<PAGE> 1
MANUFACTURERS INVESTMENT TRUST
116 Huntington Avenue
Boston, Massachusetts 02116
March 26, 1999
DEAR VARIABLE ANNUITY AND VARIABLE LIFE CONTRACT OWNERS:
A Special Meeting of Shareholders of the Manufacturers Investment Trust
(the "Trust") will be held at 73 Tremont Street, Boston, Massachusetts 02108, on
April 27, 1999, at 10:00 a.m., Eastern Standard Time, for the purpose of
considering a reorganization proposal that will combine two of the Trust's
portfolios with two other Trust portfolios.
Although you are not a shareholder of the Trust, your purchase payments and
the earnings on such purchase payments under your variable annuity or variable
life contracts issued by The Manufacturers Life Insurance Company of North
America ("Manulife North America"), The Manufacturers Life Insurance Company of
New York ("Manulife New York") and The Manufacturers Life Insurance Company of
America ("Manufacturers America") are invested in shares of one or more of the
portfolios of the Trust through subaccounts of separate accounts established by
Manulife North America, Manulife New York and Manufacturers America for such
purpose. Since the value of your contract depends in part on the investment
performance of the shares of the applicable portfolio of the Trust, you have the
right to instruct Manulife North America, Manulife New York or Manufacturers
America, as appropriate, how the shares of the Trust attributable to your
contract are voted. The number of votes for which you may give instructions for
any portfolio of the Trust is determined by dividing your contract value (or the
reserve for a contract after its maturity date) allocated to the subaccount in
which shares of such portfolio are held by the value per share of that portfolio
of the Trust. Fractional votes are counted. Manulife North America, Manulife New
York and Manufacturers America will vote all shares of the Trust issued to such
companies in proportion to the timely instructions received from owners of the
contracts participating in separate accounts registered under the Investment
Company Act of 1940.
Contract owners whose assets are invested in either the Worldwide Growth
Trust or the Capital Growth Bond Trust (collectively, the "Transferor
Portfolios") of the Trust are being asked to consider a reorganization proposal
whereby the Transferor Portfolios would merge with and into the Global Equity
Trust and the Investment Quality Bond Trust (collectively, the "Acquiring
Portfolios"), respectively, of the Trust. As a result of the reorganization,
contract owners whose assets are invested in the Transferor Portfolios will be
able to pursue substantially similar investment goals in the context of a larger
fund with potentially greater economies of scale and better performance. 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.
It is anticipated that the investment advisory fees and the
<PAGE> 2
annualized expenses as a percentage of average net assets paid by the Acquiring
Portfolios generally will be comparable to or lower than those paid by the
corresponding Transferor Portfolios. There are certain differences between the
investment objectives, policies and restrictions of the Transferor Portfolios
and the Acquiring Portfolios, as summarized in the tables beginning on page 9
and included under the caption "Investment Objectives and Policies" in the
enclosed Prospectus/Proxy Statement.
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. The Transferor Portfolios and the
Acquiring Portfolios will bear the expenses of the reorganization.
For these reasons and the additional reasons discussed in the enclosed
Prospectus/Proxy Statement, the Board of Trustees of the Trust unanimously
recommends that you vote FOR approval of the reorganization proposal.
Enclosed you will find a Notice of Special Meeting of Shareholders, a
Prospectus/Proxy Statement for the Trust and a Voting Instructions Form for each
Transferor Portfolio in which your contract values were invested as of February
28, 1999 (the record date for the Meeting). The number of shares that represent
your voting interest (determined as explained above) appears on each Voting
Instructions Form. The Prospectus/Proxy Statement provides background
information and describes, in detail, the matters to be voted on at the Meeting.
We encourage you to read the attached materials in their entirety.
If you have any questions regarding the reorganization, please call (800)
344-1029.
Sincerely yours,
/s/ JOHN D. DESPREZ III
John D. DesPrez III
President
Manufacturers Investment Trust
<PAGE> 3
MANUFACTURERS INVESTMENT TRUST
116 Huntington Avenue
Boston, Massachusetts 02116
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
March 26, 1999
To the Shareholders of
MANUFACTURERS INVESTMENT TRUST:
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of Manufacturers Investment Trust (the "Trust"), will be held at 73
Tremont Street, Boston, Massachusetts 02108 on April 27, 1999 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 "Plan") of the Trust on behalf of the
Worldwide Growth Trust and the Capital Growth Bond Trust portfolios
(collectively, the "Transferor Portfolios") and the Global Equity
Trust and the Investment Quality Bond Trust portfolios
(collectively, the "Acquiring Portfolios"). The following table
depicts each Transferor Portfolio and the corresponding Acquiring
Portfolio into which such Transferor Portfolio will be merged:
<TABLE>
<CAPTION>
TRANSFEROR PORTFOLIO CORRESPONDING ACQUIRING PORTFOLIO
-------------------- ---------------------------------
<S> <C>
Worldwide Growth Trust Global Equity Trust
Capital Growth Bond Trust Investment Quality Bond Trust
</TABLE>
Shareholders of each Transferor Portfolio will vote separately on Item 1.
Item 2 Transaction of any other business that may properly come before the
Meeting.
The Board of Trustees of the Trust has recently reviewed and unanimously
endorsed the proposal set forth in the accompanying Prospectus/Proxy Statement.
THE BOARD OF TRUSTEES OF THE TRUST RECOMMENDS THAT SHAREHOLDERS VOTE FOR ITEM 1.
<PAGE> 4
Approval of the Plan will require the affirmative vote of the holders of at
least a "majority of the outstanding voting securities" (as defined in this
Prospectus/Proxy Statement) of each of the Transferor Portfolios. By approving
the Plan, shareholders of the Transferor Portfolios will be deemed to have
waived certain of the Trust's investment limitations solely insofar as they
might be deemed to apply to the transactions contemplated by the Plan.
Each shareholder of record at the close of business on February 28, 1999 is
entitled to receive notice of and to vote at the Meeting.
Sincerely yours,
/s/ JAMES D.GALLAGHER
James D. Gallagher
Secretary
March 26, 1999
Boston, Massachusetts
<PAGE> 5
Rule 497(b) Prospectus
File No. 333-71437
PROSPECTUS/PROXY STATEMENT DATED MARCH 16, 1999
Relating to the Acquisition of the Assets of
WORLDWIDE GROWTH TRUST
AND
CAPITAL GROWTH BOND TRUST
OF
MANUFACTURERS INVESTMENT TRUST
By and in exchange for shares of
GLOBAL EQUITY TRUST
AND
INVESTMENT QUALITY BOND TRUST
OF
MANUFACTURERS INVESTMENT TRUST
116 Huntington Avenue
Boston, Massachusetts 02116
(800) 344-1029
GENERAL
This Prospectus/Proxy Statement relates to the proposed transfer of all of
the assets and liabilities of the Worldwide Growth Trust and the Capital Growth
Bond Trust (collectively, the "Transferor Portfolios") of the Manufacturers
Investment Trust (the "Trust") to the Global Equity Trust and the Investment
Quality Bond Trust (collectively, the "Acquiring Portfolios"), respectively, of
the Trust in exchange for shares of such Acquiring Portfolio (the
"Reorganization"). As a result of the Reorganization, each shareholder of a
Transferor Portfolio will receive that number of shares of the corresponding
Acquiring Portfolio equal in value at the time of the exchange to the value of
such shareholder's shares of the Transferor 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
attached hereto as Exhibit A.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS/PROXY STATEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 6
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about the Acquiring Portfolios
that a prospective investor ought to know before investing. For a more detailed
discussion of the investment objectives, policies, restrictions and risks of the
Acquiring Portfolios, see the prospectus for the Trust dated May 1, 1998, which
is incorporated by reference into this Prospectus/Proxy Statement. A copy of the
prospectus may be obtained without charge by writing to the Trust at the address
noted above or by calling toll free (800) 344-1029. A Statement of Additional
Information dated March 16, 1999 (the "Statement of Additional Information")
containing additional information about the Reorganization and the Trust 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
the Trust at the address noted above or by calling toll free (800) 344-1029. If
shareholders have any questions regarding the Reorganization, please call (800)
344-1029.
