to comply with
the diversification requirements of the regulations under Subchapter L of the
Code, owners of contracts based on such NASL Portfolio would be taxed on the
investment earnings under their contracts and thereby lose the benefit of tax
deferral. Accordingly, compliance with the above rules is carefully monitored by
NASL Financial and the NASL subadvisers and it is intended that the NASL
Portfolios will comply with these rules as they exist or as they may be modified
from time to time. Compliance with the tax requirements described above may
result in a reduction in the return under a NASL Portfolio, since, to comply
with the above rules, the investments utilized (and the time at which such
investments are entered into and closed out) may be different from those that
the NASL subadvisers might otherwise believe to be desirable.
OTHER INFORMATION. For more information regarding the tax implications
for the purchaser of a variable annuity or life insurance contract who allocates
investments to NASL, please refer to the prospectus for such contract.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations currently in effect. It is not
intended to be a complete explanation or a substitute for consultation with
individual tax advisers. For the complete provisions, reference should be made
to the pertinent Code sections and the Treasury Regulations promulgated
thereunder. The Code and Regulations are subject to change.
F. OTHER INFORMATION CONCERNING SHARES OF NASL
DIVIDENDS
NASL intends to declare as dividends substantially all of the net
investment income, if any, of each NASL Portfolio. For dividend purposes, net
investment income of each NASL Portfolio except the NASL Money Market Trust will
consist of all payments of dividends (other than stock dividends) or interest
received by such NASL Portfolio less the estimated expenses of such NASL
Portfolio (including fees payable to NASL Financial) and for the NASL Money
Market Trust it will consist of the interest income earned on investments, plus
or minus amortized purchase discount or premium, plus or minus realized gains
and losses, less estimated expenses. Dividends from the net investment income
and the net realized short-term and long-term capital gains, if any, for each
NASL Portfolio except the NASL Money Market Trust will be declared not less
frequently than annually and reinvested in additional full and fractional shares
of that NASL Portfolio or paid in cash. Dividends from net investment income and
net realized short-term and long-term capital gains, if any, for the NASL Money
Market Trust will be declared and reinvested, or paid in cash, daily.
SHARES OF NASL
NASL's Declaration of Trust authorizes the NASL Board to issue an
unlimited number of full and fractional shares of beneficial interest having a
par value of $.01 per share, to divide such shares into an unlimited number of
series of shares and to designate the relative rights and preferences thereof,
all without shareholder approval. In addition, the NASL Board is authorized to
divide any series of shares into separate classes, also without shareholder
approval. NASL currently has seventeen series of shares, one for each portfolio
of NASL. Shares of each NASL Portfolio have equal rights with regard to
redemptions, dividends, distributions and liquidations with respect to that NASL
Portfolio. When issued, shares are fully paid and non-assessable and do not have
preemptive or conversion rights or cumulative voting rights. All shares are
entitled to one vote and are voted by series, except that when voting for the
election of the NASL Board and when otherwise permitted by the 1940 Act, shares
are voted in the aggregate. Only shares of a particular NASL Portfolio are
entitled to vote on matters determined by the NASL Board to affect only the
interests of that NASL Portfolio.
NASL currently has three shareholders, Security Life, Manufacturers
Life of America and FNAL. Security Life provided NASL with its initial capital.
Currently, Security Life owns NASL shares attributable to the initial
capitalization of the NASL Growth and Income Trust. Each shareholder owns the
NASL shares attributable to contracts participating in its separate accounts and
will vote such shares and, in the case of Security Life, NASL shares owned
beneficially by Security Life, in accordance with instructions received from
contract owners.
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Shares of NASL may be sold to both variable annuity separate accounts
and variable life insurance separate accounts of affiliated insurance companies.
NASL currently does not foresee any disadvantages to the owners of variable
annuity or variable life insurance contracts arising from the fact that the
interests of those owners may differ. Nevertheless, the NASL Board will monitor
events in order to identify any material irreconcilable conflicts which may
possibly arise due to differences of tax treatment or other considerations and
to determine what action, if any, should be taken in response thereto. Such an
action could include the withdrawal of a separate account from participation in
NASL.
G. CUSTODIAN
State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02110, acts as custodian and bookkeeping agent for
all of the NASL Portfolios. State Street has selected various banks and trust
companies in foreign countries to maintain custody of certain foreign
securities. State Street is authorized to use the facilities of the Depository
Trust Company, the Participants Trust Company and the book-entry system of the
Federal Reserve Banks. State Street also acts as custodian and bookkeeping agent
for all of the Manulife Portfolios.
H. ADDITIONAL INFORMATION
The Statement of Additional Information contains more detailed
information about NASL and the shares, including additional information related
to (i) each NASL Portfolio's investment policies and restrictions, (ii) risk
factors associated with each NASL Portfolio's policies and investments, (iii)
NASL's Trustees and officers, NASL Financial and NASL subadvisers, (iv)
portfolio transactions and brokerage allocation, (v) the NASL Portfolios'
shares, including rights and liabilities of shareholders, and (vi) additional
performance information, including the method used to calculate yield or total
rate of return quotations of such shares. The audited financial statements for
the NASL Money Market Trust for its last fiscal year end, and its unaudited
financial statements for the six month period ended June 30, 1996, are
incorporated by reference into the Statement of Additional Information.
Reports and other information filed by NASL can be inspected and copied
at the Public Reference Facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of such material can also be
obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C. 20549
at prescribed rates. In addition, copies of recent information filed by NASL may
be obtained from the Commission's Internet address at http://www.sec.gov. NASL
will furnish, without charge, a copy of NASL's annual report for the fiscal year
ended December 31, 1995 and NASL's semiannual report for the six month period
ended June 30, 1996 to a shareholder upon request. To obtain a report, please
contact NASL at 1-800-827-8037 or at 116 Huntington Avenue, Boston,
Massachusetts 02116, Attn: Teleservices Department.
Directors and officers of MSF, in the aggregate, own, or have the right
to provide voting instructions for, less than 1% of each Manulife Portfolio's
outstanding shares.
Trustees and officers of NASL, in the aggregate, own, or have the right
to provide voting instructions for, less than 1% of each NASL Portfolio's
outstanding shares.
INFORMATION ABOUT MSF
Information concerning the operations and management of MSF is
incorporated herein by reference from its current prospectus and its current
statement of additional information, each dated August 14, 1996, copies of which
may be obtained without charge by writing or calling MSF at the address and
telephone number shown on the cover page of this Prospectus/Proxy Statement.
Reports and other information filed by MSF can be inspected and copied at the
Public Reference Facilities maintained by the Commission, located at 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of such material can also be
obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C. 20549
at prescribed rates. In addition, copies of recent information filed by MSF may
be obtained from the Commission's Internet address at http://www.sec.gov.
MSF will furnish, without charge, a copy of MSF's annual report for the
fiscal year ended December 31, 1995, and a copy of MSF's semiannual report for
the six month period ended June 30, 1996, to a shareholder upon request. To
obtain a report, please contact MSF at the telephone number or address set forth
on the cover of this Prospectus/Proxy Statement.
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FINANCIAL STATEMENTS AND EXPERTS
The financial statements of the NASL Money Market Trust included and
incorporated by reference into this Prospectus/Proxy Statement have been so
incorporated and included herein in reliance on the report of Coopers & Lybrand
L.L.P., independent accountants, One Post Office Square, Boston, MA 02109, given
on the authority of said firm as experts in accounting and auditing.
The financial statements of the Manulife International Fund, Manulife
Emerging Growth Equity Fund, Manulife Balanced Assets Fund, Manulife Common
Stock Fund, Manulife Pacific Rim Emerging Markets Fund, Manulife Real Estate
Securities Fund, Manulife Capital Growth Bond Fund and Manulife Equity Index
Fund for the year ended December 31, 1995 included and incorporated by reference
into this Prospectus/Proxy Statement have been so incorporated and included
herein in reliance on the report of Ernst & Young LLP, independent auditors,
John Hancock Tower, 200 Clarendon Street, Boston, MA 02116, given on the
authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
Certain matters concerning the issuance of shares of the NASL
Portfolios will be passed upon by the law department of The Manufacturers Life
Insurance Company, 116 Huntington Avenue, Boston, Massachusetts 02116.
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APPENDIX
DEBT SECURITY RATINGS
STANDARD & POOR'S RATINGS GROUP ("S&P")
Commercial Paper:
A-1 The rating A-1 is the highest rating assigned by S&P to
commercial paper. This designation indicates that the degree
of safety regarding timely payment is either overwhelming or
very strong. Those issues determined to possess overwhelming
safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high
for issuers designated "A-1".
Bonds:
AAA Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only
in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB-B-CCC-CC Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance
with the terms of the obligations. BB indicates the lowest
degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
D Bonds rated D are in default. The D category is used when
interest payments or principal payments are not made on the
date due even if the applicable grace period has not expired.
The D rating is also used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Commercial Paper:
P-1 The rating P-1 is the highest commercial paper rating assigned
by Moody's. Issuers rated P-1 (or related supporting
institutions) have a superior capacity for repayment of
short-term promissory obligations. P-1 repayment capacity will
normally be evidenced by the following characteristics: (1)
leading market positions in established industries; (2) high
rates of return on funds employed; (3) conservative
capitalization structures with moderate reliance on debt and
ample asset protection; (4) broad margins in earnings coverage
of fixed financial charges and high internal cash generation;
and (5) well established access to a range of financial
markets and assured sources of alternate liquidity.
P-2 Issuers rated P-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject
to variation. Capitalization
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characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity
is maintained.
Bonds:
Aaa Bonds which are rated Aaa by Moody's are judged to be of the
best quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edge". Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa Bonds which are rated Aa by Moody's are judged to be of high
quality by all standards. Together with the Aaa group, they
comprise what are generally known as high grade bonds. They
are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude
or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A by Moody's possess many favorable
investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and
interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the
future.
Baa Bonds which are rated Baa by Moody's are considered as medium
grade obligations, that is, they are neither highly protected
nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
B Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal
payments or of maintenance and other terms of the contract
over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its
rating classifications. The modifier "1" indicates that the security ranks in
the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
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EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
<PAGE> 76
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") made this
27th day of September, 1996, by and between Manulife Series Fund, Inc. (the
"Fund"), a Maryland corporation, on behalf of each series of the Fund listed
below (the "Manulife Portfolios") and NASL Series Trust (the "Trust"), a
Massachusetts business trust established under a Declaration of Trust dated
September 29, 1988, as amended, on behalf of each series of the Trust listed
below (the "NASL Portfolios").
Manulife Portfolios Corresponding NASL Portfolios
- ------------------- -----------------------------
Money-Market Fund Money Market Trust
International Fund International Stock Trust
Emerging Growth Equity Fund Emerging Growth Trust
Balanced Assets Fund Balanced Trust
Common Stock Fund Common Stock Trust
Pacific Rim Emerging Markets Fund Pacific Rim Emerging Markets Trust
Real Estate Securities Fund Real Estate Securities Trust
Capital Growth Bond Fund Capital Growth Bond Trust
Equity Index Fund Equity Index Trust
The International Stock Trust, Emerging Growth Trust, Balanced Trust,
Common Stock Trust, Pacific Rim Emerging Markets Trust, Real Estate Securities
Trust, Capital Growth Bond Trust and Equity Index Trust of the Trust are also
referred to as the "New NASL Portfolios".
WHEREAS, the Board of Directors of the Fund and the Board of Trustees
of the Trust have determined, respectively, that the transfer of all of the
assets and liabilities of each Manulife Portfolio to the corresponding NASL
Portfolio noted above is in the best interests of each Manulife Portfolio and
the corresponding NASL Portfolio, as well as the best interests of shareholders
and holders of variable life and annuity contracts funded by shares of the
Manulife Portfolios and the NASL Portfolios, and that the interests of existing
shareholders and contractholders would not be diluted as a result of this
transaction;
WHEREAS, the parties hereto intend to provide for the reorganization of
the Manulife Portfolios (the "Reorganization") through the acquisition by the
Trust on behalf of the NASL Portfolios of all of the assets, subject to all of
the liabilities, of the Manulife Portfolios in exchange for shares of beneficial
interest, par value $.01 per share, of the NASL Portfolios (the "NASL Portfolio
Shares"), the liquidation of the Manulife Portfolios and the distribution to
Fund shareholders of such NASL Portfolio Shares, all pursuant to the provisions
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties hereto agree as follows:
1. TRANSFER OF ASSETS OF THE MANULIFE PORTFOLIOS IN EXCHANGE FOR THE NASL
PORTFOLIO SHARES AND LIQUIDATION OF THE MANULIFE PORTFOLIOS
(a) Plan of Reorganization.
(i) The Fund on behalf of each Manulife Portfolio will convey,
transfer and deliver the assets of each Manulife Portfolio to the NASL
Portfolio set forth opposite its name in the table above (each such
NASL Portfolio being the "Corresponding NASL Portfolio" of the Manulife
Portfolio set forth opposite its name, and each such Manulife Portfolio
being the "Corresponding Manulife Portfolio" of the NASL Portfolio set
forth opposite its name) all of the then existing assets of such
Manulife Portfolio (consisting, without limitation, of portfolio
securities and instruments, dividend and interest receivables, cash and
other assets). In consideration thereof, the Trust on behalf
1
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of each NASL Portfolio will (A) assume and pay, to the extent that they
exist on or after the Effective Time of the Reorganization (as defined
in Section 1(b)(i) hereof), all of the obligations and liabilities of
the Corresponding Manulife Portfolio and (B) issue and deliver to the
Corresponding Manulife Portfolio full and fractional shares of
beneficial interest of the Corresponding NASL Portfolio, with respect
to each Corresponding NASL Portfolio equal to that number of full and
fractional NASL Portfolio Shares as determined in Section 1(c) hereof.
Any shares of capital stock (if any), par value $.01 per share, of the
Manulife Portfolios ("Manulife Portfolio Shares") held in the treasury
of the Fund at the Effective Time of the Reorganization shall thereupon
be retired. Such transactions shall take place at the closing provided
for in Section 1(b) hereof (the "Closing"). All computations for the
Manulife Portfolios and the NASL Portfolios shall be performed by State
Street Bank and Trust Company (the "Custodian"), as custodian and
pricing agent for the Manulife Portfolios and the NASL Portfolios. The
determination of said Custodian shall be conclusive and binding on all
parties in interest.
(ii) As of the Effective Time of the Reorganization, each
Manulife Portfolio will liquidate and distribute pro rata to its
shareholders of record ("Manulife Portfolio shareholders") as of the
Effective Time of the Reorganization the NASL Portfolio Shares received
by such Manulife Portfolio pursuant to Section 1(a)(i) in actual or
constructive exchange for the shares of the Manulife Portfolio held by
the Manulife Portfolio shareholders. Such liquidation and distribution
will be accomplished by the transfer of the Corresponding NASL
Portfolio Shares then credited to the account of each Manulife
Portfolio on the books of the Corresponding NASL Portfolio, to open
accounts on the share records of the Corresponding NASL Portfolio in
the names of the Manulife Portfolio shareholders and representing the
respective pro rata number of the NASL Portfolio Shares due such
shareholders. The NASL Portfolios will not issue certificates
representing the NASL Portfolio Shares in connection with such
exchange.
(iii) As soon as practicable after the Effective Time of the
Reorganization, the Fund shall take all the necessary steps under
Maryland law and the Fund's Articles of Incorporation to effect a
complete dissolution of the Fund and to deregister the Fund under the
Investment Company Act of 1940, as amended (the "Act").
(b) Closing and Effective Time of the Reorganization.
(i) Subject to the satisfaction of the conditions to
the Closing specified in this Agreement, the Closing shall
occur as of the close of regularly scheduled trading on the
New York Stock Exchange (the "Effective Time of the
Reorganization") on the day (the "Closing Date") which is the
later of (A) the final adjournment of the meeting of the
holders of Fund shares at which this Agreement will be
considered, (B) the declaration by the Securities and Exchange
Commission (the "Commission") of the effectiveness of the N-1A
Amendment (as defined in Section 4(b) hereof), (C) December
31, 1996 and (D) such later day as the parties may mutually
agree.
(ii) The Closing shall be held at the offices of the
Trust in Boston, Massachusetts or at such other place as the
parties may agree. All acts taking place at the Closing shall
be deemed to take place simultaneously as of the Effective
Time of the Reorganization unless otherwise provided.
(iii) In the event that on the proposed Closing Date
(A) the New York Stock Exchange shall be closed to trading or
trading thereon shall be restricted, or (B) trading or the
reporting of trading on said Exchange or elsewhere shall be
disrupted so that accurate valuation of the net assets of the
NASL Portfolios or the Manulife Portfolios is impracticable,
the Closing Date shall be postponed until the first business
day after the day when trading shall have been fully resumed
and reporting shall have been restored.
(iv) At the Closing, portfolio securities of the
Manulife Portfolios shall be transferred by the Custodian to
the accounts of the Corresponding NASL Portfolios duly
endorsed in proper form for transfer, in such condition as to
constitute good delivery thereof in accordance with the custom
of brokers, and shall be accompanied by all necessary federal
and state stock transfer stamps or a check for the appropriate
purchase price thereof.
(c) Valuation.
(i) The net asset value of the shares of each NASL
Portfolio and the net value of the assets of each
Corresponding Manulife Portfolio to be transferred in exchange
therefore shall be determined as of the Effective Time of the
Reorganization. The net asset value of the NASL Portfolio
Shares shall be computed by the Custodian in the manner set
forth in the Trust's Declaration of Trust or By-laws and then
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current prospectus and statement of additional information and
shall be computed to not less than two decimal places. The net
value of the assets of each Manulife Portfolio to be
transferred shall be computed by the Custodian by calculating
the value of the assets transferred by the Manulife Portfolio
and by subtracting therefrom the amount of the liabilities
assigned and transferred to the Corresponding NASL Portfolio,
said assets and liabilities to be valued in the manner set
forth in the Fund's Articles of Incorporation or By-laws and
then current prospectus and statement of additional
information.
(ii) The number of NASL Portfolio Shares to be issued
(including fractional shares, if any) by each NASL Portfolio
in exchange for the Corresponding Manulife Portfolio's assets
shall be determined by an exchange ratio computed by dividing
the net value of such Manulife Portfolio's assets by the net
asset value per share of such NASL Portfolio, both as
determined in accordance with Section 1(c)(i); provided,
however, that in the case of the Manulife Portfolios which
correspond to the New NASL Portfolios, the exchange ratio
shall be one.
(iii) All computations of value shall be made by the
Custodian in accordance with its regular practice as pricing
agent for the NASL Portfolios and the Manulife Portfolios.
2. REPRESENTATIONS AND WARRANTIES OF NASL
The Trust represents and warrants to the Fund as follows:
(a) Organization, Existence, etc. The Trust is a business trust duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Massachusetts and has the power to carry on its business as it
is now being conducted, and each NASL Portfolio is a validly existing series of
shares of such business trust representing interests therein under the laws of
Massachusetts. The Trust has all necessary federal, state and local
authorization to own all of its properties and assets and to carry on its
business as now being conducted.
(b) Registration as Investment Company. The Trust is registered under
the Act as an open-end investment company of the management type; such
registration has not been revoked or rescinded and is in full force and effect.
(c) Current Offering Documents. The current prospectus and statement of
additional information of the Trust, each dated July 11, 1996, as supplemented
in the case of the prospectus by a supplement dated July 31, 1996 and in the
case of the statement of additional information by a supplement dated July 24,
1996, and (except in the case of such supplements) included in the Trust's
registration statement on Form N-1A filed with the Commission, comply in all
material respects with the requirements of the Securities Act of 1933, as
amended (the "Securities Act") and the Act and do not contain an untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
(d) Capitalization. The Trust has an unlimited number of authorized
shares of beneficial interest, par value $.01 per share, of which as of
June 24, 1996 there were outstanding the following numbers of shares of the
NASL Portfolios: 33,815,940.278 shares of Money Market Trust, and no shares
of such NASL Portfolio were held in the treasury of the Trust. There are no
outstanding shares of the New NASL Portfolios. All of the outstanding shares
of the Trust have been duly authorized and are validly issued, fully paid
and nonassessable (except as disclosed in the Trust's prospectus and
recognizing that under Massachusetts law, shareholders of an NASL Portfolio
could, under certain circumstances, be held personally liable for the
obligations of such NASL Portfolio). Because the Trust is an open-end
investment company engaged in the continuous offering and redemption of its
shares, the number of outstanding shares may change prior to the Effective
Time of the Reorganization. All of the issued and outstanding shares of Money
Market Trust have been offered and sold in compliance in all material
respects with applicable registration requirements of the Securities Act and
applicable state securities laws.
(e) Financial Statements. The financial statements of the Trust for the
fiscal year ended December 31, 1995, which have been audited by Coopers &
Lybrand L.L.P., and the unaudited financial statements of the Trust for the six
months ended June 30, 1996 (collectively, the "Trust's Financial Statements"),
previously delivered to the Fund, fairly present the financial position of the
Trust as of the dates thereof and the results of its operations and changes in
its net assets for each of the periods indicated in accordance with generally
accepted accounting principles ("GAAP").
(f) Shares to be Issued Upon Reorganization. The NASL Portfolio Shares
to be issued in connection with the Reorganization will be duly authorized and
upon consummation of the Reorganization will be validly issued, fully paid and
nonassessable (except as disclosed in the Trust's prospectus and recognizing
that under Massachusetts law, shareholders of an NASL Portfolio could, under
certain circumstances, be held personally liable for the obligations of such
NASL Portfolio).
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(g) Authority Relative to this Agreement. The Trust has the power to
enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by the Trust's Board
of Trustees and no other proceedings by the Trust other than those contemplated
under this Agreement are necessary to authorize its officers to effectuate this
Agreement and the transactions contemplated hereby. The Trust is not a party to
or obligated under any provision of its declaration of trust or by-laws, or
under any indenture or contract provision or any other commitment or obligation,
or subject to any order or decree, which would be violated by or which would
prevent its execution and performance of this Agreement in accordance with its
terms.
(h) Liabilities. There are no liabilities of the Trust or the NASL
Portfolios, whether actual or contingent and whether or not determined or
determinable, other than liabilities disclosed or provided for in the Trust's
Financial Statements and liabilities incurred in the ordinary course of business
subsequent to June 30, 1996 or otherwise previously disclosed to the Fund, none
of which has been materially adverse to the business, assets or results of
operations of the Trust.
(i) No Material Adverse Change. Since June 30, 1996, there has been no
material adverse change in the financial condition, results of operations,
business, properties or assets of the Trust, other than those occurring in the
ordinary course of business (for these purposes, a decline in net asset value
and a decline in net assets due to redemptions do not constitute a material
adverse change).
(j) Litigation. There are no claims, actions, suits or proceedings
pending or, to the knowledge of the Trust, threatened which would adversely
affect the Trust or the NASL Portfolios or the Trust's assets or business or
which would prevent or hinder consummation of the transactions contemplated
hereby, there are no facts which would form the basis for the institution of
administrative proceedings against the Trust and, to the knowledge of the Trust,
there are no regulatory investigations of the Trust pending or threatened, other
than routine inspections and audits.
(k) Contracts. No default exists under any material contract or other
commitment to which the Trust or any NASL Portfolio is subject. As of the
Effective Time of the Reorganization, the Trust will have no liability in
respect of any of the contracts referred to in Section 4(f).
(l) Taxes. The federal income tax returns of the Trust and each series
of the Trust, and all other income tax returns required to be filed by the Trust
and any series of the Trust, have been filed for all taxable years to and
including December 31, 1995, and all taxes payable pursuant to such returns have
been paid. To the knowledge of the Trust, no such return is under audit and no
assessment has been asserted in respect of any such return. All federal and
other taxes owed by the Trust or any series of the Trust have been paid so far
as due. Each series of the Trust, other than the New NASL Portfolios, Science &
Technology Trust, Equity-Income Trust, High Yield Trust, Worldwide Growth Trust
and Pilgrim Baxter Growth Trust, which have not yet commenced operations, is
qualified as a regulated investment company under the Code in respect of each
taxable year since commencement of its operations, and each New NASL Portfolio
will elect to be treated as a regulated investment company under the Code. The
Trust and each NASL Portfolio currently are, and will continue to be up until
and at the Closing Date, in compliance with Section 817(h) of the Code.
(m) No Approvals Required. Except for the Registration Statement (as
defined in Section 4(c) hereof) and the approval of Fund shareholders referred
to in Section 6(a) hereof, the exemptive relief requested in the Exemptive
Application (as defined in Section 4(g) hereof), the N-1A Amendment (as defined
in Section 4(b) hereof) and the approvals of Trust shareholders referred to in
Sections 6(f) and 6(g) hereof, no consents, approvals, authorizations,
registrations or exemptions under federal or state laws are necessary for the
consummation by the Trust of the Reorganization, except such as have been
obtained as of the date hereof.
3. REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund represents and warrants to the Trust as follows:
(a) Organization, Existence, etc. The Fund is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland and has the power to carry on its business as it is now being
conducted, and each Manulife Portfolio is a validly existing series of shares of
such corporation representing interests therein under the laws of Maryland. The
Fund has all necessary federal, state and local authorization to own all of its
properties and assets and to carry on its business as now being conducted.
(b) Registration as Investment Company. The Fund is registered under
the Act as an open-end investment company of the management type; such
registration has not been revoked or rescinded and is in full force and effect.
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<PAGE> 80
(c) Current Offering Documents. The current prospectus and statement of
additional information of the Fund, each dated August 14, 1996 and included in
the Fund's registration statement on Form N-1A filed with the Commission,
comply in all material respects with the requirements of the Securities Act and
the Act and do not contain an untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) Capitalization. The authorized capital stock of the Fund consists
of 1,000,000,000 shares of common stock, par value $.01 per share, of which as
of June 24, 1996 there were outstanding the following numbers of shares of the
Manulife Portfolios: 4,121,516.894 shares of Money-Market Fund, 2,571,534.851
shares of International Fund, 8,770,698.390 shares of Emerging Growth Equity
Fund, 7,304,913.810 shares of Balanced Assets Fund, 4,270,608.943 shares of
Common Stock Fund, 1,908,435.152 shares of Pacific Rim Emerging Markets Fund,
3,801,682.955 shares of Real Estate Securities Fund, 3,838,453.285 shares of
Capital Growth Bond Fund and 325,263.287 shares of Equity Index Fund, and no
shares of any such Manulife Portfolio were held in the treasury of the Fund. All
of the outstanding shares of the Fund have been duly authorized and are validly
issued, fully paid and nonassessable. Because the Fund is an open-end investment
company engaged in the continuous offering and redemption of its shares, the
number of outstanding shares may change prior to the Effective Time of the
Reorganization. All such shares will, at the time of the Closing, be held by the
shareholders of record of the Manulife Portfolios as set forth on the books and
records of the Fund in the amounts set forth therein, and as set forth in any
list of shareholders of record provided to the Trust for purposes of the
Closing, and no such shareholders of record will have any preemptive rights to
purchase any Fund shares, and the Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any Fund shares (other
than any existing dividend reinvestment plans of the Manulife Portfolios or as
set forth in this Agreement), nor are there outstanding any securities
convertible into any shares of the Manulife Portfolios (except pursuant to any
existing exchange privileges described in the current prospectus and statement
of additional information of the Fund). All of each Manulife Portfolio's issued
and outstanding shares have been offered and sold in compliance in all material
respects with applicable registration requirements of the Securities Act and
applicable state securities laws.
(e) Financial Statements. The financial statements of the Fund for the
fiscal year ended December 31, 1995, which have been audited by Ernst & Young
LLP, and the unaudited financial statements of the Fund for the six months ended
June 30, 1996 (collectively, the "Fund's Financial Statements"), previously
delivered to the Trust, fairly present the financial position of the Fund as of
the date thereof, and the results of its operations and changes in its net
assets for the periods indicated, in accordance with GAAP.
(f) Authority Relative to this Agreement. The Fund has the power to
enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by the Fund's Board
of Directors and no other proceedings by the Fund other than those contemplated
by this Agreement are necessary to authorize its officers to effectuate this
Agreement and the transactions contemplated hereby. The Fund is not a party to
or obligated under any provision of its charter or by-laws, or under any
indenture or contract provision or any other commitment or obligation, or
subject to any order or decree, which would be violated by or which would
prevent its execution and performance of this Agreement in accordance with its
terms.
(g) Liabilities. There are no liabilities of the Fund, whether actual
or contingent and whether or not determined or determinable, other than
liabilities disclosed or provided for in the Fund's Financial Statements and
liabilities incurred in the ordinary course of business subsequent to June 30,
1996 or otherwise previously disclosed to the Trust, none of which has been
materially adverse to the business, assets or results of operations of the Fund.
(h) No Material Adverse Change. Since June 30, 1996, there has been no
material adverse change in the financial condition, results of operations,
business, properties or assets of the Fund, other than those occurring in the
ordinary course of business (for these purposes, a decline in net asset value
and a decline in net assets due to redemptions do not constitute a material
adverse change).
(i) Litigation. There are no claims, actions, suits or proceedings
pending or, to the knowledge of the Fund, threatened which would adversely
affect the Fund or its assets or business or which would prevent or hinder
consummation of the transactions contemplated hereby, there are no facts which
would form the basis for the institution of administrative proceedings against
the Fund and, to the knowledge of the Fund, there are no regulatory
investigations of the Fund pending or threatened, other than routine inspections
and audits.
(j) Contracts. The Fund and each Manulife Portfolio is subject to no
contracts or other commitments (other than this Agreement) which will not be
terminated without liability to the Fund or the Manulife Portfolios as of or
prior to the Effective Time of the Reorganization.
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(k) Taxes. The federal income tax returns of the Fund and each Manulife
Portfolio, and all other income tax returns required to be filed by the Fund,
have been filed for all taxable years to and including the taxable year ended
December 31, 1995, and all taxes payable pursuant to such returns have been
paid. To the knowledge of the Fund, no such return is under audit and no
assessment has been asserted in respect of any such return. All federal and
other taxes owed by the Fund or any Manulife Portfolio have been paid so far as
due. Each Manulife Portfolio has qualified as a regulated investment company
under the Code in respect of each taxable year since commencement of its
operations. The Fund and each Manulife Portfolio currently are, and will
continue to be up until and at the Closing Date, in compliance with Section
817(h) of the Code.
(l) No Approvals Required. Except for the Registration Statement and
the approval of Fund shareholders referred to in Section 6(a) hereof, the
exemptive relief requested by the Exemptive Application, the N-1A Amendment and
the approvals of Trust shareholders referred to in Sections 6(f) and 6(g)
hereof, no consents, approvals, authorizations, registrations or exemptions
under federal or state laws are necessary for the consummation by the Fund of
the Reorganization, except such as have been obtained as of the date hereof.
4. COVENANTS OF THE TRUST
The Trust covenants to the Fund as follows:
(a) Trust Meeting of Shareholders. The Trust shall call and hold a
meeting of the shareholders of the Trust for the purpose of all of the
shareholders of the Trust acting upon the matters referred to in clause (i) of
Section 6(e) of this Agreement and the shareholders of Money Market Trust acting
upon the matters referred to in Section 7(f) of this Agreement. The Trust shall
cause the sole shareholder of the New NASL Portfolios to vote, prior to the
Effective Time of the Reorganization, to approve the matters referred to in
Section 6(f) of this Agreement.
(b) Formation of New Portfolios; Amendment of Registration Statement on
Form N-1A. Prior to the Effective Time of the Reorganization, the Trust will
take all steps necessary to cause the formation and registration of the New NASL
Portfolios, including filing an amendment or amendments to the Trust's
registration statement on Form N-1A (collectively, the "N-1A Amendment") with
the Commission relating to the registration of shares of the New NASL
Portfolios. The investment objective and policies of the New NASL Portfolios
will conform with the descriptions thereof contained in the prospectus and
statement of additional information for the New NASL Portfolios and the
Registration Statement, each in the form made available to the Fund's Board of
Directors. The Trust will not issue any shares of the New NASL Portfolios prior
to the Effective Time of the Reorganization except as contemplated by this
Agreement. The N-1A Amendment will also conform the description of the Money
Market Trust in such registration statement with the descriptions of such NASL
Portfolio in the Registration Statement, as the Registration Statement may be
amended or supplemented prior to the Effective Time of the Reorganization.
(c) Registration Statement. The Trust shall file with the Commission a
Registration Statement on Form N-14 (the "Registration Statement") under the
Securities Act relating to the NASL Portfolio Shares issuable hereunder. At the
time the Registration Statement becomes effective, the Registration Statement
(i) will comply in all material respects with the provisions of the Securities
Act and the rules and regulations of the Commission thereunder (the
"Regulations") and (ii) will not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; and at the time the Registration
Statement becomes effective, at the time of the Fund shareholders' meeting
referred to in Section 5(a) hereof, and at the Effective Time of the
Reorganization, the prospectus/proxy statement (the "Prospectus") and statement
of additional information (the "Statement of Additional Information") included
therein, as amended or supplemented by any amendments or supplements filed by
the Trust, will not contain an untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that none of the representations and warranties in this subsection shall apply
to statements in or omissions from the Registration Statement, Prospectus or
Statement of Additional Information made in reliance upon and in conformity with
information furnished by the Fund for use in the Registration Statement,
Prospectus or Statement of Additional Information as provided in Section 5(c)
hereof.
(d) Cooperation in Effecting Reorganization. The Trust agrees to use
all reasonable efforts to effectuate the Reorganization, to continue in
operation thereafter, and to obtain any necessary regulatory approvals for the
Reorganization. The Trust shall furnish to the Fund such data and information
relating to the Trust as shall be reasonably requested by the Fund for inclusion
in the information to be furnished to the Manulife Portfolio shareholders in
connection with the meeting of the Manulife Portfolio shareholders for the
purpose of acting upon this Agreement and the transactions contemplated herein.
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(e) Operations in the Ordinary Course. Except as otherwise contemplated
by this Agreement, the Trust shall conduct its business in the ordinary course
until the consummation of the Reorganization, it being understood that such
ordinary course of business will include the declaration and payment of
customary dividends and distributions.
(f) Contract Terminations. Prior to the Effective Time of the
Reorganization, the investment subadvisory agreement between NASL Financial
Services, Inc. ("NFS") and Wellington Management Company with respect to Money
Market Trust shall be terminated, such termination to be effective prior to or
as of the Effective Time of the Reorganization.
(g) Exemptive Application. The Trust shall use all reasonable efforts
to cause the Commission to grant the exemptive relief requested in the Exemptive
Application filed on September 19, 1996 by the Trust and the Fund (the
"Exemptive Application"), substantially in the form requested in the Exemptive
Application, including filing any necessary or advisable amendments to the
Exemptive Application.
5. COVENANTS OF THE FUND
The Fund covenants to the Trust as follows:
(a) Fund Meeting of Shareholders. The Fund shall call and hold a
meeting of the shareholders of each Manulife Portfolio for the purpose of acting
upon this Agreement and the transactions contemplated herein. The Fund shall not
hold such meeting until such time as the Commission shall have granted the
exemptive relief requested in the Exemptive Application substantially in the
form requested in the Exemptive Application.
(b) Portfolio Securities. With respect to the assets to be transferred
in accordance with Section 1(a), each Manulife Portfolio's assets shall consist
of all property and assets of any nature whatsoever, including, without
limitation, all cash, cash equivalents, securities, claims and receivables
(including dividend and interest receivables) owned, and any deferred or prepaid
expenses shown as an asset on the Fund's books. At least five (5) business days
prior to the Closing, each Manulife Portfolio will provide the Trust with a list
of its assets and a list of its stated liabilities. Each Manulife Portfolio
shall have the right to sell any of the securities or other assets shown on the
list of assets prior to the Closing but will not, without the prior approval of
the Trust, acquire any additional securities other than securities which the
Corresponding NASL Portfolio is permitted to purchase, pursuant to its
investment objective and policies or otherwise (taking into consideration its
own portfolio composition as of such date). In the event that the Trust informs
the Fund that a Manulife Portfolio holds any investments that its Corresponding
NASL Portfolio would not be permitted to hold, the Manulife Portfolio will
dispose of such securities prior to the Closing to the extent practicable and to
the extent that its shareholders would not be materially affected in an adverse
manner by such a disposition. In addition, the Fund will prepare and deliver to
the Trust, immediately prior to the Effective Time of the Reorganization, a
Statement of Assets and Liabilities of each Manulife Portfolio, prepared in
accordance with GAAP (the "Schedule"), which shall include a list of all the
securities owned by such Manulife Portfolio as of the Effective Time of the
Reorganization. All securities to be listed in the Schedule as of the Effective
Time of the Reorganization will be owned by the Fund free and clear of any
liens, claims, charges, options and encumbrances, except as indicated in the
Schedule or as permitted by the Act, and, except as so indicated, none of such
securities is or, after the Reorganization as contemplated hereby, will be
subject to any restrictions, legal or contractual, on the disposition thereof
(including restrictions as to the public offering or sale thereof under the
Securities Act) and, except as so indicated, all such securities are or will be
readily marketable.
(c) Registration Statement. In connection with the preparation of the
Registration Statement, the Fund will cooperate with the Trust and will furnish
to the Trust the information relating to the Fund required by the Securities Act
and the Regulations to be set forth in the Registration Statement (including the
Prospectus and Statement of Additional Information). At the time the
Registration Statement becomes effective, the Registration Statement, insofar as
it relates to the Fund, (i) will comply in all material respects with the
provisions of the Securities Act and the Regulations and (ii) will not contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading;
and at the time the Registration Statement becomes effective, at the time of the
Fund shareholders' meeting referred to in Section 5(a) and at the Effective Time
of the Reorganization, the Prospectus and Statement of Additional Information,
as amended or supplemented by any amendments or supplements filed by the Trust,
insofar as they relate to the Fund, will not contain an untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the representations and warranties in this
subsection shall apply only to statements in or omissions from the Registration
Statement, Prospectus or Statement of Additional Information made in reliance
upon and in conformity with information furnished by the Fund for use in the
Registration Statement, Prospectus or Statement of Additional Information as
provided in this Section 5(c).
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<PAGE> 83
(d) Cooperation in Effecting Reorganization. The Fund agrees to use all
reasonable efforts to effectuate the Reorganization and to obtain any necessary
regulatory approvals for the Reorganization.
(e) Operations in the Ordinary Course. Except as otherwise contemplated
by this Agreement, the Fund shall conduct its business in the ordinary course
until the consummation of the Reorganization, it being understood that such
ordinary course of business will include the declaration and payment of
customary dividends and distributions.
(f) Contract Terminations. The Fund shall, prior to the Effective Time
of the Reorganization, terminate all contracts and other commitments (other than
this Agreement) to which the Fund or any Manulife Portfolio is subject, such
terminations to be effective as of or prior to the Effective Time of the
Reorganization.
(g) Exemptive Application. The Fund shall use all reasonable efforts to
cause the Commission to grant the exemptive relief requested in the Exemptive
Application, substantially in the form requested in the Exemptive Application,
including filing any necessary or advisable amendments to the Exemptive
Application.
(h) Statement of Earnings and Profits. As promptly as practicable, but
in any case within 60 days after the Closing Date, the Fund on behalf of each
Manulife Portfolio shall furnish to the Trust on behalf of each NASL Portfolio,
in such form as is reasonably satisfactory to the Trust, a statement of the
earnings and profits of the Manulife Portfolios for federal income tax purposes,
and of any capital loss carryovers and other items that the NASL Portfolios will
succeed to and take into account as a result of Section 381 of the Code.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE FUND
The obligations of the Fund hereunder with respect to the consummation
of the Reorganization as it relates to each Manulife Portfolio are subject to
the satisfaction of the following conditions:
(a) Approval by the Fund's Shareholders. This Agreement and the
transactions contemplated by the Reorganization, including, when necessary, a
temporary amendment of the Manulife Portfolios' investment restrictions that
might otherwise preclude the consummation of the Reorganization, shall have been
approved by the requisite vote of the shares of each Manulife Portfolio entitled
to vote on the matter ("Manulife Shareholder Approval").
(b) Covenants, Warranties and Representations. The Trust shall have
complied with each of its covenants contained herein, each of the
representations and warranties contained herein shall be true in all material
respects as of the Effective Time of the Reorganization (except as otherwise
contemplated herein), and there shall have been no material adverse change (as
described in Section 2(i)) in the financial condition, results of operations,
business, properties or assets of the NASL Portfolios since June 30, 1996.
(c) Regulatory Approval. The Registration Statement and the N-1A
Amendment shall each have been declared effective by the Commission and no stop
orders under the Securities Act pertaining thereto shall have been issued, the
Commission shall have granted the exemptive relief requested in the Exemptive
Application substantially in the form requested in the Exemptive Application,
and all other approvals, registrations, and exemptions under federal and state
laws considered to be necessary shall have been obtained (collectively, the
"Regulatory Approvals").
(d) Tax Opinion. The Fund shall have received the opinion of Simpson
Thacher & Bartlett (a partnership which includes professional corporations),
dated on or before the Closing Date, addressed to and in form and substance
satisfactory to each of the Fund and the Trust, as to certain of the federal
income tax consequences under the Code of the Reorganization, insofar as it
relates to each Manulife Portfolio and its Corresponding NASL Portfolio, and to
shareholders of each Manulife Portfolio (the "Tax Opinion"). For purposes of
rendering the Tax Opinion, Simpson Thacher & Bartlett may rely exclusively and
without independent verification, as to factual matters, upon the statements
made in this Agreement, the Prospectus and Statement of Additional Information,
and upon such other written representations as the President of each of the Fund
and the Trust will have verified as of the Effective Time of the Reorganization.
The Tax Opinion will be to the effect that, based on the facts and assumptions
stated therein, for federal income tax purposes: (i) the Reorganization will
constitute a reorganization within the meaning of section 368(a)(1) of the Code
with respect to each Manulife Portfolio and its Corresponding NASL Portfolio;
(ii) no gain or loss will be recognized by any of the Manulife Portfolios or the
Corresponding NASL Portfolios upon the transfer of all the assets and
liabilities, if any, of each Manulife Portfolio to its Corresponding NASL
Portfolio solely in exchange for NASL Portfolio Shares or upon the distribution
of the NASL Portfolio Shares to the holders of Manulife Portfolio Shares solely
in exchange for all of their Manulife Portfolio Shares; (iii) no gain or loss
will be recognized by shareholders of any of the Manulife Portfolios upon the
exchange of such Manulife Portfolio Shares solely for NASL Portfolio Shares;
(iv) the holding period and tax basis of the NASL Portfolio Shares received by
each holder of
8
<PAGE> 84
Manulife Portfolio Shares pursuant to the Reorganization will be the same as the
holding period (provided the Manulife Portfolio Shares were held as a capital
asset on the date of the Reorganization) and tax basis of the Manulife Portfolio
Shares held by the shareholder immediately prior to the Reorganization; and (v)
the holding period and tax basis of the assets of each of the Manulife
Portfolios acquired by its Corresponding NASL Portfolio will be the same as the
holding period and tax basis of those assets to each of the Manulife Portfolios
immediately prior to the Reorganization. The payment by NFS or its affiliates of
the Reorganization expenses referred to in Section 9 hereof will not affect the
opinions set forth above regarding the tax consequences of the exchanges by the
Fund and the shareholders of the Fund; however, Simpson Thacher & Bartlett will
express no opinion as to any federal income tax consequences to any of the
parties of the payment of such expenses by NFS or its affiliates.
(e) Board of Trustees Approvals. The Board of Trustees of the Trust
shall have taken the following action with respect to the Trust or the NASL
Portfolios, as the case may be, at a meeting duly called for such purposes:
(i) approval of the selection of Coopers & Lybrand L.L.P. as the
Trust's independent auditors for the fiscal year ending December 31,
1997, on terms acceptable to the Fund's Board of Directors;
(ii) approval of an investment advisory agreement with NFS with
respect to each New NASL Portfolio in the form made available to the
Fund's Board of Directors;
(iii) approval of investment subadvisory agreements between NFS
and Manufacturers Adviser Corporation ("MAC") with respect to each of
Money Market Trust, Common Stock Trust, Pacific Rim Emerging Markets
Trust, Real Estate Securities Trust, Capital Growth Bond Trust and
Equity Index Trust, Rowe Price-Fleming International, Inc.
("Price-Fleming") with respect to International Stock Trust, Warburg,
Pincus Counsellors, Inc. ("Warburg Pincus") with respect to Emerging
Growth Trust, and Founders Asset Management, Inc. ("Founders") with
respect to Balanced Trust, in each case in the form made available to
the Fund's Board of Directors; and
(iv) approval of the modification of certain investment policies
of the NASL Portfolios to conform with the descriptions thereof
contained in the Prospectus and Statement of Additional Information in
the form made available to the Fund's Board of Directors or as such
descriptions may be amended or supplemented at the time of the Fund
shareholders' meeting referred to in Section 6(a) hereof.
(f) Vote by the Initial Shareholder. North American Security Life
Insurance Company, as initial shareholder of each of the New NASL Portfolios,
shall have voted, immediately after becoming the initial shareholder of each of
the New NASL Portfolios, and prior to the receipt by the Fund of any shares of
the New NASL Portfolios, to:
(i) approve the investment advisory agreement between the Trust
and NFS with respect to each of the New NASL Portfolios, as
contemplated by Section 6(e) hereof; and
(ii) approve the investment subadvisory agreements between NFS
and MAC with respect to each of Common Stock Trust, Pacific Rim
Emerging Markets Trust, Real Estate Securities Trust, Capital Growth
Bond Trust and Equity Index Trust, Price-Fleming with respect to
International Stock Trust, Warburg Pincus with respect to Emerging
Growth Trust, and Founders with respect to Balanced Trust, in each case
as contemplated by Section 6(e) hereof.
(g) Approval by Money Market Trust Shareholders. The shareholders of
the Money Market Trust shall have voted, at the Trust shareholders' meeting
referred to in Section 5(a) hereof, to approve the investment subadvisory
agreement between NFS and MAC with respect to Money Market Trust, as
contemplated by Section 6(e) hereof ("NASL Shareholder Approval").
(h) Contract Terminations. NFS shall have terminated the agreements
referred to in Section 4(f) as provided therein.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST
The obligations of the Trust hereunder with respect to the consummation
of the Reorganization as it relates to each NASL Portfolio are subject to the
satisfaction of the following conditions:
(a) Approval by the Fund's Shareholders. Manulife Shareholder Approval
shall have been obtained.
(b) Covenants, Warranties and Representations. The Fund shall have
complied with each of its covenants contained herein, each of the
representations and warranties contained herein shall be true in all material
respects as of the
9
<PAGE> 85
Effective Time of the Reorganization (except as otherwise contemplated herein),
and there shall have been no material adverse change (as described in Section
3(h)) in the financial condition, results of operations, business, properties or
assets of the Manulife Portfolios since June 30, 1996.
(c) Portfolio Securities. All securities to be acquired by each NASL
Portfolio in the Reorganization shall have been approved for acquisition by NFS
as consistent with the investment policies of such NASL Portfolio.
(d) Regulatory Approval. The Regulatory Approvals shall have been
obtained.
(e) Tax Opinion. The Trust shall have received the Tax Opinion.
(f) Approval by Money Market Trust Shareholders. NASL Shareholder
Approval shall have been obtained.
(g) Contract Terminations. The Fund shall have terminated the
agreements referred to in Section 5(f) as provided therein.
(h) Distribution of Income and Gains. The Fund shall have distributed
to the shareholders of each Manulife Portfolio all of such Manulife Portfolio's
investment company taxable income as defined in Section 852(b)(2) of the Code
for its taxable year ending on the Closing Date and all of its net capital gain
as such term is used in Section 852(b)(3) of the Code, after reduction by any
capital loss carryforward, for its taxable year ending on the Closing Date.
8. AMENDMENTS; TERMINATIONS; NO SURVIVAL OF COVENANTS, WARRANTIES AND
REPRESENTATIONS
(a) Amendments. The parties hereto may, by agreement in writing
authorized by their respective Board of Trustees or Board of Directors, as the
case may be, amend this Agreement at any time before or after approval hereof by
the shareholders of the Fund, but after such approval, no amendment shall be
made which substantially changes the terms hereof.
(b) Waivers. At any time prior to the Effective Time of the
Reorganization, either the Fund or the Trust may by written instrument signed by
it (i) waive any inaccuracies in the representations and warranties made to it
contained herein and (ii) waive compliance with any of the covenants or
conditions made for its benefit contained herein, except that neither the Fund
nor the Trust may waive the conditions set forth in Sections 6(c) or 7(d)
hereof.
(c) Termination by the Fund. The Fund may terminate this Agreement at
any time prior to the Effective Time of the Reorganization by notice to the
Trust and NFS if (i) a material condition to its performance hereunder or a
material covenant of the Trust contained herein shall not be fulfilled on or
before the date specified for the fulfillment thereof or (ii) a material default
or material breach of this Agreement shall be made by the Trust.
(d) Termination by the Trust. The Trust may terminate this Agreement at
any time prior to the Effective Time of the Reorganization by notice to the Fund
and NFS if (i) a material condition to its performance hereunder or a material
covenant of the Fund contained herein shall not be fulfilled on or before the
date specified for the fulfillment thereof or (ii) a material default or
material breach of this Agreement shall be made by the Fund.
(e) Termination by Either the Fund or the Trust. This Agreement may be
terminated by the Fund or the Trust at any time prior to the Effective Time of
the Reorganization, whether before or after approval of this Agreement by the
shareholders of the Fund, without liability on the part of either party hereto,
its respective Directors, Trustees, officers or shareholders or NFS, on notice
to the other parties in the event that such party's Board of Directors or Board
of Trustees, as the case may be, determines that proceeding with this Agreement
is not in the best interests of that party's shareholders or contractholders.
(f) Unless the parties hereto shall otherwise agree in writing, this
Agreement shall terminate without liability as of the close of business on June
30, 1997 if the Effective Time of the Reorganization is not on or prior to such
date.
(g) Survival. No representations, warranties or covenants in or
pursuant to this Agreement, except for the provisions of Section 5(h) and
Section 9 of this Agreement, shall survive the Reorganization.
9. EXPENSES; INSURANCE
Except as otherwise specified in this Section 9, the expenses of the
Reorganization will be borne by NFS or its affiliates (other than the Fund or
the Trust). Such expenses include, without limitation, (i) expenses incurred in
connection with the entering into and the carrying out of the provisions of this
Agreement; (ii) expenses associated with the preparation and filing of the
Registration Statement (other than registration fees payable to the Commission
in respect of the registration
10
<PAGE> 86
of the NASL shares registered thereby, which shall be payable by the respective
NASL Portfolios in which such shares represent interests); (iii) fees and
expenses of preparing and filing such forms as are necessary under any
applicable state securities laws in connection with the Reorganization; (iv)
postage; (v) printing; (vi) accounting fees; (vii) legal fees and (viii)
solicitation costs relating to the Reorganization.
10. NOTICES
Any notice, report, statement or demand required or permitted by any
provision of this Agreement shall be in writing and shall be given by hand,
certified mail or by facsimile transmission, shall be deemed given when received
and shall be addressed to the parties hereto at their respective addresses
listed below or to such other persons or addresses as the relevant party shall
designate as to itself from time to time in writing delivered in like manner:
(a) if to the Fund, to it at:
200 Bloor Street East
Toronto, Ontario, Canada M4W 1E5
Attention: Sheri L. Kocen, Esq.
Facsimile: (416) 926-5403
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Sarah E. Cogan, Esq.
Facsimile: (212) 455-2502
and
Jones & Blouch L.L.P.
Suite 405 West
1025 Thomas Jefferson Street, N.W.
Washington, D.C. 20007
Attention: J. Sumner Jones, Esq.
Facsimile: (202) 223-4593
(b) if to the Trust, to it at:
116 Huntington Avenue
Boston, Massachusetts 02116
Attention: James D. Gallagher, Esq.
Facsimile: (617) 266-8201
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Sarah E. Cogan, Esq.
Facsimile: (212) 455-2502
and
Jones & Blouch L.L.P.
Suite 405 West
1025 Thomas Jefferson Street, N.W.
Washington, D.C. 20007
Attention: J. Sumner Jones, Esq.
Facsimile: (202) 223-4593
11
<PAGE> 87
(c) if to NFS, to it at:
116 Huntington Avenue
Boston, Massachusetts 02116
Attention: James D. Gallagher, Esq.
Facsimile: (617) 266-8201
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Sarah E. Cogan, Esq.
Facsimile: (212) 455-2502
and
Jones & Blouch L.L.P.
Suite 405 West
1025 Thomas Jefferson Street, N.W.
Washington, D.C. 20007
Attention: J. Sumner Jones, Esq.
Facsimile: (202) 223-4593
11. RELIANCE
All covenants and agreements made under this Agreement shall be deemed
to have been material and relied upon by the Fund and the Trust notwithstanding
any investigation made by such party or on its behalf.
12. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
(a) The section and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(b) This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
(c) This Agreement shall be governed by and construed in accordance
with the laws of The Commonwealth of Massachusetts.
(d) This Agreement shall bind and inure to the benefit of the Fund and
the Trust and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other parties. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
(e) The name "Manulife Series Fund, Inc." is the designation of the
Directors under the Fund's Articles of Incorporation and all persons dealing
with the Fund must look solely to the Fund's property for the enforcement of any
claim against the Fund, as neither the Directors, officers, agents or
shareholders assume any personal liability for obligations entered into on
behalf of the Fund. No series of the Fund shall be liable for claims against any
other series of the Fund.
(f) The name "NASL Series Trust" is the designation of the Trustees
under a Declaration of Trust dated September 29, 1988, as amended, and all
persons dealing with the Trust must look solely to the Trust's property for the
enforcement of any claims against the Trust, as neither the Trustees, officers,
agents or shareholders assume any personal liability for obligations entered
into on behalf of the Trust. No series of the Trust shall be liable for claims
against any other series of the Trust.
12
<PAGE> 88
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
MANULIFE SERIES FUND, INC.
By: /s/ Donald A. Guloien
------------------------------
Donald A. Guloien
NASL SERIES TRUST
By: /s/ John D. Des Prez III
------------------------------
John D. Des Prez III
Accepted and agreed to
as to Section 9:
NASL FINANCIAL SERVICES, INC.
By: /s/ Richard Hirtle
------------------------------
Richard Hirtle
<PAGE> 89
PART B
<PAGE> 90
STATEMENT OF ADDITIONAL INFORMATION
NASL SERIES TRUST
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus/Proxy Statement dated November __,
1996 (the "Prospectus/Proxy Statement"), which may be obtained without charge by
writing to NASL Series Trust ("NASL") at 116 Huntington Avenue, Boston,
Massachusetts 02116, or by calling 1-800-827-8037. The statement of additional
information for Manulife Series Fund, Inc. ("MSF"), dated August 14, 1996 is
incorporated herein by reference and may be obtained without charge by writing
to MSF at 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5, or by calling
1-800-827-4546.
The date of this Statement of Additional Information is November __,
1996.
<PAGE> 91
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT POLICIES................................................................... 1
Money Market Instruments....................................................... 1
Other Instruments.............................................................. 3
HEDGING AND OTHER STRATEGIC TRANSACTIONS.............................................. 8
General Characteristics of Options............................................. 9
General Characteristics of Futures Contracts and Options on Futures Contracts.. 10
Options on Securities Indices and Other Financial Indices...................... 11
Currency Transactions.......................................................... 11
Combined Transactions.......................................................... 12
Swaps, Caps, Floors and Collars................................................ 12
Eurodollar Instruments......................................................... 13
Risk Factors................................................................... 13
Risks of Hedging and Other Strategic Transactions Outside the United States.... 14
Use of Segregated and Other Special Accounts................................... 14
Other Limitations.............................................................. 15
INVESTMENT RESTRICTIONS............................................................... 15
Fundamental.................................................................... 15
Nonfundamental................................................................. 16
PORTFOLIO TURNOVER.................................................................... 17
MANAGEMENT OF NASL.................................................................... 17
Compensation of Trustees....................................................... 19
INVESTMENT MANAGEMENT ARRANGEMENTS.................................................... 19
The Advisory Agreement......................................................... 20
The Subadvisory Agreements..................................................... 21
PORTFOLIO BROKERAGE................................................................... 22
PURCHASE AND REDEMPTION OF SHARES..................................................... 23
DETERMINATION OF NET ASSET VALUE...................................................... 23
PERFORMANCE DATA...................................................................... 24
ORGANIZATION OF NASL.................................................................. 25
Shares of NASL................................................................. 25
Principal Holders of Securities................................................ 26
REPORTS TO SHAREHOLDERS............................................................... 26
INDEPENDENT ACCOUNTANTS............................................................... 26
</TABLE>
<PAGE> 92
INVESTMENT POLICIES
The following discussion supplements the discussion set forth in the
Prospectus/Proxy Statement under "Comparison of Investment Objectives and
Policies".
MONEY MARKET INSTRUMENTS
The NASL Money Market Trust will be invested in the types of money market
instruments described below. Certain of the instruments listed below may also be
purchased by the other NASL Portfolios in accordance with their investment
policies and all NASL Portfolios may purchase such instruments to invest
otherwise idle cash or for defensive purposes, except that the NASL Equity Index
Trust may not invest in the instruments described in 2. below.
1. U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS. Government
obligations are debt securities issued or guaranteed as to principal or interest
by the U.S. Treasury. These securities include treasury bills, notes and bonds.
U.S. Government agency obligations are debt securities issued or guaranteed as
to principal or interest by an agency or instrumentality of the U.S. Government
pursuant to authority granted by Congress. U.S. Government agency obligations
include, but are not limited to, the Student Loan Marketing Association, Federal
Home Loan Banks, Federal Intermediate Credit Banks and the Federal National
Mortgage Association. U.S. instrumentality obligations include, but are not
limited to, the Export-Import Bank and Farmers Home Administration. Some
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities are supported by the right of the issuer to borrow from the
U.S. Treasury or the Federal Reserve Banks, such as those issued by Federal
Intermediate Credit Banks; others, such as those issued by the Federal National
Mortgage Association, by discretionary authority of the U.S. Government to
purchase certain obligations of the agency or instrumentality; and others, such
as those issued by the Student Loan Marketing Association, only by the credit of
the agency or instrumentality. There are also separately traded interest
components of securities issued or guaranteed by the United States Treasury. No
assurance can be given that the U.S. Government will provide financial support
to such U.S. Government sponsored agencies or instrumentalities in the future,
since it is not obligated to do so by law. The foregoing types of instruments
are hereafter collectively referred to as "U.S. Government securities."
2. CANADIAN AND PROVINCIAL GOVERNMENT AND CROWN AGENCY OBLIGATIONS.
Canadian Government obligations are debt securities issued or guaranteed as to
principal or interest by the Government of Canada pursuant to authority granted
by the Parliament of Canada and approved by the Governor in Council, where
necessary. These securities include treasury bills, notes, bonds, debentures and
marketable Government of Canada loans. Canadian Crown agency obligations are
debt securities issued or guaranteed by a Crown corporation, company or agency
("Crown agencies") pursuant to authority granted by the Parliament of Canada and
approved by the Governor in Council, where necessary. Certain Crown agencies are
by statute agents of Her Majesty in right of Canada, and their obligations, when
properly authorized, constitute direct obligations of the Government of Canada.
Such obligations include, but are not limited to, those issued or guaranteed by
the Export Development Corporation, Farm Credit Corporation, Federal Business
Development Bank and Canada Post Corporation. In addition, certain Crown
agencies which are not by law agents of Her Majesty may issue obligations which
by statute the Governor in Council may authorize the Minister of Finance to
guarantee on behalf of the Government of Canada. Other Crown agencies which are
not by law agents of Her Majesty may issue or guarantee obligations not entitled
to be guaranteed by the Government of Canada. No assurance can be given that the
Government of Canada will support the obligations of Crown agencies which are
not agents of Her Majesty, which it has not guaranteed, since it is not
obligated to do so by law.
Provincial Government obligations are debt securities issued or
guaranteed as to principal or interest by the government of any province of
Canada pursuant to authority granted by the Legislature of any such province and
approved by the Lieutenant Governor in Council of any such province, where
necessary. These securities include treasury bills, notes, bonds and debentures.
Provincial Crown agency obligations are debt securities issued or guaranteed by
a provincial Crown corporation, company or agency ("provincial Crown agencies")
pursuant to authority granted by a provincial Legislature and approved by the
Lieutenant Governor in Council of such province, where necessary. Certain
provincial Crown agencies are by statute agents of Her Majesty in right of a
particular province of Canada, and their obligations, when properly authorized,
constitute direct obligations of such province. Other provincial Crown agencies
which are not by law agents of Her Majesty in right of a particular province of
Canada may issue obligations which by statute the Lieutenant Governor in Council
of such province may guarantee, or may authorize the Treasurer thereof to
guarantee, on behalf of the government of such province. Finally, other
provincial Crown agencies which are not by law agencies of Her Majesty may issue
or guarantee obligations not entitled to be guaranteed by a provincial
government. No assurance can be given that the government of any province of
Canada will support the obligations of provincial Crown agencies which are not
agents of Her Majesty, which it has not guaranteed, as it is not obligated to do
so by law. Provincial Crown agency obligations described above include, but are
not
<PAGE> 93
limited to, those issued or guaranteed by a provincial railway corporation, a
provincial hydroelectric or power commission or authority, a provincial
municipal financing corporation or agency and a provincial telephone commission
or authority.
Any Canadian obligation acquired by the NASL Money Market Trust will be
payable in U.S. dollars.
3. CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES. Certificates of
deposit are certificates issued against funds deposited in a bank or a savings
and loan. They are for a definite period of time and earn a specified rate of
return. Bankers' acceptances are short-term credit instruments evidencing the
obligation of a bank to pay a draft which has been drawn on it by a customer.
These instruments reflect the obligation both of the bank and of the drawer to
pay the face amount of the instrument upon maturity. They are primarily used to
finance the import, export, transfer or storage of goods. They are termed
"accepted" when a bank guarantees their payment at maturity.
NASL Portfolios may acquire obligations of foreign banks and foreign
branches of U.S. banks. These obligations are not insured by the Federal Deposit
Insurance Corporation.
4. COMMERCIAL PAPER. Commercial paper consists of unsecured promissory
notes issued by corporations to finance short-term credit needs. Commercial
paper is issued in bearer form with maturities generally not exceeding nine
months. Commercial paper obligations may include variable amount master demand
notes. Variable amount master demand notes are obligations that permit the
investment of fluctuating amounts at varying rates of interest pursuant to
direct arrangements between a NASL Portfolio, as lender, and the borrower. These
notes permit daily changes in the amounts borrowed. The NASL Portfolio has the
right to increase the amount under the note at any time up to the full amount
provided by the note agreement, or to decrease the amount, and the borrower may
prepay up to the full amount of the note without penalty. Because variable
amount master demand notes are direct lending arrangements between the lender
and borrower, it is not generally contemplated that such instruments will be
traded, and there is no secondary market for these notes, although they are
redeemable (and thus immediately repayable by the borrower) at face value, plus
accrued interest, at any time. A NASL Portfolio will only invest in variable
amount master demand notes issued by companies which at the date of investment
have an outstanding debt issue rated "Aaa" or "Aa" by Moody's or "AAA" or "AA"
by S&P and which the applicable subadviser has determined present minimal risk
of loss to the NASL Portfolio. A subadviser will look generally at the financial
strength of the issuing company as "backing" for the note and not to any
security interest or supplemental source such as a bank letter of credit. A
master demand note will be valued each day a NASL Portfolio's net asset value is
determined, which value will generally be equal to the face value of the note
plus accrued interest unless the financial position of the issuer is such that
its ability to repay the note when due is in question.
5. CORPORATE OBLIGATIONS. Corporate obligations include bonds and
notes issued by corporations to finance long-term credit needs.
6. REPURCHASE AGREEMENTS. Repurchase agreements are arrangements
involving the purchase of obligations by a NASL Portfolio and the simultaneous
agreement to resell the same obligations on demand or at a specified future date
and at an agreed upon price. A repurchase agreement can be viewed as a loan made
by a NASL Portfolio to the seller of the obligation with such obligation serving
as collateral for the seller's agreement to repay the amount borrowed with
interest. Such transactions afford an opportunity for a NASL Portfolio to earn a
return on cash which is only temporarily available. Repurchase agreements
entered into by the NASL Portfolio will be with banks, brokers or dealers.
However, a NASL Portfolio will enter into a repurchase agreement with a broker
or dealer only if the broker or dealer agrees to deposit additional collateral
should the value of the obligation purchased by the NASL Portfolio decrease
below the resale price.
In selecting sellers with whom the NASL Portfolio will enter into
repurchase transactions, NASL's Board of Trustees (the "NASL Board") has adopted
procedures that establish certain credit worthiness, asset and collateralization
requirements and limit the counterparties to repurchase transactions to those
financial institutions which are members of the Federal Reserve System and for a
primary government securities dealer reporting to the Federal Reserve Bank of
New York's Market Reports Division or a broker/dealer which meet certain credit
worthiness criteria or which report U.S. Government securities positions to the
Federal Reserve Board. However, the NASL Board reserves the right to change the
criteria used to select such financial institutions and broker/dealers. The NASL
Board will regularly monitor the use of repurchase agreements and the subadviser
will, pursuant to procedures adopted by the NASL Board, continuously monitor
that the collateral held with respect to a repurchase transaction equals or
exceeds the amount of the obligations.
Should an issuer of a repurchase agreement fail to repurchase the
underlying obligation, the loss to the NASL Portfolio, if any, would be the
difference between the repurchase price and the underlying obligation's market
value. A NASL Portfolio might also incur certain costs in liquidating the
underlying obligation. Moreover, if bankruptcy or other insolvency proceedings
-2-
<PAGE> 94
should be commenced with respect to the seller, realization upon the underlying
obligation by NASL might be delayed or limited. Generally, repurchase agreements
are of a short duration, often less than one week but on occasion for longer
periods.
OTHER INSTRUMENTS
The following provides a more detailed explanation of some of the other
instruments in which certain of the NASL Portfolios may invest.
1. MORTGAGE SECURITIES
Mortgage securities differ from conventional bonds in that principal is
paid over the life of the securities rather than at maturity. As a result, a
NASL Portfolio receives monthly scheduled payments of principal and interest,
and may receive unscheduled principal payments representing prepayments on the
underlying mortgages. When a NASL Portfolio reinvests the payments and any
unscheduled prepayments of principal it receives, it may receive a rate of
interest which is higher or lower than the rate on the existing mortgage
securities. For this reason, mortgage securities may be less effective than
other types of debt securities as a means of locking in long term interest
rates.
In addition, because the underlying mortgage loans and assets may be
prepaid at any time, if a NASL Portfolio purchases mortgage securities at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity. Conversely, if a NASL Portfolio
purchases these securities at a discount, faster than expected prepayments will
increase, while slower than expected payments will reduce, yield to maturity.
Adjustable rate mortgage securities, are similar to the mortgage
securities discussed above, except that unlike fixed rate mortgage securities,
adjustable rate mortgage securities are collateralized by or represent interests
in mortgage loans with variable rates of interest. These variable rates of
interest reset periodically to align themselves with market rates. Most
adjustable rate mortgage securities provide for an initial mortgage rate that is
in effect for a fixed period, typically ranging from three to twelve months.
Thereafter, the mortgage interest rate will reset periodically in accordance
with movements in a specified published interest rate index. The amount of
interest due to an adjustable rate mortgage holder is determined in accordance
with movements in a specified published interest rate index by adding a
pre-determined increment or "margin" to the specified interest rate index. Many
adjustable rate mortgage securities reset their interest rates based on changes
in the one-year, three-year and five-year constant maturity Treasury rates, the
three-month or six-month Treasury Bill rate, the 11th District Federal Home Loan
Bank Cost of Funds, the National Median Cost of Funds, the one-month,
three-month, six-month or one-year London Interbank Offered Rate ("LIBOR") and
other market rates.
A NASL portfolio will not benefit from increases in interest rates to
the extent that interest rates rise to the point where they cause the current
coupon of adjustable rate mortgages held as investments to exceed any maximum
allowable annual or lifetime reset limits (or "cap rates") for a particular
mortgage. In this event, the value of the mortgage securities in a NASL
Portfolio would likely decrease. Also, the NASL Portfolio's net asset value
could vary to the extent that current yields on adjustable rate mortgage
securities are different than market yields during interim periods between
coupon reset dates. During periods of declining interest rates, income to a NASL
Portfolio derived from adjustable rate mortgages which remain in a mortgage pool
will decrease in contrast to the income on fixed rate mortgages, which will
remain constant. Adjustable rate mortgages also have less potential for
appreciation in value as interest rates decline than do fixed rate investments.
Privately-Issued Mortgage Securities. Privately-issued pass through
securities provide for the monthly principal and interest payments made by
individual borrowers to pass through to investors on a corporate basis, and in
privately issued collateralized mortgage obligations, as further described
below. Privately-issued mortgage securities are issued by private originators
of, or investors in, mortgage loans, including mortgage bankers, commercial
banks, investment banks, savings and loan associations and special purpose
subsidiaries of the foregoing. Since privately-issued mortgage certificates are
not guaranteed by an entity having the credit status of GNMA or FHLMC, such
securities generally are structured with one or more types of credit
enhancement. For a description of the types of credit enhancements that may
accompany privately-issued mortgage securities, see "Types of Credit Support"
below. A NASL Portfolio will not limit its investments to asset-backed
securities with credit enhancements.
Collateralized Mortgage Obligations ("CMOs"). CMOs generally are bonds
or certificates issued in multiple classes that are collateralized by or
represent an interest in mortgages. CMOs may be issued by single-purpose,
stand-alone finance subsidiaries or trusts of financial institutions, government
agencies, investment banks or other similar institutions. Each class of CMOs,
often referred to as a "tranche", may be issued with a specific fixed coupon
rate (which may be zero) or a floating
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coupon rate, and has a stated maturity or final distribution date. Principal
prepayments on the underlying mortgages may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrued on CMOs on a monthly, quarterly or semiannual basis.
The principal of and interest on the underlying mortgages may be allocated among
the several classes of a series of a CMO in many ways. The general goal sought
to be achieved in allocating cash flows on the underlying mortgages to the
various classes of a series of CMOs is to create tranches on which the expected
cash flows have a higher degree of predictability than the underlying mortgages.
As a general matter, the more predictable the cash flow is on a CMO tranche, the
lower the anticipated yield will be on that tranche at the time of issuance. As
part of the process of creating more predictable cash flows on most of the
tranches in a series of CMOs, one or more tranches generally must be created
that absorb most of the volatility in the cash flows on the underlying
mortgages. The yields on these tranches are relatively higher than on tranches
with more predictable cash flows. Because of the uncertainty of the cash flows
on these tranches, and the sensitivity thereof to changes in prepayment rates on
the underlying mortgages, the market prices of and yield on these tranches tend
to be highly volatile.
CMOs purchased may be:
(1) collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. Government;
(2) collateralized by pools of mortgages in which payment of principal
and interest is guaranteed by the issuer and the guarantee is
collateralized by U.S. Government securities; or
(3) securities for which the proceeds of the issuance are invested in
mortgage securities and payment of the principal and interest is
supported by the credit of an agency or instrumentality of the U.S.
Government.
STRIPS. In addition to the U.S. Government securities discussed above,
certain NASL Portfolios may invest in separately traded interest components of
securities issued or guaranteed by the United States Treasury. The interest
components of selected securities are traded independently under the Separate
Trading of Registered Interest and Principal of Securities program ("STRIPS").
Under the STRIPS program, the interest components are individually numbered and
separately issued by the United States Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Stripped Mortgage Securities. Stripped mortgage securities are
derivative multiclass mortgage securities. Stripped mortgage securities may be
issued by agencies or instrumentalities of the U.S. Government, or by private
issuers, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
Stripped mortgage securities have greater volatility than other types of
mortgage securities in which the NASL Portfolio invests. Although stripped
mortgage securities are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, the market for
such securities has not yet been fully developed. Accordingly, stripped mortgage
securities are generally illiquid and to such extent, together with any other
illiquid investments, will not exceed 15% of a NASL Portfolio's net assets.
Stripped mortgage securities are usually structured with two classes
that receive different proportions of the interest and principal distributions
on a pool of mortgage assets. A common type of stripped mortgage security will
have one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest only or "IO" class), while the other class will
receive all of the principal (the principal only or "PO" class). The yield to
maturity on an IO class is extremely sensitive not only to changes in prevailing
interest rates but also the rate of principal payments (including prepayments)
on the related underlying mortgage assets, and a rapid rate of principal
payments may have a material adverse effect on the NASL Portfolio's yield to
maturity. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the NASL Portfolio may fail to fully recoup its
initial investment in these securities even if the securities are rated AAA by
S&P.
As interest rates rise and fall, the value of IOs tends to move in the
same direction as interest rates. The value of the other mortgage securities
described in the Prospectus/Proxy Statement, like other debt instruments, will
tend to move in the opposite direction to interest rates. Accordingly, NASL
believes that investing in IOs, in conjunction with the other mortgage
securities described herein, will contribute to a NASL Portfolio's relatively
stable net asset value.
In addition to the stripped mortgage securities described above,
certain NASL Portfolios may invest in similar securities such as Super POs and
Levered IOs which are more volatile than POs IOs and IOettes. Risks associated
with instruments such as Super POs are similar in nature to those risks
related to investments in POs. Risks connected with Levered
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IOs and IOettes are similar in nature to those associated with IOs. The NASL
Strategic Bond Trust may also invest in other similar instruments developed in
the future that are deemed consistent with the investment objectives, policies
and restrictions of the NASL Portfolio.
Under the Internal Revenue Code of 1986, as amended (the "Code"), POs may
generate taxable income from the current accrual of original issue discount,
without a corresponding distribution of cash to the NASL Portfolio. See
"Additional Information Concerning Taxes."