The Trust is a no-load, open-end management investment company, commonly
known as a mutual fund, registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Trust currently offers shares in 36 investment
portfolios. The shares of the Trust are divided into 36 series corresponding to
the investment portfolios. Each Transferor Portfolio and each Acquiring
Portfolio is a series of the Trust. In this Prospectus/Proxy Statement, for
simplicity, certain actions are described as being taken by either a Transferor
Portfolio or an Acquiring Portfolio, each of which is a portfolio of the Trust,
although all actions are actually taken by the Trust on behalf of the applicable
portfolio.
The Trust does not sell its shares directly to the public, but sells its
shares generally only to insurance companies and their separate accounts as the
underlying investment medium for variable contracts and group annuity contracts
("contracts"). Only shares of a particular portfolio are entitled to vote on
matters which affect only the interests of that portfolio. As of the record date
for the Special Meeting of Shareholders, the shares of the Transferor Portfolios
were legally owned by The Manufacturers Life Insurance Company of North America
("Manulife North America"), The Manufacturers Life Insurance Company of New York
("Manulife New York"), The Manufacturers Life Insurance Company of America
("Manufacturers America") and The Manufacturers Life Insurance Company (U.S.A.)
("Manufacturers U.S.A."). The ultimate parent of each of Manulife North America,
Manulife New York, Manufacturers America and Manufacturers U.S.A., 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.
2
<PAGE> 7
Manulife North America is a stock life insurance company organized under
the laws of Delaware. Manulife North America holds shares of the Transferor
Portfolios attributable to variable annuity contracts in The Manufacturers Life
Insurance Company of North America Separate Account A and variable life
contracts in The Manufacturers Life Insurance Company of North America Separate
Account B, both of which are separate accounts registered under the 1940 Act, as
well as in an unregistered separate account.
Manulife New York is a stock life insurance company organized under the
laws of New York. Manulife New York holds shares of the Transferor Portfolios
attributable to variable annuity contracts in The Manufacturers Life Insurance
Company of New York Separate Account A and variable life contracts in The
Manufacturers Life Insurance Company of New York Separate Account B, both of
which are separate accounts registered under the 1940 Act, as well as in an
unregistered separate account.
Manufacturers America is a stock life insurance company organized under the
laws of Pennsylvania and redomesticated under the laws of Michigan.
Manufacturers America holds shares of the Transferor Portfolios attributable to
variable annuity contracts in Separate Account Two and variable life contracts
in Separate Accounts Three and Four, all of which are separate accounts
registered under the 1940 Act.
Manufacturers U.S.A. is a stock life insurance company organized under the
laws of Pennsylvania and redomesticated under the laws of Michigan whose
principal address is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5.
Manufacturers U.S.A. holds shares of the Trust in various unregistered separate
accounts.
Manulife North America, Manulife New York, Manufacturers America and
Manufacturers U.S.A. have the right to vote upon matters that may be voted upon
at a special shareholders' meeting. The companies will vote all shares of the
Portfolios issued to such companies in proportion to the timely instructions
received from owners of the contracts ("contractholders" or "contract owners")
participating in separate accounts described above which are registered under
the 1940 Act. The companies, in connection with their solicitation of voting
instructions, are furnishing this Prospectus/Proxy Statement to the owners of
contracts participating in registered separate accounts holding shares of the
Portfolios to be voted on the Proposal included in this Prospectus/Proxy
Statement.
NO PERSON, INCLUDING ANY DEALER OR SALESPERSON, HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, UNLESS THE INFORMATION OR
REPRESENTATION IS SET FORTH IN THIS PROSPECTUS/PROXY STATEMENT. IF ANY SUCH
3
<PAGE> 8
INFORMATION IS GIVEN, IT SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE TRUST, THE ADVISER OR ANY SUBADVISERS TO THE TRUST OR THE PRINCIPAL
UNDERWRITER OF THE CONTRACTS. THIS PROSPECTUS/PROXY STATEMENT IS NOT AN OFFER TO
SELL SHARES OF THE TRUST IN ANY STATE WHERE SUCH OFFER OR SALE WOULD BE
PROHIBITED.
AN INVESTMENT IN ANY OF THE PORTFOLIOS IS NOT A DEPOSIT OF ANY BANK AND IS NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
4
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 5
Information About the Reorganization........................ 24
Voting Information.......................................... 30
Additional Information on Investment Policies and Techniques
and Risk Factors.......................................... 32
Additional Information About the Trust...................... 44
Financial Statements and Experts............................ 58
Legal Matters............................................... 58
Appendix.................................................... A-1
Exhibit A -- Agreement and Plan of Reorganization
</TABLE>
SUMMARY
The following is a summary of certain information contained in this
Prospectus/Proxy Statement. This summary is qualified by reference to the more
complete information contained elsewhere in this Prospectus/Proxy Statement, the
prospectus of the Trust and the Agreement and Plan of Reorganization attached to
this Prospectus/Proxy Statement as Exhibit A. Shareholders should read this
entire Prospectus/Proxy Statement carefully.
PROPOSED TRANSACTION. The Board of Trustees of the Trust (the "Board"),
including all of the Trustees who are not "interested persons" of the Trust (the
"Independent Trustees"), has unanimously approved an Agreement and Plan of
Reorganization (the "Plan") providing for the transfer of all of the assets and
liabilities of each Transferor Portfolio to the corresponding Acquiring
Portfolio in exchange for shares of such corresponding Acquiring Portfolio.
Subject to its approval by the shareholders of the Transferor Portfolios
and the owners of the variable contracts issued by such shareholders, the Plan
provides for the tax-free reorganization of the Transferor Portfolios, including
(a) the transfer of all of the assets, subject to all of the liabilities, of the
Transferor Portfolios in exchange for the Acquiring Portfolio shares; (b) the
liquidation of the Transferor Portfolios; and (c) the distribution to Transferor
Portfolio shareholders of such Acquiring Portfolio shares. As a result of the
Reorganization, each holder of shares of each Transferor Portfolio specified in
the table below will become a holder of shares of the Acquiring Portfolio listed
opposite such Transferor Portfolio (each Transferor or Acquiring Portfolio being
referred to herein as the "corresponding" Transferor or Acquiring
5
<PAGE> 10
Portfolio to the respective Acquiring or Transferor Portfolio listed opposite
its name).