Inverse Floaters. Certain NASL Portfolios may invest in inverse floaters
which are also derivative mortgage securities. Inverse floaters may be issued
by agencies or instrumentalities of the U.S. Government, or by private issuers,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. Inverse
floaters have greater volatility than other types of mortgage securities in
which the NASL Portfolio invests (with the exception of stripped mortgage
securities). Although inverse floaters are purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers,
the market for such securities has not yet been fully developed. Accordingly,
inverse floaters are generally illiquid and to such extent, together with any
other illiquid investments, will not exceed 15% of a NASL Portfolio's net
assets.
Inverse floaters are structured as a class of security that receives
distributions on a pool of mortgage assets and whose yields move in the opposite
direction of short-term interest rates and at an accelerated rate. Inverse
floaters may be volatile and there is a risk that their market value will vary
from their amortized cost.
2. ASSET-BACKED SECURITIES
The securitization techniques used to develop mortgage securities are also
being applied to a broad range of other assets. Through the use of trusts and
special purpose corporations, automobile and credit card receivables are being
securitized in pass-through structures similar to mortgage pass-through
structures or in a pay-through structure similar to the CMO structure. Generally
the issuers of asset-backed bonds, notes or pass-through certificates are
special purpose entities and do not have any significant assets other than the
receivables securing such obligations. In general, the collateral supporting
asset-backed securities is of shorter maturity than mortgage loans. As a result,
investment in these securities should result in greater price stability for the
NASL Portfolio's shares. Instruments backed by pools of receivables are similar
to mortgage-backed securities in that they are subject to unscheduled
prepayments of principal prior to maturity. When the obligations are prepaid,
the NASL Portfolio must reinvest the prepaid amounts in securities the yields of
which reflect interest rates prevailing at the time. Therefore, a NASL
Portfolio's ability to maintain a portfolio which includes high-yielding
asset-backed securities will be adversely affected to the extent that
prepayments of principal must be reinvested in securities which have lower
yields than the prepaid obligations. Moreover, prepayments of securities
purchased at a premium could result in a realized loss. A NASL Portfolio will
only invest in asset-backed securities rated, at the time of purchase, AA or
better by S&P or Aa or better by Moody's or which, in the opinion of the
investment subadviser, are of comparable quality.
As with mortgage securities, asset-backed securities are often backed by a
pool of assets representing the obligation of a number of different parties and
use similar credit enhancement techniques. For a description of the types of
credit enhancement that may accompany privately-issued mortgage securities, see
"Types of Credit Support" below. A NASL Portfolio will not limit its investments
to asset-backed securities with credit enhancements. Although asset-backed
securities are not generally traded on a national securities exchange, such
securities are widely traded by brokers and dealers, and to such extent will not
be considered illiquid securities for the purposes of the investment restriction
under "Investment Restrictions" below.
TYPES OF CREDIT SUPPORT. Mortgage securities and asset-backed securities
are often backed by a pool of assets representing the obligations of a number of
different parties. To lessen the effect of failure by obligors on underlying
assets to make payments, such securities may contain elements of credit support.
Such credit support falls into two categories: (i) liquidity protection and (ii)
protection against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure that the
pass-through of payments due on the underlying pool occurs in a timely fashion.
Protection against losses resulting from ultimate default enhances the
likelihood of ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through a
combination of such approaches. NASL will not pay any additional fees for such
credit support, although the existence of credit support may increase the price
of a security.
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The ratings of mortgage securities and asset-backed securities for which
third-party credit enhancement provides liquidity protection or protection
against losses from default are generally dependent upon the continued
creditworthiness of the provider of the credit enhancement. The ratings of such
securities could be subject to reduction in the event of deterioration in the
creditworthiness of the credit enhancement provider even in cases where the
delinquency and loss experience on the underlying pool of assets is better than
expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such security.
3. ZERO COUPON SECURITIES AND PAY-IN-KIND BONDS
Zero coupon securities and pay-in-kind bonds involve special risk
considerations. Zero coupon securities are debt securities that pay no cash
income but are sold at substantial discounts from their value at maturity. When
a zero coupon security is held to maturity, its entire return, which consists of
the amortization of discount, comes from the difference between its purchase
price and its maturity value. This difference is known at the time of purchase,
so that investors holding zero coupon securities until maturity know at the time
of their investment what the return on their investment will be. Certain zero
coupon securities also are sold at substantial discounts from their maturity
value and provide for the commencement of regular interest payments at a
deferred date. The NASL Portfolios also may purchase pay-in-kind bonds.
Pay-in-kind bonds are bonds that pay all or a portion of their interest in the
form of debt or equity securities.
Zero coupon securities and pay-in-kind bonds tend to be subject to greater
price fluctuations in response to changes in interest rates than are ordinary
interest-paying debt securities with similar maturities. The value of zero
coupon securities appreciates more during periods of declining interest rates
and depreciates more during periods of rising interest rates.
Zero coupon securities and pay-in-kind bonds may be issued by a wide
variety of corporate and governmental issuers. Although zero coupon securities
and pay-in-kind bonds are generally not traded on a national securities
exchange, such securities are widely traded by brokers and dealers and, to such
extent, will not be considered illiquid for the purposes of the investment
restriction under "Investment Restrictions" below.
Current federal income tax law requires the holder of a zero coupon
security or certain pay-in-kind bonds to accrue income with respect to these
securities prior to the receipt of cash payments. To maintain its qualification
as a regulated investment company and avoid liability for federal income and
excise taxes, a NASL Portfolio may be required to distribute income accrued with
respect to these securities and may have to dispose of portfolio securities
under disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements. See "Taxes--Pay-in-kind Bonds and Zero Coupon Bonds"
below.
4. HIGH YIELD (HIGH RISK) DOMESTIC CORPORATE DEBT SECURITIES
The market for high yield U.S. corporate debt securities has undergone
significant changes in the past decade. Issuers in the U.S. high yield market
originally consisted primarily of growing small capitalization companies and
larger capitalization companies whose credit quality had declined from
investment grade. During the mid-1980's, participants in the U.S. high yield
market issued high yield securities principally in connection with leveraged
buyouts and other leveraged recapitalizations. In late 1989 and 1990, the volume
of new issues of high yield U.S. corporate debt declined significantly and
liquidity in the market decreased. Since early 1991, the volume of new issues of
high yield U.S. corporate debt securities has increased substantially and
secondary market liquidity has improved. During the same periods, the U.S. high
yield debt market exhibited strong returns, and it continues to be an attractive
market in terms of yield and yield spread over U.S. Treasury securities.
Currently, most new offerings of U.S. high yield securities are being issued to
refinance higher coupon debt and to raise funds for general corporate purposes.
High yield U.S. corporate debt securities in which the NASL Portfolios may
invest include bonds, debentures, notes and commercial paper and will generally
be unsecured. Most of these debt securities will bear interest at fixed rates.
However, the NASL Portfolios may also invest in debt securities with variable
rates of interest or which involve equity features, such
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as contingent interest or participations based on revenues, sales or profits
(i.e., interest or other payments, often in addition to a fixed rate of return,
that are based on the borrower's attainment of specified levels of revenues,
sales or profits and thus enable the holder of the security to share in the
potential success of the venture).
5. HIGH YIELD FOREIGN SOVEREIGN DEBT SECURITIES
Certain NASL Portfolios expect that a significant portion of
their emerging market governmental debt obligations will consist of "Brady
Bonds". In addition, certain NASL Portfolios may also invest in "Brady
Bonds". Brady Bonds are debt securities issued under the framework of the "Brady
Plan," an initiative announced by former U.S. Treasury Secretary Nicholas F.
Brady in 1989 as a mechanism for debtor nations to restructure their outstanding
external commercial bank indebtedness. The Brady Plan framework, as it has
developed, contemplates the exchange of external commercial bank debt for newly
issued bonds (Brady Bonds). Brady Bonds may also be issued in respect of new
money being advanced by existing lenders in connection with the debt
restructuring. Investors should recognize that Brady Bonds have been issued only
recently, and accordingly do not have a long payment history. Brady Bonds issued
to date generally have maturities of between 15 and 30 years from the date of
issuance and have traded at a deep discount from their face value. Certain NASL
Portfolios may invest in Brady Bonds of emerging market countries that
have been issued to date, as well as those which may be issued in the future. In
addition to Brady Bonds, certain NASL Portfolios may invest in emerging
market governmental obligations issued as a result of debt restructuring
agreements outside of the scope of the Brady Plan.
Agreements implemented under the Brady Plan to date are designed to
achieve debt and debt-service reduction through specific options negotiated by a
debtor nation with its creditors. As a result, the financial packages offered by
each country differ. The types of options have included the exchange of
outstanding commercial bank debt for bonds issued at 100% of face value of such
debt which carry a below-market stated rate of interest (generally known as par
bonds), bonds issued at a discount from face value of such debt (generally known
as discount bonds), bonds bearing an interest rate which increases over time and
bonds issued in exchange for the advancement of new money by existing lenders.
Discount bonds issued to date under the framework of the Brady Plan have
generally borne interest computed semi-annually at a rate equal to 13/16 of one
percent above the current six month LIBOR rate. Regardless of the stated face
amount and stated interest rate of the various types of Brady Bonds, certain
NASL Portfolios will purchase Brady Bonds in secondary markets, as described
below, in which the price and yield to the investor reflect market conditions at
the time of purchase. Brady Bonds issued to date have traded at a deep discount
from their face value. Certain sovereign bonds are entitled to "value recovery
payments" in certain circumstances, which in effect constitute supplemental
interest payments but generally are not collateralized. Certain Brady Bonds have
been collateralized as to principal due at maturity (typically 15 to 30 years
from the date of issuance) by U.S. Treasury zero coupon bonds with a maturity
equal to the final maturity of such Brady Bonds, although the collateral is not
available to investors until the final maturity of the Brady Bonds. Collateral
purchases are financed by the International Monetary Fund (the "IMF"), the World
Bank and the debtor nations' reserves. In addition, interest payments on certain
types of Brady Bonds may be collateralized by cash or high-grade securities in
amounts that typically represent between 12 and 18 months of interest accruals
on these instruments with the balance of the interest accruals being
uncollateralized. Certain NASL Portfolios may purchase Brady Bonds with
no or limited collateralization, and will be relying for payment of interest and
(except in the case of principal collateralized Brady Bonds) principal primarily
on the willingness and ability of the foreign government to make payment in
accordance with the terms of the Brady Bonds. Brady Bonds issued to date are
purchased and sold in secondary markets through U.S. securities dealers and
other financial institutions and are generally maintained through European
transactional securities depositories. A substantial portion of the Brady Bonds
and other sovereign debt securities in which the NASL Portfolios invest are
likely to be acquired at a discount.
6. HYBRID INSTRUMENTS
Hybrid instruments (a type of potentially high-risk derivative) have
been developed and combine the elements of futures contracts or options with
those of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Generally, a Hybrid Instrument will be a debt security, preferred
stock, depository share, trust certificate, certificate of deposit or other
evidence of indebtedness on which a portion of or all interest payments, and/or
the principal or stated amount payable at maturity, redemption or retirement, is
determined by reference to prices, changes in prices, or differences between
prices, of securities, currencies, intangibles, goods, articles or commodities
(collectively "Underlying Assets") or by another objective index, economic
factor or other measure, such as interest rates, currency exchange rates,
commodity indices, and securities indices (collectively "Benchmarks"). Thus,
Hybrid Instruments may take a variety of forms, including, but not limited to,
debt instruments with interest or principal payments or redemption terms
determined by reference to the value of a currency or commodity or securities
index at a future point in time, preferred stock with dividend rates determined
by reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity.
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Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing total
return. For example, a NASL Portfolio may wish to take advantage of expected
declines in interest rates in several European countries, but avoid the
transactions costs associated with buying and currency-hedging the foreign bond
positions. One solution would be to purchase a U.S. dollar-denominated Hybrid
Instrument whose redemption price is linked to the average three year interest
rate in a designated group of countries. The redemption price formula would
provide for payoffs of greater than par if the average interest rate was lower
than a specified level, and payoffs of less than par if rates were above the
specified level. Furthermore, the NASL Portfolio could limit the downside risk
of the security by establishing a minimum redemption price so that the principal
paid at maturity could not be below a predetermined minimum level if interest
rates were to rise significantly. The purpose of this arrangement, known as a
structured security with an embedded put option, would be to give the NASL
Portfolio the desired European bond exposure while avoiding currency risk,
limiting downside market risk, and lowering transactions costs. Of course, there
is no guarantee that the strategy will be successful and the NASL Portfolio
could lose money if, for example, interest rates do not move as anticipated or
credit problems develop with the issuer of the Hybrid.
The risks of investing in Hybrid Instruments reflect a combination of
the risks of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that has a
fixed principal amount, is denominated in U.S. dollars or bears interest either
at a fixed rate or a floating rate determined by reference to a common,
nationally published Benchmark. The risks of a particular Hybrid Instrument
will, of course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the Benchmarks or
the prices of Underlying Assets to which the instrument is linked. Such risks
generally depend upon factors which are unrelated to the operations or credit
quality of the issuer of the Hybrid Instrument and which may not be readily
foreseen by the purchaser, such as economic and political events, the supply and
demand for the Underlying Assets and interest rate movements. In recent years,
various Benchmarks and prices for Underlying Assets have been highly volatile,
and such volatility may be expected in the future. Reference is also made to the
discussion below of futures, options, and forward contracts for a description of
certain risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry greater
market risks than traditional debt instruments. Depending on the structure of
the particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the Hybrid
Instrument and the Benchmark or Underlying Asset may not move in the same
direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at
below market (or even relatively nominal) rates. Alternatively, Hybrid
Instruments may bear interest at above market rates but bear an increased risk
of principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid Instrument,
thereby magnifying the risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the instruments
are often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
NASL Portfolio and the issuer of the Hybrid Instrument, the creditworthiness of
the counter party or issuer of the Hybrid Instrument would be an additional risk
factor which the NASL Portfolio would have to consider and monitor. Hybrid
Instruments also may not be subject to regulation of the Commodities Futures
Trading Commission ("CFTC"), which generally regulates the trading of commodity
futures by U.S. persons, the SEC, which regulates the offer and sale of
securities by and to U.S. persons, or any other governmental regulatory
authority. The various risks discussed above, particularly the market risk of
such instruments, may in turn cause significant fluctuations in the net asset
value of the NASL Portfolio.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
As described in the Prospectus/Proxy Statement under "Comparison of
Investment Objectives and Policies--J. Additional Information on Investment
Policies and Techniques and Risk Factors--Hedging and Other Strategic
Transactions", an individual NASL Portfolio may be authorized to use a variety
of investment strategies. These strategies will be used for hedging purposes
only, including hedging various market risks (such as interest rates, currency
exchange rates and broad or specific market movements), and managing the
effective maturity or duration of debt instruments held by the NASL Portfolio
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(such investment strategies and transactions are referred to herein as "Hedging
and Other Strategic Transactions"). The description in the Prospectus/Proxy
Statement of each NASL Portfolio indicates which, if any, of these types of
transactions may be used by the NASL Portfolio.
A detailed discussion of Hedging and Other Strategic Transactions follows
below. No NASL Portfolio which is authorized to use any of these investment
strategies will be obligated, however, to pursue any of such strategies and no
NASL Portfolio makes any representation as to the availability of these
techniques at this time or at any time in the future. In addition, a NASL
Portfolio's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable rules and regulations of the CFTC
thereunder and the federal income tax requirements applicable to regulated
investment companies which are not operated as commodity pools.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Hedging and Other Strategic Transactions
involving options require segregation of portfolio assets in special accounts,
as described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
A NASL Portfolio's purchase of a put option on a security, for example, might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
of such instrument by giving the NASL Portfolio the right to sell the instrument
at the option exercise price. A call option, upon payment of a premium, gives
the purchaser of the option the right to buy, and the seller the obligation to
sell, the underlying instrument at the exercise price. A NASL Portfolio's
purchase of a call option on a security, financial futures contract, index,
currency or other instrument might be intended to protect the NASL Portfolio
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase the
instrument. An "American" style put or call option may be exercised at any time
during the option period, whereas a "European" style put or call option may be
exercised only upon expiration or during a fixed period prior to expiration.
Exchange-listed options are issued by a regulated intermediary such as the
Options Clearing Corporation ("OCC"), which guarantees the performance of the
obligations of the parties to the options. The discussion below uses the OCC as
an example, but is also applicable to other similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options and Eurodollar
instruments (which are described below under "Eurodollar Instruments") are cash
settled for the net amount, if any, by which the option is "in-the-money" (that
is, the amount by which the value of the underlying instrument exceeds, in the
case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A NASL Portfolio's ability to close out its position as a purchaser or
seller of an OCC-issued or exchange-listed put or call option is dependent, in
part, upon the liquidity of the particular option market. Among the possible
reasons for the absence of a liquid option market on an exchange are: (1)
insufficient trading interest in certain options, (2) restrictions on
transactions imposed by an exchange, (3) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities, including reaching daily price limits, (4) interruption
of the normal operations of the OCC or an exchange, (5) inadequacy of the
facilities of an exchange or the OCC to handle current trading volume or (6) a
decision by one or more exchanges to discontinue the trading of options (or a
particular class or series of options), in which event the relevant market for
that option on that exchange would cease to exist, although any such outstanding
options on that exchange would continue to be exercisable in accordance with
their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
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Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through
direct bilateral agreement with the Counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics, all
of the terms of an OTC option, including such terms as method of settlement,
term, exercise price, premium, guaranties and security, are determined by
negotiation of the parties. It is anticipated that any NASL Portfolio authorized
to use OTC options will generally only enter into OTC options that have cash
settlement provisions, although it will not be required to do so.
Unless the parties provide for it, no central clearing or guaranty
function is involved in an OTC option. As a result, if a Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a NASL Portfolio or fails to make a cash
settlement payment due in accordance with the terms of that option, the NASL
Portfolio will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Thus, the subadviser must assess the
creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be met. A NASL Portfolio will enter into OTC option
transactions only with U.S. Government securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers," or broker-dealers,
domestic or foreign banks, or other financial institutions that are deemed
creditworthy by the subadviser. In the absence of a change in the current
position of the staff of the Commission, OTC options purchased by a NASL
Portfolio and the amount of the NASL Portfolio's obligation pursuant to an OTC
option sold by the NASL Portfolio (the cost of the sell-back plus the
in-the-money amount, if any) or the value of the assets held to cover such
options will be deemed illiquid.
If a NASL Portfolio sells a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments held by the
NASL Portfolio or will increase the NASL Portfolio's income. Similarly, the sale
of put options can also provide portfolio gains.
If and to the extent authorized to do so, a NASL Portfolio may purchase
and sell call options on securities and on Eurodollar instruments that are
traded on U.S. and foreign securities exchanges and in the OTC markets, and on
securities indices, currencies and futures contracts. All calls sold by a NASL
Portfolio must be "covered" (that is, the NASL Portfolio must own the securities
or futures contract subject to the call) or must otherwise meet the asset
segregation requirements described below for so long as the call is outstanding.
Even though a NASL Portfolio will receive the option premium to help protect it
against loss, a call sold by the NASL Portfolio will expose the NASL Portfolio
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the NASL Portfolio to hold a security or instrument that it might
otherwise have sold.
Each NASL Portfolio reserves the right to invest in options on instruments
and indices which may be developed in the future to the extent consistent with
applicable law, the NASL Portfolio's investment objective and the restrictions
set forth herein.
If and to the extent authorized to do so, a NASL Portfolio may purchase
and sell put options on securities (whether or not it holds the securities in
its portfolio) and on securities indices, currencies and futures contracts. A
NASL Portfolio will not sell put options if, as a result, more than 50% of the
NASL Portfolio's assets would be required to be segregated to cover its
potential obligations under put options other than those with respect to futures
contracts. In selling put options, a NASL Portfolio faces the risk that it may
be required to buy the underlying security at a disadvantageous price above the
market price.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
If and to the extent authorized to do so, a NASL Portfolio may trade
financial futures contracts or purchase or sell put and call options on those
contracts as a hedge against anticipated interest rate, currency or market
changes, for duration management and for risk management purposes. Futures
contracts are generally bought and sold on the commodities exchanges on which
they are listed with payment of initial and variation margin as described below.
The sale of a futures contract creates a firm obligation by a NASL Portfolio, as
seller, to deliver to the buyer the specific type of financial instrument called
for in the contract at a specific future time for a specified price (or, with
respect to certain instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right, in return for the premium paid,
to assume a position in a futures contract and obligates the seller to deliver
that position.
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A NASL Portfolio's use of financial futures contracts and options thereon
will in all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the CFTC and will be entered into only
for bona fide hedging, risk management (including duration management) or other
appropriate portfolio management purposes. Maintaining a futures contract or
selling an option on a futures contract will typically require a NASL Portfolio
to deposit with a financial intermediary, as security for its obligations, an
amount of cash or other specified assets ("initial margin") that initially is
from 1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ("variation margin") may be required
to be deposited thereafter daily as the mark-to-market value of the futures
contract fluctuates. The purchase of an option on a financial futures contract
involves payment of a premium for the option without any further obligation on
the part of a NASL Portfolio. If a NASL Portfolio exercises an option on a
futures contract it will be obligated to post initial margin (and potentially
variation margin) for the resulting futures position just as it would for any
futures position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction, but no assurance can be given that a
position can be offset prior to settlement or that delivery will occur.
No NASL Portfolio will enter into a futures contract or option thereon if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the current
fair market value of the NASL Portfolio's total assets; however, in the case of
an option that is in-the-money at the time of the purchase, the in-the-money
amount may be excluded in calculating the 5% limitation. The value of all
futures contracts sold by a NASL Portfolio (adjusted for the historical
volatility relationship between such NASL Portfolio and the contracts) will not
exceed the total market value of the NASL Portfolio's securities. The
segregation requirements with respect to futures contracts and options thereon
are described below under "Use of Segregated and Other Special Accounts".
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
If and to the extent authorized to do so, a NASL Portfolio may purchase
and sell call and put options on securities indices and other financial indices.
In so doing, the NASL Portfolio can achieve many of the same objectives it would
achieve through the sale or purchase of options on individual securities or
other instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, options on indices
settle by cash settlement; that is, an option on an index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of the index upon which the option is based exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option
(except if, in the case of an OTC option, physical delivery is specified). This
amount of cash is equal to the excess of the closing price of the index over the
exercise price of the option, which also may be multiplied by a formula value.
The seller of the option is obligated, in return for the premium received, to
make delivery of this amount. The gain or loss on an option on an index depends
on price movements in the instruments comprising the market, market segment,
industry or other composite on which the underlying index is based, rather than
price movements in individual securities, as is the case with respect to options
on securities.
CURRENCY TRANSACTIONS
If and to the extent authorized to do so, a NASL Portfolio may engage in
currency transactions with Counterparties to hedge the value of portfolio
securities denominated in particular currencies against fluctuations in relative
value. Currency transactions include currency forward contracts, exchange-listed
currency futures contracts and options thereon, exchange-listed and OTC options
on currencies, and currency swaps. A forward currency contract involves a
privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. A currency swap is an agreement to exchange cash flows
based on the notional difference among two or more currencies and operates
similarly to an interest rate swap, which is described below under "Swaps, Caps,
Floors and Collars". A NASL Portfolio may enter into currency transactions only
with Counterparties that are deemed creditworthy by its subadviser.
A NASL Portfolio's dealings in forward currency contracts and other
currency transactions such as futures contracts, options, options on futures
contracts and swaps will be limited to hedging and other non-speculative
purposes, including transaction hedging and position hedging. Transaction
hedging is entering into a currency transaction with respect to specific assets
or liabilities of a NASL Portfolio, which will generally arise in connection
with the purchase or sale of the NASL Portfolio's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A NASL Portfolio will not enter into a
transaction to hedge currency exposure to an extent greater, after netting all
transactions intended wholly or partially to offset other transactions, than the
aggregate market value (at the time of entering into the transaction) of the
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securities held by the NASL Portfolio that are denominated or generally quoted
in or currently convertible into the currency, other than with respect to proxy
hedging as described below.
A NASL Portfolio may cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to increase or
decline in value relative to other currencies to which the NASL Portfolio has or
in which the NASL Portfolio expects to have exposure. To reduce the effect of
currency fluctuations on the value of existing or anticipated holdings of its
securities, a NASL Portfolio may also engage in proxy hedging. Proxy hedging is
often used when the currency to which a NASL Portfolio's holdings is exposed is
difficult to hedge generally or difficult to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency, the changes
in the value of which are generally considered to be linked to a currency or
currencies in which some or all of a NASL Portfolio's securities are or are
expected to be denominated, and to buy dollars. The amount of the contract would
not exceed the market value of the NASL Portfolio's securities denominated in
linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under "Risk Factors". If a NASL Portfolio
enters into a currency hedging transaction, the NASL Portfolio will comply with
the asset segregation requirements described below under "Use of Segregated and
Other Special Accounts".
COMBINED TRANSACTIONS
If and to the extent authorized to do so, a NASL Portfolio may enter into
multiple transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts), multiple interest rate transactions and any combination of futures,
options, currency and interest rate transactions, instead of a single Hedging
and Other Strategic Transaction, as part of a single or combined strategy when,
in the judgment of the subadviser, it is in the best interests of the NASL
Portfolio to do so. A combined transaction will usually contain elements of risk
that are present in each of its component transactions. Although combined
transactions will normally be entered into by a NASL Portfolio based on the
subadviser's judgment that the combined strategies will reduce risk or otherwise
more effectively achieve the desired portfolio management goal, it is possible
that the combination will instead increase the risks or hinder achievement of
the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS
Among the Hedging and Other Strategic Transactions into which a NASL
Portfolio may be authorized to enter are interest rate, currency and index
swaps, the purchase or sale of related caps, floors and collars and other
derivatives. A NASL Portfolio will enter into these transactions primarily to
seek to preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a duration management
technique or to protect against any increase in the price of securities a NASL
Portfolio anticipates purchasing at a later date. A NASL Portfolio will use
these transactions for non-speculative purposes and will not sell interest rate
caps or floors if it does not own securities or other instruments providing the
income the NASL Portfolio may be obligated to pay. Interest rate swaps involve
the exchange by a NASL Portfolio with another party of their respective
commitments to pay or receive interest (for example, an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal). A currency swap is an agreement to exchange cash flows on a notional
amount based on changes in the values of the reference indices. The purchase of
a cap entitles the purchaser to receive payments on a notional principal amount
from the party selling the cap to the extent that a specified index exceeds a
predetermined interest rate. The purchase of an interest rate floor entitles the
purchaser to receive payments of interest on a notional principal amount from
the party selling the interest rate floor to the extent that a specified index
falls below a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling the floor to the extent that a specific index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return with a predetermined range of interest
rates or values.
A NASL Portfolio will usually enter into interest rate swaps on a net
basis, that is, two payment streams are netted out in a cash settlement on the
payment date or dates specified in the instrument, with the NASL Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these swaps, caps, floors, collars and other similar
derivatives are entered into for good faith hedging or other non-speculative
purposes, they do not constitute senior securities under the Investment Company
Act of 1940, as amended, and, thus, will not be treated as being subject to the
NASL Portfolio's borrowing restrictions. A NASL Portfolio will not enter into
any swap, cap, floor, collar or other derivative transaction unless the
Counterparty is deemed creditworthy by the subadviser. If a Counterparty
defaults, a NASL Portfolio may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
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in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps, floors and collars
are more recent innovations for which standardized documentation has not yet
been fully developed and, for that reason, they are less liquid than swaps.
The liquidity of swap agreements will be determined by a subadviser based
on various factors, including (1) the frequency of trades and quotations, (2)
the number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset a NASL Portfolio's rights and
obligations relating to the investment). Such determination will govern whether
a swap will be deemed to be within the 15% restriction on investments in
securities that are not readily marketable.
Each NASL Portfolio will maintain cash and appropriate liquid assets in a
segregated custodial account to cover its current obligations under swap
agreements. If a NASL Portfolio enters into a swap agreement on a net basis, it
will segregate assets with a daily value at least equal to the excess, if any,
of the NASL Portfolio's accrued obligations under the swap agreement over the
accrued amount the NASL Portfolio is entitled to receive under the agreement. If
a NASL Portfolio enters into a swap agreement on other than a net basis, it will
segregate assets with a value equal to the full amount of the NASL Portfolio's
accrued obligations under the agreement. See also, "Use of Segregated and Other
Special Accounts."
EURODOLLAR INSTRUMENTS
If and to the extent authorized to do so, a NASL Portfolio may make
investments in Eurodollar instruments, which are typically dollar-denominated
futures contracts or options on those contracts that are linked to the London
Interbank Offered Rate ("LIBOR"), although foreign currency denominated
instruments are available from time to time. Eurodollar futures contracts enable
purchasers to obtain a fixed rate for the lending of funds and sellers to obtain
a fixed rate for borrowings. A NASL Portfolio might use Eurodollar futures
contracts and options thereon to hedge against changes in LIBOR, to which many
interest rate swaps and fixed income instruments are linked.
RISK FACTORS
Hedging and Other Strategic Transactions have special risks associated
with them, including possible default by the Counterparty to the transaction,
illiquidity and, to the extent the subadviser's view as to certain market
movements is incorrect, the risk that the use of the Hedging and Other Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options could result in losses to a NASL Portfolio, force the
sale or purchase of portfolio securities at inopportune times or for prices
higher than (in the case of put options) or lower than (in the case of call
options) current market values, or cause a NASL Portfolio to hold a security it
might otherwise sell.
The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of a
NASL Portfolio could create the possibility that losses on the hedging
instrument are greater than gains in the value of the NASL Portfolio's position.
In addition, futures and options markets could be illiquid in some circumstances
and certain over-the-counter options could have no markets. As a result, in
certain markets, a NASL Portfolio might not be able to close out a transaction
without incurring substantial losses. Although a NASL Portfolio's use of futures
and options transactions for hedging should tend to minimize the risk of loss
due to a decline in the value of the hedged position, at the same time it will
tend to limit any potential gain to a NASL Portfolio that might result from an
increase in value of the position. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing potential financial
risk than would purchases of options, in which case the exposure is limited to
the cost of the initial premium.
Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to a NASL Portfolio if the currency being hedged fluctuates in value to a
degree or in a direction that is not anticipated. Further, the risk exists that
the perceived linkage between various currencies may not be present or may not
be present during the particular time that a NASL Portfolio is engaging in proxy
hedging. Currency transactions are also subject to risks different from those of
other portfolio transactions. Because currency control is of great importance to
the issuing governments and influences economic planning and policy, purchases
and sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to a NASL Portfolio if
it is unable to deliver or receive currency or monies in settlement of
obligations and could
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also cause hedges it has entered into to be rendered useless, resulting in full
currency exposure as well as incurring transaction costs. Buyers and sellers of
currency futures contracts are subject to the same risks that apply to the use
of futures contracts generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures contracts is relatively new,
and the ability to establish and close out positions on these options is subject
to the maintenance of a liquid market that may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Losses resulting from the use of Hedging and Other Strategic Transactions
will reduce a NASL Portfolio's net asset value, and possibly income, and the
losses can be greater than if Hedging and Other Strategic Transactions had not
been used.
RISKS OF HEDGING AND OTHER STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES
When conducted outside the United States, Hedging and Other Strategic
Transactions may not be regulated as rigorously as in the United States, may not
involve a clearing mechanism and related guarantees, and will be subject to the
risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of positions taken as
part of non-U.S. Hedging and Other Strategic Transactions also could be
adversely affected by: (1) other complex foreign political, legal and economic
factors, (2) lesser availability of data on which to make trading decisions than
in the United States, (3) delays in a NASL Portfolio's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States and (5) lower
trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Use of many Hedging and Other Strategic Transactions by a NASL Portfolio
will require, among other things, that the NASL Portfolio segregate cash, liquid
high grade debt obligations or other assets with its custodian, or a designated
sub-custodian, to the extent the NASL Portfolio's obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by a NASL
Portfolio to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high grade debt
obligations at least equal to the current amount of the obligation must be
segregated with the custodian or sub-custodian. The segregated assets cannot be
sold or transferred unless equivalent assets are substituted in their place or
it is no longer necessary to segregate them. A call option on securities written
by a NASL Portfolio, for example, will require the NASL Portfolio to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid high grade
debt obligations sufficient to purchase and deliver the securities if the call
is exercised. A call option sold by a NASL Portfolio on an index will require
the NASL Portfolio to own portfolio securities that correlate with the index or
to segregate liquid high grade debt obligations equal to the excess of the index
value over the exercise price on a current basis. A put option on securities
written by a NASL Portfolio will require the NASL Portfolio to segregate liquid
high grade debt obligations equal to the exercise price. Except when a NASL
Portfolio enters into a forward contract in connection with the purchase or sale
of a security denominated in a foreign currency or for other non-speculative
purposes, which requires no segregation, a currency contract that obligates the
NASL Portfolio to buy or sell a foreign currency will generally require the NASL
Portfolio to hold an amount of that currency or liquid securities denominated in
that currency equal to a NASL Portfolio's obligations or to segregate liquid
high grade debt obligations equal to the amount of the NASL Portfolio's
obligations.
OTC options entered into by a NASL Portfolio, including those on
securities, currency, financial instruments or indices, and OCC-issued and
exchange-listed index options will generally provide for cash settlement,
although a NASL Portfolio will not be required to do so. As a result, when a
NASL Portfolio sells these instruments it will segregate an amount of assets
equal to its obligations under the options. OCC-issued and exchange-listed
options sold by a NASL Portfolio other than those described above generally
settle with physical delivery, and the NASL Portfolio will segregate an amount
of assets equal to the full value of the option. OTC options settling with
physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option on a futures contract, a
NASL Portfolio must deposit initial margin and, in some instances, daily
variation margin in addition to segregating assets sufficient to meet its
obligations to purchase or provide securities or currencies, or to pay the
amount owed at the expiration of an index-based futures contract. These assets
may consist of cash, cash equivalents, liquid debt or equity securities or other
acceptable assets. A NASL Portfolio will accrue the net amount of the excess, if
any, of its obligations relating to swaps over its entitlements with respect to
each swap on a daily basis and will segregate with its custodian, or designated
sub-custodian, an amount of cash or liquid high grade debt
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obligations having an aggregate value equal to at least the accrued excess.
Caps, floors and collars require segregation of assets with a value equal to a
NASL Portfolio's net obligation, if any.
Hedging and Other Strategic Transactions may be covered by means other
than those described above when consistent with applicable regulatory policies.
A NASL Portfolio may also enter into offsetting transactions so that its
combined position, coupled with any segregated assets, equals its net
outstanding obligation in related options and Hedging and Other Strategic
Transactions. A NASL Portfolio could purchase a put option, for example, if the
strike price of that option is the same or higher than the strike price of a put
option sold by the NASL Portfolio. Moreover, instead of segregating assets if it
holds a futures contracts or forward contract, a NASL Portfolio could purchase a
put option on the same futures contract or forward contract with a strike price
as high or higher than the price of the contract held. Other Hedging and Other
Strategic Transactions may also be offset in combinations. If the offsetting
transaction terminates at the time of or after the primary transaction, no
segregation is required, but if it terminates prior to that time, assets equal
to any remaining obligation would need to be segregated.
OTHER LIMITATIONS
No NASL Portfolio will maintain open short positions in futures
contracts, call options written on futures contracts, and call options written
on securities indices if, in the aggregate, the current market value of the open
positions exceeds the current market value of that portion of its securities
portfolio being hedged by those futures and options plus or minus the unrealized
gain or loss on those open positions, adjusted for the historical volatility
relationship between that portion of the portfolio and the contracts (e.g., the
Beta volatility factor). For purposes of the limitation stated in the
immediately preceding sentence, to the extent the NASL Portfolio has written
call options on specific securities in that portion of its portfolio, the value
of those securities will be deducted from the current market value of that
portion of the securities portfolio. If this limitation should be exceeded at
any time, the NASL Portfolio will take prompt action to close out the
appropriate number of open short positions to bring its open futures and options
positions within this limitation.
The degree to which a NASL Portfolio may utilize Hedging and Other
Strategic Transactions may also be affected by certain provisions of the
Internal Revenue Code of 1986, as amended.
INVESTMENT RESTRICTIONS
There are two classes of investment restrictions to which NASL is
subject in implementing the investment policies of the NASL Portfolios:
fundamental and nonfundamental. Nonfundamental restrictions are subject to
change by the NASL Board without shareholder approval. Fundamental restrictions
may only be changed by a vote of the lesser of (i) 67% or more of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares.
With respect to the submission of a change in an investment restriction
to the holders of NASL's outstanding voting securities, the matter shall be
deemed to have been effectively acted upon with respect to a particular NASL
Portfolio if a majority of the outstanding voting securities of the NASL
Portfolio vote for the approval of the matter, notwithstanding (1) that the
matter has not been approved by the holders of a majority of the outstanding
voting securities of any other NASL Portfolio affected by the matter, and (2)
that the matter has not been approved by the vote of a majority of the
outstanding voting securities of NASL.
All of the restrictions through restriction 8. are fundamental.
Restrictions 9. through 15. are nonfundamental.
FUNDAMENTAL
NASL may not issue senior securities, except to the extent that the
borrowing of money in accordance with restriction 3. may constitute the issuance
of a senior security. (For purposes of this restriction, purchasing securities
on a when-issued or delayed delivery basis and engaging in Hedging and Other
Strategic Transactions will not be deemed to constitute the issuance of a senior
security.) In addition, unless a NASL Portfolio is specifically excepted by the
terms of a restriction, each NASL Portfolio will not:
(1) Invest more than 25% of the value of its total assets in securities of
issuers having their principal activities in any particular industry,
excluding United States Government securities and obligations of domestic
branches of U.S. banks and savings and loan associations, except that this
restriction shall not apply to the NASL Real Estate Securities Trust.
[NASL has determined to forego the exclusion from the above policy of
obligations of domestic branches of U.S.
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savings and loan associations and to limit the exclusion of obligations of
domestic branches of U.S. banks to the NASL Money Market Trust.] For
purposes of this restriction, neither finance companies as a group nor
utility companies as a group are considered to be a single industry. Such
companies will be grouped instead according to their services; for
example, gas, electric and telephone utilities will each be considered a
separate industry. Also for purposes of this restriction, foreign
government issuers and supranational issuers are not considered members of
any industry.
(2) Purchase the securities of any issuer if the purchase would cause more
than 5% of the value of the NASL Portfolio's total assets to be invested
in the securities of any one issuer (excluding United States Government
securities) or cause more than 10% of the voting securities of the issuer
to be held by the NASL Portfolio, except that up to 25% of the value of
each NASL Portfolio's total assets may be invested without regard to these
restrictions. The NASL Emerging Growth Trust is not subject to these
restrictions.
(3) Borrow money, except that each NASL Portfolio may borrow (i) for temporary
or emergency purposes (not for leveraging) up to 33 1/3% of the value of
the NASL Portfolio's total assets (including amounts borrowed) less
liabilities (other than borrowings) and (ii) in connection with reverse
repurchase agreements, mortgage dollar rolls and other similar
transactions.
(4) Underwrite securities of other issuers except insofar as NASL may be
considered an underwriter under the Securities Act of 1933 in selling
portfolio securities.
(5) Purchase or sell real estate, except that each NASL Portfolio may invest
in securities issued by companies which invest in real estate or interests
therein and each of the NASL Portfolios other than the NASL Money Market
Trust may invest in mortgages and mortgage backed securities.
(6) Purchase or sell commodities or commodity contracts except that each NASL
Portfolio other than the NASL Money Market Trust may purchase and sell
futures contracts on financial instruments and indices and options on such
futures contracts and each NASL Portfolio other than the NASL Money Market
Trust may purchase and sell futures contracts on foreign currencies and
options on such futures contracts.
(7) Lend money to other persons except by the purchase of obligations in which
the NASL Portfolio is authorized to invest and by entering into repurchase
agreements. For purposes of this restriction, collateral arrangements with
respect to options, forward currency and futures transactions will not be
deemed to involve the lending of money.
(8) Lend securities in excess of 33 1/3% of the value of its total assets. For
purposes of this restriction, collateral arrangements with respect to
options, forward currency and futures transactions will not be deemed to
involve loans of securities.
NONFUNDAMENTAL
(9) Knowingly invest more than 15% of the value of its net assets in
securities or other investments, including repurchase agreements maturing
in more than seven days but excluding master demand notes, that are not
readily marketable, except that the NASL Money Market Trust may not invest
in excess of 10% of its net assets in such securities or other
investments.
(10) Sell securities short or purchase securities on margin except that it may
obtain such short-term credits as may be required to clear transactions.
For purposes of this restriction, collateral arrangements with respect to
Hedging and Other Strategic Transactions will not be deemed to involve the
use of margin.
(11) Write or purchase options on securities, financial indices or currencies
except to the extent a NASL Portfolio is specifically authorized to engage
in Hedging and Other Strategic Transactions.
(12) Purchase securities for the purpose of exercising control or management.
(13) Purchase securities of other investment companies if the purchase would
cause more than 10% of the value of the NASL Portfolio's total assets to
be invested in investment company securities, provided that (i) no
investment will be made in the securities of any one investment company if
immediately after such investment more than 3% of the outstanding voting
securities of such company would be owned by the NASL Portfolio or more
than 5% of the value of the NASL Portfolio's total assets would be
invested in such company and (ii) no restrictions shall apply to a
purchase of investment company securities in connection with a merger,
consolidation or reorganization or in connection with the investment of
collateral received in connection with the lending of securities in the
Navigator Securities Lending Trust. For purposes
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of this restriction, privately issued collateralized mortgage obligations
will not be treated as investment company securities if issued by
"Exemptive Issuers". Exemptive Issuers are defined as unmanaged,
fixed-asset issuers that (a) invest primarily in mortgage-backed
securities, (b) do not issue redeemable securities as defined in section
2(a)(32) of the Investment Company Act of 1940, (c) operate under general
exemptive orders exempting them from "all provisions of the Investment
Company Act of 1940," and (d) are not registered or regulated under the
Investment Company Act of 1940 as investment companies.
(14) Pledge, hypothecate, mortgage or transfer (except as provided in
restriction 8.) as security for indebtedness any securities held by the
NASL Portfolio except in an amount of not more than 10% (33 1/3% in the
case of the NASL International Stock Trust and 15% in the case of the NASL
Balanced Trust) of the value of the NASL Portfolio's total assets and then
only to secure borrowings permitted by restrictions 3. and 10. For
purposes of this restriction, collateral arrangements with respect to
Hedging and Other Strategic Transactions will not be deemed to involve a
pledge of assets.
(15) Purchase securities of foreign issuers, except that (A) each NASL
Portfolio may invest up to 20% of its total assets in such securities (in
the case of the NASL Balanced Trust, the applicable percentage limit is
30% of its total assets and ADRs and U.S. dollar-denominated securities
are not included in the applicable percentage limit); and (B) the
foregoing restriction shall not apply to the NASL Pacific Rim Emerging
Markets, NASL International Stock, NASL Capital Growth Bond, NASL Real
Estate Securities and NASL Common Stock Trusts.
In addition to the above policies, the NASL Money Market Trust is
subject to certain restrictions required by Rule 2a-7 under the Investment
Company Act of 1940. In order to comply with such restrictions, the NASL Money
Market Trust will, inter alia, not purchase the securities of any issuer if it
would cause (i) more than 5% of its total assets to be invested in the
securities of any one issuer (excluding U.S. Government securities and
repurchase agreements fully collateralized by U.S. Government securities),
except as permitted by Rule 2a-7 for certain securities for a period of up to
three business days after purchase, (ii) more than 5% of its total assets to be
invested in "second tier securities," as defined by Rule, or (iii) more than the
greater of $1 million or 1% of its total assets to be invested in the second
tier securities of that issuer.
If a percentage restriction is adhered to at the time of an investment,
a later increase or decrease in the investment's percentage of the value of a
NASL Portfolio's total assets resulting from a change in such values or assets
will not constitute a violation of the percentage restriction, except in the
case of the NASL Money Market Trust where the percentage limitation of
restriction 9. must be met at all times.
PORTFOLIO TURNOVER
The annual rate of portfolio turnover will normally differ for each
NASL Portfolio and may vary from year to year. Portfolio turnover is calculated
by dividing the lesser of purchases or sales of portfolio securities during the
fiscal year by the monthly average of the value of the NASL Portfolio's
securities (excluding from the computation all securities, including options,
with maturities at the time of acquisition of one year or less). A high rate of
portfolio turnover generally involves correspondingly greater brokerage
commission expenses, which must be borne directly by the NASL Portfolio. No
portfolio turnover rate can be calculated for the NASL Money Market Trust due to
the short maturities of the instruments purchased. The portfolio turnover rate
may vary from year to year, as well as within a year. High portfolio turnover
rates (100% or more) can result in corresponding increases in brokerage
commissions for the NASL Portfolio. Anticipated portfolio turnover rates (based
on normal circumstances) for the other NASL Portfolios are not expected to
exceed 200%.
Estimated rates are not a limiting factor when it is deemed appropriate
to purchase or sell securities for a NASL Portfolio. Each NASL Portfolio
intends to comply with the various requirements of the Internal Revenue Code so
as to qualify as a "regulated investment company" thereunder. One such
requirement is that a portfolio must derive less than 30% of its gross income
from the sale or other disposition of stock or securities held for less
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than three months. Accordingly, the ability of a particular NASL Portfolio to
effect certain portfolio transactions may be limited.
MANAGEMENT OF NASL
The Trustees and officers of NASL, together with information as to their
principal occupations during the past five years, are listed below:
<TABLE>
<CAPTION>
===================================================================================================================================
PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE POSITION WITH NASL DURING PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Don B. Allen Trustee Senior Lecturer, William E. Simon Graduate
136 Knickerbocker Road School of Business Administration,
Pittsford, NY 14534 University of Rochester
Age: 67
- -----------------------------------------------------------------------------------------------------------------------------------
John D. DesPrez* President Vice President, Annuities, of Manulife,
116 Huntington Avenue September 1996 to present; President and
Boston, MA 02116 Director, North American Security Life
Age: 39 Insurance Company since September 1996; President
North American Funds, March 1993 to September 1996;
Vice President and General Counsel, North American
Security Life Insurance Company, 1991 to 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Charles L. Bardelis Trustee President and Executive Officer, Island
297 Dillingham Ave. Commuter Corp.(Marine Transport)
Falmouth, MA 02540
Age: 54
- -----------------------------------------------------------------------------------------------------------------------------------
Samuel Hoar** Trustee Senior Mediator, Judicial Arbitration
73 Tremont Street Mediation Services "JAMS/Endispute," June
Boston, MA 02109 1, 1994 to date; Partner, Goodwin, Proctor
Age: 68 and Hoar, prior to June 1, 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Brian L. Moore* Chairman of Trustees Executive Vice President, Canadian
5650 Yonge Street Insurance Operations, The Manufacturers
North York, Ontario, Canada, M2M Life Insurance Company, January 1, 1996 to
4G4 date; Chief Executive Officer, North
Age: 51 American Life Assurance Company,
October 1993 to December 1995; Executive
Vice President and Chief Financial Officer,
September 1988 to October 1993, North
American Life Assurance Company
- -----------------------------------------------------------------------------------------------------------------------------------
Robert J. Myers Trustee Consulting Actuary (self-employed), April
9610 Wire Avenue 1983 to date; Member, Prospective Payment
Silver Springs, MD 20921 Assessment Commission, June 1993 to date;
Age: 83 Chairman, Commission on Railroad Retirement
Reform, 1988 to 1990
- -----------------------------------------------------------------------------------------------------------------------------------
John G. Vrysen Vice President Vice President, Chief Financial Officer, U.S.
116 Huntington Avenue Operations, of Manulife, January 1, 1996 to
Boston, MA 02116 date; Vice President and Actuary, January
Age: 40 1986 to date, North American Security Life
Insurance Company.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 110
<TABLE>
<CAPTION>
===================================================================================================================================
PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE POSITION WITH NASL DURING PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
James D. Gallagher Secretary Vice President, Legal Services, of Manulife,
116 Huntington Avenue January 1, 1996 to date; Vice President,
Boston, MA 02116 Secretary and General Counsel, June 1994
Age: 41 to date, North American Security Life In-
surance Company; Vice President and
Associate General Counsel, 1990 to 1994,
The Prudential Insurance Company of
America.
- -----------------------------------------------------------------------------------------------------------------------------------
Richard C. Hirtle Vice President Vice President, Chief Financial Officer, An-
116 Huntington Avenue and Treasurer nuities, of Manulife, January 1996 to date;
Boston, MA 02116 Vice President, Treasurer and Chief
Age: 40 Financial Officer, November 1988 to date,
North American Security Life Insurance
Company.
===================================================================================================================================
</TABLE>
* Trustee who is an "interested person", as defined in the Investment
Company Act of 1940.
** Trustee who is an "interested person" of NASL but not NASL Financial
Services, Inc. ("NASL Financial").
COMPENSATION OF TRUSTEES
NASL does not pay any remuneration to its Trustees who are officers or
employees of NASL Financial or its affiliates. Trustees not so affiliated
receive an annual retainer of $18,000, a fee of $4,750 for each meeting of the
Trustees that they attend in person and a fee of $200 for each such meeting
conducted by telephone. Trustees are reimbursed for travel and other
out-of-pocket expenses. The officers listed above are furnished to NASL pursuant
to the Advisory Agreement described below and receive no compensation from NASL.
These officers spend only a portion of their time on the affairs of NASL.
<TABLE>
<CAPTION>
========================================================================================================================
AGGREGATE COMPENSATION FROM TOTAL COMPENSATION FROM TRUST
NAMES OF PERSON, POSITION NASL FOR PRIOR FISCAL YEAR* COMPLEX FOR PRIOR FISCAL YEAR*#
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Don B. Allen, Trustee $35,000 $42,500
- ------------------------------------------------------------------------------------------------------------------------
Charles L. Bardelis, Trustee $35,000 $42,500
- ------------------------------------------------------------------------------------------------------------------------
Samuel Hoar, Trustee $35,000 $42,500
- ------------------------------------------------------------------------------------------------------------------------
Robert J. Myers, Trustee $35,000 $42,500
========================================================================================================================
</TABLE>
* Compensation received for services as Trustee.
# Trust Complex includes all portfolios of NASL as well as all portfolios of
North American Funds of which NASL Financial is the investment adviser.
INVESTMENT MANAGEMENT ARRANGEMENTS
The following information supplements the material appearing in the
Prospectus/Proxy Statement under the caption "Additional Information About
NASL--C. Management." Copies of the Advisory and Subadvisory Agreements
discussed below have been filed with and are available from the Securities and
Exchange Commission.
NASL, formerly a Maryland corporation known as "NASL Series Fund, Inc."
(the "Fund"), was reorganized as a Massachusetts business trust effective
December 31, 1988. Pursuant to such reorganization, NASL assumed all the assets
and liabilities of the Fund and carried on its business and operations with the
same investment management arrangements as were in effect for the Fund at the
time of the reorganization. The assets and liabilities of each of the Fund's
separate portfolios were assumed by the corresponding portfolios of NASL.
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<PAGE> 111
NASL Financial is a Massachusetts corporation whose principal offices are
located at 116 Huntington Avenue, Boston, Massachusetts 02116. NASL Financial is
registered as an investment adviser under the Investment Advisers Act of 1940
and as a broker-dealer under the Securities Exchange Act of 1934. It is a member
of the National Association of Securities Dealers, Inc. (the "NASD"). In
addition, NASL Financial serves as principal underwriter of certain contracts
issued by Security Life.
The Advisory Agreement was approved by the NASL Board on September 28,
1995 and by the shareholders of the then existing portfolios of NASL on December
5, 1995. These approvals occurred in connection with the change of control of
NASL Financial as a result of the merger of North American Life Assurance
Company, the ultimate controlling parent of NASL Financial, with The
Manufacturers Life Insurance Company on January 1, 1996.
On September 27, 1996, the NASL Board appointed Manufacturers Adviser
Corporation ("MAC") pursuant to a new Subadvisory Agreement with MAC ("MAC
Subadvisory Agreement") to manage the NASL Money Market Trust. Such Subadvisory
Agreement was approved by the NASL Board, including a majority of the Trustees
who are not parties to the agreements or interested persons of any party to such
agreements, on September 27 (with an effective date of October 1, 1996) and has
been submitted for ratification by the shareholders of the NASL Money Market
Trust, as described in the Prospectus/Proxy Statement. Also on September 27,
1996, the NASL Board (i) appointed Rowe Price-Fleming International, Inc.
("Price-Fleming") pursuant to a new Subadvisory Agreement with Price-Fleming
("Price-Fleming Subadvisory Agreement") to manage the NASL International Stock
Trust, (ii) appointed Founders Asset Management, Inc. ("Founders") pursuant to
an amendment to its existing Subadvisory Agreement with respect to other
portfolios of NASL ("Founders Subadvisory Agreement") to also manage the NASL
Balanced Trust, (iii) appointed MAC pursuant to the MAC Subadvisory Agreement to
also manage the NASL Pacific Rim Emerging Markets, NASL Real Estate Securities,
NASL Common Stock, NASL Capital Growth Bond and NASL Equity Index Trusts and
(iv) Warburg, Pincus Counsellors, Inc. ("Warburg Pincus") pursuant to a new
Subadvisory Agreement with Warburg Pincus ("Warburg Pincus Subadvisory
Agreement") to manage the NASL Emerging Growth Trust. Such Subadvisory
Agreements or amended Subadvisory Agreement and amendments to the Advisory
Agreement, to provide for the management of the newly-established portfolios,
were approved by the NASL Board, including a majority of the Trustees who are
not parties to the agreements or interested persons of any party to such
agreements on September 27, 1996.
THE ADVISORY AGREEMENT
Under the terms of the Advisory Agreement, NASL Financial administers the
business and affairs of NASL. NASL Financial is responsible for performing or
paying for various administrative services for NASL, including providing at NASL
Financial's expense (i) office space and all necessary office facilities and
equipment, (ii) necessary executive and other personnel for managing the affairs
of NASL and for performing certain clerical, accounting and other office
functions, and (iii) all other information and services, other than services of
counsel, independent accountants or investment subadvisory services provided by
any subadviser under a subadvisory agreement, required in connection with the
preparation of all tax returns and documents required to comply with the federal
securities laws. NASL Financial pays the cost of any advertising or sales
literature relating solely to NASL, the cost of printing and mailing
prospectuses to persons other than current holders of NASL shares or of variable
contracts funded by NASL shares and the compensation of NASL's officers and
Trustees that are officers, directors or employees of NASL Financial or its
affiliates. In addition, advisory fees are reduced or NASL Financial reimburses
NASL if the total of all expenses (excluding advisory fees, taxes, portfolio
brokerage commissions, interest, litigation and indemnification expenses and
other extraordinary expenses not incurred in the ordinary course of NASL's
business) applicable to a NASL Portfolio exceeds an annual rate of .75% in the
case of the NASL International Stock Trust and NASL Pacific Rim Emerging Markets
Trust or .50% in the case of all other NASL Portfolios of the average net asset
value of such NASL Portfolio. The expense limitation will continue in effect
from year to year unless otherwise terminated at any year end by NASL Financial
on 30 days' notice to NASL.
In addition to providing the services and expense limitation described
above, NASL Financial selects, contracts with and compensates subadvisers to
manage the investment and reinvestment of the assets of the NASL Portfolios.
NASL Financial monitors the compliance of such subadvisers with the investment
objectives and related policies of each NASL Portfolio and reviews the
performance of such subadvisers and reports periodically on such performance to
the NASL Board.
As compensation for its services, NASL Financial receives a fee from NASL
computed separately for each NASL Portfolio. The fee for each NASL Portfolio is
stated as an annual percentage of the current value of the net assets of such
NASL Portfolio, and is possible at the rate set forth in the Prospectus/Proxy
Statement. The fee, which is accrued daily and
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<PAGE> 112
payable monthly, is calculated for each day by multiplying the daily equivalent
of the annual percentage prescribed for a NASL Portfolio by the value of its net
assets at the close of business on the previous business day of NASL.
For the years ended December 31, 1995, 1994 and 1993 the aggregate
investment advisory fee payable by NASL under the fee schedule then in effect
for the then-existing portfolios of NASL, absent the expense limitation
provision, was $33,808,255, $27,076,438 and $16,988,737. Of such amounts,
$1,318,573, $1,158,400, and $606,603 was paid on behalf of the NASL Money Market
Trust in such years, respectively. For the six month period ended June 30, 1996,
see the Prospectus/Proxy Statement.
THE SUBADVISORY AGREEMENTS
Under the terms of each of the current subadvisory agreements
(collectively "Subadvisory Agreements"), the subadviser manages the investment
and reinvestment of the assets of the assigned NASL Portfolios, subject to the
supervision of the NASL Board. The subadviser formulates a continuous investment
program for each such NASL Portfolio consistent with its investment objectives
and policies outlined in the Prospectus/Proxy Statement. Each subadviser
implements such programs by purchases and sales of securities and regularly
reports to NASL Financial and the NASL Board with respect to the implementation
of such programs. Each subadviser, at its expense, furnishes all necessary
investment and management facilities, including salaries of personnel required
for it to execute its duties, as well as administrative facilities, including
bookkeeping, clerical personnel, and equipment necessary for the conduct of the
investment affairs of the assigned NASL Portfolios.
As compensation for their services, the subadvisers receive fees from NASL
Financial computed separately for each NASL Portfolio. The fee for each NASL
Portfolio is stated as an annual percentage of the current value of the net
assets of the NASL Portfolio, and is payable at the rate set forth in the
Prospectus/Proxy Statement. The fees are calculated on the basis of the average
of all valuations of net assets of each NASL Portfolio made at the close of
business on each business day of NASL during the period for which such fees are
paid. Once the average net assets of a NASL Portfolio exceed amounts specified
in the Prospectus/Proxy Statement, the fee is reduced with respect to such
excess.
For the years ended December 31, 1995, 1994 and 1993, NASL Financial paid
aggregate subadvisory fees of $12,007,940 $9,905,072, and $6,285,555,
respectively. Of such amounts $197,786, $173,760 and $90,990 was paid on behalf
of the NASL Money Market Trust (to its previous subadviser) in such years,
respectively. For the six month period ended June 30, 1996, see the
Prospectus/Proxy Statement.
Subject to the expense limitations discussed above, NASL is responsible
for the payment of all expenses of its organization, operations and business,
except those which NASL Financial or subadvisers have agreed to pay pursuant to
the Advisory or Subadvisory Agreements. Expenses borne by NASL include charges
and expenses of the custodian, independent accountants and transfer, bookkeeping
and dividend disbursing agent appointed by NASL; brokers' commissions and issue
and transfer taxes on securities transactions to which NASL is a party; taxes
and fees payable by NASL; and legal fees and expenses in connection with the
affairs of NASL, including registering and qualifying its shares with regulatory
authorities and in connection with any litigation.
The Advisory Agreement and each Subadvisory Agreement will continue in
effect as to a NASL Portfolio for a period no more than two years from the date
of its execution or the execution of an amendment making the agreement
applicable to that NASL Portfolio only so long as such continuance is
specifically approved at least annually either by the NASL Board or by the vote
of a majority of the outstanding voting securities of NASL, provided that in
either event such continuance shall also be approved by the vote of the majority
of the Trustees who are not interested persons of any party to the Agreements,
cast in person at a meeting called for the purpose of voting on such approval.
The required shareholder approval of any continuance of any of the Agreements
shall be effective with respect to any NASL Portfolio if a majority of the
outstanding voting securities of the series of shares of beneficial interest of
that NASL Portfolio vote to approve such continuance, notwithstanding that such
continuance may not have been approved by a majority of the outstanding voting
securities of (i) any other NASL Portfolio affected by the Agreement or (ii) all
of the portfolios of NASL.
If the holders of any series of shares of beneficial interest of any NASL
Portfolio fail to approve any continuance of the Advisory Agreement or the
Subadvisory Agreement, NASL Financial or the subadviser will continue to act as
investment adviser or subadviser with respect to such NASL Portfolio pending the
required approval of the continuance of such Agreement, of a new contract with
NASL Financial or the subadviser or different adviser or subadviser, or other
definitive action. In the case of NASL Financial, the compensation received in
respect of such a NASL Portfolio during such period will be no more than its
actual costs incurred in furnishing investment advisory and management services
to such NASL
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<PAGE> 113
Portfolio or the amount it would have received under the Advisory Agreement in
respect of such NASL Portfolio, whichever is less. In the case of the
subadvisers, the compensation received in respect of such a NASL Portfolio
during such period will be no more than that permitted by Rule 15a-4 under the
Investment Company Act of 1940.
The Advisory Agreement and the Subadvisory Agreements may be terminated at
any time without the payment of any penalty on 60 days' written notice to the
other party or parties to the Agreements, and to NASL in the case of the
Subadvisory Agreements, (i) by the NASL Board; (ii) by the vote of a majority of
the outstanding voting securities of NASL, or with respect to any NASL
Portfolio, by the vote of a majority of the outstanding voting securities of the
series of shares of beneficial interest of such NASL Portfolio; and (iii) by
NASL Financial, and in the case of the Subadvisory Agreements, by the respective
subadvisers. The Agreements will automatically terminate in the event of their
assignment.
The Advisory Agreement may be amended by NASL and NASL Financial and the
Subadvisory Agreements by NASL Financial and respective subadvisers provided
such amendment is specifically approved by the vote of a majority of the
outstanding voting securities of NASL and by the vote of a majority of the
Trustees of NASL who are not interested persons of NASL, NASL Financial or the
applicable subadviser cast in person at a meeting called for the purpose of
voting on such approval. The required shareholder approval of any amendment
shall be effective with respect to any NASL Portfolio if a majority of the
outstanding voting securities of that NASL Portfolio vote to approve the
amendment, notwithstanding that the amendment may not have been approved by a
majority of the outstanding voting securities of (i) any other NASL portfolio
affected by the amendment or (ii) all the portfolios of NASL.
PORTFOLIO BROKERAGE
Pursuant to the Subadvisory Agreements, the subadvisers are responsible
for placing all orders for the purchase and sale of portfolio securities of
NASL. The subadvisers have no formula for the distribution of NASL's brokerage
business, their intention being to place orders for the purchase and sale of
securities with the primary objective of obtaining the most favorable overall
results for NASL. The cost of securities transactions for each NASL Portfolio
will consist primarily of brokerage commissions or dealer or underwriter
spreads. Bonds and money market instruments are generally traded on a net basis
and do not normally involve either brokerage commissions or transfer taxes.
Occasionally, securities may be purchased directly from the issuer. For
securities traded primarily in the over-the-counter market, the subadvisers
will, where possible, deal directly with dealers who make a market in the
securities unless better prices and execution are available elsewhere. Such
dealers usually act as principals for their own account.
In selecting brokers or dealers through whom to effect transactions, the
subadvisers will give consideration to a number of factors, including price,
dealer spread or commission, if any, the reliability, integrity and financial
condition of the broker-dealer, size of the transaction and difficulty of
execution. Consideration of these factors by a subadviser, either in terms of a
particular transaction or the subadviser's overall responsibilities with respect
to NASL and any other accounts managed by the subadviser, could result in NASL
paying a commission or spread on a transaction that is in excess of the amount
of commission or spread another broker-dealer might have charged for executing
the same transaction. In selecting brokers and dealers, the subadvisers will
also give consideration to the value and quality of any research, statistical,
quotation or valuation services provided by the broker or dealer. In placing a
purchase or sale order, a subadviser may use a broker whose commission in
effecting the transaction is higher than that of some other broker if the
subadviser determines in good faith that the amount of the higher commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker, viewed in terms of either the particular transaction or
the subadviser's overall responsibilities with respect to NASL and any other
accounts managed by the subadviser. Brokerage and research services provided by
brokers and dealers include advice, either directly or through publications or
writings, as to the value of securities, the advisability of purchasing or
selling securities, the availability of securities or purchasers or sellers of
securities, and analyses and reports concerning issuers, industries, securities,
economic factors and trends and portfolio strategy. Consistent with the
foregoing considerations and the Rules of Fair Practice of the NASD, sales of
contracts for which the broker-dealer or an affiliate thereof is responsible may
be considered as a factor in the selection of such brokers or dealers. A higher
cost broker-dealer will not be selected, however, solely on the basis of sales
volume but will be selected in accordance with the criteria set forth above.
To the extent research services are used by the subadvisers in rendering
investment advice to NASL, such services would tend to reduce the subadvisers'
expenses. However, the subadvisers do not believe that an exact dollar value can
be assigned to these services. Research services received by the subadvisers
from brokers or dealers executing transactions for NASL will be available also
for the benefit of other portfolios managed by the subadvisers.
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<PAGE> 114
The subadvisers manage a number of accounts other than the NASL
Portfolios. Although investment recommendations or determinations for the NASL
portfolios will be made by the subadvisers independently from the investment
recommendations and determinations made by them for any other account,
investments deemed appropriate for the NASL Portfolios by the subadvisers may
also be deemed appropriate by them for other accounts, so that the same security
may be purchased or sold at or about the same time for both the NASL Portfolios
and other accounts. In such circumstances, the subadvisers may determine that
orders for the purchase or sale of the same security for the NASL Portfolios and
one or more other accounts should be combined, in which event the transactions
will be priced and allocated in a manner deemed by the subadvisers to be
equitable and in the best interests of the NASL Portfolios and such other
accounts. While in some instances combined orders could adversely affect the
price or volume of a security, NASL believes that its participation in such
transactions on balance will produce better overall results for NASL.
For the years ended December 31, 1995, 1994 and 1993, NASL paid
brokerage commissions in connection with portfolio transactions of $6,609,957,
$5,510,656 and $2,877,317, respectively.
PURCHASE AND REDEMPTION OF SHARES
NASL will redeem all full and fractional portfolio shares for cash at the
net asset value per share of each NASL Portfolio. Payment for shares redeemed
will generally be made within seven days after receipt of a proper notice of
redemption. However, NASL may suspend the right of redemption or postpone the
date of payment beyond seven days during any period when (a) trading on the New
York Stock Exchange is restricted, as determined by the Securities and Exchange
Commission, or such Exchange is closed for other than weekends and holidays; (b)
an emergency exists, as determined by the Commission, as a result of which
disposal by NASL of securities owned by it is not reasonably practicable or it
is not reasonably practicable for NASL fairly to determine the value of its net
assets; or (c) the Commission by order so permits for the protection of security
holders of NASL.
DETERMINATION OF NET ASSET VALUE
The following supplements the discussion of the valuation of portfolio
assets set forth in the Prospectus/Proxy Statement under the caption "Additional
Information About NASL--D. Purchase and Redemption of Shares."
Securities held by the NASL Portfolios except for debt instruments with
remaining maturities of 60 days or less and all debt instruments held by the
NASL Money Market Trust will be valued as follows: securities which are traded
on stock exchanges (including securities traded in both the over-the-counter
market and on an exchange) are valued at the last sales price as of the close of
the regularly scheduled trading of the New York Stock Exchange on the day the
securities are being valued, or, lacking any sales, at the closing bid prices.
Securities traded only in the over-the-counter market are valued at the last bid
prices quoted by brokers that make markets in the securities at the close of
trading on the New York Stock Exchange. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the NASL Board.
Generally, trading in non-U.S. securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of the regularly scheduled trading of the New
York Stock Exchange. The values of such securities used in computing the net
asset value of a NASL Portfolio's shares are generally determined as of such
times. Occasionally, events which affect the values of such securities may occur
between the times at which they are generally determined and the close of the
New York Stock Exchange and would therefore not be reflected in the computation
of a NASL Portfolio's net asset value. If events materially affecting the value
of such securities occur during such period, then these securities will be
valued at their fair value as determined in good faith by the subadvisers under
procedures established and regularly reviewed by the NASL Board.
Debt instruments with a remaining maturity of 60 days or less held by each
of the NASL Portfolios other than the NASL Money Market Trust, and all
instruments held by the NASL Money Market Trust, will be valued on an amortized
cost basis. Under this method of valuation, the instrument is initially valued
at cost (or in the case of instruments initially valued at market value, at the
market value on the day before its remaining maturity is such that it qualifies
for amortized cost valuation); thereafter, NASL assumes a constant proportionate
amortization in value until maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price that would be received upon sale of the instrument.
-23-
<PAGE> 115
The NASL Money Market Trust uses the amortized cost valuation method in
reliance upon Rule 2a-7 under the Investment Company Act of 1940. As required by
the Rule, the NASL Money Market Trust will maintain a dollar weighted average
maturity of 90 days or less. In addition, the NASL Money Market Trust is
permitted to purchase only securities that the NASL Board determines to present
minimal credit risks and which are at the time of purchase "eligible
securities," as defined by the Rule. Generally, eligible securities must be
rated by a nationally recognized statistical rating organization in one of the
two highest rating categories for short-term debt obligations or be of
comparable quality. The NASL Money Market Trust will invest only in obligations
that have remaining maturities of thirteen months or less.
The NASL Board has established procedures designed to stabilize, to the
extent reasonably possible, the NASL Money Market Trust's price per share as
computed for the purpose of sales and redemptions at $10.00. Such procedures
include a direction to NASL Financial to establish procedures which will allow
for the monitoring of the propriety of the continued use of amortized cost
valuation to maintain a constant net asset value of $10.00 per share. Such
procedures include a directive to NASL Financial that requires that on
determining net asset value per share based upon available market quotations,
the NASL Money Market Trust shall value weekly (a) all portfolio instruments for
which market quotations are readily available at market, and (b) all portfolio
instruments for which market quotations are not readily available or are not
obtainable from a pricing service, at their fair value as determined in good
faith by the NASL Board, although the actual calculations may be made by persons
acting pursuant to the direction of the NASL Board. If the fair value of a
security needs to be determined, the subadviser will provide determinations, in
accordance with procedures and methods established by the NASL Board, of the
fair value of securities held by the NASL Money Market Trust for which market
quotations are not readily available for purposes of enabling the NASL Money
Market Trust's Custodian to calculate net asset value. NASL Financial, with the
subadviser's assistance, periodically (but no less frequently than annually)
shall prepare a written report to the NASL Board verifying the accuracy of the
pricing system or estimate. A non-negotiable security which is not treated as an
illiquid security because it may be redeemed with the issuer, subject to a
penalty for early redemption, shall be assigned a value that takes into account
the reduced amount that would be received if it were currently liquidated. In
the event that the deviation from the amortized cost exceeds .50 of 1% or more
or a difference of $.05 per share in net asset value, NASL Financial shall
promptly call a special meeting of the NASL Board to determine what, if any,
action should be initiated. Where the NASL Board believes the extent of any
deviation from the NASL Money Market Trust's amortized cost price per share may
result in material dilution or other unfair results to investors or existing
shareholders, they shall take such action as they deem appropriate to eliminate
or reduce to the extent reasonably practical such dilution or unfair results.
The actions that may be taken by the NASL Board include, but are not limited to:
(a) redeeming shares in kind; (b) selling portfolio instruments prior to
maturity to realize capital gains or losses or to shorten the average portfolio
maturity of the NASL Money Market Trust; (c) withholding or reducing
dividends;(d) utilizing a net asset value per share based on available market
quotations; (e) investing all cash in instruments with a maturity on the next
business day. The NASL Money Market Trust may also reduce the number of shares
outstanding by redeeming proportionately from shareholders, without the payment
of any monetary compensation, such number of full and fractional shares as is
necessary to maintain the net asset value at $10.00 per share. Any such
redemption will be treated as a negative dividend for purposes of the Net
Investment Factor under the contracts issued by North American Security Life
Insurance Company.
PERFORMANCE DATA
Each of the NASL Portfolios may quote total return figures in its
advertising and sales materials. Such figures will always include the average
annual total return for recent one year and, when applicable, five and ten year
periods and where less than five or ten years, the period since the NASL
Portfolio (including, in the case of the NASL Money Market Trust, its
predecessor prior to the reorganization of the Fund on December 31, 1988) became
available for investment. In the case of the NASL Pacific Rim Emerging Markets,
NASL Real Estate Securities, NASL Common Stock, NASL Capital Growth Bond and
NASL Equity Index Trusts, such quotations will be for periods that include the
performance of the corresponding Manulife Portfolios. Where the period since
inception is less than one year, the total return quoted will be the aggregate
return for the period. The average annual total return is the average annual
compounded rate of return that equates the initial amount invested to the market
value of such investment on the last day of the period for which such return is
calculated. For purposes of the calculation it is assumed that an initial
payment of $1,000 is made on the first day of the period for which the return is
calculated and that all dividends and distributions are reinvested at the net
asset value on the reinvestment dates during the period. All recurring fees such
as advisory fees charged to NASL and all NASL expenses are reflected in the
calculations. There are no non-recurring fees such as sales loads, surrender
charges or account fees charged by NASL. If the period since inception is less
than one year, the figures will be based on an aggregate total return rather
than an average annual total return.
-24-
<PAGE> 116
TOTAL ANNUALIZED RETURN
(UNAUDITED)
<TABLE>
<CAPTION>
SINCE INCEPTION OR
10 YEARS,
ONE YEAR FIVE YEARS WHICHEVER IS
ENDED ENDED SHORTER THROUGH DATE FIRST
TRUST 6/30/96 6/30/96 6/30/96 AVAILABLE
- ----- -------- ---------- ------------------ ----------
<S> <C> <C> <C> <C>
NASL Money Market Trust 5.28% 4.11% 5.63% 06/18/85
NASL Common Stock Trust* 22.55% 13.44% 10.31% 04/30/87
NASL Pacific Rim Emerging
Markets Trust* 15.80% - 7.05% 10/04/94
NASL Real Estate Securities Trust* 15.34% 15.78% 11.24% 04/30/87
NASL Capital Growth Bond Trust* 4.43% 7.94% 7.50% 06/26/84
NASL Equity Index Trust* - - 3.71% 02/14/96
</TABLE>
* Performance presented for these NASL Portfolios is based upon the
performance of their respective predecessor Manulife Portfolios for periods
prior to the consummation of the Reorganization. Performance presented for each
of these NASL Portfolios is based on the historical expenses and performance of
its predecessor Manulife Portfolio and does not reflect the current expenses
that an investor would incur as a holder of shares of such NASL Portfolio.