<TABLE>
<CAPTION>
TRANSFEROR PORTFOLIO ACQUIRING PORTFOLIO
<S> <C>
- -----------------------------------------------------------
Worldwide Growth Trust Global Equity Trust
- -----------------------------------------------------------
Capital Growth Bond Trust Investment Quality Bond Trust
</TABLE>
The total value of all shares of each Acquiring Portfolio issued in the
Reorganization will equal the total value of the net assets of the corresponding
Transferor Portfolio being acquired by such Acquiring Portfolio. The number of
full and fractional shares of an Acquiring Portfolio received by a shareholder
of the corresponding Transferor Portfolio will be equal in value to the value of
that shareholder's shares of the corresponding Transferor Portfolio as of the
close of regularly scheduled trading on the New York Stock Exchange on the
closing date of the Reorganization (the "Effective Time of the Reorganization").
The Effective Time of the Reorganization is expected to occur on April 30, 1999
or on such later day as the parties may mutually agree (the "Exchange Date"). As
a result, shareholders should carefully consider the information about the
Acquiring Portfolios presented in this Prospectus/ Proxy Statement in connection
with voting on the Reorganization.
There are certain differences between the investment objectives, policies
and restrictions of the Acquiring Portfolios and the corresponding Transferor
Portfolios, as discussed below. See "Investment Objectives and Policies." The
fee structure of the Transferor Portfolios will also change, as discussed below.
The existing purchase, redemption and dividend policies of the Transferor
Portfolios will remain substantially unchanged. The consummation of the
Reorganization is contingent on the satisfaction of the conditions described
below under "Information About the Reorganization -- Agreement and Plan of
Reorganization."
If the Reorganization were to have been consummated as of December 31,
1998, the approximate resulting aggregate net assets of the Acquiring Portfolios
would be (1) $969,269,523 in the case of the Global Equity Trust and (2)
$377,222,690 in the case of the Investment Quality Bond Trust.
No gain or loss will be recognized by the Transferor Portfolios or the
Acquiring Portfolios or shareholders of the Transferor 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."
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held personally liable for the obligations of the Trust.
6
<PAGE> 11
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust, and requires that notice of such disclaimer be given
in each agreement, obligation, or instrument entered into or executed by the
Trust or the Trustees. Moreover, the Declaration of Trust provides for
indemnification out of the Trust property for all losses and expenses of any
shareholder held personally liable for the obligations of the Trust. Thus, the
risk of a shareholder's incurring financial loss on account of shareholder
liability is considered by the Trust 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 the
Trust itself is unable to meet its obligations.
INVESTMENT MANAGEMENT. Manulife Securities Services, LLC ("Manulife
Securities") currently serves as investment adviser to the Trust and each of its
portfolios. Manulife Securities, a wholly-owned subsidiary of Manulife North
America, is a Delaware limited liability company whose principal offices are
located at 73 Tremont Street, Boston, Massachusetts 02108. In addition, each
portfolio of the Trust has a separate subadviser which is responsible for the
day-to-day decision making. Each of the subadvisers to the portfolios of the
Trust is registered as an investment adviser under the Investment Advisers Act
of 1940 or is otherwise exempt from registration.
The following table illustrates the current management arrangements for the
Transferor Portfolios and the management arrangements to be in effect for the
corresponding Acquiring Portfolios upon consummation of the Reorganization:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
MANAGEMENT ARRANGEMENTS
CURRENT MANAGEMENT ARRANGEMENTS UPON CONSUMMATION OF THE REORGANIZATION
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Transferor Investment Acquiring Investment
Portfolio Adviser Subadviser Portfolio Adviser Subadviser
- -----------------------------------------------------------------------------------------
Worldwide Manulife Founders* Global Manulife Morgan
Growth Trust Securities Equity Securities Stanley
Trust
- -----------------------------------------------------------------------------------------
Capital Growth Manulife MAC** Investment Manulife Wellington
Bond Trust Securities Quality Securities
Bond
Trust
- -----------------------------------------------------------------------------------------
</TABLE>
- ---------------
* Founders Asset Management, LLC ("Founders").
** Manufacturers Adviser Corporation ("MAC"), an indirect wholly owned
subsidiary of Manulife.
7
<PAGE> 12
SUBADVISORY ARRANGEMENTS. It is anticipated that following consummation of
the Reorganization and pursuant to existing agreements with Manulife Securities,
each of Morgan Stanley Asset Management Inc. ("Morgan Stanley") and Wellington
Management Company LLP ("Wellington Management") will continue to serve in its
current capacity.
MORGAN STANLEY
Morgan Stanley has been the subadviser to the Global Equity Trust since
October 1, 1996. Morgan Stanley, a wholly-owned subsidiary of Morgan Stanley,
Dean Witter, Discover & Co., conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
United States and abroad. Its principal offices are located at 1221 Avenue of
the Americas, New York, New York 10020.
Morgan Stanley, Dean Witter, Discover & Co. is a global financial services
firm with three major businesses: securities, asset management and credit
services.
Frances Campion has been primarily responsible for the portfolio management
of the Global Equity Trust since January 1, 1997. Ms. Campion joined Morgan
Stanley in January 1990 as a global equity fund manager and is now a Managing
Director of Morgan Stanley & Co. Incorporated. Her responsibilities include day
to day management of the Global Equity Portfolio of Morgan Stanley Institutional
Fund, Inc. Prior to joining Morgan Stanley, Ms. Campion was a U.S. equity
analyst with Lombard Odler Limited where she had responsibility for the
management of global portfolios. Ms. Campion has eleven years global investment
experience. She is a graduate of University of College, Dublin.
WELLINGTON MANAGEMENT
Wellington Management is subadviser to the Investment Quality Bond Trust.
Founded in 1933, Wellington Management is a Massachusetts limited liability
partnership whose principal business address is 75 State Street, Boston,
Massachusetts 02109. Wellington Management is a professional investment
counseling firm which provides investment services to investment companies,
employee benefit plans, endowments, foundations and other institutions and
individuals.
Thomas L. Pappas, Senior Vice President of Wellington Management, has
served as portfolio manager to the Investment Quality Bond Trust since March
1994. Mr. Pappas has been a portfolio manager with Wellington Management since
1987.
8
<PAGE> 13
INVESTMENT OBJECTIVES AND POLICIES. The following table sets forth the
investment objective and approach of each Transferor Portfolio and its
corresponding Acquiring Portfolio. There are certain differences in the
investment objectives and approaches of the portfolios that should be
considered.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE AND APPROACH
- --------- ---------------------------------
<S> <C>
Worldwide Growth Trust Seeks to achieve long-term growth
capital by normally investing at
least 65% of its total assets in
equity securities of growth
companies in a variety of markets
throughout the world.
Global Equity Trust Seeks to achieve long-term capital
appreciation by investing
primarily in equity securities
throughout the world, including
U.S. issuers and emerging markets.
Capital Growth Bond Trust Seeks to achieve growth of capital
by investing in medium-grade or
better debt securities, with
income as a secondary
consideration.
Investment Quality Bond Trust Seeks to achieve a high level of
current income consistent with the
maintenance of principal and
liquidity by investing primarily
in a diversified portfolio of
investment grade corporate bonds
and U.S. Government bonds with
intermediate to longer term
maturities. Up to 20% of the
portfolio's assets may be invested
in non-investment grade fixed
income securities.
</TABLE>
The investment objectives and policies of each Transferor Portfolio are set
forth below, together with a discussion of the primary differences, if any, from
those of its corresponding Acquiring Portfolio. Each Transferor Portfolio and
Acquiring 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 Transferor Portfolio and
corresponding Acquiring Portfolio is subject.
9
<PAGE> 14
The investment objective of each Acquiring Portfolio represents fundamental
policies of each such Acquiring Portfolio and may not be changed without the
approval of the holders of a majority of the outstanding shares of the Acquiring
Portfolio. Except for certain investment restrictions, the policies by which an
Acquiring Portfolio seeks to achieve its investment objective may be changed by
the Trust's Board without the approval of shareholders.
The following is a description of the investment objective and policies of
each Transferor Portfolio and the corresponding Acquiring Portfolio. More
complete descriptions of the money market instruments in which the Transferor
Portfolios and Acquiring Portfolios may invest and of the options, futures,
currency and other derivative transactions that certain Transferor Portfolios
and Acquiring Portfolios may engage in are set forth in the Statement of
Additional Information. A description of the debt security ratings used by the
Transferor Portfolios and Acquiring Portfolios and assigned by Moody's Investors
Service, Inc. ("Moody's") or Standard and Poor's Corporation ("Standard &
Poor's") 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 Transferor Portfolios or Acquiring Portfolios will be achieved.
WORLDWIDE GROWTH TRUST AND GLOBAL EQUITY TRUST
Worldwide Growth Trust
The investment objective of the Worldwide Growth Trust is long-term growth
of capital. The Worldwide Growth Trust seeks to attain this objective by
investing, under normal circumstances, at least 65% of the portfolio's total
assets in equity securities of growth companies in a variety of markets
throughout the world.
The Worldwide Growth Trust will emphasize common stocks of both emerging
and established growth companies that generally have proven performance records
and strong market positions. The portfolio's holdings will usually consist of
investments in companies in various countries throughout the world, but it will
always invest at least 65% of its total assets in three or more countries. The
portfolio will not invest more than 50% of its total assets in the securities of
any one foreign country.
The Worldwide Growth Trust has the ability to purchase securities in any
foreign country as well as in the United States. Foreign investments of the
portfolio may include securities issued by companies located in countries not
considered to be major industrialized nations. Such countries are subject to
10
<PAGE> 15
more economic, political and business risk than major industrialized nations,
and the securities they issue are expected to be more volatile and more
uncertain as to payments of interest and principal. Investments of the portfolio
may include securities created through the Brady Plan, a program under which
heavily indebted countries have restructured their bank debt into bonds.
Since the Worldwide Growth Trust's assets will be invested primarily in
foreign securities and since substantially all of the portfolio's revenues will
be received in foreign currencies, the portfolio's net asset values will be
affected by changes in currency exchange rates. The portfolio will pay dividends
in dollars and will incur currency conversion costs.
The Worldwide Growth Trust may invest in convertible securities, preferred
stocks, bonds, debentures, and other corporate obligations when the subadviser
believes that these investments offer opportunities for capital appreciation.
Current income will not be a substantial factor in the selection of these
securities.
The portfolio will only invest in bonds, debentures, and corporate
obligations -- other than convertible securities and preferred stocks -- rated
investment grade (BBB or higher) at the time of purchase or, if unrated, of
comparable quality in the opinion of the subadviser. Convertible securities and
preferred stocks purchased by the portfolio may be rated in medium and lower
categories by Moody's or Standard & Poor's (Ba or lower by Moody's and BB or
lower by Standard & Poor's), but will not be rated lower than B. The portfolio
may also invest in unrated convertible securities and preferred stocks in
instances in which the subadviser 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 portfolio
rated in categories no lower than B. At no time will the portfolio have more
than 5% of its total assets invested in any fixed-income securities (excluding
preferred stocks) 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 portfolio is not required to dispose of debt securities whose ratings are
downgraded below these ratings subsequent to the portfolio's purchase of the
securities, unless such a disposition is necessary to reduce the portfolio's
holdings of such securities to less than 5% of its total assets.
Up to 100% of the assets of the Worldwide Growth 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 the subadviser determines it to be appropriate
for purposes of enhancing liquidity or preserving capital in light of
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<PAGE> 16
prevailing market or economic conditions. The portfolio may also acquire
certificates of deposit and bankers' acceptances of banks which meet criteria
established by the Trust's Trustees. While the portfolio 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 portfolio
will be foregoing the opportunity to benefit from capital growth resulting from
increases in the value of equity investments.
The Worldwide Growth Trust may invest in the securities of small and
medium-sized companies. The subadviser considers small and medium-sized
companies to be those which are still in the developing stages of their life
cycles and are attempting to achieve rapid growth in both sales and earnings.
Investments in small sized companies involve greater risk than is customarily
associated with more established companies. For a description of these risks see
"Additional Information on Investment Policies and Techniques and Risk
Factors -- Small Company and Emerging Growth Securities."
The Worldwide Growth 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 "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 the Trust -- Tax
Matters."
The Worldwide Growth Trust is currently authorized to use all of the
various investment strategies referred to as "Hedging and Other Strategic
Transactions" under "Additional Information on Investment Policies and
Techniques and Risk Factors." The Statement of Additional Information contains a
description of these strategies and of certain risks associated therewith.
Global Equity Trust
The investment objective of the Global Equity Trust is long-term capital
appreciation. The Global Equity Trust seeks to attain this objective by
investing the portfolio's assets primarily in common and preferred stocks,
convertible securities, rights and warrants to purchase common stocks, American
and Global Depository Receipts and other equity securities of issuers throughout
the world, including issuers located in the U.S. and emerging market countries.
Under normal circumstances, at least 65% of the value of the total assets
of the Global Equity Trust will be invested in equity securities and at least
20% of the value of the portfolio's total assets will be invested in the common
stocks of U.S. issuers. The portfolio may also invest in money market
12
<PAGE> 17
instruments. Although the portfolio intends to invest primarily in securities
listed on stock exchanges, it will also invest in equity securities that are
traded over-the-counter or that are not admitted to listing on a stock exchange
or dealt in on a regulated market. As a result of the absence of a public
trading market, such securities may pose liquidity risks.
The subadviser's approach is oriented to individual stock selection and is
value driven. In selecting stocks for the portfolio, the subadviser initially
identifies those stocks that it believes to be undervalued in relation to the
issuer's assets, cash flow, earnings and revenues, and then evaluates the future
value of such stocks by running the results of an in-depth study of the issuer
through a dividend discount model. In selecting investments, the subadviser
utilizes the research of a number of sources, including an international
affiliate of the subadviser. Portfolio holdings are regularly reviewed and
subjected to fundamental analysis to determine whether they continue to conform
to the subadviser's value criteria. Equity securities which no longer conform to
such investment criteria will be sold. Although the portfolio will not invest
for short-term trading purposes, investment securities may be sold from time to
time without regard to the length of time they have been held.