NASL may also from time to time include in advertising and sales
literature the following: 1) information regarding its portfolio subadvisers,
such as information regarding a subadvisers specific investment expertise,
client base, assets under management or other relevant information; 2)
quotations about NASL, its portfolios or its investment subadvisers that appear
in various publications and media; and 3) general discussions of economic
theories, including but not limited to discussions of how demographics and
political trends may effect future financial markets, as well as market or other
relevant information.
ORGANIZATION OF NASL
SHARES OF NASL
The Declaration of Trust authorizes the NASL Board to issue an unlimited
number of full and fractional shares of beneficial interest having a par value
of $.01 per share, to divide such shares into an unlimited number of series of
shares and to designate the relative rights and preferences thereof, all without
shareholder approval. NASL currently has thirty series of shares: the NASL Small
Cap Trust, the NASL International Small Cap Trust, the NASL Small/Mid Cap Trust,
the NASL Aggressive Growth Trust, the NASL Pacific Rim Emerging Markets Trust,
the NASL International Stock Trust, the NASL Global Equity Trust, the NASL
Worldwide Growth Trust, the NASL Science & Technology Trust, the NASL Growth
Trust, the NASL Equity Trust, the NASL Common Stock Trust, the NASL Real Estate
Securities Trust, the NASL Blue Chip Growth Trust, the NASL Equity-Income Trust,
the NASL Value Trust, the NASL International Growth and Income Trust, the NASL
Growth and Income Trust, the NASL Equity Index Trust, the NASL Balanced Trust,
the NASL Aggressive Asset Allocation Trust, the NASL Moderate Asset Allocation
Trust, the NASL Conservative Asset Allocation Trust, the NASL High Yield Trust,
the NASL Strategic Bond Trust, the NASL Global Government Bond Trust, the NASL
Capital Growth Bond Trust, the NASL Investment Quality Bond Trust, the NASL U.S.
Government Securities Trust and the NASL Money Market Trust. The shares of each
NASL Portfolio, when issued and paid for, will be fully paid and non-assessable
and will have no preemptive or conversion rights. Holders of shares of any NASL
Portfolio are entitled to redeem their shares as set forth under "Additional
Information About NASL--D. Purchase and Redemption of Shares." NASL reserves the
right to later issue additional series of shares or separate classes of existing
series of shares without the consent of outstanding shareholders.
Each issued and outstanding share is entitled to participate equally in
dividends and distributions declared by the respective NASL Portfolio and upon
liquidation in the net assets of such NASL Portfolio remaining after
satisfaction of outstanding liabilities. For these purposes and for purposes of
determining the sale and redemption prices of shares, any assets which are not
clearly allocable to a particular NASL Portfolio will be allocated in the manner
determined by the NASL Board. Accrued liabilities which are not clearly
allocable to one or more NASL Portfolios will also be allocated among the NASL
Portfolios in the manner determined by the NASL Board. Shareholders of each
portfolio of NASL are entitled to one vote for each full share held (and
fractional votes for fractional shares held) irrespective of the relative net
asset values of the shares of the NASL Portfolio. All shares entitled to vote
are voted by series, except that when voting for the election of the NASL Board
and when otherwise permitted by the Investment Company Act of 1940, shares are
voted in the aggregate and not by series. Only shares of a particular NASL
Portfolio are entitled to vote on matters determined by the NASL Board to affect
only the interests of
-25-
<PAGE> 117
that NASL Portfolio. Pursuant to the Investment Company Act of 1940 and the
rules and regulations thereunder, certain matters approved by a vote of a
majority of all the shareholders of NASL may not be binding on a NASL Portfolio
whose shareholders have not approved such matter. There will normally be no
meetings of shareholders for the purpose of electing Trustees unless and until
less than a majority of the Trustees holding office has been elected by
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Holders of not less than
two-thirds of the outstanding shares of NASL may remove a Trustee by a vote cast
in person or by proxy at a meeting called for such purpose. Shares of NASL do
not have cumulative voting rights, which means that the holders of more than 50%
of NASL's shares voting for the election of Trustees can elect all of the
Trustees if they so choose. In such event, the holders of the remaining shares
would not be able to elect any Trustees.
Under Massachusetts law, shareholders of NASL could, under certain
circumstances, be held personally liable for the obligations of NASL. The
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of NASL and requires that notice of such disclaimer be given
in each agreement, obligation, or instrument entered into or executed by the
NASL Board or any officer of NASL. The Declaration of Trust provides for
indemnification out of the property of a NASL Portfolio for all losses and
expenses of any shareholder held personally liable for the obligations of such
NASL Portfolio. The Declaration of Trust also provides that NASL shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of NASL and satisfy any judgment thereon, but only out of the
property of a particular NASL Portfolio. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which a particular NASL Portfolio would be unable to meet its
obligations.
PRINCIPAL HOLDERS OF SECURITIES
NASL currently has three shareholders: The Manufacturers Life Insurance
Company of America ("Manulife America"), Security Life and First North American
Life Assurance Company ("FNAL"). Each shareholder holds NASL shares attributable
to variable and variable life contracts in their separate accounts registered
under the Investment Company Act of 1940. Each shareholder will solicit voting
instructions from such variable and variable life contract owners and vote all
shares held in proportion to the instructions received.
Reflecting the conditions of section 817(h) and other provisions of the
Internal Revenue Code and regulations thereunder, the By-laws of NASL provide
that shares of NASL may be purchased only by the following eligible
shareholders: (a) separate accounts of Security Life or of other insurance
companies; (b) Security Life; (c) NASL Financial; (d) any corporation related in
a manner specified in section 267(b) of the Internal Revenue Code to Security
Life or to NASL Financial, including North American Life; and (e) any Trustee of
a qualified pension of retirement plan. As a matter of operating policy, shares
of NASL may be purchased only by the eligible shareholders of categories (a),
(b) and (d).
REPORTS TO SHAREHOLDERS
Annual and semi-annual reports containing financial statements of NASL
will be sent to contract owners.
-26-
<PAGE> 118
INDEPENDENT ACCOUNTANTS
The audited financial statements of NASL relating to the NASL Money Market
Trust at December 31, 1995 included in the Annual Report of NASL for the year
ended December 31, 1995, and the audited financial statements of MSF relating to
the Manulife International Fund, Manulife Emerging Growth Equity Fund, Manulife
Balanced Assets Fund, Manulife Common Stock Fund, Manulife Pacific Rim Emerging
Markets Fund, Manulife Real Estate Securities Fund, Manulife Capital Growth Bond
Fund and Manulife Equity Index Fund at December 31, 1995 included in the Annual
Report of MSF for the year ended December 31, 1995, are incorporated herein by
reference. The unaudited financial statements of NASL relating to the NASL Money
Market Trust at June 30, 1996 included in the Semi-Annual Report of NASL for the
six month period ended June 30, 1996, and the unaudited financial statements of
MSF relating to the Manulife International Fund, Manulife Emerging Growth Equity
Fund, Manulife Balanced Assets Fund, Manulife Common Stock Fund, Manulife
Pacific Rim Emerging Markets Fund, Manulife Real Estate Securities Fund,
Manulife Capital Growth Bond Fund and Manulife Equity Index Fund at June 30,
1996 included in the Semi-Annual Report of MSF for the six month period ended
June 30, 1996, are incorporated herein by reference. The audited financial
statements of NASL at December 31, 1995 incorporated by reference herein and the
Supplementary Information for the period from the commencement of operations of
NASL's corporate predecessor through December 31, 1995 included in the
Prospectus/Proxy Statement with respect to the NASL Money Market Trust have been
audited by Coopers & Lybrand L.L.P., independent public accountants, and are
included herein in reliance upon their report thereon, which report also is
incorporated herein by reference, and upon the authority of such firm as experts
in accounting and auditing. The audited financial statements of MSF at December
31, 1995 incorporated herein by reference have been audited by Ernst & Young
LLP, independent auditors and the information under the caption "Additional
Information About NASL-B. Financial Highlights" appearing in the
Prospectus/Proxy Statement with respect to the Manulife International Fund,
Manulife Emerging Growth Equity Fund, Manulife Balanced Assets Fund, Manulife
Common Stock Fund, Manulife Pacific Rim Emerging Markets Fund, Manulife Real
Estate Securities Fund, Manulife Capital Growth Bond Fund and Manulife Equity
Index Fund has been derived from financial statements audited by Ernst & Young
LLP to the extent indicated in their reports thereon appearing in the Annual
Report of MSF referenced above. Such financial statements and condensed
financial information are included in reliance upon such reports, which reports
also are incorporated herein by reference, given upon the authority of such firm
as experts in accounting and auditing.
-27-
<PAGE> 119
NASL SERIES TRUST
PRO FORMA FINANCIAL STATEMENTS
<PAGE> 120
NASL SERIES TRUST - MONEY MARKET TRUST
MANULIFE SERIES FUND - MONEY MARKET FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
NASL MSF MONEY MARKET
MONEY MONEY TRUST
MARKET MARKET PRO FORMA PRO FORMA
TRUST FUND ADJUSTMENTS COMBINED
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at value (See
accompanying portfolio of investments).... $337,731,474 $38,180,399 $375,911,873
Cash........................................ 535 124,478 125,013
Receivables:
Interest............................... 872,047 950 872,997
Other assets................................ 4,591 -- 4,591
------------ ----------- ------------
Total assets....................... 338,608,647 38,305,827 376,914,474
------------ ----------- ------------
LIABILITIES
Payables:
Dividends.............................. 137,061 -- 137,061
Investment adviser..................... -- 16,329 16,329
Custodian fee.......................... 12,922 -- 12,922
Other accrued expenses................. 23,896 -- 23,896
------------ ----------- ------------
Total liabilities.................. 173,879 16,329 190,208
------------ ----------- ------------
NET ASSETS.................................. 338,434,768 38,289,498 376,724,266
============ =========== ============
Net assets consist of:
Accumulated undistributed net investment
income............................... -- $ 2,640,844 ($2,640,844)(A) --
Capital shares......................... $ 338,435 -- 38,289 (B) $376,724
Additional paid-in capital............. 338,096,333 35,648,654 2,602,555 (B) 376,347,542
------------ ----------- ----------- ------------
Net assets......................... $338,434,768 $38,289,498 $ 0 $376,724,266
============ =========== =========== ============
Capital shares outstanding.................. 33,843,477 3,447,615 381,335 37,672,427
------------ ----------- ----------- ------------
Net asset value, offering price and redemption price
per share.............................. $ 10.00 $11.11 $10.00
------------ ----------- ------------
Investments in securities, at identified cost $337,731,474 $38,180,399 $375,911,873
============ =========== ============
</TABLE>
<PAGE> 121
NASL SERIES TRUST - MONEY MARKET TRUST
MANULIFE SERIES FUND - MONEY MARKET FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS - (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
NASL MSF MONEY MARKET
MONEY MONEY TRUST
MARKET MARKET PRO FORMA PRO FORMA
TRUST FUND ADJUSTMENTS COMBINED
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Investment Income:
Interest............................... $7,745,941 $1,054,344 $8,800,285
---------- ---------- ----------
Total income........................ 7,745,941 1,054,344 8,800,285
---------- ---------- ----------
Expenses:
Investment adviser fee................. 707,737 97,884 805,621
Custodian fee.......................... 52,240 -- $ 7,225 (C) 59,465
Audit and legal fees................... 17,468 -- 2,416 (C) 19,884
Trustees fees and expenses............. 4,289 -- 593 (C) 4,882
Registration and filing fees........... 3,898 -- 539 (C) 4,437
Miscellaneous.......................... 4,989 -- 690 (C) 5,679
---------- ---------- --------- ----------
Total expenses...................... 790,621 97,884 11,463 899,968
---------- ---------- --------- ----------
Net investment income............... 6,955,320 956,460 (11,463) 7,900,317
---------- ---------- --------- ----------
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on
investment transactions.............. -- -- --
Change in unrealized appreciation (depreciation)
on investments....................... -- -- --
Net gain (loss) on investments......... -- -- --
---------- ---------- ----------
Net increase in net assets resulting
from operations................... $6,955,320 $ 956,460 ($11,463) $7,900,317
========== ========== ======== ==========
</TABLE>
<PAGE> 122
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS- JUNE 30, 1996
NASL SERIES TRUST - MONEY MARKET TRUST / MANULIFE SERIES FUND -
MONEY MARKET FUND
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount Value
- ---------------------------------------- -----------------------------------------
NASL Manulife Pro NASL Manulife Pro
Series Series Forma Series Series Forma
Trust Fund Combined Security Description Trust Fund Combined
- ---------------------------------------- -------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS - 7.65%
U.S. TREASURY BILLS - 4.69%
$8,500,000 $ 8,500,000 4.93% due 08/01/96 $ 8,463,915 $ 8,463,915
6,000,000 6,000,000 4.98% due 08/01/96 5,974,270 5,974,270
3,200,000 3,200,000 5.01% due 08/01/96 3,186,195 3,186,195
.........................................
17,624,380 17,624,380
.........................................
U.S. TREASURY NOTES - 2.96%
$11,000,000 11,000,000 7.50% due 01/31/97 $11,145,949 11,145,949
.........................................
TOTAL U.S. TREASURY OBLIGATIONS 11,145,949 17,624,380 28,770,329
-----------------------------------------
U.S. GOVERNMENT AGENCY AND
MORTGAGE-BACKED OBLIGATIONS - 8.61%
FEDERAL HOME LOAN BANK - 0.91%
3,440,000 3,440,000 5.18% due 07/17/96 3,432,081 3,432,081
.........................................
FEDERAL FARM CREDIT BANK - 2.13%
8,000,000 8,000,000 5.24% due 09/28/98 7,989,659 7,989,659
.........................................
FEDERAL HOME LOAN MORTGAGE
CORPORATION - 0.41%
1,550,000 1,550,000 5.17% due 07/16/96 1,546,661 1,546,661
.........................................
FEDERAL NATIONAL MORTGAGE
ASSOCIATION - 0.66%
1,200,000 1,200,000 5.20% due 07/12/96 1,198,093 1,198,093
1,290,000 1,290,000 5.20% due 07/18/96 1,286,832
1,286,832
.........................................
2,484,925 2,484,925
.........................................
STUDENT LOAN MARKETING ASSOCIATION
- 4.50%
9,000,000 9,000,000 5.41% due 09/28/98 9,000,000 9,000,000
7,900,000 7,900,000 5.44% due 02/22/99 7,900,679 7,900,679
.........................................
16,900,679 16,900,679
.........................................
TOTAL U.S. GOVERNMENT
AND AGENCY OBLIGATIONS 24,890,338 7,463,667 32,354,005
-----------------------------------------
FOREIGN GOVERNMENT AGENCY
OBLIGATIONS - 3.11%
CANADIAN GOVERNMENT - 3.11%
Canadian Wheat Board,
1,000,000 1,000,000 5.35% due 07/10/96 998,662 998,662
CIT Group Holdings, Incorporated,
1,700,000 1,700,000 5.27% due 07/05/96 1,699,005 1,699,005
Export Development Corporation,
839,000 839,000 5.25% due 07/08/96 838,144 838,144
Her Majesty In Right of Canada,
900,000 900,000 5.22% due 08/15/96 894,127 894,127
5,000,000 5,000,000 5.25% due 07/10/96 4,993,437 4,993,437
2,270,000 2,270,000 5.35% due 07/08/96 2,267,639 2,267,639
.........................................
TOTAL FOREIGN GOVERNMENT
AGENCY OBLIGATIONS 998,662 10,692,352 11,691,014
-----------------------------------------
</TABLE>
<PAGE> 123
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS - JUNE 30, 1996
NASL SERIES TRUST - MONEY MARKET TRUST / MANULIFE SERIES FUND -
MONEY MARKET FUND
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount Value
- -------------------------------------- -------------------------------------
NASL Manulife Pro NASL Manulife Pro
Series Series Forma Series Series Forma
Trust Fund Combined Security Description Trust Fund Combined
- -------------------------------------- -------------------- -------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER - 79.93%
American Home Products
$10,000,000 $10,000,000 Corporation, 5.40% due 08/13/96 $ 9,935,500 $ 9,935,500
Assets Securitization Cooperative
10,000,000 10,000,000 Corporation, 5.41% due 07/29/96 9,957,922 9,957,922
Associates Corporation of North
8,000,000 8,000,000 America, 5.40% due 08/27/97 7,931,600 7,931,600
Banco Bilbao Vizcaya Financial, Incorporated
4,500,000 4,500,000 5.33% due 08/07/96 4,475,349 4,475,349
Bank of Tokyo-Mitsubishi,
4,000,000 4,000,000 5.52% due 09/09/96 4,000,127 4,000,127
BCI Funding Corporation,
7,000,000 7,000,000 5.34% due 08/02/96 6,966,773 6,966,773
11,000,000 11,000,000 BHF Finance, Incorporated 10,986,947 10,986,947
5.34% due 07/09/96
Centric Funding Corporation,
4,000,000 4,000,000 5.30% due 08/01/96 3,981,744 3,981,744
7,000,000 7,000,000 5.35% due 07/17/96 6,983,355 6,983,355
Chrysler Financial Corporation,
10,000,000 10,000,000 5.30% due 07/03/96 9,998,528 9,998,528
10,000,000 10,000,000 CIESCO LP, 5.33% due 07/17/96 9,976,311 9,976,311
Clipper Receivables Corporation,
10,400,000 10,400,000 5.40% due 07/23/96 10,365,680 10,365,680
The Coca-Cola Enterprises, Incorporated,
7,000,000 7,000,000 5.35% due 07/22/96 6,978,154 6,978,154
Corestates Capital Corporation,
4,000,000 4,000,000 5.42% due 11/01/96 4,000,000 4,000,000
Enterprise Funding Corporation,
2,177,000 2,177,000 5.31% due 07/01/96 2,177,000 2,177,000
8,000,000 8,000,000 5.41% due 07/24/96 7,972,349 7,972,349
First National Bank of Boston,
1,000,000 1,000,000 5.10% due 07/22/96 997,025 997,025
Ford Motor Credit Company,
11,000,000 11,000,000 5.25% due 08/01/96 10,950,271 10,950,271
General Motors Acceptance Corporation,
10,500,000 10,500,000 5.45% due 11/08/96 10,293,354 10,293,354
Government Development for Puerto Rico,
5,000,000 5,000,000 5.40% due 07/01/96 5,000,000 5,000,000
5,000,000 5,000,000 5.40% due 07/12/96 4,991,750 4,991,750
Hitachi America, Ltd.,
1,945,000 1,945,000 5.34% due 10/07/96 1,916,726 1,916,726
1,000,000 1,000,000 5.34% due 10/09/96 985,167 985,167
Lockheed Martin Corporation,
3,000,000 3,000,000 5.50% due 07/08/96 2,996,792 2,996,792
Mont Blanc Capital Corporation,
4,000,000 4,000,000 5.40% due 07/10/96 3,994,600 3,994,600
10,000,000 10,000,000 Motorola Incorporated, 5.35% due 07/22/96 9,968,792 9,968,792
4,000,000 4,000,000 New Center Asset Trust, 5.27% due 09/26/96 3,949,057 3,949,057
Peoples Security Life Insurance,
10,000,000 10,000,000 Incorporated, 5.58% due 08/20/96 10,000,000 10,000,000
Pitney Bowes Credit Corporation,
6,000,000 6,000,000 5.35% due 07/09/96 5,992,867 5,992,867
</TABLE>
<PAGE> 124
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS - JUNE 30, 1996
NASL SERIES TRUST - MONEY MARKET TRUST / MANULIFE SERIES FUND -
MONEY MARKET FUND
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount Value
- ----------------------------------------- ------------------------------------------
NASL Manulife Pro NASL Manulife Pro
Series Series Forma Series Series Forma
Trust Fund Combined Security Description Trust Fund Combined
- ----------------------------------------- -------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL PAPER - continued
PNC Funding Corporation,
$10,000,000 $10,000,000 5.377% due 01/06/97 $ 9,995,979 $ 9,995,979
2,800,000 2,800,000 Praxair, Incorporated, 5.55% due 08/09/96 2,783,165 2,783,165
Province of British Columbia,
2,000,000 2,000,000 5.33% due 12/20/96 1,949,069 1,949,069
9,000,000 9,000,000 5.36% due 10/29/96 8,839,200 8,839,200
3,000,000 3,000,000 Ranger Funding, 5.30% due 08/02/96 2,985,867 2,985,867
Sears Roebuck Acceptance
8,000,000 8,000,000 Corporation, 5.41% due 08/19/96 7,941,091 7,941,091
Smith Barney Shearson, Incorporated,
7,000,000 7,000,000 5.40% due 07/25/96 6,974,800 6,974,800
8,000,000 8,000,000 SMM Trust, 5.55% due 11/15/96 8,000,000 8,000,000
3,000,000 3,000,000 SouthTrust Bank, 5.45% due 10/04/96 2,999,395 2,999,395
SunTrust Banks, Incorporated,
5,000,000 5,000,000 5.25% due 09/03/96 4,953,333 4,953,333
Supervalu, Incorporated,
2,600,000 2,600,000 5.50% due 07/01/96 2,600,000 2,600,000
11,000,000 11,000,000 Toshiba America, 5.33% due 10/01/96 10,850,168 10,850,168
Travelers Insurance Company,
6,000,000 6,000,000 5.57% due 08/31/96 6,000,000 6,000,000
Virginia Electric & Power Company,
10,000,000 10,000,000 5.40% due 07/31/96 9,955,000 9,955,000
Westpac Banking Company,
9,000,000 9,000,000 5.23% due 07/31/96 9,000,000 9,000,000
Westpac Capital Corporation,
2,000,000 2,000,000 5.28% due 09/05/96 1,980,640 1,980,640
Whirlpool Financial Corporation,
10,000,000 10,000,000 5.40% due 07/30/96 9,956,500 9,956,500
Zeneca Wilmington Company,
4,000,000 4,000,000 5.41% due 07/17/96 3,990,578 3,990,578
..........................................
TOTAL COMMERCIAL PAPER 300,478,525 300,478,525
------------------------------------------
REPURCHASE AGREEMENTS - 0.70%
218,000 218,000 Repurchase Agreement with Shearson Lehman
dated 06/28/96 at 5.47%, to be repurchased
at $218,099 on 07/01/96, collateralized by
$1,115,000 U.S Treasury STRIPS, 7.13% due
11/15/18 (valued at $255,125 including
interest) 218,000 218,000
$2,400,000 2,400,000 Repurchase Agreement with State Street
Bank & Trust Company dated 06/28/96 at
4.75%, to be repurchased at $2,400,950 on
07/01/96, collateralized by $2,450,000
FHLMC, 5.00% due 05/15/14 (valued at
$2,465,312 including interest) $ 2,400,000 2,400,000
..........................................
TOTAL REPURCHASE AGREEMENTS 218,000 2,400,000 2,618,000
------------------------------------------
TOTAL INVESTMENTS $337,731,474 $38,180,399 $375,911,873
============ =========== ============
</TABLE>
<PAGE> 125
NASL SERIES TRUST/MANULIFE SERIES FUND, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF COMBINATION. The Pro Forma Combining Schedule of Portfolio
Investments, the Statement of Assets and Liabilities and the Statement of
Operations reflect the accounts of the NASL Series Trust Money Market Trust
("NASL Money Market"), one of seventeen investment portfolios offered by the
NASL Series Trust (the "Trust") and the Manulife Series Fund Money Market Fund
("MSF Money Market"), one of nine investment portfolios offered by the Manulife
Series Fund, Inc. (the "Fund") for the six months ended June 30, 1996. These
statements have been derived from the books and records of each portfolio
utilized in calculating daily net asset value at June 30, 1996.
The Pro Forma statements reflect the proposed transfer of the assets and
liabilities of MSF Money Market in exchange for shares of NASL Money Market.
Under generally accepted accounting principles ("GAAP"), the NASL Money Market
will be the surviving entity for accounting purposes. The Pro Forma financial
statements have been adjusted to reflect the anticipated fee arrangements for
the surviving entity and do not reflect the expenses of either portfolio in
carrying out its obligations under the Agreement and Plan of Reorganization.
The Pro Forma Combining Schedule of Portfolio Investments, Statement of Assets
and Liabilities and Statement of Operations should be read in conjunction with
the historical financial statements of NASL Money Market and MSF Money Market
incorporated by reference in the Statement of Additional Information.
NASL Financial Services, Inc. ("NASL Financial"), a wholly-owned subsidiary of
North American Security Life ("Security Life"), serves as investment adviser to
NASL Money Market for which it receives a fee for services, computed daily and
paid monthly, at the annual rate 0.50% of the average daily net assets of NASL
Money Market. Security Life is controlled by The Manufacturers Life Insurance
Company ("Manulife Financial"), a mutual life insurance company based in
Toronto, Canada.
Manufacturers Adviser Corporation ("MAC"), a wholly-owned subsidiary of The
Manufacturers Life Insurance Company of America, which in turn is a wholly-owned
subsidiary of The Manulife Reinsurance Corporation (USA)("MRC"), serves as
investment adviser to MSF Money Market for which it receives a fee for services,
computed daily and paid monthly, at an annual rate of 0.50% of the average daily
net assets of MSF Money Market. MRC is a life insurance holding company
organized in 1983 under Michigan law and is a wholly-owned subsidiary of
Manulife Financial.
Pro Forma Adjustments:
- ---------------------
(A) Adjustment to reflect reinvestment of undistributed net investment income.
(B) Adjustment to reflect amount allocated to capital shares ($0.01 par value)
for shares issued to MSF Money Market Fund in reorganization.
(C) Adjustment to reflect change in MSF Money Market Fund expense structure due
to reorganization calculated based upon average net assets.
2. SIGNIFICANT ACCOUNTING POLICIES. The policies described below are followed by
the Trust in the preparation of the financial statements for its portfolios in
conformity with generally accepted accounting principles ("GAAP").
SECURITY VALUATION. Securities held by NASL Money Market with remaining
maturities of 60 days or less are valued on an amortized cost basis or at
original cost plus accrued interest, both of which approximate current market
value.
SECURITIES LENDING. The Trust may lend securities in amounts up to 33 1/3% of
its total non-cash assets to brokers, dealers and other financial institutions,
provided such loans are callable at any time and are at all times fully secured
by cash, cash equivalents or securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities, marked to market to the value
of the loaned securities on a daily basis. The Trust may bear the risk of delay
in recovery of, or even of rights in, the securities loaned should the borrower
of the securities fail financially. Consequently, loans of portfolio securities
will only be made to firms deemed by the subadvisers to be creditworthy. The
Trust receives compensation for lending its securities either in the form of
fees or by retaining a portion of interest on the investment of any cash
received as collateral. Income generated from the investment of cash collateral
is included as interest income in the Statement of Operations. All collateral
received will be in an amount equal to at least 100% of the market value of the
loaned securities and must be maintained at that level during the period of the
loan. During the loan period, the fund continues to retain rights of ownership,
including dividends and interest of the loaned securities.
FEDERAL INCOME TAXES. The Trust's policy is to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code, as amended,
and to distribute all of its taxable income to its shareholders. Accordingly, no
federal income tax provision is required. Each portfolio of the Trust is treated
as a separate taxpayer for federal income tax purposes.
DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of NASL Money
Market is declared as a dividend to shareholders of record as of the close of
business each day and is reinvested daily. During any particular year, net
realized gains from investment transactions of each portfolio, in excess of
available capital loss carryforwards of each portfolio would be taxable to such
portfolio if not distributed. Therefore, each portfolio of the Trust intends to
distribute all of its investment company taxable income and any net realized
capital gains in order to avoid federal income tax. Each portfolio of the Trust
is exempt from federal excise tax. Net investment income is reported in the
accompanying statements under GAAP. The Trust's distributions are based on
income amounts determined in accordance with federal income tax regulations.
Overdistributions of net investment income as determined in accordance with GAAP
have been presented in the financial statements as distributions in excess of
net investment income. Net investment income and net realized gains differ for
financial statement and tax purposes due to distributions in accordance with
income tax regulations which may differ from GAAP: marking-to-market of certain
financial instruments, the deferral of certain losses for tax purposes and the
treatment of currency gains or losses. As a result, the character of
distributions made during the year from net investment income may differ from
its ultimate characterization for tax purposes.
<PAGE> 126
NASL SERIES TRUST/MANULIFE SERIES FUND, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
EXPENSE ALLOCATION. Expenses not directly attributable to a particular portfolio
are allocated based on the relative share of net assets of each portfolio for
the time during which the expense was incurred.
REPURCHASE AGREEMENTS. Each portfolio of the Trust may enter into repurchase
agreements. When a portfolio enters into a repurchase agreement through its
custodian, it receives delivery of the underlying securities, the amount of
which at the time of purchase and each subsequent business day is required to be
maintained at such a level that the market value is 102% of the repurchase
amount. Each portfolio will take constructive receipt of all securities
underlying the repurchase agreements it has entered into until such agreements
expire. If the seller defaults, a portfolio would suffer a loss to the extent
that proceeds from the sale of underlying securities were less than the
repurchase amount.
CAPITAL ACCOUNTS. The Trust reports the accumulated undistributed net investment
income (loss) and accumulated undistributed net realized gain (loss) accounts on
a basis approximating amounts available for future tax distributions (or to
offset future taxable realized gains when a capital loss carryforward is
available). Accordingly, each portfolio of the Trust may periodically make
reclassifications among certain capital accounts without impacting the net asset
value.
OTHER. Investment security transactions are accounted for on a trade date plus
one basis. Interest income is accrued as earned. Dividend income and
distributions to shareholders are recorded on the ex-dividend date. All original
issue discounts are accreted for financial and tax reporting purposes. The Trust
uses the First In, First Out method for determining realized gain or loss on
investments for both financial and federal income tax reporting purposes. The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amount of assets and
liabilities. Actual results may differ from these estimates.
3. CAPITAL SHARES. The Pro Forma net asset value per share assumes the issuance
of shares of NASL Money Market which would have been issued at June 30, 1996 had
the proposed reorganization taken place on such date. The amount of additional
shares assumed to be issued was calculated based on the per share net asset
value of NASL Money Market ($10.00).
<PAGE> 127
NASL SERIES TRUST - COMMON STOCK TRUST
MANULIFE SERIES FUND - COMMON STOCK FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
MSF COMMON
COMMON STOCK TRUST
STOCK PRO FORMA PRO FORMA
FUND ADJUSTMENTS COMBINED
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value.............. $76,128,531 $76,128,531
Cash............................................. 78,149 78,149
Receivables:
Investments sold............................ 515,797 515,797
Interest.................................... 127,639 127,639
----------- -----------
Total assets............................ 76,850,116 76,850,116
----------- -----------
LIABILITIES
Payables:
Investments purchased....................... 787,207 787,207
Investment adviser.......................... 30,811 30,811
----------- -----------
Total liabilities....................... 818,018 818,018
----------- -----------
NET ASSETS....................................... $76,032,098 $76,032,098
=========== ===========
Net assets consist of:
Accumulated undistributed net investment income $ 1,463,845 $ 1,463,845
Accumulated undistributed net realized gain
on investments............................ 6,472,576 6,472,576
Unrealized appreciation on investments...... 8,725,515 8,725,515
Capital shares.............................. -- 40,595 (A) 40,595
Additional paid-in capital.................. 59,370,162 (40,595)(A) 59,329,567
----------- ------- -----------
Net assets.............................. $76,032,098 $76,032,098
=========== ===========
Capital shares outstanding....................... 4,059,539 4,059,539
----------- -----------
Net asset value, offering price and redemption price
per share................................... $18.73 $18.73
----------- -----------
Investments in securities, at identified cost.... $67,403,016 $67,403,016
=========== ===========
</TABLE>
<PAGE> 128
NASL SERIES TRUST - COMMON STOCK TRUST
MANULIFE SERIES FUND - COMMON STOCK FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS - (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
MSF COMMON
COMMON STOCK TRUST
STOCK PRO FORMA PRO FORMA
FUND ADJUSTMENTS COMBINED
----------- ----------- -----------
<S> <C> <C> <C>
Investment Income:
Interest.................................... $ 151,112 $ 151,112
Dividends................................... 650,953 650,953
----------- ----------
Total income............................. 802,065 802,065
----------- ----------
Expenses:
Investment adviser fee...................... 172,981 $69,192(B) $ 242,173
Custodian fee............................... -- 14,125(B) 14,125
Audit and legal fees........................ -- 4,274(B) 4,274
Trustees fees and expenses.................. -- 1,041(B) 1,041
Registration and filing fees................ -- 795(B) 795
Miscellaneous............................... -- 523(B) 523
----------- ------- ----------
Expenses before reimbursement
by adviser................................ 172,981 89,950 262,931
----------- ------- ----------
Reimbursement of expenses by adviser........ -- 89,950(C) 89,950
----------- ------- ----------
Net expenses............................. 172,981 172,981
----------- ----------
Net investment income.................... 629,084 629,084
----------- ----------
Realized and unrealized gain (loss) on investments:
Net realized gain on
investment transactions................... 4,965,989 4,965,989
Change in unrealized appreciation
on investments............................ 4,889 4,889
Net gain on investments..................... 4,970,878 4,970,878
----------- ----------
Net increase in net assets resulting
from operations........................ $5, 599,962 $5,599,962
=========== ==========
</TABLE>
<PAGE> 129
NASL SERIES TRUST - PACIFIC RIM EMERGING MARKETS TRUST
MANULIFE SERIES FUND - PACIFIC RIM EMERGING MARKETS FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
MSF PACIFIC RIM
PACIFIC RIM EMERGING MARKETS
EMERGING PRO FORMA PRO FORMA
MARKETS FUND ADJUSTMENTS COMBINED
------------ ----------- ----------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value.............. $17,814,408 $17,814,408
Cash............................................. 23 23
Foreign currency (cost: $2,009,700).............. 2,008,640 2,008,640
Receivables:
Investments sold............................ 20,272 20,272
Interest.................................... 51,679 51,679
----------- -----------
Total assets............................ 19,895,022 19,895,022
----------- -----------
LIABILITIES
Payables:
Investments purchased....................... 240,472 240,472
Investment adviser.......................... 23,723 23,723
Dividend and interest withholding tax....... 4,244 4,244
----------- -----------
Total liabilities....................... 268,439 268,439
----------- -----------
NET ASSETS....................................... 19,626,583 19,626,583
=========== ===========
Net assets consist of:
Accumulated undistributed net investment income $105,491 $105,491
Accumulated undistributed net realized gain
on investments............................ 431,405 431,405
Unrealized appreciation (depreciation) on:
Investments............................... 1,057,239 1,057,239
Foreign currency and forward foreign currency contracts (963) (963)
Capital shares.............................. -- 17,708 (A) 17,708
Additional paid-in capital.................. 18,033,411 (17,708)(A) 18,015,703
----------- ------- -----------
Net assets.............................. $19,626,583 $19,626,583
=========== ===========
Capital shares outstanding....................... 1,770,794 1,770,794
----------- -----------
Net asset value, offering price and redemption price
per share................................... $11.08 $11.08
----------- -----------
Investments in securities, at identified cost.... $16,757,169 $16,757,169
=========== ===========
</TABLE>
<PAGE> 130
NASL SERIES TRUST - PACIFIC RIM EMERGING MARKETS TRUST
MANULIFE SERIES FUND - PACIFIC RIM EMERGING MARKETS FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS - (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
PACIFIC RIM
MSF EMERGING
PACIFIC RIM MARKETS PRO
EMERGING PRO FORMA FORMA
MARKETS FUND ADJUSTMENTS COMBINED
------------ ----------- ------------
<S> <C> <C> <C>
Investment Income:
Interest (Net of $105 withholding tax)...... $ 79,854 $ 79,854
Dividends (Net of $12,535 withholding tax).. 148,867 148,867
-------- --------
Total income............................. 228,721 228,721
-------- --------
Expenses:
Investment adviser fee...................... 70,055 70,055
Custodian fee............................... -- $ 21,670 (B) 21,670
Audit and legal fees........................ -- 1,944 (B) 1,944
Trustees fees and expenses.................. -- 443 (B) 443
Registration and filing fees................ -- 398 (B) 398
Miscellaneous............................... -- 272 (B) 272
General expenses............................ 53,572 (53,572)(B) --
-------- -------- --------
Total expenses........................... 123,627 (28,845) 94,782
-------- -------- --------
Net investment income.................... 105,094 28,845 133,939
-------- -------- --------
Realized and unrealized gain (loss) on
investments and foreign currency:
Net realized gain (loss) on:
Investment transactions................... 496,780 496,780
Foreign currency and forward foreign
currency contracts...................... (75,880) (75,880)
Change in unrealized appreciation (depreciation) on:
Investment transactions................... 432,559 432,559
Translation of foreign currency and forward foreign
currency contracts...................... (1,336) (1,336)
Net gain on investments and foreign currency 852,123 852,123
-------- --------
Net increase in net assets resulting
from operations........................ $957,217 $ 28,845 $986,062
======== ======== ========
</TABLE>
<PAGE> 131
NASL SERIES TRUST - REAL ESTATE SECURITIES TRUST
MANULIFE SERIES FUND - REAL ESTATE SECURITIES FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1996
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
REAL ESTATE
MSF SECURITIES
REAL ESTATE TRUST
SECURITIES PRO FORMA PRO FORMA
FUND ADJUSTMENTS COMBINED
ASSETS ------------- ------------- -------------
<S> <C> <C> <C>
Investments in securities, at value.............. $55,797,294 $55,797,294
Cash............................................. 70,145 70,145
Receivables:
Investments sold............................ 2,199,964 2,199,964
Interest.................................... 271,617 271,617
----------- -----------
Total assets............................ 58,339,020 58,339,020
----------- -----------
LIABILITIES
Payables:
Investments purchased....................... 1,455,685 1,455,685
Investment adviser.......................... 22,972 22,972
----------- -----------
Total liabilities....................... 1,478,657 1,478,657
----------- -----------
NET ASSETS....................................... $56,860,363 $56,860,363
=========== ===========
Net assets consist of:
Accumulated undistributed net investment
income.................................... $3,697,651 $3,697,651
Accumulated undistributed net realized gain
on investments............................ 2,721,627 2,721,627
Unrealized appreciation (depreciation)
on investments............................ 1,610,235 1,610,235
Capital shares.............................. -- 35,507 (A) 35,507
Additional paid-in capital.................. 48,830,850 (35,507)(A) 48,795,343
----------- ------- -----------
Net assets.............................. $56,860,363 $56,860,363
=========== ===========
Capital shares outstanding....................... 3,550,678 3,550,678
----------- -----------
Net asset value, offering price and redemption price
per share................................... $16.01 $16.01
====== ======
Investments in securities, at identified cost.... $54,187,059 $54,187,059
=========== ===========
</TABLE>
<PAGE> 132
NASL SERIES TRUST - REAL ESTATE SECURITIES TRUST
MANULIFE SERIES FUND- REAL ESTATE SECURITIES FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS - (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
MSF REAL ESTATE
REAL ESTATE SECURITIES
SECURITIES PRO FORMA TRUST PRO
FUND ADJUSTMENTS FORMA
COMBINED
-------------- ------------- --------------
Investment Income:
<S> <C> <C> <C>
Interest.................................... $ 91,455 $ 91,455
Dividends................................... 1,374,851 1,374,851
---------- ----------
Total income............................. 1,466,306 1,466,306
---------- ----------
Expenses:
Investment adviser fee...................... 134,516 $53,806(B) 188,322
Custodian fee............................... ----- 18,307(B) 18,307
Audit and legal fees........................ ----- 5,539(B) 5,539
Trustees fees and expenses.................. ----- 1,349(B) 1,349
Registration and filing fees................ ----- 1,031(B) 1,031
Miscellaneous............................... ----- 678(B) 678
---------- ------- ----------
Expenses before reimbursement
by adviser................................ 134,516 80,710 215,226
---------- ------- ----------
Reimbursement of expenses by adviser........ ----- 80,710(C) 80,710
---------- ------- ----------
Net expenses............................. 134,516 134,516
---------- ----------
Net investment income.................... 1,331,790 1,331,790
---------- ----------
Realized and unrealized gain (loss) on investments:
Net realized gain on
investment transactions................... 1,881,741 1,881,741
Change in unrealized appreciation (depreciation)
on investments............................ 9,993 9,993
Net gain on investments..................... 1,891,734 1,891,734
---------- ----------
Net increase in net assets resulting
from operations........................ $3,223,524 $3,223,524
========== ==========
</TABLE>
<PAGE> 133
NASL SERIES TRUST - CAPITAL GROWTH BOND TRUST
MANULIFE SERIES FUND - CAPITAL GROWTH BOND FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1996
(UNAUDITED)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
MSF CAPITAL GROWTH
CAPITAL BOND TRUST
GROWTH PRO FORMA PRO FORMA
BOND FUND ADJUSTMENTS COMBINED
------------- ------------- ---------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value.............. $40,621,944 $40,621,944
Cash............................................. 74,833 74,833
Receivables:
Interest.................................... 649,655 649,655
----------- -----------
Total assets............................ 41,346,432 41,346,432
----------- -----------
LIABILITIES
Payables:
Investment adviser.......................... 17,168 17,168
----------- -----------
Total liabilities....................... 17,168 17,168
----------- -----------
NET ASSETS....................................... 41,329,264 41,329,264
=========== ===========
Net assets consist of:
Accumulated undistributed net investment
income ................................... $1,294,996 $1,294,996
Accumulated undistributed net realized loss
on investments............................ (1,262,470) (1,262,470)
Unrealized depreciation on investments...... (70,549) (70,549)
Capital shares.............................. -- 37,442 (A) 37,442
Additional paid-in capital.................. 41,367,287 (37,442)(A) 41,329,845
----------- ------- -----------
Net assets.............................. $41,329,264 $41,329,264
=========== ===========
Capital shares outstanding....................... 3,744,236 3,744,236
----------- -----------
Net asset value, offering price and redemption price
per share................................... $11.04 $11.04
====== ======
Investments in securities, at identified cost.... $40,692,493 $40,692,493
=========== ===========
</TABLE>
<PAGE> 134
NASL SERIES TRUST - CAPITAL GROWTH BOND TRUST
MANULIFE SERIES FUND - CAPITAL GROWTH BOND FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS - (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
MSF CAPITAL GROWTH
CAPITAL BOND TRUST
GROWTH PRO FORMA PRO FORMA
BOND FUND ADJUSTMENTS COMBINED
------------- ------------- --------------
<S> <C> <C> <C>
Investment Income:
Interest.................................... $1,398,946 $1,398,946
---------- ----------
Total income............................. 1,398,946 1,398,946
---------- ----------
Expenses:
Investment adviser fee...................... 105,547 $31,664(B) 137,211
Custodian fee............................... -- 14,364(B) 14,364
Audit and legal fees........................ -- 4,346(B) 4,346
Trustees fees and expenses.................. -- 1,058(B) 1,058
Registration and filing fees................ -- 809(B) 809
Miscellaneous............................... -- 532(B) 532
---------- ------- ----------
Expenses before reimbursement
by adviser................................ 105,547 52,773 158,320
---------- ------- ----------
Reimbursement of expenses by adviser........ -- 52,773(C) 52,773
---------- ------- ----------
Net expenses............................. 105,547 105,547
---------- ----------
Net investment income.................... 1,293,399 1,293,399
---------- ----------
Realized and unrealized gain (loss) on investments:
Net realized loss on
investment transactions................... (202,432) (202,432)
Change in unrealized depreciation
on investments............................ (2,083,239) (2,083,239)
Net loss on investments..................... (2,285,671) (2,285,671)
---------- ----------
Net decrease in net assets resulting
from operations........................ ($992,272) ($992,272)
========== ==========
</TABLE>
<PAGE> 135
NASL SERIES TRUST - EQUITY INDEX TRUST
MANULIFE SERIES FUND - EQUITY INDEX FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1996
(UNAUDITED)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
EQUITY INDEX
MSF TRUST
EQUITY INDEX PRO FORMA PRO FORMA
FUND ADJUSTMENTS COMBINED
-------------- ------------- --------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value.............. $2,408,849 $2,408,849
Cash............................................. 70,910 70,910
Receivables:
Variation margin for open futures contracts. 13,200 13,200
Interest.................................... 794 794
---------- ----------
Total assets............................ 2,493,753 2,493,753
---------- ----------
LIABILITIES
Payables:
Investment adviser.......................... 726 726
---------- ----------
Total liabilities....................... 726 726
---------- ----------
NET ASSETS....................................... 2,493,027 2,493,027
========== ==========
Net assets consist of:
Accumulated undistributed net investment
income..................................... $ 20,867 $ 20,867
Accumulated undistributed net realized gain
on investments............................. 5,943 5,943
Unrealized appreciation (depreciation) on:
Investments............................... 118 118
Futures contracts......................... 16,455 16,455
Capital shares.............................. -- 2,404 (A) 2,404
Additional paid-in capital.................. 2,449,644 (2,404)(A) 2,447,240
---------- ------ ----------
Net assets.............................. $2,493,027 $2,493,027
========== ==========
Capital shares outstanding....................... 240,388 240,388
---------- ----------
Net asset value, offering price and redemption price
per share................................... $10.37 $10.37
====== ======
Investments in securities, at identified cost.... $2,408,731 $2,408,731
========== ==========
</TABLE>
<PAGE> 136
NASL SERIES TRUST - EQUITY INDEX TRUST
MANULIFE SERIES FUND - EQUITY INDEX FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS - (UNAUDITED)
FOR THE PERIOD FEBRUARY 14, 1996 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
EQUITY INDEX
MSF TRUST
EQUITY INDEX PRO FORMA PRO FORMA
FUND ADJUSTMENTS COMBINED
------------ ----------- ------------
<S> <C> <C> <C>
Investment Income:
Interest .............................................................. $22,081 $22,081
Dividends ............................................................. 596 596
------- -------
Total income ....................................................... 22,677 22,677
------- -------
Expenses:
Investment adviser fee ................................................ 1,810 1,810
Custodian fee ......................................................... -- $ 915 (B) 915
Audit and legal fees .................................................. -- 101 (B) 101
Trustees fees and expenses ............................................ -- 24 (B) 24
Registration and filing fees .......................................... -- 28 (B) 28
Miscellaneous ......................................................... -- 19 (B) 19
------- ------- -------
Total expenses ..................................................... 1,810 1,087 2,897
------- ------- -------
Net investment income .............................................. 20,867 (1,087) 19,780
------- ------- -------
Realized and unrealized gain (loss)
on investments and futures contracts:
Net realized gain on
futures contracts ................................................... 5,943 5,943
Change in unrealized appreciation (depreciation) on:
Investment transactions ............................................. 118 118
Futures contracts ................................................... 16,455 16,455
Net gain on investments and futures ................................... 22,516 22,516
------- -------
Net increase in net assets resulting
from operations .................................................. $43,383 ($1,087) $42,296
======= ======= =======
</TABLE>
<PAGE> 137
NASL SERIES TRUST - INTERNATIONAL STOCK TRUST
MANULIFE SERIES FUND - INTERNATIONAL FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1996
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
INTERNATIONAL
MSF STOCK TRUST
INTERNATIONAL PRO FORMA PRO FORMA
FUND ADJUSTMENTS COMBINED
------------- ----------- -------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value .................................. $20,082,817 $20,082,817
Cash ................................................................. 678 678
Foreign currency (cost: $6,518,107) .................................. 6,551,938 6,551,938
Receivables:
Investments sold ................................................ 51,837 51,837
Interest ........................................................ 60,323 60,323
Foreign tax withholding reclaim ................................. 19,336 19,336
----------- -----------
Total assets ................................................ 26,766,929 26,766,929
----------- -----------
LIABILITIES
Payables:
Investments purchased ........................................... 254,506 254,506
Investment adviser .............................................. 28,563 28,563
Dividend and interest withholding tax ........................... 6,608 6,608
----------- -----------
Total liabilities ........................................... 289,677 289,677
----------- -----------
NET ASSETS ........................................................... 26,477,252 26,477,252
=========== ===========
Net assets consist of:
Accumulated undistributed net investment income ................. $ 218,925 $ 218,925
Accumulated undistributed net realized gain
on investments ................................................ 262,255 262,255
Unrealized appreciation (depreciation) on:
Investments ................................................... 1,710,640 1,710,640
Foreign currency and forward foreign currency contracts ....... 33,537 33,537
Capital shares .................................................. -- 23,595 (A) 23,595
Additional paid-in capital ...................................... 24,251,895 (23,595)(A) 24,228,300
----------- ------ -----------
Net assets .................................................. $26,477,252 $26,477,252
=========== ===========
Capital shares outstanding ........................................... 2,359,525 2,359,525
----------- -----------
Net asset value, offering price and redemption price
per share ....................................................... $ 11.22 $ 11.22
----------- -----------
Investments in securities, at identified cost ........................ $18,372,177 $18,372,177
=========== ===========
</TABLE>
<PAGE> 138
NASL SERIES TRUST - INTERNATIONAL STOCK TRUST
MANULIFE SERIES FUND - INTERNATIONAL FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS - (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
INTERNATIONAL
MSF STOCK TRUST
INTERNATIONAL PRO FORMA PRO FORMA
FUND ADJUSTMENTS COMBINED
------------- ----------- ------------
<S> <C> <C> <C>
Investment Income:
Interest (Net of $211 withholding tax) ....................... $ 122,180 $ 122,180
Dividends (Net of $30,789 withholding tax) ................... 248,188 248,188
---------- ----------
Total income .............................................. 370,368 370,368
---------- ----------
Expenses:
Investment adviser fee ....................................... 97,095 $22,846 (B) 119,941
Custodian fee ................................................ -- 20,022 (B) 20,022
Audit and legal fees ......................................... -- 1,796 (B) 1,796
Trustees fees and expenses ................................... -- 409 (B) 409
Registration and filing fees ................................. -- 367 (B) 367
Miscellaneous ................................................ -- 251 (B) 251
General expenses ............................................. 57,115 (57,115)(B) --
---------- ------- ----------
Total expenses ............................................ 154,210 (11,424) 142,786
---------- ------- ----------
Net investment income ..................................... 216,158 11,424 227,582
---------- ------- ----------
Realized and unrealized gain (loss) on
investments and foreign currency:
Net realized gain (loss) on:
Investment transactions .................................... 534,044 534,044
Foreign currency and forward foreign
currency contracts ....................................... (215,423) (215,423)
Change in unrealized appreciation (depreciation) on:
Investment transactions .................................... 540,566 540,566
Translation of foreign currency and forward foreign
currency contracts ....................................... 33,131 33,131
Net gain on investments and foreign currency ................. 892,318 892,318
---------- ----------
Net increase in net assets resulting
from operations ......................................... $1,108,476 $11,424 $1,119,900
========== ======= ==========
</TABLE>
<PAGE> 139
NASL SERIES TRUST - EMERGING GROWTH TRUST
MANULIFE SERIES FUND - EMERGING GROWTH EQUITY FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1996
(UNAUDITED)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
MSF EMERGING
EMERGING GROWTH TRUST
GROWTH PRO FORMA PRO FORMA
EQUITY FUND ADJUSTMENTS COMBINED
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value ............................... $188,957,916 $188,957,916
Cash .............................................................. 1,466,529 1,466,529
Receivables:
Investments sold ............................................. 1,999,612 1,999,612
Interest ..................................................... 27,004 27,004
------------ ------------
Total assets ............................................. 192,451,061 192,451,061
------------ ------------
LIABILITIES
Payables:
Investments purchased ........................................ 1,176,204 1,176,204
Investment adviser ........................................... 82,205 82,205
------------ ------------
Total liabilities ........................................ 1,258,409 1,258,409
------------ ------------
NET ASSETS ........................................................ $191,192,652 $191,192,652
============ ============
Net assets consist of:
Accumulated undistributed net investment income .............. $ 215,889 $ 215,889
Accumulated undistributed net realized gain
on investments ............................................. 33,822,586 33,822,586
Unrealized appreciation (depreciation) on investments ........ 8,500,393 8,500,393
Capital shares ............................................... -- 77,296 (A) 77,296
Additional paid-in capital ................................... 148,653,784 (77,296)(A) 148,576,488
------------ ------ ------------
Net assets ............................................... $191,192,652 $191,192,652
============ ============
Capital shares outstanding ........................................ 7,729,562 7,729,562
------------ ------------
Net asset value, offering price and redemption price
per share .................................................... $ 24.74 $ 24 .74
------------ ------------
Investments in securities, at identified cost ..................... $180,457,523 $180,457,523
============ ============
</TABLE>
<PAGE> 140
NASL SERIES TRUST - EMERGING GROWTH TRUST
MANULIFE SERIES FUND - EMERGING GROWTH EQUITY FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS - (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
MSF EMERGING
EMERGING GROWTH TRUST
GROWTH PRO FORMA PRO FORMA
EQUITY FUND ADJUSTMENTS COMBINED
------------- ----------- ------------
<S> <C> <C> <C>
Investment Income:
Interest ........................................................ $ 247,804 $ 247,804
Dividends ....................................................... 223,013 223,013
----------- ----------
Total income ................................................. 470,817 470,817
----------- ----------
Expenses:
Investment adviser fee .......................................... 461,194 $ 507,313 (B) 968,507
Custodian fee ................................................... -- 62,766 (B) 62,766
Audit and legal fees ............................................ -- 18,990 (B) 18,990
Trustees fees and expenses ...................................... -- 4,624 (B) 4,624
Registration and filing fees .................................... -- 3,534 (B) 3,534
Miscellaneous ................................................... -- 2,324 (B) 2,324
----------- ---------- -----------
Total expenses ............................................... 461,194 599,551 1,060,745
----------- ---------- -----------
Net investment income ........................................ 9,623 (599,551) (589,928)
----------- ---------- -----------
Realized and unrealized gain (loss) on investments:
Net realized gain on
investment transactions ....................................... 15,682,844 15,682,844
Change in unrealized appreciation (depreciation)
on investments ................................................ (4,172,268) (4,172,268)
Net gain on investments ......................................... 11,510,576 11,510,576
----------- -----------
Net increase in net assets resulting
from operations ............................................ $11,520,199 ($599,551) $10,920,648
=========== ========= ===========
</TABLE>
<PAGE> 141
NASL SERIES TRUST - BALANCED TRUST
MANULIFE SERIES FUND - BALANCED ASSETS FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
MSF BALANCED
BALANCED TRUST
ASSETS PRO FORMA PRO FORMA
FUND ADJUSTMENTS COMBINED
------------ ----------- ------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value .................................. $122,858,143 $122,858,143
Cash ................................................................. 45,438 45,438
Receivables:
Investments sold ................................................ 459,946 459,946
Interest ........................................................ 918,870 918,870
------------ ------------
Total assets 124,282,397 124,282,397
------------ ------------
LIABILITIES
Payables:
Investments purchased ........................................... 2,214,428 2,214,428
Investment adviser .............................................. 49,625 49,625
------------ ------------
Total liabilities ........................................... 2,264,053 2,264,053
------------ ------------
NET ASSETS $122,018,344 $122,018,344
============ ============
Net assets consist of:
Accumulated undistributed net investment income ................. $5,428,388 $5,428,388
Accumulated undistributed net realized gain
on investments ................................................ 6,433,581 6,433,581
Unrealized appreciation (depreciation) on investments ........... 8,439,856 8,439,856
Capital shares .................................................. -- 68,822 (A) 68,822
Additional paid-in capital ...................................... 101,716,519 (68,822)(A) 101,647,697
------------ -------- ------------
Net assets .................................................. $122,018,344 $122,018,344
============ ============
Capital shares outstanding ........................................... 6,882,224 6,882,224
------------ ------------
Net asset value, offering price and redemption price
per share ....................................................... $17.73 $17.73
------------ ------------
Investments in securities, at identified cost ........................ $114,418,287 $114,418,287
============ ============
</TABLE>
<PAGE> 142
NASL SERIES TRUST - BALANCED TRUST
MANULIFE SERIES FUND - BALANCED ASSETS FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS - (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
MSF BALANCED
BALANCED TRUST PRO
ASSETS PRO FORMA FORMA
FUND ADJUSTMENTS COMBINED
----------- ---------- -----------
<S> <C> <C> <C>
Investment Income:
Interest ...................................................... $ 1,841,754 $ 1,841,754
Dividends ..................................................... 608,989 608,989
----------- -----------
Total income ............................................... 2,450,743 2,450,743
----------- -----------
Expenses:
Investment adviser fee ........................................ 291,102 $ 174,661(B) 465,763
Custodian fee ................................................. -- 73,542(B) 73,542
Audit and legal fees .......................................... -- 8,083(B) 8,083
Trustees fees and expenses .................................... -- 1,948(B) 1,948
Registration and filing fees .................................. -- 2,252(B) 2,252
Miscellaneous ................................................. -- 1,507(B) 1,507
----------- ---------- -----------
Total expenses ............................................. 291,102 261,993 553,095
----------- ---------- -----------
Net investment income ...................................... 2,159,641 (261,993) 1,897,648
----------- ---------- -----------
Realized and unrealized gain (loss) on investments:
Net realized gain on
investment transactions ..................................... 4,751,133 4,751,133
Change in unrealized appreciation (depreciation)
on investments .............................................. (3,034,280) (3,034,280)
Net gain on investments ....................................... 1,716,853 1,716,853
----------- -----------
Net increase in net assets resulting
from operations .......................................... $ 3,876,494 ($261,993) $ 3,614,501
=========== ========== ===========
</TABLE>
<PAGE> 143
NASL SERIES TRUST/MANULIFE SERIES FUND, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES. The policies described below are followed by
the NASL Series Trust (the "Trust") in the preparation of the Pro Forma
financial statements for the following nine portfolios: The Common Stock Trust
("Common Stock"), the Pacific Rim Emerging Markets Trust ("Pacific Rim Emerging
Markets"), the Real Estate Securities Trust ("Real Estate Securities"), the
Capital Growth Bond Trust ("Capital Growth Bond"), the Equity Index Trust
("Equity Index"), the International Stock Trust ("International Stock"), the
Emerging Growth Trust ("Emerging Growth") and the Balanced Trust ("Balanced") in
conformity with generally accepted accounting principles ("GAAP"). These
statements have been derived from the books and records of each portfolio
utilized in calculating daily net asset value at June 30, 1996.
SECURITY VALUATION. Short term instruments with remaining maturities of 60 days
or less held by the other portfolios of the Trust are valued on an amortized
cost basis or at original cost plus accrued interest, both of which approximate
current market value. All other securities held by the Trust are valued at the
last sale price as of the close of business on a principal securities exchange
(domestic or foreign) or, lacking any sales, at the closing bid prices.
Securities traded only in the over-the-counter market are valued at the last bid
prices quoted by brokers making markets in the securities at the close of
trading on the Exchange.
Trust securities for which there are no such quotations, principally debt
securities, are valued on the basis of the valuation provided by a pricing
service which utilizes both dealer-supplied and electronic data processing
techniques. Other assets and securities for which no such quotations are readily
available are valued at their fair value as determined in good faith under
consistently applied procedures established by and under the general supervision
of the Board of Trustees.
FOREIGN CURRENCY TRANSLATIONS. The accounting records of the Trust are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of securities, other assets and other liabilities at
the current rate of exchange of such currencies against U.S.
dollars;
(ii) purchases and sales of securities, income and expenses at the
rate of exchange quoted on the respective dates of such
transactions.
Gains and losses that arise from changes in foreign exchange rates have been
segregated from gains and losses that arise from changes in the market prices of
investments. These gains and losses are included with gains and losses on
foreign currency and forward foreign currency contracts in the Statements of
Operations.
FORWARD FOREIGN CURRENCY CONTRACTS. All portfolios with the exception of Equity
Index may purchase and sell forward foreign currency contracts in order to hedge
a specific transaction or portfolio position.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held at the end of the period and the resulting net unrealized
appreciation (depreciation) and related net receivable or payable amount are
determined using forward foreign currency exchange rates supplied by a quotation
service. The Trust could be exposed to risks if the counterparties to the
contracts are unable to meet the terms of their contracts or if the value of the
foreign currency changes unfavorably.
Net realized gains (losses) on foreign currency and forward foreign currency
contracts shown in the Statements of Operations, include net gains or losses
realized by a portfolio on contracts which have matured or which the portfolio
has terminated by entering into an offsetting commitment with the same broker.
FUTURES. All portfolios may purchase and sell financial futures contracts and
options on those contracts. The portfolios invest in contracts based on
financial instruments such as U.S. Treasury bonds or notes or on securities
indices such as the S&P 500 Index, in order to hedge against a decline in the
value of securities owned by the portfolios.
When a portfolio sells a futures contract based on a financial instrument, the
portfolio becomes obligated to deliver that kind of instrument at an agreed upon
date for a specified price. The portfolio realizes a gain or loss depending on
whether the price of an offsetting purchase is less or more than the price of
the initial sale or on whether the price of an offsetting sale is more or less
than the price of the initial purchase . The Trust could be exposed to risks if
it could not close out futures positions because of an illiquid secondary market
or the inability of counterparties to meet the terms of their contracts. Upon
entering into futures contracts, the Trust is required to deposit with a broker
an amount, initial margin, which represents 5% of the purchase price indicated
in the futures contract.
Payments to and from the broker, known as variation margin, are required to be
made on a daily basis as the price of the futures contract fluctuates, making
the long or short positions in the contract more or less valuable. If the
position is closed out by taking an opposite position prior to the settlement
date of the futures contract, a final determination of variation margin is made,
cash is required to be paid to or released by the broker, and the portfolio
realizes a gain or loss.
<PAGE> 144
NASL SERIES TRUST/MANULIFE SERIES FUND, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FORWARD COMMITMENTS. The portfolios of the Trust may purchase debt securities on
a when issued or forward delivery basis, which means that the obligations will
be delivered to the portfolios of the Trust at a future date, which may be a
month or more after the date of commitment. The price of the underlying
securities and the date when the securities will be delivered and paid for are
fixed at the time the transaction is negotiated. The value of the securities
underlying a forward commitment to purchase securities, and the subsequent
fluctuations in their value, is taken into account when determining the Trust's
net asset value starting on the day the Trust agrees to purchase the securities.
SECURITIES LENDING. The Trust may lend securities in amounts up to 33 1/3% of
its total non-cash assets to brokers, dealers and other financial institutions,
provided such loans are callable at any time and are at all times fully secured
by cash, cash equivalents or securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities, marked to market to the value
of the loaned securities on a daily basis. The Trust may bear the risk of delay
in recovery of, or even of rights in, the securities loaned should the borrower
of the securities fail financially. Consequently, loans of portfolio securities
will only be made to firms deemed by the subadvisers to be creditworthy. The
Trust receives compensation for lending its securities either in the form of
fees or by retaining a portion of interest on the investment of any cash
received as collateral. Income generated from the investment of cash collateral
is included as interest income in the Statement of Operations. All collateral
received will be in an amount equal to at least 100% of the market value of the
loaned securities and must be maintained at that level during the period of the
loan. During the loan period, the fund continues to retain rights of ownership,
including dividends and interest of the loaned securities.
MORTGAGE DOLLAR ROLLS. All portfolios may enter into mortgage dollar rolls in
which they sell mortgage securities for delivery in the current month and
simultaneously contract to repurchase similar, but not identical, securities at
the same price on an agreed upon date. The Trusts receive compensation as
consideration for entering into the commitment to repurchase. The compensation
is recorded as deferred income and amortized to income over the roll period. As
the holder, the counterparty receives all principal and interest payments,
including prepayments, made with respect to the similar security. Mortgage
dollar rolls may be renewed with a new sale and repurchase price with a cash
settlement made at renewal without physical delivery of the securities subject
to the contract.
FEDERAL INCOME TAXES. The Trust's policy is to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code, as amended,
and to distribute all of its taxable income to its shareholders. Accordingly, no
federal income tax provision is required. Each portfolio of the Trust is treated
as a separate taxpayer for federal income tax purposes.
DISTRIBUTION OF INCOME AND GAINS. During any particular year, net realized gains
from investment transactions of each portfolio, in excess of available capital
loss carryforwards of each portfolio would be taxable to such portfolio if not
distributed. Therefore, each portfolio of the Trust intends to distribute all of
its investment company taxable income and any net realized capital gains in
order to avoid federal income tax. Each portfolio of the Trust is exempt from
federal excise tax. Net investment income is reported in the accompanying
statements under GAAP. The Trust's distributions are based on income amounts
determined in accordance with federal income tax regulations. Overdistributions
of net investment income as determined in accordance with GAAP have been
presented in the financial statements as distributions in excess of net
investment income. Net investment income and net realized gains differ for
financial statement and tax purposes due to distributions in accordance with
income tax regulations which may differ from GAAP: marking-to-market of certain
financial instruments, the deferral of certain losses for tax purposes and the
treatment of currency gains or losses. As a result, the character of
distributions made during the year from net investment income may differ from
its ultimate characterization for tax purposes.
EXPENSE ALLOCATION. Expenses not directly attributable to a particular portfolio
are allocated based on the relative share of net assets of each portfolio for
the time during which the expense was incurred.
REPURCHASE AGREEMENTS. Each portfolio of the Trust may enter into repurchase
agreements. When a portfolio enters into a repurchase agreement through its
custodian, it receives delivery of the underlying securities, the amount of
which at the time of purchase and each subsequent business day is required to be
maintained at such a level that the market value is 102% of the repurchase
amount. Each portfolio will take constructive receipt of all securities
underlying the repurchase agreements it has entered into until such agreements
expire. If the seller defaults, a portfolio would suffer a loss to the extent
that proceeds from the sale of underlying securities were less than the
repurchase amount.
<PAGE> 145
NASL SERIES TRUST/MANULIFE SERIES FUND, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
CAPITAL ACCOUNTS. The Trust reports the accumulated undistributed net investment
income (loss) and accumulated undistributed net realized gain (loss) accounts on
a basis approximating amounts available for future tax distributions (or to
offset future taxable realized gains when a capital loss carryforward is
available). Accordingly, each portfolio of the Trust may periodically make
reclassifications among certain capital accounts without impacting the net asset
value.
OTHER. Investment security transactions are accounted for on a trade date plus
one basis. Interest income is accrued as earned. Dividend income and
distributions to shareholders are recorded on the ex-dividend date. All original
issue discounts are accreted for financial and tax reporting purposes. The Trust
uses the First In, First Out method for determining realized gain or loss on
investments for both financial and federal income tax reporting purposes. The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amount of assets and
liabilities. Actual results may differ from these estimates.
2. PRO FORMA ADJUSTMENTS.
(A) Adjustment to reflect amount allocated to capital shares ($0.01 par value)
for shares issued in reorganization.
(B) Adjustment to reflect change in investment advisory fee and other expenses
due to reorganization, calculated based upon average net assets and
allocated based upon budgeted spending amounts.
(C) Adjustment to reflect the advisor's voluntary fee waiver limiting total
fund operating expenses to .50% of average net assets.