The Global Equity Trust may engage in forward foreign currency exchanges
and when-issued or delayed delivery securities.
The Global Equity 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, including the risks of the possible increased likelihood of expropriation
or the return to power of a communist regime which would institute policies to
expropriate, nationalize or otherwise confiscate investments are described under
the caption "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 the Trust -- Tax Matters."
The Global Equity Trust is currently authorized to use all of the various
investment strategies referred to as "Hedging and Other Strategic Transactions."
The Statement of Additional Information contains a description of these
strategies and of certain risks associated therewith.
13
<PAGE> 18
Differences between the Worldwide Growth Trust and the Global Equity Trust
<TABLE>
<CAPTION>
WORLDWIDE GROWTH TRUST GLOBAL EQUITY TRUST COMMENT
- ---------------------- ------------------- -------
<S> <C> <C>
Authorized to invest Authorized to invest The Global Equity
in any country, in any country, Trust will, under
including the United including the United normal circumstances,
States. States; under normal have at least 20% of
circumstances, its portfolio
invests at least 20% invested in the
of the value of the United States,
portfolio's total whereas the Worldwide
assets in the common Growth Trust is not
stocks of U.S. required to maintain
issuers. this level of
investment.
(Historically,
however, the
Worldwide Growth
Trust has invested
more than 20% of its
assets in the United
States.)
Emphasizes the common Emphasizes common The Global Equity
stocks of both stocks of undervalued Trust seeks to invest
emerging and companies (i.e., in undervalued
established growth value investing). companies, whereas
companies (i.e., the Worldwide Growth
growth investing). Trust seeks to invest
in growth companies.
</TABLE>
CAPITAL GROWTH BOND TRUST AND INVESTMENT QUALITY BOND TRUST
Capital Growth Bond Trust
The investment objective of the Capital Growth Bond Trust is to achieve
growth of capital by investing debt securities of medium-grade or better debt
securities, with income as a secondary consideration.
The 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 the subadviser 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 the
subadviser expects interest rates to rise or believes that market or economic
conditions otherwise warrant such action, the portfolio may invest
14
<PAGE> 19
substantially all 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 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 portfolio'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),
Standard & Poor'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, Standard & Poor's,
or Fitch's, are considered by the subadviser 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 portfolio drop below investment grade, the
portfolio will make every effort to dispose of it promptly so long as to do so
would not be detrimental to the portfolio.
Government obligations in which the Capital Growth Bond Trust may invest
include those of foreign governments provided they are denominated in U.S.
dollars. The portfolio may purchase securities on a forward-commitment,
when-issued or delayed-delivery basis.
The 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 portfolio 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 portfolio's total
assets.
The 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 Depository
Receipts ("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
15
<PAGE> 20
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). Moreover, substantial investments in
foreign securities may have adverse tax implications.
The Capital Growth Bond Trust is currently authorized to use all of the
investment strategies referred to as "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 portfolio. The Statement of Additional
Information contains a description of these strategies and of certain risks
associated therewith.
Investment Quality Bond Trust
The investment objective of the Investment Quality Bond Trust is to provide
a high level of current income consistent with the maintenance of principal and
liquidity.
The Investment Quality Bond Trust seeks to achieve its objective by
investing the portfolio's assets primarily in investment grade corporate bonds
and U.S. Government bonds with intermediate to longer term maturities.
Investment management will emphasize sector analysis, which focuses on relative
value and yield spreads among security types and among quality, issuer, and
industry sectors, call protection and credit research. Credit research on
corporate bonds is based on both quantitative and qualitative criteria
established by the subadviser, such as an issuer's industry, operating and
financial profiles, business strategy, management quality, and projected
financial and business conditions. The subadviser will attempt to maintain a
highly steady and possibly growing income stream.
At least 65% of the Investment Quality Bond Trust's assets will be invested
in:
(1) marketable debt securities of domestic issuers and foreign issuers
(payable in U.S. dollars) rated at the time of purchase "A" or better
by Moody's or Standard & Poor's (or, if unrated, of comparable quality
as determined by the subadviser);
(2) securities issued or guaranteed as to principal or interest by the U.S.
Government or its agencies or instrumentalities, including mortgage
backed securities; and
(3) cash and certain cash equivalent securities.
16
<PAGE> 21
The balance of the Investment Quality Bond Trust's investments may include:
domestic and foreign debt securities rated below "A" by Moody's and Standard &
Poor's (and unrated securities of comparable quality as determined by the
subadviser), preferred stocks, convertible securities (including those issued in
the Euromarket) and securities carrying warrants to purchase equity securities,
privately placed debt securities, asset-backed securities and privately issued
mortgage securities. At least 65% of the Investment Quality Bond Trust's assets
will be invested in bonds and debentures.
In pursuing its investment objective, the Investment Quality Bond Trust may
invest up to 20% of its assets in domestic and foreign high yield (high risk)
corporate and government debt securities, commonly known as "junk bonds" (i.e.,
rated "Ba" or below by Moody's or "BB" or below by Standard & Poor's, or if
unrated, of comparable quality as determined by the subadviser). No minimum
rating standard is required for a purchase by the portfolio. Domestic and
foreign high yield debt securities involve comparatively greater risks,
including price volatility and risk of default in the payment of interest and
principal, than higher-quality securities.
The Investment Quality Bond Trust may also invest in debt securities
carrying the fourth highest quality rating ("Baa" by Moody's or "BBB" by
Standard & Poor's) and unrated securities of comparable quality as determined by
the subadviser. While such securities are considered investment grade quality
and are deemed to have adequate capacity for payment of principal and interest,
investments in such securities involve a higher degree of risk than that
associated with investments in debt securities in the higher rating categories;
such securities lack outstanding investment characteristics and in fact have
speculative characteristics as well. For example, 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. While
the Investment Quality Bond Trust may only invest up to 20% of its assets in
bonds rated below "Baa" by Moody's or "BBB" by Standard & Poor's (or, if
unrated, of comparable quality as determined by the subadviser), it is not
required to dispose of bonds that may be downgraded after being purchased by the
Investment Quality Bond Trust, even though such downgrade may cause the
portfolio to exceed this 20% maximum.
The Investment Quality Bond Trust is currently authorized to use all of the
various investment strategies referred to as "Hedging and Other Strategic
Transactions." The Statement of Additional Information contains a description of
these strategies and of certain risks associated therewith. The Investment
Quality Bond 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
17
<PAGE> 22
under the caption "Additional Information on Investment Policies and Techniques
and Risk Factors -- Foreign Securities" in this Prospectus. Moreover,
substantial investments in foreign securities may have adverse tax implications
as described under "Additional Information About the Trust -- Tax Matters."
Differences between the Capital Growth Bond Trust and the Investment Quality
Bond Trust
<TABLE>
<CAPTION>
CAPITAL GROWTH INVESTMENT QUALITY
BOND TRUST BOND TRUST COMMENT
-------------- ------------------ -------
<S> <C> <C>
Differs from most Stated fundamental The Investment
bond funds in that investment objective Quality Bond Trust
its primary is to provide a high seeks current
investment objective level of current income, not capital
is capital income. appreciation.
appreciation, not
income.