<PAGE> 146
NASL SERIES TRUST - MONEY MARKET TRUST
MANULIFE SERIES FUND - MONEY MARKET FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
NASL MSF MONEY MARKET
MONEY MONEY TRUST
MARKET MARKET PRO FORMA PRO FORMA
TRUST FUND ADJUSTMENTS COMBINED
--------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at value (See
accompanying portfolio of investments)..... $258,581,602 $35,998,414 $294,580,016
Cash........................................ 701 8,573 9,274
Receivables:
Interest............................... 446,107 --- 446,107
Other assets................................ 2,865 --- 2,865
------------ ----------- ------------
Total assets....................... 259,031,275 36,006,987 295,038,262
------------ ----------- ------------
LIABILITIES
Payables:
Fund shares redeemed................... 877,850 --- 877,850
Investment adviser..................... --- 14,988 14,988
Custodian fee.......................... 17,052 --- 17,052
Other accrued expenses................. 19,410 --- 19,410
------------ ----------- ------------
Total liabilities.................. 914,312 14,988 929,300
------------ ----------- ------------
NET ASSETS.................................. $258,116,963 $35,991,999 $294,108,262
============ =========== ============
Net assets consist of:
Accumulated undistributed net investment
income............................... --- $1,684,384 ($1,684,384)(A) ---
Capital shares......................... $258,117 --- 35,992 (B) $294,109
Additional paid-in capital............. 257,858,846 34,307,615 1,648,392 (B) 293,814,853
------------ ----------- ------------ -------------
Net assets......................... $258,116,963 $35,991,999 $0 $294,108,962
============ =========== ============ ============
Capital shares outstanding.................. 25,811,696 3,320,455 278,745 29,410,896
------------ ----------- ------------ -------------
Net asset value, offering price and redemption price
per share.............................. $10.00 $10.84 $10.00
====== ====== ======
Investments in securities, at identified cost $258,581,602 $35,998,414 $294,580,016
============ =========== ============
</TABLE>
<PAGE> 147
NASL SERIES TRUST - MONEY MARKET TRUST
MANULIFE SERIES FUND - MONEY MARKET FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS - (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
NASL MSF MONEY MARKET
MONEY MONEY TRUST
MARKET MARKET PRO FORMA PRO FORMA
TRUST FUND ADJUSTMENTS COMBINED
--------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Investment Income:
Interest............................... $15,862,051 $1,838,797 $17,700,848
----------- ---------- -----------
Total income........................ 15,862,051 1,838,797 17,700,848
----------- ---------- -----------
Expenses:
Investment adviser fee................. 1,318,573 154,412 1,472,985
Custodian fee.......................... 52,444 --- $6,141(C) 58,585
Audit and legal fees................... 35,918 --- 4,206(C) 40,124
Trustees fees and expenses............. 9,424 --- 1,104(C) 10,528
Miscellaneous.......................... 7,222 --- 846(C) 8,068
----------- ---------- --------- -----------
Total expenses...................... 1,423,581 154,412 12,297 1,590,290
----------- ---------- --------- -----------
Net investment income............... 14,438,470 1,684,385 (12,297) 16,110,558
----------- ---------- --------- -----------
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on
investment transactions.............. --- --- ---
Change in unrealized appreciation (depreciation)
on investments....................... --- --- ---
Net gain (loss) on investments......... --- --- ---
----------- ---------- -----------
Net increase in net assets resulting
from operations................... $14,438,470 $1,684,385 ($12,297) $16,110,558
=========== ========== ========= ===========
</TABLE>
<PAGE> 148
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS - DECEMBER 31, 1995 NASL
SERIES TRUST - MONEY MARKET TRUST / MANULIFE SERIES FUND - MONEY MARKET FUND
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount Value
- ----------------------------------------- ----------------------------------------
NASL Manulife Pro NASL Manulife Pro
Series Series Forma Series Series Forma
Trust Fund Combined Security Description Trust Fund Combined
- ----------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS - 0.66%
U.S. TREASURY BILLS - 0.66%
$2,000,000 $2,000,000 5.035% due 06/27/96 $1,950,209 $1,950,209
----------------------------------------
U.S. GOVERNMENT AGENCY AND
MORTGAGE-BACKED OBLIGATIONS - 12.02%
FEDERAL HOME LOAN BANK - 0.12%
350,000 350,000 5.55% due 02/21/96 347,248 347,248
----------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 2.14%
2,335,000 2,335,000 5.57% due 02/15/96 2,318,743 2,318,743
4,000,000 4,000,000 5.67% due 01/16/96 3,990,550 3,990,550
----------------------------------------
6,309,293 6,309,293
----------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 3.68%
880,000 880,000 5.15% due 06/27/96 857,592 857,592
1,715,000 1,715,000 5.35% due 04/26/96 1,685,435 1,685,435
3,785,000 3,785,000 5.38% due 04/24/96 3,720,516 3,720,516
755,000 755,000 5.49% due 03/28/96 744,983 744,983
1,780,000 1,780,000 5.50% due 03/22/96 1,757,972 1,757,972
1,955,000 1,955,000 5.50% due 03/28/96 1,929,015 1,929,015
150,000 150,000 5.62% due 01/11/96 149,766 149,766
----------------------------------------
10,845,279 10,845,279
----------------------------------------
STUDENT LOAN MARKETING ASSOCIATION - 6.08%
$10,000,000 10,000,000 5.24% due 09/28/98 $10,000,000 10,000,000
7,900,000 7,900,000 5.25% due 02/22/99 7,900,807 7,900,807
----------------------------------------
17,900,807 17,900,807
----------------------------------------
TOTAL U.S. GOVERNMENT
AND AGENCY OBLIGATIONS 17,900,807 17,501,820 35,402,627
----------------------------------------
FOREIGN GOVERNMENT AGENCY
OBLIGATIONS - 5.98%
CANADIAN GOVERNMENT - 5.98%
Canadian Wheat Board,
1,600,000 1,600,000 5.60% due 03/29/96 1,578,098 1,578,098
CIT Group Holdings, Incorporated,
1,500,000 1,500,000 5.63% due 03/01/96 1,485,925 1,485,925
5,000,000 5,000,000 5.70% due 01/24/96 4,981,792 4,981,792
Export Development Corporation,
1,500,000 1,500,000 5.80% due 01/03/96 1,499,517 1,499,517
Government of Canada Treasury
1,500,000 1,500,000 Bills, 5.50% due 03/26/96 1,480,521 1,480,521
Her Majesty In Right of Canada,
6,680,000 6,680,000 5.50% due 03/22/96 6,597,335 6,597,335
----------------------------------------
TOTAL FOREIGN GOVERNMENT
AGENCY OBLIGATIONS 11,579,127 6,044,061 17,623,188
----------------------------------------
COMMERCIAL PAPER - 80.88%
American Express Credit Corporation,
1,500,000 1,500,000 5.59% due 04/25/96 1,473,215 1,473,215
9,000,000 9,000,000 5.61% due 03/15/96 8,896,215 8,896,215
American Home Products
2,000,000 2,000,000 Corporation, 5.72% due 02/09/96 1,987,607 1,987,607
</TABLE>
<PAGE> 149
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS - DECEMBER 31,1995
NASL SERIES TRUST - MONEY MARKET TRUST / MANULIFE SERIES FUND -
MONEY MARKET FUND
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount Value
- ----------------------------------------- ----------------------------------------
NASL Manulife Pro NASL Manulife Pro
Series Series Forma Series Series Forma
Trust Fund Combined Security Description Trust Fund Combined
- ----------------------------------------- ---------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL PAPER - CONTINUED
American Telephone and Telegraph
$1,500,000 $1,500,000 Corporation, 5.65% due 02/15/96 $1,489,406 $1,489,406
Assets Securitization Cooperative
$5,500,000 5,500,000 Corporation, 5.70% due 01/16/96 $5,486,937 5,486,937
Associates Corporation of North
8,000,000 8,000,000 America, 5.68% due 02/09/96 7,950,773 7,950,773
Avco Financial Services,
9,000,000 9,000,000 Incorporated, 5.75% due 01/23/96 8,968,375 8,968,375
BankAmerica,
4,000,000 4,000,000 5.74% due 02/16/96 3,999,950 3,999,950
The Bank of New York,
4,000,000 4,000,000 5.52% due 05/22/96 3,998,781 3,998,781
Banque National de Paris,
6,500,000 6,500,000 5.51% due 05/21/96 6,359,725 6,359,725
Bayerische Hypotheken,
7,000,000 7,000,000 6.14% due 10/29/96 7,000,000 7,000,000
BCI Funding Corporation,
5,000,000 5,000,000 5.70% due 02/09/96 4,969,125 4,969,125
5,000,000 5,000,000 5.71% due 02/16/96 4,963,520 4,963,520
Bear Stearns Companies,
8,000,000 8,000,000 Incorporated, 5.77% due 01/16/96 7,980,767 7,980,767
Burlington Northern Santa Fe,
2,500,000 2,500,000 5.90% due 02/28/96 2,476,236 2,476,236
Cariplo Finance, Incorporated,
6,500,000 6,500,000 5.61% due 03/04/96 6,436,186 6,436,186
Chase Manhattan Corporation,
1,500,000 1,500,000 5.65% due 02/29/96 1,486,110 1,486,110
7,500,000 7,500,000 5.77% due 04/15/96 7,500,000 7,500,000
Chevron Transport Corporation,
1,000,000 1,000,000 5.60% due 03/14/96 988,644 988,644
Chevron UK Investment PLC,
8,000,000 8,000,000 5.72% due 01/30/96 7,963,138 7,963,138
Corestates Capital Corporation,
3,000,000 3,000,000 5.68% due 02/16/96 2,978,227 2,978,227
6,000,000 6,000,000 5.86% due 01/05/96 6,000,000 6,000,000
Delaware Funding Corporation,
500,000 500,000 5.71% due 01/08/96 499,445 499,445
Den Danske Corporation,
7,500,000 7,500,000 5.63% due 03/04/96 7,426,106 7,426,106
Dresdner U.S. Finance,
7,000,000 7,000,000 5.72% due 01/22/96 6,976,643 6,976,643
ESC Securitization, Incorporated,
2,000,000 2,000,000 5.68% due 02/22/96 1,983,591 1,983,591
9,000,000 9,000,000 5.72% due 02/02/96 8,954,240 8,954,240
First Bank System,
5,000,000 5,000,000 FRN due 05/06/96 4,999,669 4,999,669
Ford Motor Credit Corporation,
1,500,000 1,500,000 5.69% due 02/26/96 1,486,723 1,486,723
General Electric Capital Corporation,
1,500,000 1,500,000 5.57% due 03/06/96 1,484,915 1,484,915
General Electric Capital Corporation,
7,000,000 7,000,000 5.59% due 03/01/96 6,934,783 6,934,783
</TABLE>
<PAGE> 150
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS - DECEMBER 31,1995
NASL SERIES TRUST - MONEY MARKET TRUST / MANULIFE SERIES FUND -
MONEY MARKET FUND
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount Value
- ----------------------------------------- ----------------------------------------
NASL Manulife Pro NASL Manulife Pro
Series Series Forma Series Series Forma
Trust Fund Combined Security Description Trust Fund Combined
- ----------------------------------------- ---------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL PAPER - CONTINUED
General Electric Capital Services,
$2,000,000 $2,000,000 Incorporated, 5.70% due 02/09/96 $1,987,650 $1,987,650
General Motors Acceptance
8,000,000 8,000,000 Corporation, 5.58% due 04/15/96 7,869,800 7,869,800
4,000,000 4,000,000 Glaxo PLC, 5.57% due 03/11/96 3,956,678 3,956,678
Hitachi America, Ltd.,
1,490,000 1,490,000 5.72% due 01/12/96 1,487,396 1,487,396
Household Finance Corporation,
3,000,000 3,000,000 5.70% due 01/31/96 2,985,750 2,985,750
Household International, Incorporated,
3,000,000 3,000,000 5.65% due 03/08/96 2,968,454 2,968,454
3,000,000 3,000,000 5.73% due 02/08/96 2,981,855 2,981,855
J.C. Penny Funding Corporation,
$1,500,000 1,500,000 5.65% due 02/22/96 $1,487,758 1,487,758
KFW International Finance,
9,000,000 9,000,000 Incorporated, 5.68% due 02/08/96 8,946,040 8,946,040
Kreditbank North America,
7,500,000 7,500,000 5.70% due 03/01/96 7,428,750 7,428,750
National Westminister Bank of
4,000,000 4,000,000 Canada, 5.76% due 02/22/96 4,000,000 4,000,000
Norwest Financial, Incorporated,
4,000,000 4,000,000 5.69% due 02/28/96 3,963,331 3,963,331
PNC Funding Corporation,
700,000 700,000 5.75% due 02/05/96 696,087 696,087
5,965,000 5,965,000 5.76% due 02/05/96 5,931,596 5,931,596
600,000 600,000 5.77% due 02/05/96 596,634 596,634
Pepsico, Incorporated,
1,500,000 1,500,000 5.62% due 02/23/96 1,487,589 1,487,589
Sears Roebuck Acceptance
8,000,000 8,000,000 Corporation, 5.70% due 02/22/96 7,934,133 7,934,133
8,000,000 8,000,000 SMM Trust, 5.925% due 11/15/96 8,000,000 8,000,000
Texaco, Incorporated,
1,600,000 1,600,000 5.65% due 01/30/96 1,592,718 1,592,718
Toshiba America,
7,000,000 7,000,000 5.65% due 01/12/96 6,987,915 6,987,915
Zeneca Wilmington Company,
2,875,000 2,875,000 5.70% due 01/19/96 2,866,806 2,866,806
----------------------------------------
TOTAL COMMERCIAL PAPER 227,753,668 10,502,324 238,255,992
----------------------------------------
REPURCHASE AGREEMENT - 0.46%
1,348,000 1,348,000 Repurchase Agreement with Aubrey Lanston
dated 12/29/95 at 5.90%, to be repurchased
at $1,348,884 on 01/02/96, collateralized
by $1,350,000 U.S Treasury Notes, 5.125%
due 12/31/98 (valued at $1,372,781
including interest) 1,348,000 1,348,000
TOTAL INVESTMENTS $258,581,602 $35,998,414 $294,580,016
============ =========== ============
</TABLE>
<PAGE> 151
NASL SERIES TRUST/MANULIFE SERIES FUND, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
1. BASIS OF COMBINATION. The Pro Forma Combining Schedule of Portfolio
Investments, the Statement of Assets and Liabilities and the Statement of
Operations reflect the accounts of the NASL Series Trust Money Market Trust
("NASL Money Market"), one of seventeen investment portfolios offered by the
NASL Series Trust (the "Trust") and the Manulife Series Fund Money Market Fund
("MSF Money Market"), one of eight investment portfolios offered by the Manulife
Series Fund, Inc. (the "Fund") for the year ended December 31, 1995. These
statements have been derived from the books and records of each portfolio
utilized in calculating daily net asset value at December 31, 1995.
The Pro Forma statements reflect the proposed transfer of the assets and
liabilities of MSF Money Market in exchange for shares of NASL Money Market.
Under generally accepted accounting principles ("GAAP"), the NASL Money Market
will be the surviving entity for accounting purposes. The Pro Forma financial
statements have been adjusted to reflect the anticipated fee arrangements for
the surviving entity and do not reflect the expenses of either portfolio in
carrying out its obligations under the Agreement and Plan of Reorganization.
The Pro Forma Combining Schedule of Portfolio Investments, Statement of Assets
and Liabilities and Statement of Operations should be read in conjunction with
the historical financial statements of NASL Money Market and MSF Money Market
incorporated by reference in the Statement of Additional Information.
NASL Financial Services, Inc. ("NASL Financial"), a wholly-owned subsidiary of
North American Security Life ("Security Life"), serves as investment adviser to
NASL Money Market for which it receives a fee for services, computed daily and
paid monthly, at the annual rate 0.50% of the average daily net assets of NASL
Money Market. Security Life is controlled by The Manufacturers Life Insurance
Company ("Manulife Financial"), a mutual life insurance company based in
Toronto, Canada.
Manufacturers Adviser Corporation ("MAC"), a wholly-owned subsidiary of The
Manufacturers Life Insurance Company of America, which in turn is a wholly-owned
subsidiary of The Manulife Reinsurance Corporation (USA)("MRC"), serves as
investment adviser to MSF Money Market for which it receives a fee for services,
computed daily and paid monthly, at an annual rate of 0.50% of the average daily
net assets of MSF Money Market. MRC is a life insurance holding company
organized in 1983 under Michigan law and is a wholly-owned subsidiary of
Manulife Financial.
Pro Forma Adjustments:
- ---------------------
(A) Adjustment to reflect reinvestment of undistributed net investment income.
(B) Adjustment to reflect amount allocated to capital shares ($0.01 par value)
for shares issued to MSF Money Market Fund in reorganization.
(C) Adjustment to reflect change in MSF Money Market expense structure due to
reorganization calculated based upon average net assets.
2. SIGNIFICANT ACCOUNTING POLICIES. The policies described below are followed by
the Trust in the preparation of the financial statements for its portfolios in
conformity with generally accepted accounting principles ("GAAP").
SECURITY VALUATION. Securities held by NASL Money Market with remaining
maturities of 60 days or less are valued on an amortized cost basis or at
original cost plus accrued interest, both of which approximate current market
value.
SECURITIES LENDING. The Trust may lend securities in amounts up to 33 1/3% of
its total non-cash assets to brokers, dealers and other financial institutions,
provided such loans are callable at any time and are at all times fully secured
by cash, cash equivalents or securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities, marked to market to the value
of the loaned securities on a daily basis. The Trust may bear the risk of delay
in recovery of, or even of rights in, the securities loaned should the borrower
of the securities fail financially. Consequently, loans of portfolio securities
will only be made to firms deemed by the subadvisers to be creditworthy. The
Trust receives compensation for lending its securities either in the form of
fees or by retaining a portion of interest on the investment of any cash
received as collateral. Income generated from the investment of cash collateral
is included as interest income in the Statement of Operations. All collateral
received will be in an amount equal to at least 100% of the market value of the
loaned securities and must be maintained at that level during the period of the
loan. During the loan period, the fund continues to retain rights of ownership,
including dividends and interest of the loaned securities.
FEDERAL INCOME TAXES. The Trust's policy is to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code, as amended,
and to distribute all of its taxable income to its shareholders. Accordingly, no
federal income tax provision is required. Each portfolio of the Trust is treated
as a separate taxpayer for federal income tax purposes.
DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of NASL Money
Market is declared as a dividend to shareholders of record as of the close of
business each day and is reinvested daily. During any particular year, net
realized gains from investment transactions of each portfolio, in excess of
available capital loss carryforwards of each portfolio would be taxable to such
portfolio if not distributed. Therefore, each portfolio of the Trust intends to
distribute all of its investment company taxable income and any net realized
capital gains in order to avoid federal income tax. Each portfolio of the Trust
is exempt from federal excise tax. Net investment income is reported in the
accompanying statements under GAAP. The Trust's distributions are based on
income amounts determined in accordance with federal income tax regulations.
Overdistributions of net investment income as determined in accordance with GAAP
have been presented in the financial statements as distributions in excess of
net investment income. Net investment income and net realized gains differ for
financial statement and tax purposes due to distributions in accordance with
income tax regulations which may differ from GAAP: marking-to-market of certain
financial instruments, the deferral of certain losses for tax purposes and the
treatment of currency gains or losses. As a result, the character of
distributions made during the year from net investment income may differ from
its ultimate characterization for tax purposes.
<PAGE> 152
NASL SERIES TRUST/MANULIFE SERIES FUND, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
EXPENSE ALLOCATION. Expenses not directly attributable to a particular portfolio
are allocated based on the relative share of net assets of each portfolio for
the time during which the expense was incurred.
REPURCHASE AGREEMENTS. Each portfolio of the Trust may enter into repurchase
agreements. When a portfolio enters into a repurchase agreement through its
custodian, it receives delivery of the underlying securities, the amount of
which at the time of purchase and each subsequent business day is required to be
maintained at such a level that the market value is 102% of the repurchase
amount. Each portfolio will take constructive receipt of all securities
underlying the repurchase agreements it has entered into until such agreements
expire. If the seller defaults, a portfolio would suffer a loss to the extent
that proceeds from the sale of underlying securities were less than the
repurchase amount.
CAPITAL ACCOUNTS. The Trust reports the accumulated undistributed net investment
income (loss) and accumulated undistributed net realized gain (loss) accounts on
a basis approximating amounts available for future tax distributions (or to
offset future taxable realized gains when a capital loss carryforward is
available). Accordingly, each portfolio of the Trust may periodically make
reclassifications among certain capital accounts without impacting the net asset
value.
OTHER. Investment security transactions are accounted for on a trade date plus
one basis. Interest income is accrued as earned. Dividend income and
distributions to shareholders are recorded on the ex-dividend date. All original
issue discounts are accreted for financial and tax reporting purposes. The Trust
uses the First In, First Out method for determining realized gain or loss on
investments for both financial and federal income tax reporting purposes. The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amount of assets and
liabilities. Actual results may differ from these estimates.
3. CAPITAL SHARES. The Pro Forma net asset value per share assumes the issuance
of shares of NASL Money Market which would have been issued at December 31, 1995
had the proposed reorganization taken place on such date. The amount of
additional shares assumed to be issued was calculated based on the per share net
asset value of NASL Money Market ($10.00).
<PAGE> 153
NASL SERIES TRUST - COMMON STOCK TRUST
MANULIFE SERIES FUND - COMMON STOCK FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
MSF COMMON
COMMON STOCK TRUST
STOCK PRO FORMA PRO FORMA
FUND ADJUSTMENTS COMBINED
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value.............. $60,834,031 $60,834,031
Cash............................................. 6,354 6,354
Receivables:
Investments sold............................ 179,942 179,942
Interest.................................... 115,521 115,521
----------- -----------
Total assets............................ 61,135,848 61,135,848
----------- -----------
LIABILITIES
Payables:
Investments purchased....................... 114,570 114,570
Investment adviser.......................... 25,350 25,350
----------- -----------
Total liabilities....................... 139,920 139,920
----------- -----------
NET ASSETS....................................... $60,995,928 $60,995,928
=========== ===========
Net assets consist of:
Accumulated undistributed net investment income.. $834,761 $834,761
Accumulated undistributed net realized gain
on investments............................ 1,506,587 1,506,587
Unrealized appreciation on investments...... 8,720,626 8,720,626
Capital shares.............................. -- 35,321 (A) 35,321
Additional paid-in capital.................. 49,933,954 (35,321)(A) 49,898,633
----------- ------- -----------
Net assets.............................. $60,995,928 $60,995,928
=========== ===========
Capital shares outstanding....................... 3,532,074 3,532,074
----------- -----------
Net asset value, offering price and redemption price
per share................................... $17.27 $17.27
====== ======
Investments in securities, at identified cost.... $52,113,405 $52,113,405
=========== ===========
</TABLE>
<PAGE> 154
NASL SERIES TRUST - COMMON STOCK TRUST
MANULIFE SERIES FUND - COMMON STOCK FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS - (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
MSF COMMON
COMMON STOCK TRUST
STOCK PRO FORMA PRO FORMA
FUND ADJUSTMENTS COMBINED
-------------- ------------- -------------
<S> <C> <C> <C>
Investment Income:
Interest.................................... $295,300 $295,300
Dividends................................... 771,938 771,938
--------- ---------
Total income............................. 1,067,238 1,067,238
--------- ---------
Expenses:
Investment adviser fee...................... 232,477 $92,991(B) $325,468
Custodian fee............................... --- 18,983(B) 18,983
Audit and legal fees........................ --- 5,743(B) 5,743
Trustees fees and expenses.................. --- 1,399(B) 1,399
Registration and filing fees................ --- 1,069(B) 1,069
Miscellaneous............................... --- 703(B) 703
--------- ------- ----------
Expenses before reimbursement
by adviser................................ 232,477 120,888 353,365
--------- ------- ----------
Reimbursement of expenses by adviser........ --- 120,888(C) 120,888
--------- ------- ----------
Net expenses............................. 232,477 232,477
--------- ----------
Net investment income.................... 834,761 834,761
--------- ----------
Realized and unrealized gain (loss) on investments:
Net realized gain on
investment transactions................... 2,091,782 2,091,782
Change in unrealized appreciation
on investments............................ 9,276,249 9,276,249
Net gain on investments..................... 11,368,031 11,368,031
---------- ----------
Net increase in net assets resulting
from operations........................ $12,202,792 $12,202,792
=========== ===========
</TABLE>
<PAGE> 155
NASL SERIES TRUST - PACIFIC RIM EMERGING MARKETS TRUST
MANULIFE SERIES FUND - PACIFIC RIM EMERGING MARKETS FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
MSF PACIFIC RIM
PACIFIC RIM EMERGING MARKETS
EMERGING PRO FORMA PRO FORMA
MARKETS FUND ADJUSTMENTS COMBINED
------------- ------------- -----------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value.............. $12,130,390 $12,130,390
Cash............................................. 33,259 33,259
Foreign currency (cost: $860,393)................ 862,205 862,205
Receivables:
Investments sold............................ 516,949 516,949
Interest.................................... 4,645 4,645
----------- -----------
Total assets............................ 13,547,448 13,547,448
----------- -----------
LIABILITIES
Payables:
Investments purchased....................... 474,078 474,078
Investment adviser.......................... 16,156 16,156
Dividend and interest withholding tax....... 115 115
----------- -----------
Total liabilities....................... 490,349 490,349
----------- -----------
NET ASSETS....................................... 13,057,099 13,057,099
===========- ===========
Net assets consist of:
Accumulated undistributed net investment
income.................................... $397 $397
Accumulated undistributed net realized gain
on investments............................ 10,505 10,505
Unrealized appreciation (depreciation) on:
Investments............................... 624,680 624,680
Foreign currency and forward foreign
currency contracts...................... 373 373
Capital shares.............................. --- 12,609 (A) 12,609
Additional paid-in capital.................. 12,421,144 (12,609)(A) 12,408,535
----------- -------- -----------
Net assets.............................. $13,057,099 $13,057,099
=========== ===========
Capital shares outstanding....................... 1,260,885 1,260,885
----------- -----------
Net asset value, offering price and redemption price
per share................................... $10.36 $10.36
====== ======
Investments in securities, at identified cost.... $11,505,710 $11,505,710
=========== ===========
</TABLE>
<PAGE> 156
NASL SERIES TRUST - PACIFIC RIM EMERGING MARKETS TRUST
MANULIFE SERIES FUND - PACIFIC RIM EMERGING MARKETS FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS - (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
PACIFIC RIM
MSF EMERGING
PACIFIC RIM MARKETS PRO
EMERGING PRO FORMA FORMA
MARKETS FUND ADJUSTMENTS COMBINED
------------- ------------- -------------
<S> <C> <C> <C>
Investment Income:
Interest.................................... $58,812 $58,812
Dividends (Net of $15,842 withholding tax).. 215,991 215,991
---------- ----------
Total income............................. 274,803 274,803
---------- ----------
Expenses:
Investment adviser fee...................... 95,770 95,770
Custodian fee............................... -- $29,623 (B) 29,623
Audit and legal fees........................ -- 2,657 (B) 2,657
Trustees fees and expenses.................. -- 605 (B) 605
Registration and filing fees................ -- 544 (B) 544
Miscellaneous............................... -- 371 (B) 371
General expenses............................ 73,235 (73,235)(B) --
---------- ------- ----------
Total expenses........................... 169,005 (39,435) 129,570
---------- ------- ----------
Net investment income.................... 105,798 39,435 145,233
---------- ------- ----------
Realized and unrealized gain (loss) on
investments and foreign currency:
Net realized gain (loss) on:
Investment transactions................... 79,497 79,497
Foreign currency and forward foreign
currency contracts...................... (23,307) (23,307)
Change in unrealized appreciation (depreciation) on:
Investment transactions................... 1,075,255 1,075,255
Translation of foreign currency and forward foreign
currency contracts...................... 380 380
Net gain on investments and foreign currency.. 1,131,825 1,131,825
---------- ----------
Net increase in net assets resulting
from operations........................ $1,237,623 $39,435 $1,277,058
========== ======= ==========
</TABLE>
<PAGE> 157
NASL SERIES TRUST - REAL ESTATE SECURITIES TRUST
MANULIFE SERIES FUND - REAL ESTATE SECURITIES FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
REAL ESTATE
MSF SECURITIES
REAL ESTATE TRUST
SECURITIES PRO FORMA PRO FORMA
FUND ADJUSTMENTS COMBINED
------------- ------------- --------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value.............. $50,599,913 $50,599,913
Cash............................................. 14,188 14,188
Receivables:
Investments sold............................ 3,245,631 3,245,631
Interest.................................... 258,891 258,891
----------- -----------
Total assets............................ 54,118,623 54,118,623
----------- -----------
LIABILITIES
Payables:
Investments purchased....................... 1,656,789 1,656,789
Investment adviser.......................... 21,717 21,717
----------- -----------
Total liabilities....................... 1,678,506 1,678,506
----------- -----------
NET ASSETS....................................... $52,440,117 $52,440,117
=========== ===========
Net assets consist of:
Accumulated undistributed net investment income.. $2,365,861 $2,365,861
Accumulated undistributed net realized gain
on investments............................ 839,886 839,886
Unrealized appreciation (depreciation) on investments.. 1,600,242 1,600,242
Capital shares.............................. -- 34,729 (A) 34,729
Additional paid-in capital.................. 47,634,128 (34,729)(A) 47,599,399
----------- ------- -----------
Net assets.............................. $52,440,117 $52,440,117
=========== ===========
Capital shares outstanding....................... 3,472,861 3,472,861
--------- ---------
Net asset value, offering price and redemption price
per share................................... $15.10 $15.10
====== ======
Investments in securities, at identified cost.... $48,999,671 $48,999,671
=========== ===========
</TABLE>
<PAGE> 158
NASL SERIES TRUST - REAL ESTATE SECURITIES TRUST
MANULIFE SERIES FUND- REAL ESTATE SECURITIES FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS - (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
REAL ESTATE
MSF SECURITIES
REAL ESTATE TRUST
SECURITIES PRO FORMA PRO FORMA
FUND ADJUSTMENTS COMBINED
-------------- ------------- --------------
<S> <C> <C> <C>
Investment Income:
Interest.................................... $ 277,831 $ 277,831
Dividends................................... 2,320,479 2,320,479
-------------- --------------
Total income............................. 2,598,310 2,598,310
-------------- --------------
Expenses:
Investment adviser fee...................... 232,449 $ 92,980(B) 325,429
Custodian fee............................... ----- 31,635(B) 31,635
Audit and legal fees........................ ----- 9,571(B) 9,571
Trustees fees and expenses.................. ----- 2,331(B) 2,331
Registration and filing fees................ ----- 1,781(B) 1,781
Miscellaneous............................... ----- 1,172(B) 1,172
-------------- ------------- --------------
Expenses before reimbursement
by adviser................................ 232,449 139,470 371,919
-------------- ------------- --------------
Reimbursement of expenses by adviser........ ----- 139,470(C) 139,470
-------------- ------------- --------------
Net expenses............................. 232,449 232,449
-------------- --------------
Net investment income.................... 2,365,861 2,365,861
-------------- --------------
Realized and unrealized gain (loss) on investments:
Net realized gain on
investment transactions................... 1,242,307 1,242,307
Change in unrealized appreciation (depreciation)
on investments............................ 3,176,323 3,176,323
Net gain on investments..................... 4,418,630 4,418,630
-------------- --------------
Net increase in net assets resulting
from operations........................ $ 6,784,491 $ 6,784,491
============== ==============
</TABLE>
<PAGE> 159
NASL SERIES TRUST - CAPITAL GROWTH BOND TRUST
MANULIFE SERIES FUND - CAPITAL GROWTH BOND FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
MSF Capital Growth
Capital Bond Trust
Growth Pro Forma Pro Forma
Bond Fund Adjustments Combined
-------------- ------------- --------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value.............. $ 41,984,131 $ 41,984,131
Cash............................................. 7,291 7,291
Receivables:
Interest.................................... 720,600 720,600
-------------- --------------
Total assets............................ 42,712,022 42,712,022
-------------- --------------
LIABILITIES
Payables:
Investment adviser.......................... 18,236 18,236
------------- ---------------
Total liabilities....................... 18,236 18,236
------------- ---------------
NET ASSETS....................................... 42,693,786 42,693,786
============= ===============
Net assets consist of:
Accumulated undistributed net investment income.. $1,597 $1,597
Accumulated undistributed net realized loss
on investments............................ (1,060,038) (1,060,038)
Unrealized appreciation on investments...... 2,012,690 2,012,690
Capital shares.............................. ----- 37,794 (A) 37,794
Additional paid-in capital.................. 41,739,537 (37,794)(A) 41,701,743
------------- -------------- ---------------
Net assets.............................. $42,693,786 $42,693,786
============= ===============
Capital shares outstanding....................... 3,779,382 3,779,382
Net asset value, offering price and redemption price ------------- ---------------
per share................................... $11.30 $11.30
------ ------
Investments in securities, at identified cost.... $39,971,441 $39,971,441
============= ===============
</TABLE>
<PAGE> 160
NASL SERIES TRUST - CAPITAL GROWTH BOND TRUST
MANULIFE SERIES FUND - CAPITAL GROWTH BOND FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS - (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
Capital
MSF Growth Bond
Capital Trust
Growth Pro Forma Pro Forma
Bond Fund Adjustments Combined
-------------- ------------- --------------
<S> <C> <C> <C>
Investment Income:
Interest.................................... $ 2,739,692 $ 2,739,692
-------------- --------------
Total income............................. 2,739,692 2,739,692
Expenses: -------------- ---------------
Investment adviser fee...................... 198,316 $ 59,495(B) 257,811
Custodian fee............................... ----- 26,990(B) 26,990
Audit and legal fees........................ ----- 8,166(B) 8,166
Trustees fees and expenses.................. ----- 1,989(B) 1,989
Registration and filing fees................ ----- 1,520(B) 1,520
Miscellaneous............................... ----- 1,000(B) 1,000
Expenses before reimbursement --------------- -------------- ---------------
by adviser................................ 198,316 99,160 297,476
--------------- -------------- ---------------
Reimbursement of expenses by adviser........ ----- 99,160(C) 99,160
-------------- ------------- --------------
198,316 198,316
Net expenses............................. --------------- ---------------
Net investment income.................... 2,541,376 2,541,376
--------------- ---------------
Realized and unrealized gain (loss) on investments:
Net realized gain on
investment transactions................... 677,362 677,362
Change in unrealized appreciation
on investments............................ 4,016,399 4,016,399
Net gain on investments..................... 4,693,761 4,693,761
--------------- ---------------
Net increase in net assets resulting
from operations........................ $ 7,235,137 $ 7,235,137
=============== ===============
</TABLE>
<PAGE> 161
NASL SERIES TRUST - INTERNATIONAL STOCK TRUST
MANULIFE SERIES FUND - INTERNATIONAL FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1995
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
International
MSF Stock Trust
International Pro Forma Pro Forma
Fund Adjustments Combined
-------------- ------------- --------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value.............. $ 18,439,089 $ 18,439,089
Cash............................................. 28,184 28,184
Foreign currency (cost: $546,598)................ 547,004 547,004
Receivables:
Investments sold............................ 53,729 53,729
Interest.................................... 50,507 50,507
Foreign tax withholding reclaim............. 15,074 15,074
-------------- --------------
Total assets............................ 19,133,587 19,133,587
-------------- --------------
LIABILITIES
Payables:
Investments purchased....................... 57,668 57,668
Investment adviser.......................... 21,260 21,260
Dividend and interest withholding tax....... 7,121 7,121
-------------- --------------
Total liabilities....................... 86,049 86,049
-------------- --------------
NET ASSETS....................................... 19,047,538 19,047,538
============== ==============
Net assets consist of:
Accumulated undistributed net investment income.. $ 2,767 $ 2,767
Accumulated undistributed net realized loss
on investments............................ (56,366) (56,366)
Unrealized appreciation (depreciation) on:
Investments............................... 1,170,074 1,170,074
Foreign currency and forward foreign currency contracts.. 406 406
Capital Shares ............................. ----- 17,855 (A) 17,855
Additional paid-in capital.................. 17,930,657 (17,855)(A) 17,912,802
-------------- ------------- ---------------
Net assets.............................. $ 19,047,538 $ 19,047,538
============== ===============
Capital shares outstanding....................... 1,785,480 1,785,480
-------------- ---------------
Net asset value, offering price and redemption price
per share................................... $ 10.67 $ 10.67
-------------- ---------------
Investments in securities, at identified cost.... $ 17,269,015 $ 17,269,015
============== ===============
</TABLE>
<PAGE> 162
NASL SERIES TRUST - INTERNATIONAL STOCK TRUST
MANULIFE SERIES FUND - INTERNATIONAL FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS - (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
International
MSF Stock Trust
International Pro Forma Pro Forma
Fund Adjustments Combined
-------------- ------------- ---------------
Investment Income:
<S> <C> <C> <C>
Interest.................................... $ 143,986 $ 143,986
Dividends (Net of $41,289 withholding tax).. 331,975 331,975
--------------- ---------------
Total income............................. 475,961 475,961
-------------- ---------------
Expenses:
Investment adviser fee...................... 154,896 $ 36,446 (B) 191,342
Custodian fee............................... ----- 31,941 (B) 31,941
Audit and legal fees........................ ----- 2,865 (B) 2,865
Trustees fees and expenses.................. ----- 653 (B) 653
Registration and filing fees................ ----- 586 (B) 586
Miscellaneous............................... ----- 400 (B) 400
General expenses............................ 91,115 (91,115)(B) ----
-------------- ------------- ---------------
Total expenses........................... 246,011 (18,224) 227,787
-------------- ------------- ---------------
Net investment income.................... 229,950 18,224 248,174
-------------- ------------- ---------------
Realized and unrealized gain (loss) on
investments and foreign currency:
Net realized gain (loss) on:
Investment transactions................... 239,190 239,190
Foreign currency and forward foreign
currency contracts...................... (68,901) (68,901)
Change in unrealized appreciation (depreciation) on:
Investment transactions................... 1,358,135 1,358,135
Translation of foreign currency and forward foreign
currency contracts...................... 2,542 2,542
Net gain on investments and foreign currency.. 1,530,966 1,530,966
-------------- ---------------
Net increase in net assets resulting
from operations........................ $ 1,760,916 $ 18,224 $ 1,779,140
============== ============= ===============
</TABLE>
<PAGE> 163
NASL SERIES TRUST - EMERGING GROWTH TRUST
MANULIFE SERIES FUND - EMERGING GROWTH EQUITY FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1995
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
MSF Emerging
Emerging Growth Trust
Growth Pro Forma Pro Forma
Equity Fund Adjustments Combined
-------------- ------------- ---------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value.............. $ 161,858,889 $ 161,858,889
Cash............................................. 10,003 10,003
Receivables:
Investments sold............................ 5,632,745 5,632,745
Interest.................................... 2,580 2,580
-------------- ---------------
Total assets............................ 167,504,217 167,504,217
-------------- ---------------
LIABILITIES
Payables:
Investments purchased....................... 5,011,143 5,011,143
Investment adviser.......................... 66,607 66,607
-------------- ------------
Total liabilities....................... 5,077,750 5,077,750
-------------- ---------------
NET ASSETS....................................... $ 162,426,467 $ 162,426,467
============== ===============
Net assets consist of:
Accumulated undistributed net investment income $ 206,266 $ 206,266
Accumulated undistributed net realized gain
on investments............................ 18,139,742 18,139,742
Unrealized appreciation (depreciation) on investments 12,672,661 12,672,661
Capital shares.............................. ----- 70,307 (A) 70,307
Additional paid-in capital.................. 131,407,798 (70,307)(A) 131,337,491
-------------- ------------- ---------------
Net assets.............................. $ 162,426,467 $ 162,426,467
============== ===============
Capital shares outstanding....................... 7,030,732 7,030,732
-------------- ---------------
Net asset value, offering price and redemption price
per share................................... $ 23.10 $ 23.10
-------------- ---------------
Investments in securities, at identified cost.... $ 149,186,228 $ 149,186,228
============== ===============
</TABLE>
<PAGE> 164
NASL SERIES TRUST - EMERGING GROWTH TRUST
MANULIFE SERIES FUND - EMERGING GROWTH EQUITY FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS - (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
MSF EMERGING
EMERGING GROWTH TRUST
GROWTH PRO FORMA PRO FORMA
EQUITY FUND ADJUSTMENTS COMBINED
-------------- ------------- -------------
<S> <C> <C> <C>
Investment Income:
Interest.................................... $826,889 $826,889
Dividends................................... 23,376 23,376
--------------- --------------
Total income............................. 850,265 850,265
Expenses: --------------- --------------
Investment adviser fee...................... 643,999 $ 708,399 (B) 1,352,398
Custodian fee............................... -- 87,645 (B) 87,645
Audit and legal fees........................ -- 26,517 (B) 26,517
Trustees fees and expenses.................. -- 6,457 (B) 6,457
Registration and filing fees................ -- 4,935 (B) 4,935
Miscellaneous............................... -- 3,246 (B) 3,246
--------------- -------------- ---------------
Total expenses........................... 643,999 837,199 1,481,198
--------------- -------------- ---------------
Net investment income 206,266 (837,199) (630,933)
--------------- -------------- ---------------
Realized and unrealized gain (loss) on investments:
Net realized gain on
investment transactions................. 18,252,359 18,252,359
Change in unrealized appreciation (depreciation)
on investments 12,756,627 12,756,627
Net gain on investments 31,008,986 31,008,986
--------------- ---------------
Net increase in net assets resulting
from operations $ 31,215,252 ($837,199) $ 30,378,053
=============== ============== ================
</TABLE>
<PAGE> 165
NASL SERIES TRUST - BALANCED TRUST
MANULIFE SERIES FUND - BALANCED ASSETS FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1995
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
MSF BALANCED
BALANCED TRUST
ASSETS PRO FORMA PRO FORMA
FUND ADJUSTMENTS COMBINED
--------------- -------------- ---------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value.............. $ 109,759,871 $ 109,759,871
Cash............................................. 4,854 4,854
Receivables:
Investments sold............................ 179,942 179,942
Interest.................................... 958,446 958,446
--------------- ---------------
Total assets............................ 110,903,113 110,903,113
--------------- ---------------
LIABILITIES
Payables:
Investments purchased....................... 96,106 96,106
Investment adviser.......................... 46,268 46,268
--------------- ---------------
Total liabilities....................... 142,374 142,374
--------------- ---------------
NET ASSETS....................................... $ 110,760,739 $ 110,760,739
=============== ===============
Net assets consist of:
Accumulated undistributed net investment income $ 3,268,747 $ 3,268,747
Accumulated undistributed net realized gain
on investments............................ 1,682,448 1,682,448
Unrealized appreciation (depreciation) on investments 11,474,136 11,474,136
Capital shares.............................. -- 64,572 (A) 64,572
Additional paid-in capital.................. 94,335,408 (64,572)(A) 94,270,836
--------------- -------------- ----------------
Net assets.............................. $ 110,760,739 $ 110,760,739
=============== ================
Capital shares outstanding....................... 6,457,180 6,457,180
--------------- ----------------
Net asset value, offering price and redemption price
per share................................... $ 17.15 $ 17.15
--------------- ----------------
Investments in securities, at identified cost.... $ 98,285,735 $ 98,285,735
=============== ================
</TABLE>
<PAGE> 166
NASL SERIES TRUST - BALANCED TRUST
MANULIFE SERIES FUND - BALANCED ASSETS FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS - (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NASL
MSF BALANCED
BALANCED TRUST
ASSETS PRO FORMA PRO FORMA
FUND ADJUSTMENTS COMBINED
--------------- -------------- ---------------
<S> <C> <C> <C>
Investment Income:
Interest.................................... $ 3,022,480 $3,022,480
Dividends................................... 826,873 826,873
--------------- ---------------
Total income............................. 3,849,353 3,849,353
--------------- ---------------
Expenses:
Investment adviser fee...................... 456,917 $274,150 (B) 731,067
Custodian fee............................... -- 115,432 (B) 115,432
Audit and legal fees........................ -- 12,686 (B) 12,686
Trustees fees and expenses.................. -- 3,057 (B) 3,057
Registration and filing fees................ -- 3,535 (B) 3,535
Miscellaneous............................... -- 2,365 (B) 2,365
--------------- -------------- ---------------
Total expenses........................... 456,917 411,225 868,142
--------------- -------------- ---------------
Net investment income.................... 3,392,436 (411,225) 2,981,211
--------------- -------------- ---------------
Realized and unrealized gain (loss) on investments:
Net realized gain on
investment transactions................... 2,741,674 2,741,674
Change in unrealized appreciation (depreciation)
on investments............................ 14,094,035 14,094,035
Net gain on investments..................... 16,835,709 16,835,709
--------------- ---------------
Net increase in net assets resulting
from operations........................ $ 20,228,145 ($411,225) $ 19,816,920
=============== ============= ===============
</TABLE>
<PAGE> 167
NASL SERIES TRUST/MANULIFE SERIES FUND, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES. The policies described below are followed by
the NASL Series Trust (the "Trust") in the preparation of the Pro Forma
financial statements for the following eight portfolios: The Common Stock Trust
("Common Stock"), the Pacific Rim Emerging Markets Trust ("Pacific Rim Emerging
Markets"), the Real Estate Securities Trust ("Real Estate Securities"), the
Capital Growth Bond Trust ("Capital Growth Bond"), the International Stock Trust
("International Stock"), the Emerging Growth Trust ("Emerging Growth") and the
Balanced Trust ("Balanced") in conformity with generally accepted accounting
principles ("GAAP"). These statements have been derived from the books and
records of each portfolio utilized in calculating daily net asset value at
December 31, 1995.