Stated fundamental Stated fundamental Because the
investment objective investment objective Investment Quality
is to achieve growth is to provide a high Bond Trust's
of capital by level of current investment approach
investing in income consistent is not contained in
medium-grade or with the maintenance its objective, it is
better debt of principal and non- fundamental and
securities, with liquidity. can be changed by
income as a secondary the Trust's Board
consideration. without shareholder
approval, unlike the
investment approach
of the Capital
Growth Bond Trust.
</TABLE>
18
<PAGE> 23
<TABLE>
<CAPTION>
CAPITAL GROWTH INVESTMENT QUALITY
BOND TRUST BOND TRUST COMMENT
-------------- ------------------ -------
<S> <C> <C>
Does not invest in Authorized to invest The Investment
debt securities rated up to 35% of its Quality Bond Trust
below BBB or unrated total assets in debt is subject to the
securities of similar securities rated additional risks
quality. below A, and may associated with
invest up to 20% of investing in lower
its assets in high rated securities.
yield (high risk)
debt securities
rated below
investment grade
(commonly known as
"junk bonds") and
unrated securities
of similar quality.
Historically,
however, the
Investment Quality
Bond Trust has not
invested more than
15% of its assets in
high yield (high
risk) debt
securities.
</TABLE>
ADDITIONAL INVESTMENT TRUST PORTFOLIOS. In addition to the Transferor
Portfolios and the Acquiring Portfolios referred to above, the Trust currently
offers the following thirty-two additional portfolios.
Pacific Rim Emerging Markets Trust
Science & Technology Trust
International Small Cap Trust
Emerging Small Company Trust (formerly, Emerging Growth Trust)
Pilgrim Baxter Growth Trust
Small/Midcap Trust
International Stock Trust
Small Company Value Trust
Equity Trust
Growth Trust
Quantitative Equity Trust
Equity Index Trust
Blue Chip Growth Trust
Real Estate Securities Trust
Value Trust
International Growth and Income Trust
19
<PAGE> 24
Growth and Income Trust
Equity-Income Trust
Balanced Trust
Aggressive Asset Allocation Trust
High Yield Trust
Moderate Asset Allocation Trust
Conservative Asset Allocation Trust
Strategic Bond Trust
Global Government Bond Trust
U.S. Government Securities Trust
Money Market Trust
Lifestyle Aggressive 1000 Trust
Lifestyle Growth 820 Trust
Lifestyle Balanced 640 Trust
Lifestyle Moderate 460 Trust
Lifestyle Conservative 280 Trust
FEES AND EXPENSES. The tables which follow set forth the ratios of
expenses to average net assets and expense examples for each of the Transferor
Portfolios and the corresponding Acquiring Portfolios for the fiscal year ended
December 31, 1998, and the pro forma expense ratios and expense examples for the
shares of the corresponding Acquiring Portfolios as if the Reorganization had
occurred at the commencement of the fiscal year ended December 31, 1998, based
upon the fee arrangements that will be in place upon the consummation of the
Reorganization. Therefore, the tables describe the fees and expenses a
shareholder can expect to incur if the Reorganization is consummated.
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
WORLDWIDE GLOBAL PRO FORMA
GROWTH TRUST EQUITY TRUST (UNAUDITED)
------------ ------------ -----------
<S> <C> <C> <C>
Advisory Fee..................... 1.00% 0.90% 0.90%
Other Expenses*.................. 0.21% 0.11% 0.11%
Total Annual Operating
Expenses....................... 1.21% 1.01% 1.01%
</TABLE>
20
<PAGE> 25
<TABLE>
<CAPTION>
CAPITAL GROWTH INVESTMENT QUALITY PRO FORMA
BOND TRUST BOND TRUST (UNAUDITED)
-------------- ------------------ -----------
<S> <C> <C> <C>
Advisory Fee............... 0.65% 0.65% 0.65%
Other Expenses*............ 0.07% 0.07% 0.07%
Total Annual Operating
Expenses................. 0.72% 0.72% 0.72%
</TABLE>
- ---------------
* "Other Expenses" include custody fees, registration fees, legal fees, audit
fees, trustees' fees, insurance fees and other miscellaneous expenses.
Advisory fees are reduced or Manulife Securities reimburses the Trust 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 the Trust's
business) applicable to a portfolio exceeds a specified annual rate (e.g.,
.75% in the case of the Worldwide Growth Trust and the Global Equity Trust or
.50% in the case of the Capital Growth Bond Trust and the Investment Quality
Bond Trust). These expense limitations continue in effect from year to year
unless terminated by Manulife Securities at any year end upon 30 days' notice
to the Trust.
EXAMPLES: These Examples are intended to help you compare the cost of investing
in the Transferor Portfolios with the cost of investing in other mutual fund
portfolios. The Examples assume that you invest $10,000 in a particular
portfolio for the time periods indicated and then redeem all of your shares at
the end of those periods. The Examples also assume that your investment has a 5%
return each year and that such portfolio's operating expense levels remain the
same as set forth in the table above. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
Worldwide Growth Trust and Global Equity Trust
<TABLE>
<CAPTION>
WORLDWIDE GLOBAL
GROWTH TRUST EQUITY TRUST PRO FORMA
(UNAUDITED) (UNAUDITED) (UNAUDITED)
-------------- ------------------ -----------
<S> <C> <C> <C>
1 Year................. $ 123 $ 103 $ 103
3 Years................ $ 384 $ 322 $ 322
5 Years................ $ 665 $ 558 $ 558
10 Years............... $1,466 $1,236 $1,236
</TABLE>
21
<PAGE> 26
Capital Growth Bond Trust and Investment Quality Bond Trust
<TABLE>
<CAPTION>
CAPITAL GROWTH INVESTMENT QUALITY
BOND TRUST BOND TRUST PRO FORMA
(UNAUDITED) (UNAUDITED) (UNAUDITED)
-------------- ------------------ -----------
<S> <C> <C> <C>
1 Year................. $ 74 $ 74 $ 74
3 Years................ $ 230 $ 230 $ 230
5 Years................ $ 401 $ 401 $ 401
10 Years............... $ 894 $ 894 $ 894
</TABLE>
THE EXAMPLES ASSUME REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS. THE
EXAMPLES SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES OR ANNUAL RETURN OF SHARES OF AN ACQUIRING PORTFOLIO; 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 Acquiring 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 Acquiring Portfolios indicated above if the Reorganization is
consummated. The purpose of these tables is to assist investors in understanding
the expenses an investor in each of the Transferor Portfolios and corresponding
Acquiring Portfolios will bear. The variable contracts issued by Manulife North
America, Manulife New York and Manufacturers America provide for charges not
reflected in the above table.
The expense ratio of the Global Equity Trust is lower than that of the
Worldwide Growth Trust, while the expense ratio of the Investment Quality Bond
Trust is substantially the same as that of the Capital Growth Bond Trust.
The Board of Trustees of the Trust, including all of the Independent
Trustees, has unanimously concluded that (i) the Reorganization is in the best
interests of each Transferor Portfolio, as well as its shareholders and the
contractholders whose contract values are invested in shares thereof; and (ii)
the interests of existing shareholders of the Transferor Portfolios and
contractholders would not be diluted as a result of the Reorganization. The
Trust's Board has unanimously recommended to shareholders approval of the
Reorganization. See "Information About the Reorganization -- Reasons for the
Reorganization."