SECURITY VALUATION. Short term instruments with remaining maturities of 60 days
or less held by the other portfolios of the Trust are valued on an amortized
cost basis or at original cost plus accrued interest, both of which approximate
current market value. All other securities held by the Trust are valued at the
last sale price as of the close of business on a principal securities exchange
(domestic or foreign) or, lacking any sales, at the closing bid prices.
Securities traded only in the over-the-counter market are valued at the last bid
prices quoted by brokers making markets in the securities at the close of
trading on the Exchange.
Trust securities for which there are no such quotations, principally debt
securities, are valued on the basis of the valuation provided by a pricing
service which utilizes both dealer-supplied and electronic data processing
techniques. Other assets and securities for which no such quotations are readily
available are valued at their fair value as determined in good faith under
consistently applied procedures established by and under the general supervision
of the Board of Trustees.
FOREIGN CURRENCY TRANSLATIONS. The accounting records of the Trust are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of securities, other assets and other liabilities
at the current rate of exchange of such currencies against
U.S. dollars;
(ii) purchases and sales of securities, income and expenses at the
rate of exchange quoted on the respective dates of such
transactions.
Gains and losses that arise from changes in foreign exchange rates have been
segregated from gains and losses that arise from changes in the market prices of
investments. These gains and losses are included with gains and losses on
foreign currency and forward foreign currency contracts in the Statements of
Operations.
FORWARD FOREIGN CURRENCY CONTRACTS. All portfolios with the exception of Equity
Index may purchase and sell forward foreign currency contracts in order to hedge
a specific transaction or portfolio position.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held at the end of the period and the resulting net unrealized
appreciation (depreciation) and related net receivable or payable amount are
determined using forward foreign currency exchange rates supplied by a quotation
service. The Trust could be exposed to risks if the counterparties to the
contracts are unable to meet the terms of their contracts or if the value of the
foreign currency changes unfavorably.
Net realized gains (losses) on foreign currency and forward foreign currency
contracts shown in the Statements of Operations, include net gains or losses
realized by a portfolio on contracts which have matured or which the portfolio
has terminated by entering into an offsetting commitment with the same broker.
FUTURES. All portfolios may purchase and sell financial futures contracts and
options on those contracts. The portfolios invest in contracts based on
financial instruments such as U.S. Treasury bonds or notes or on securities
indices such as the S&P 500 Index, in order to hedge against a decline in the
value of securities owned by the portfolios.
When a portfolio sells a futures contract based on a financial instrument, the
portfolio becomes obligated to deliver that kind of instrument at an agreed upon
date for a specified price. The portfolio realizes a gain or loss depending on
whether the price of an offsetting purchase is less or more than the price of
the initial sale or on whether the price of an offsetting sale is more or less
than the price of the initial purchase. The Trust could be exposed to risks if
it could not close out futures positions because of an illiquid secondary market
or the inability of counterparties to meet the terms of their contracts. Upon
entering into futures contracts, the Trust is required to deposit with a broker
an amount, initial margin, which represents 5% of the purchase price indicated
in the futures contract.
Payments to and from the broker, known as variation margin, are required to be
made on a daily basis as the price of the futures contract fluctuates, making
the long or short positions in the contract more or less valuable. If the
position is closed out by taking an opposite position prior to the settlement
date of the futures contract, a final determination of variation margin is made,
cash is required to be paid to or released by the broker, and the portfolio
realizes a gain or loss.
<PAGE> 168
NASL SERIES TRUST/MANULIFE SERIES FUND, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- CONTINUED
- -------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FORWARD COMMITMENTS. The portfolios of the Trust may purchase debt securities on
a when issued or forward delivery basis, which means that the obligations will
be delivered to the portfolios of the Trust at a future date, which may be a
month or more after the date of commitment. The price of the underlying
securities and the date when the securities will be delivered and paid for are
fixed at the time the transaction is negotiated. The value of the securities
underlying a forward commitment to purchase securities, and the subsequent
fluctuations in their value, is taken into account when determining the Trust's
net asset value starting on the day the Trust agrees to purchase the securities.
SECURITIES LENDING. The Trust may lend securities in amounts up to 33 1/3% of
its total non-cash assets to brokers, dealers and other financial institutions,
provided such loans are callable at any time and are at all times fully secured
by cash, cash equivalents or securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities, marked to market to the value
of the loaned securities on a daily basis. The Trust may bear the risk of delay
in recovery of, or even of rights in, the securities loaned should the borrower
of the securities fail financially. Consequently, loans of portfolio securities
will only be made to firms deemed by the subadvisers to be creditworthy. The
Trust receives compensation for lending its securities either in the form of
fees or by retaining a portion of interest on the investment of any cash
received as collateral. Income generated from the investment of cash collateral
is included as interest income in the Statement of Operations. All collateral
received will be in an amount equal to at least 100% of the market value of the
loaned securities and must be maintained at that level during the period of the
loan. During the loan period, the fund continues to retain rights of ownership,
including dividends and interest of the loaned securities.
MORTGAGE DOLLAR ROLLS. All portfolios may enter into mortgage dollar rolls in
which they sell mortgage securities for delivery in the current month and
simultaneously contract to repurchase similar, but not identical, securities at
the same price on an agreed upon date. The Trusts receive compensation as
consideration for entering into the commitment to repurchase. The compensation
is recorded as deferred income and amortized to income over the roll period. As
the holder, the counterparty receives all principal and interest payments,
including prepayments, made with respect to the similar security. Mortgage
dollar rolls may be renewed with a new sale and repurchase price with a cash
settlement made at renewal without physical delivery of the securities subject
to the contract.
FEDERAL INCOME TAXES. The Trust's policy is to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code, as amended,
and to distribute all of its taxable income to its shareholders. Accordingly, no
federal income tax provision is required. Each portfolio of the Trust is treated
as a separate taxpayer for federal income tax purposes.
DISTRIBUTION OF INCOME AND GAINS. During any particular year, net realized gains
from investment transactions of each portfolio, in excess of available capital
loss carryforwards of each portfolio would be taxable to such portfolio if not
distributed. Therefore, each portfolio of the Trust intends to distribute all of
its investment company taxable income and any net realized capital gains in
order to avoid federal income tax. Each portfolio of the Trust is exempt from
federal excise tax. Net investment income is reported in the accompanying
statements under GAAP. The Trust's distributions are based on income amounts
determined in accordance with federal income tax regulations. Overdistributions
of net investment income as determined in accordance with GAAP have been
presented in the financial statements as distributions in excess of net
investment income. Net investment income and net realized gains differ for
financial statement and tax purposes due to distributions in accordance with
income tax regulations which may differ from GAAP: marking-to-market of certain
financial instruments, the deferral of certain losses for tax purposes and the
treatment of currency gains or losses. As a result, the character of
distributions made during the year from net investment income may differ from
its ultimate characterization for tax purposes.
EXPENSE ALLOCATION. Expenses not directly attributable to a particular portfolio
are allocated based on the relative share of net assets of each portfolio for
the time during which the expense was incurred.
REPURCHASE AGREEMENTS. Each portfolio of the Trust may enter into repurchase
agreements. When a portfolio enters into a repurchase agreement through its
custodian, it receives delivery of the underlying securities, the amount of
which at the time of purchase and each subsequent business day is required to be
maintained at such a level that the market value is 102% of the repurchase
amount. Each portfolio will take constructive receipt of all securities
underlying the repurchase agreements it has entered into until such agreements
expire. If the seller defaults, a portfolio would suffer a loss to the extent
that proceeds from the sale of underlying securities were less than the
repurchase amount.
<PAGE> 169
NASL SERIES TRUST/MANULIFE SERIES FUND, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- CONTINUED
- -------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
CAPITAL ACCOUNTS. The Trust reports the accumulated undistributed net investment
income (loss) and accumulated undistributed net realized gain (loss) accounts on
a basis approximating amounts available for future tax distributions (or to
offset future taxable realized gains when a capital loss carryforward is
available). Accordingly, each portfolio of the Trust may periodically make
reclassifications among certain capital accounts without impacting the net asset
value.
OTHER. Investment security transactions are accounted for on a trade date plus
one basis. Interest income is accrued as earned. Dividend income and
distributions to shareholders are recorded on the ex-dividend date. All original
issue discounts are accreted for financial and tax reporting purposes. The Trust
uses the First In, First Out method for determining realized gain or loss on
investments for both financial and federal income tax reporting purposes. The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amount of assets and
liabilities. Actual results may differ from these estimates.
2. PRO FORMA ADJUSTMENTS.
(A) Adjustment to reflect amount allocated to capital shares ($0.01 par value)
for shares issued in reorganization.
(B) Adjustment to reflect change in investment advisory fee and other expenses
due to reorganization, calculated based upon average net assets and
allocated based upon budgeted spending amounts.
(C) Adjustment to reflect the advisor's voluntary fee waiver limiting total
fund operating expenses to .50% of average net assets.
<PAGE> 170
NASL SERIES TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification.
The response to this item is incorporated by reference to Item 27 of Part
C of Post-Effective Amendment No. 34, filed October 4, 1996 ("Post-Effective
Amendment No. 34"), to the Registrant's Registration Statement on Form N-1A,
filed November 5, 1984, Registration Nos. 2-94157 and 811-4146 (the
"Registration Statement").
Item 16. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
1 Registrant's Agreement and Declaration of Trust dated September 29, 1988 is incorporated by reference
to Exhibit 1(a) to Post-Effective Amendment No. 31 to the Registration Statement, filed February 28,
1996.
2 Registrant's By-Laws are incorporated by reference to Exhibit 2 to Post-Effective Amendment No. 7 to
the Registration Statement, filed October 31, 1988 ("Post-Effective Amendment No. 7").
3 Inapplicable.
4 Agreement and Plan of Reorganization between Registrant and Manulife Series Fund, Inc. (filed herewith
as Exhibit A to the Prospectus/Proxy Statement).
5(a) Registrant's Specimen Share Certificate for the Money Market Trust is incorporated by reference to
Exhibit 4(c) to Post-Effective Amendment No. 7.
5(b) Registrant's Specimen Share Certificate for the International Stock Trust is incorporated by reference to
Exhibit 4(u) to Post-Effective Amendment No. 34.
5(c) Registrant's Specimen Share Certificate for the Emerging Growth Trust is incorporated by reference to
Exhibit 4(r) to Post-Effective Amendment No. 34.
5(d) Registrant's Specimen Share Certificate for the Balanced Trust is incorporated by reference to Exhibit
4(bb) to Post-Effective Amendment No. 34.
5(e) Registrant's Specimen Share Certificate for the Common Stock Trust is incorporated by reference to
Exhibit 4(x) to Post-Effective Amendment No. 34.
5(f) Registrant's Specimen Share Certificate for the Pacific Rim Emerging Markets Trust is incorporated by
reference to Exhibit 4(t) to Post-Effective Amendment No. 34.
5(g) Registrant's Specimen Share Certificate for the Real Estate Securities Trust is incorporated by reference
to Exhibit 4(y) to Post-Effective Amendment No. 34.
5(h) Registrant's Specimen Share Certificate for the Capital Growth Bond Trust is incorporated by reference to
Exhibit 4(dd) to Post-Effective Amendment No. 34.
5(i) Registrant's Share Certificate for the Equity Index Trust is incorporated by reference to Exhibit 4(aa)
to Post-Effective Amendment No. 34.
6(a) Advisory Agreement between Registrant and NASL Financial Services, Inc. is incorporated by reference to
Exhibit (5)(a)(1) to Post-Effective Amendment No. 30, filed December 14, 1995 ("Post-Effective
Amendment No. 30").
6(b) Form of Amendment to Advisory Agreement between Registrant and NASL Financial Services, Inc.
adding Emerging Growth Trust, Pacific Rim Emerging Markets Trust, International Stock Trust,
Common Stock Trust, Real Estate Securities Trust, Equity Index Trust, Balanced Trust, and Capital
</TABLE>
C-1
<PAGE> 171
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
Growth Bond Trust is incorporated by reference to Exhibit (5)(a)(4) to Post-Effective Amendment No.
34.
6(c) Form of Subadvisory Agreement between NASL Financial Services, Inc. and Founders Asset Management,
Inc. is incorporated by reference to Exhibit (5)(b)(xii) to Post-Effective Amendment No. 30.
6(d) Form of Amendment to Subadvisory Agreement between NASL Financial Services, Inc. and Founders Asset
Management, Inc. adding the Balanced Trust is incorporated by reference to Exhibit (5)(b)(xii) to
Post-Effective Amendment No. 34.
6(e) Form of Subadvisory Agreement between NASL Financial Services, Inc. and Rowe Price-Fleming International,
Inc. adding the International Stock Trust is incorporated by reference to Exhibit (5)(b)(xiv) to
Post-Effective Amendment No. 34.
6(f) Form of Subadvisory Agreement between NASL Financial Services, Inc. and Warburg, Pincus Counsellors, Inc.
adding the Emerging Growth Trust is incorporated by reference to Exhibit (5)(b)(xvii) to
Post-Effective Amendment No. 34.
6(g) Subadvisory Agreement between NASL Financial Services, Inc. and Manufacturers Adviser Corporation
providing for the Money Market Trust is incorporated by reference to Exhibit 5(b)(xviii) to
Post-Effective Amendment No. 34.
6(h) Form of Amendment to Subadvisory Agreement between NASL Financial Services, Inc. and Manufacturers
Adviser Corporation adding the Pacific Rim Emerging Markets Trust, Common Stock Trust, Real Estate
Securities Trust, Equity Index Trust and Capital Growth Bond Trust is incorporated by reference to
Exhibit (5)(b)(xix) to Post-Effective Amendment No. 34.
7 Inapplicable.
8 Inapplicable.
9 Custodian Agreement between Registrant and State Street Bank and Trust Company is incorporated by
reference to Exhibit 8(b) to Post-Effective Amendment No. 6 filed on March 14, 1988.
10 Inapplicable.
11 Opinion of the law department of The Manufacturers Life Insurance Company regarding legality of issuance of
shares and other matters (filed herewith).
12 Opinion of Simpson Thacher & Bartlett on tax matters (filed herewith).
13 Inapplicable.
14(a) Consent of Coopers & Lybrand L.L.P., Independent Accountants (filed herewith).
14(b) Consent of Ernst & Young LLP, Independent Auditors (filed herewith).
14(c) Consent of Simpson Thacher & Bartlett (included in Exhibit 12 hereto).
15 Inapplicable.
16 Power of Attorney for Messrs. Don B. Allen, Charles L. Bardelis, Samuel Hoar, Brian L. Moore and
Robert J. Myers (filed herewith).
17 Copy of Registrant's Declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940
(filed herewith).
</TABLE>
C-2
<PAGE> 172
Item 17. Undertakings.
(a) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is a part of this Registration Statement by any
person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) of the Securities Act, the reoffering
prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be
deemed underwriters, in addition to the information called for by
the other items of the applicable form.
(b) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as part of an
amendment to the Registration Statement and will not be used until
the amendment is effective, and that, in determining any liability
under the 1933 Act, each post-effective amendment shall be deemed
to be a new registration statement for the securities offered
therein, and the offering of the securities at that time shall be
deemed to be the initial bona fide offering of them.
C-3
<PAGE> 173
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on behalf of the registrant, in the City
of Boston and State of Massachusetts, on the 4th day of October, 1996.
NASL Series Trust
By: /s/ John D. DesPrez III
- ---------------------------
John D. DesPrez III
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated on the 4th day of October, 1996.
Signature Title
--------- -----
*
- ----------------------------------
Don B. Allen Trustee
*
- ----------------------------------
Charles L. Bardelis Trustee
*
- ----------------------------------
Samuel Hoar Trustee
*
- ----------------------------------
Brian L. Moore Chairman of the Board of
Trustees
*
- ----------------------------------
Robert J. Myers Trustee
/s/ John D. DesPrez III
- ----------------------------------
John D. DesPrez III President (Chief Executive
Officer)
**
- ----------------------------------
Richard C. Hirtle Vice President and Treasurer
(Chief Financial Officer)
* /s/ James D. Gallagher
- ----------------------------------
James D. Gallagher, pursuant to
a power of attorney filed herewith
** /s/ James D. Gallagher
- ----------------------------------
James D. Gallagher pursuant to
a power of attorney filed as
Exhibit 17(d) to post-effective
amendment no. 27 to NASL Series
Trust registration statement on
Form N-1A filed 10/20/94.
C-4
<PAGE> 174
NASL SERIES TRUST
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
4 Agreement and Plan of Reorganization between Registrant and
Manulife Series Funds, Inc. (filed herewith as Exhibit A to
the Prospectus/Proxy Statement).
11 Opinion of the law department of The Manufacturers Life Insurance
Company regarding legality of issuance of shares and other matters.
12 Opinion of Simpson Thacher & Bartlett on tax matters.
14(a) Consent of Coopers & Lybrand L.L.P., Independent Accountants.
14(b) Consent of Ernst & Young LLP, Independent Auditors.
16 Power of Attorney for Messrs. Don B. Allen, Charles L.
Bardelis, Samuel Hoar, Brian L. Moore and Robert J. Myers.
17 Copy of Registrant's Declaration pursuant to Rule 24f-2 under
the Investment Company Act of 1940.
</TABLE>
<PAGE> 1
North American Security Life Insurance Company
116 Huntington Avenue
Boston, Massachusetts 02116
(617) 266-6008
October 3, 1996
To Whom it may concern:
This opinion is written in reference to the shares of beneficial interest, $.01
par value (the "Shares") of the Money Market, International Stock, Emerging
Growth, Balanced, Common Stock, Pacific Rim Emerging Markets, Real Estate
Securities, Capital Growth and Equity Index Trusts of NASL Series Trust, a
Massachusetts business trust (the "Trust"), to be offered and sold pursuant to a
Registration Statement on Form N-14 (the "Registration Statement") filed by the
Trust pursuant to the Securities Act of 1933.
I have examined such records and documents and reviewed such questions of law as
I deemed necessary for purposes of this opinion.
1. The Trust has been duly recorded under the laws of the
Commonwealth of Massachusetts and is a validly existing Massachusetts
business trust.
2. The Shares have been duly authorized and, when sold, issued and
paid for in the manner contemplated by the Registration Statement, will
be legally issued, fully paid and non-assessable.
I consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement.
Very truly yours,
/s/ Betsy Anne Seel
Betsy Anne Seel, Esq.
<PAGE> 1
[On Simpson, Thacher & Bartlett letterhead]
October 4, 1996
Re: Agreement and Plan of Reorganization
dated as of September 27, 1996,
between Manulife Series Fund, Inc.
and NASL Series Trust
Manulife Series Fund, Inc.
200 Bloor Street East
Toronto, Ontario, Canada M4W 1E5
NASL Series Trust
116 Huntington Avenue
Boston, Massachusetts 02116
Ladies and Gentlemen:
You have requested our opinion with respect to the federal income
tax consequences of certain aspects of the proposed transfer by each Manulife
Portfolio(1) of all of its assets to its Corresponding NASL Portfolio solely in
exchange for NASL Portfolio Shares of the Corresponding NASL Portfolio and the
assumption of all its obligations and liabilities by the Corresponding NASL
Portfolio (as described in Section 1(a) of the Reorganization Agreement)
followed by the liquidation of each Manulife Portfolio and the distribution pro
rata of such NASL Portfolio Shares to the shareholders of the Corresponding
Manulife Portfolio. The series of steps that will occur to effect such
transaction are hereinafter referred to as the
- -----------------------
(1) Where relevant, capitalized terms not otherwise defined herein have the
meanings they have for the purposes of the Agreement and Plan of
Reorganization dated as of September 27, 1996, between the Manulife Series
Fund, Inc. and NASL Series Trust (the "Reorganization Agreement").
<PAGE> 2
Manulife Series Fund, Inc. -2- October 4, 1996
NASL Series Trust
"Reorganization." This opinion is being delivered pursuant to Section 6(d) of
the Reorganization Agreement.
Manulife Series Fund, Inc. ("Manulife") is a Maryland corporation
registered under the Investment Company Act of 1940, as amended (the "Act"), as
an open-end investment company of the management type and is comprised of the
following separate investment portfolios: The Money-Market Fund, the Common
Stock Fund, the International Fund, the Emerging Growth Equity Fund, the
Balanced Assets Fund, the Pacific Rim Emerging Markets Fund, the Real Estate
Securities Fund, the Capital Growth Bond Fund, and the Equity Index Fund (each,
a "Manulife Portfolio"). The authorized capital stock of Manulife as of the
date hereof consists of one billion shares of common stock, each having a par
value of $.01 per share. As of June 24, 1996, there were outstanding
4,121,516.894 shares of the Money-Market Fund, 4,270,608.943 shares of the
Common Stock Fund, 2,571,534.851 shares of the International Fund,
8,770,698.390 shares of the Emerging Growth Equity Fund, 7,304,913.80 shares of
the Balanced Assets Fund, 1,908,435.152 shares of the Pacific Rim Emerging
Markets Fund, 3,801,682.955 shares of the Real Estate Securities Fund,
3,838,453.285 shares of the Capital Growth Bond Fund, and 325,263.287 shares of
the Equity Index Fund.
NASL Series Trust ("NASL") is registered under the Act as a no-load,
open-end investment company of the management type and is organized
as a Massachusetts business trust comprised of separate investment portfolios,
which include Money Market Trust, and which are expected to include, at the
Effective Time of the Reorganization, International Stock Trust, Emerging
Growth Trust, Balanced Trust, Common Stock Trust, Pacific Rim Emerging Markets
Trust, Real Estate Securities Trust, Capital Growth Bond Trust, and Equity
Index Trust (each, a "NASL Portfolio"). NASL's investment portfolios other than
the NASL Portfolios (consisting of Small/Mid Cap Trust, International Small Cap
Trust, Global Equity Trust, Pasadena Growth Trust, Equity Trust, Growth Trust,
Value Equity Trust, Growth and Income Trust, International Growth and Income
Trust, Strategic Bond Trust, Global Government Bond Trust, Investment Quality
Bond Trust, U.S. Government Securities Trust, and three Automatic Asset
Allocation Trusts (Aggressive, Moderate and Conservative)) are not parties to
the Reorganization.
<PAGE> 3
Manulife Series Fund, Inc. -3- October 4, 1996
NASL Series Trust
NASL has an unlimited number of authorized shares of beneficial
interest, with a par value of $.01 per share, of which as of June 24, 1996 there
were outstanding 33,815,940.278 shares of Money Market Trust. There are no
outstanding shares of International Stock Trust, Emerging Growth Trust, Balanced
Trust, Common Stock Trust, Pacific Rim Emerging Markets Trust, Real Estate
Securities Trust, Capital Growth Bond Trust, or Equity Index Trust.
The Manulife Portfolio Shares are not offered directly to the
public but are sold only to The Manufacturers Life Insurance Company of America
("Manulife America"), a stock life insurance company organized under the laws of
Pennsylvania and redomesticated under the laws of Michigan, in connection with
the issuance of variable life insurance and variable annuity contracts. Manulife
America holds Manulife Portfolio Shares attributable to variable life contracts
in Separate Accounts One, Three and Four and variable annuity contracts in
Separate Account Two, each a separate account registered under the Act. One
hundred percent of the Manulife Portfolio Shares are owned by Manulife America.
The Reorganization Agreement was approved by the Board of Trustees
of NASL on September 27, 1996 and by the Board of Directors of Manulife on
September 27, 1996.
Upon satisfaction of all conditions precedent set forth in the
Reorganization Agreement, the Reorganization will be effected as set forth in
the following summary:
1. Pursuant to the Reorganization Agreement, Manulife will cause
each Manulife Portfolio to convey, transfer and deliver at the Closing
to the NASL Portfolio set forth opposite its name in the table included
in the recitals to the Reorganization Agreement (each such NASL
Portfolio being the "Corresponding NASL Portfolio" of the Manulife
Portfolio set forth opposite its name, and each such Manulife Portfolio
being the "Corresponding Manulife Portfolio" of the NASL Portfolio set
forth opposite its name) all of the then existing assets of such
Manulife Portfolio. In consideration thereof, NASL agrees at the Closing
to cause each NASL Portfolio (i) to assume and pay, to the extent that
they exist on or after the Effective Time of the Reorganization, all of
the obligations and liabilities of the Corresponding Manulife Portfolio
and (ii) to issue and deliver to the
<PAGE> 4
Manulife Series Fund, Inc. -4- October 4, 1996
NASL Series Trust
Corresponding Manulife Portfolio full and fractional shares of
beneficial interest of the Corresponding NASL Portfolio, with respect to
each Corresponding NASL Portfolio equal to that number of full and
fractional shares of the NASL Portfolios (the "NASL Portfolio Shares")
as determined in Section 1(c) of the Reorganization Agreement. Any
shares of capital stock (if any), par value $.01 per share, of the
Manulife Portfolios ("Manulife Portfolio Shares") held in the treasury
of Manulife on the Effective Time of the Reorganization shall thereupon
be retired.
2. At the Effective Time of the Reorganization, each Manulife
Portfolio will liquidate and distribute pro rata to Manulife America, as
sole shareholder of the Manulife Portfolio Shares, as of the Effective
Time of the Reorganization, the NASL Portfolio Shares of the
Corresponding NASL Portfolio received by such Manulife Portfolio
pursuant to Section 1(a)(i) of the Reorganization Agreement in actual or
constructive exchange for the shares of the Manulife Portfolio held by
Manulife America, as sole shareholder of the Manulife Portfolio Shares.
Such liquidation and distribution will be accomplished by the transfer
of the Corresponding NASL Portfolio Shares then credited to the account
of each Manulife Portfolio on the books of the Corresponding NASL
Portfolio, to open accounts on the share records of the Corresponding
NASL Portfolio in the names of the Manulife Portfolio shareholders and
representing the respective pro rata number of the NASL Portfolio Shares
due such shareholders. The NASL Portfolios will not issue certificates
representing the NASL Portfolio Shares in connection with such exchange.
3. As soon as practicable after the Effective Time of the
Reorganization, Manulife shall take all the necessary steps under
Maryland law and Manulife's Articles of Incorporation, as amended and
supplemented, to effect a complete dissolution of Manulife and to
deregister Manulife under the Act.
In acting as special counsel to NASL and Manulife with respect to
the Reorganization, we have, among other things, reviewed the following
documents:
1. The Reorganization Agreement;
<PAGE> 5
Manulife Series Fund, Inc. -5- October 4, 1996
NASL Series Trust
2. NASL's Registration Statement on Form N-14 under the
Securities Act of 1933, as filed with the Securities and
Exchange Commission (the "Registration Statement on Form
N-14"); and
3. The current prospectuses and statements of additional
information of Manulife and NASL.
For purposes of this opinion, as hereinafter set forth, we have
reviewed such other documents relating to the Reorganization as we have deemed
relevant under the circumstances and have relied upon representations contained
in certain certificates (the "Certificates") provided to us by Manulife, NASL,
and Manulife America.
For purposes of the opinions expressed in this letter, it is
expressly assumed (1) that the Separate Accounts are properly treated for
federal income tax purposes as assets of Manulife America and are not separate
taxable entities for federal income tax purposes; and (2) that the
contractholders of variable life and variable annuity contracts are not
considered for federal income tax purposes to be the owners of the assets held
in the Separate Accounts and after the Reorganization will not be considered for
such purposes to be the owners of the assets in the Separate Accounts.
If the Merger is effected on a factual basis different from that
contemplated above, any or all of the opinions expressed herein may be
inapplicable. Further, our opinion is based on (i) the Internal Revenue Code of
1986, as amended (the "Code"), (ii) Treasury Regulations, (iii) judicial
precedents and (iv) administrative interpretations (including the current ruling
practice of the Internal Revenue Service) as of the date hereof. If there is any
subsequent change in the applicable law or regulations, or if there are
subsequently any new administrative or judicial interpretations of the law or
regulations, any or all of the individual opinions expressed herein may become
inapplicable.
Based on the foregoing, and assuming that the Reorganization is
effected in accordance with the terms of the Reorganization Agreement (and
exhibits thereto) and that the representations made pursuant thereto by the
parties are true at the Effective Time, it is our opinion that for federal
income tax purposes:
<PAGE> 6
Manulife Series Fund, Inc. -6- October 4, 1996
NASL Series Trust
(i) the Reorganization will constitute a reorganization within
the meaning of section 368(a)(1) of the Code with respect to each
Manulife Portfolio and its Corresponding NASL Portfolio;
(ii) no gain or loss will be recognized by any of the Manulife
Portfolios or the Corresponding NASL Portfolios upon the transfer of all
the assets and liabilities, if any, of each Manulife Portfolio to its
Corresponding NASL Portfolio solely in exchange for NASL Portfolio
Shares or upon the distribution of the NASL Portfolio Shares to the
holders of Manulife Portfolio Shares solely in exchange for all of their
Manulife Portfolio Shares;
(iii) no gain or loss will be recognized by shareholders of any
of the Manulife Portfolios upon the exchange of such Manulife Portfolio
Shares solely for NASL Portfolio Shares;
(iv) the holding period and tax basis of the NASL Portfolio
Shares received by each holder of Manulife Portfolio Shares pursuant to
the Reorganization will be the same as the holding period (provided the
Manulife Portfolio Shares were held as a capital asset on the date of
the Reorganization) and tax basis of the Manulife Portfolio Shares held
by the shareholder immediately prior to the Reorganization; and
(v) the holding period and tax basis of the assets of each of
the Manulife Portfolios acquired by its Corresponding NASL Portfolio
will be the same as the holding period and tax basis of those assets to
each of the Manulife Portfolios immediately prior to the Reorganization.
The payment by NASL Financial Services, Inc. ("NASL Financial") or
its affiliates of certain expenses of Manulife and NASL which are directly
related to the Reorganization (referred to in section 9 of the Reorganization
Agreement) will not affect the opinions set forth above regarding the federal
income tax consequences of the exchanges by Manulife and the shareholders of
Manulife. However, no opinion is expressed as to any other federal income tax
consequences to any of the parties of the payment of such expenses by NASL
Financial or its affiliates.
<PAGE> 7
Manulife Series Fund, Inc. -7- October 4, 1996
NASL Series Trust
We express our opinion herein only as to those matters
specifically set forth above and such opinion may be relied upon solely by you
for the exclusive purpose of ascertaining the federal income tax consequences of
the Reorganization contemplated in the Reorganization Agreement to the Manulife
Portfolios, the NASL Portfolios and the shareholders of the Corresponding
Manulife Portfolios on their receipt of the NASL Portfolio Shares pursuant to
the Reorganization Agreement.
Very truly yours,
/s/ SIMPSON THACHER & BARTLETT
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement on Form N-14 (File No. 2-94157) of our report dated February 15,
1996, on our audits of the financial statements and financial highlights of
NASL Series Trust, for the year ended December 31, 1995, which are incorporated
by reference in the Registration Statement. We also consent to the reference in
the Registration Statement on Form N-14 of our report dated February 15, 1996,
on our audit of the financial highlights of NASL Series Trust - Money Market
Trust, for the year ended December 31, 1995. We also consent to the reference
to our Firm under the captions "Financial Statements and Experts" and
"Independent Accountants" in Parts A and B of the Registration Statement,
respectively.
Boston, Massachusetts /s/ Coopers & Lybrand L.L.P.
October 4, 1996
<PAGE> 1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the references to our firm under the captions "Financial
Highlights" and "Financial Statements and Experts" in the Registration
Statement and "Independent Accountants" in the Statement of Additional
Information on Form N-14 of NASL Series Trust for the Manulife International
Fund, Manulife Emerging Growth Equity Fund, Manulife Balanced Assets Fund,
Manulife Common Stock Fund, Manulife Pacific Rim Emerging Markets Fund,
Manulife Real Estate Securities Fund, Manulife Capital Growth Bond Fund, and
Manulife Equity Index Fund of Manulife Series Fund, Inc.
We also consent to the incorporation by reference in the Registration
Statement of our report dated February 2, 1996 on the financial statements
included in the Annual Report to Shareholders of the Manulife Series Fund,
Inc. for its fiscal year ended December 31, 1995.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
October 4, 1996
<PAGE> 1
NASL SERIES TRUST
POWER OF ATTORNEY
The undersigned do hereby constitute and appoint John D. DesPrez
III, James D. Gallagher, Richard C. Hirtle, Brian L. Moore, John G. Vyrsen and
James Boyle, or any one of them, our true and lawful attorneys to execute
registration statements to be filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "1933 Act") and/or the
Investment Company Act of 1940, as amended (the "1940 Act"), and to do any and
all acts and things and to execute any and all instruments for us and in our
names in the capacities indicated below, which said attorney, may deem necessary
or advisable to enable NASL Series Trust (the "Trust") to comply with the 1933
Act and the 1940 Act, and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with such registration
statement, including specifically, but without limitation, power and authority
to sign for us or any of us in our names and in the capacities indicated below,
any and all amendments (including post-effective amendments); and we do hereby
ratify and confirm all that the said attorneys, or any of them, shall do or
cause to be done by virtue of this power of attorney.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Don B. Allen Trustee September 27, 1996
- ----------------------------- ------------------
Don B. Allen
/s/ Charles L. Bardelis Trustee September 27, 1996
- ----------------------------- ------------------
Charles L. Bardelis
/s/ Samuel Hoar Trustee September 27, 1996
- ----------------------------- ------------------
Samuel Hoar
/s/ Brian L. Moore Trustee and Chairman September 27, 1996
- ----------------------------- ------------------
Brian L. Moore
/s/ Robert J. Myers Trustee September 27, 1996
- ----------------------------- ------------------
Robert J. Myers
</TABLE>
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
Form N-1A
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933 /x/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. / /
and
REGISTRATION STATEMENT
under
THE INVESTMENT COMPANY ACT OF 1940 /x/
AMENDMENT NO. / /
-------------------
NASL SERIES FUND, INC.
(Exact Name of Registrant as Specified in Charter)
105 Adelaide Street West
Toronto, Ontario, Canada M5H 1R1
(Address of Principal Executive Offices)
-------------------
Barbara E. Burk, Esq. Copy to:
Secretary E. Ladd Thurston, Esq.
North American Security Life Insurance Co. Nelson Thurston Jones & Blouch
57 River Street, Suite 104 1776 F Street, N.W.
Wellesley Hills, Massachusetts 02181 Washington, D.C. 20006
(Name and Address of Agent for Service)
-------------------
Approximate Date of Proposed Public Offering: As soon as practicable after
the Registration Statement under the Securities Act of 1933 becomes effective.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, registrant
elects to register an indefinite amount of the securities being registered.
Amount of registration fee: $500.00
-------------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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