PURCHASE AND REDEMPTION. The purchase and redemption procedures with
respect to the Transferor Portfolios are identical to those of the corresponding
Acquiring Portfolios. Shares of the Trust are offered continuously, without
sales charge, at prices equal to the respective net asset values of the
portfolio being purchased. The Trust sells its shares directly without the use
of
22
<PAGE> 27
any underwriter. Shares of the Trust 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 contractholder or after any other purchase or
redemption order is received by the Trust. 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.
DIVIDENDS AND DISTRIBUTIONS. The dividends and distributions procedures
with respect to the Transferor Portfolios are identical to those of the
corresponding Acquiring Portfolios. The Trust intends to declare as dividends
substantially all of the net investment income, if any, of each of the Acquiring
Portfolios. For dividend purposes, net investment income of each of the
Acquiring Portfolios, will consist of all payments of dividends (other than
stock dividends) or interest received by such portfolio less the estimated
expenses of such portfolio (including fees payable to Manulife Securities).
Dividends from the net investment income and the net realized short-term and
long-term capital gains, if any, for each Acquiring Portfolio, will be declared
not less frequently than annually and reinvested in additional full and
fractional shares of that Acquiring Portfolio or paid in cash.
FEDERAL INCOME TAX CONSEQUENCES. The Trust will have received an opinion
from Simpson Thacher & Bartlett, counsel to the Trust in connection with the
Reorganization, to the effect that, based upon certain facts, assumptions and
representations, the Reorganization will constitute a tax-free reorganization
within the meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code"). If the Reorganization constitutes a tax-free
reorganization, no gain or loss will be recognized by the Transferor Portfolios
or the Acquiring Portfolios or the shareholders of the Transferor Portfolios as
a result of the Reorganization. See "Information About the
Reorganization -- Federal Income Tax Consequences."
PRINCIPAL RISK FACTORS. The risks associated with an investment in an
Acquiring Portfolio, in general, are those typically associated with investing
in a managed portfolio of the specific types of instruments in which such
Acquiring Portfolio invests. Both of the Acquiring Portfolios may invest to
varying degrees in the securities of foreign issuers and the Investment Quality
Bond Trust may invest in high yield (high risk) securities which entail certain
additional risks. Further information relating to these and other risks
associated with an investment in the Acquiring Portfolios is set forth below
under "Additional Information on Investment Policies and Techniques and Risk
Factors."
23
<PAGE> 28
WORLDWIDE GROWTH TRUST AND GLOBAL EQUITY TRUST
Risks of investment in these portfolios relate primarily to fluctuations in
stock prices and risks associated with foreign investing.
CAPITAL GROWTH BOND TRUST AND INVESTMENT QUALITY 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 Investment Quality Bond Trust includes the additional risks
associated with its ability to invest up to 20% of its assets in high yield
(high risk) debt securities, commonly known as "junk bonds," including the
greater risk of default by the issuers of such bonds, and its ability to invest
up to 20% of its assets in foreign securities.
INFORMATION ABOUT THE REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION. The following summary of the Plan is
qualified in its entirety by reference to the form of the Plan attached to this
Prospectus/Proxy Statement as Exhibit A. The Plan provides that each Acquiring
Portfolio will acquire all of the assets, subject to all of the liabilities, of
the corresponding Transferor Portfolio in exchange for shares of such Acquiring
Portfolio. Subject to the satisfaction of the conditions described below, such
acquisitions shall take place on April 30, 1999 (the "Exchange Date"), or such
later date as may be agreed upon by the parties. The net asset value per share
for each Acquiring Portfolio and each Transferor Portfolio will be determined by
dividing each Acquiring Portfolio's assets, less liabilities, by the total
number of its outstanding shares. Portfolio assets will be valued in accordance
with the valuation practices of the Acquiring Portfolios. See "General
Information -- Shares of the Trust" in the Prospectus.
The number of full and fractional shares of an Acquiring Portfolio received
by a shareholder of the corresponding Transferor Portfolio will be equal in
value to the value of that shareholder's shares of the corresponding Transferor
Portfolio as of the close of regularly scheduled trading on the New York Stock
Exchange on the Exchange Date of the Reorganization. As promptly as practicable
after the Exchange Date, each Transferor 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 Exchange Date the shares of the
corresponding Acquiring Portfolio received by that Transferor Portfolio in the
Reorganization. Such liquidation and distribution will be accomplished by the
establishment of accounts on the share records of the Acquiring Portfolios in
the names of the shareholders of the corresponding Transferor Portfolio, each
account representing the respec-
24
<PAGE> 29
tive pro rata number of shares of such Acquiring Portfolio due the shareholder.
After such distribution, the Trust shall take all necessary steps under
Massachusetts law, the Trust's Declaration of Trust and any other applicable law
to effect a complete dissolution of each Transferor Portfolio.
The Board has determined, with respect to the Transferor Portfolios and the
Acquiring Portfolios, 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 Transferor Portfolios
that require shareholder approval for amendment prohibit each Transferor
Portfolio from engaging in activities such as investing more than a stated
percentage of its assets in an issuer's securities. By approving the Plan, the
shareholders of the Transferor 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 Plan, including that the holders of at least a majority of the
outstanding voting securities of each Transferor Portfolio entitled to vote
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. As used in this Prospectus/Proxy Statement, a "majority of
the outstanding voting securities" means the affirmative vote of the lesser of
(1) 67% or more of the voting securities of a portfolio present at the Meeting,
if the holders of more than 50% of the outstanding voting securities of such
portfolio are present or represented by proxy or (2) more than 50% of the
outstanding voting securities of the portfolio. On November 13, 1998, the Trust
filed an Application with the Commission requesting exemption from certain
provisions of the 1940 Act as they relate to the proposed Reorganization.
Manulife, Manufacturers Securities, Manulife North America, Manulife New York,
Manufacturers America, Manufacturers U.S.A. and Manufacturers Adviser
Corporation 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 the Trust." In addition, the proposal to approve the Plan will
not be submitted to shareholders of the Transferor 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
25
<PAGE> 30
exemptive relief or that it will be granted in time for the Special Meeting of
Shareholders to be held on April 27, 1999, as scheduled.
The Plan may be terminated and the Reorganization abandoned at any time
prior to the Effective Time of the Reorganization, before or after approval by
the shareholders of the Transferor Portfolios, by either the Transferor
Portfolios or the Acquiring Portfolios if (i) any material condition or covenant
set forth in the Plan has not been fulfilled or waived by the party entitled to
its benefits, or (ii) there has been a material breach or default by the other
party or (iii) the Board determines that proceeding with the Reorganization is
not in the best interests of the Transferor Portfolios or the Acquiring
Portfolios, respectively, or their respective shareholders or contractholders.
The Plan 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 Acquiring Portfolios in connection with
the Reorganization, which will be payable by such Acquiring Portfolios),
including the cost of a proxy soliciting agent that has been retained will be
borne by the Transferor Portfolios and the Acquiring Portfolios. See "Voting
Information."
Approval of the Plan will require a majority of the outstanding voting
securities of each Transferor Portfolio. See "Voting Information." If the
Reorganization is not approved by the shareholders of each Transferor Portfolio
or is not consummated for any other reason, the Board will consider other
possible courses of action. See "Voting Information." THE BOARD HAS UNANIMOUSLY
RECOMMENDED APPROVAL OF THE PLAN.
Shareholders of each Transferor Portfolio will receive shares of the
corresponding Acquiring Portfolio in accordance with the procedures provided for
in the Plan as described above. Each such share will be fully paid and
nonassessable when issued (except as noted under "Summary -- Proposed
Transaction") and transferable without restrictions and will have no preemptive
or conversion rights.
DESCRIPTION OF THE SECURITIES TO BE ISSUED. The Trust has an unlimited
number of authorized shares of beneficial interest, par value $0.01 per share.
These authorized shares may be divided into series and classes thereof. The
Declaration of Trust authorizes the Board to issue shares in different series.
In addition, the Declaration of Trust authorizes the Board to create new series
and to name the rights and preferences of the shareholders of each of the
series. The Board does not need additional shareholder action to divide the
shares into separate series or to name the shareholders' rights and preferences.
26
<PAGE> 31
Each Transferor Portfolio and Acquiring Portfolio is a series of the Trust.
Currently, none of the Trust series issues multiple classes of shares, although
they may do so in the future. Each share of each series represents an equal
proportionate interest in that series with each other share of that series. The
shares of each series of the Trust participate equally in the earnings,
dividends and assets of the particular series. Fractional shares have
proportionate fractional rights to full shares. Expenses of the Trust which are
not attributable to a specific series are allocated to all series of the Trust
in a fair and equal manner, as determined by management of the Trust. Generally,
shares of each series will vote separately. Shares of all series will vote
together when the 1940 Act requires it, for example, to elect the Trustees or to
select independent accountants. The Trust is not required to hold shareholder
meetings annually, although shareholder meetings may be called from time to
time. There are no conversion or preemptive rights in connection with shares of
the Trust.
REASONS FOR THE REORGANIZATION. The principal purpose of the
Reorganization is to provide a means by which shareholders of each of the
Transferor Portfolios, in combination with the corresponding Acquiring
Portfolios, can pursue substantially similar investment objectives and policies
in the context of a larger fund with better investment performance and
potentially greater economies of scale.
In determining whether to approve the Reorganization and recommend its
approval to shareholders, the Board (including the Independent Trustees (with
the advice and assistance of independent legal counsel), made an inquiry into a
number of matters and considered the following factors, among others: (1)
expense ratios and available information regarding the fees and expenses of each
Transferor Portfolio and each corresponding Acquiring Portfolio (historical and
pro forma), as well as of similar funds; (2) the compatibility of the investment
objective, policies and restrictions of each Transferor Portfolio and each
corresponding Acquiring Portfolio; (3) the advantages to each Transferor
Portfolio of investing in larger asset pools with potentially greater
diversification; (4) the historical performance of each Transferor Portfolio and
each Acquiring Portfolio; (5) the investment experience, expertise and resources
of each subadviser to the Transferor Portfolios and the Acquiring Portfolios;
(6) the terms and conditions of the Reorganization and whether the
Reorganization would result in dilution of shareholder or contractholder
interests; (7) any direct and indirect costs to be incurred by each Transferor
Portfolio and each corresponding Acquiring Portfolio as a result of the
Reorganization; (8) the tax consequences of the Reorganization; and (9) possible
alternatives to the Reorganization.
27
<PAGE> 32
In reaching the decision to recommend approval of the Reorganization, the
Board concluded that the participation of each Transferor Portfolio and each
corresponding Acquiring Portfolio in the Reorganization is in the best interests
of each Transferor Portfolio and each corresponding Acquiring Portfolio, as well
as the best interests of shareholders and the contractholders whose contract
values are invested in shares of the Transferor Portfolios and the Acquiring
Portfolios, and that the interests of existing shareholders and contractholders
will not be diluted as a result of this transaction. Their conclusion was based
on a number of factors, including the following:
1. The expense ratios of the Acquiring Portfolios are comparable or lower
than those of the corresponding Transferor Portfolios.
2. The Reorganization will permit shareholders of each Transferor Portfolio
to pursue similar investment goals in the context of a larger fund
immediately following consummation of the Reorganization. It is
anticipated that the combined Transferor and Acquiring Portfolios will
experience more rapid asset growth in the future than would have been
the case for the Transferor 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.
3. (a) The one year annualized return as of December 31, 1998 of the Global
Equity Trust exceeded that of the Worldwide Growth Trust. The historical
performance of these portfolios could not be compared meaningfully for
any longer period, as the inception date for the Worldwide Growth Trust
was January 1, 1997.
(b) While the ten year annualized return as of December 31, 1998 of the
Capital Growth Bond Trust exceeded that of the Investment Quality Bond
Trust, the one year annualized return and the five year annualized
return as of December 31, 1998 of the Investment Quality Bond Trust
exceeded that of the Capital Growth Bond Trust.
FEDERAL INCOME TAX CONSEQUENCES. As a condition to the consummation of the
Reorganization, the Transferor Portfolios and the Acquiring Portfolios will have
received an opinion from Simpson Thacher & Bartlett 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 Code with respect to each Transferor Portfolio and its
corresponding Acquiring Portfolio; (2) no gain or loss will be recognized by any
of the Transferor Portfolios or the corresponding Acquiring
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<PAGE> 33
Portfolios upon the transfer of all of the assets and liabilities, if any, of
each Transferor Portfolio to its corresponding Acquiring Portfolio solely in
exchange for shares of the Acquiring Portfolio or upon the distribution of the
shares of the Acquiring Portfolio to the holders of shares of the Transferor
Portfolio solely in exchange for all of their shares of the Transferor
Portfolio; (3) no gain or loss will be recognized by shareholders of any of the
Transferor Portfolios upon the exchange of such Transferor Portfolio's shares
solely for shares of the corresponding Acquiring Portfolio; (4) the holding
period and tax basis of the shares of each Acquiring Portfolio received by each
holder of shares of the corresponding Transferor Portfolio pursuant to the
Reorganization will be the same as the holding period and tax basis of the
shares of the Transferor Portfolio held by the shareholder (provided the shares
of the Transferor Portfolios were held as a capital asset on the date of the
Reorganization) immediately prior to the Reorganization; and (5) the holding
period and tax basis of the assets of each of the Transferor Portfolios acquired
by its corresponding Acquiring Portfolio will be the same as the holding period
and tax basis of those assets to each of the Transferor Portfolios immediately
prior to the Reorganization.
CAPITALIZATION. The following tables show the capitalization of each
Transferor Portfolio and the corresponding Acquiring Portfolio as of December
31, 1998, and on a pro forma combined basis as of that date for the
Reorganization giving effect to the proposed acquisition of assets at net asset
value.
<TABLE>
<CAPTION>
PRO FORMA
WORLDWIDE GLOBAL EQUITY FOR
GROWTH TRUST TRUST REORGANIZATION
-------------- ------------------ --------------
<S> <C> <C> <C>
DECEMBER 31, 1998
Net Assets............. $40,705,902 $928,563,621 $ 969,269,523
Net Asset Value Per
Share................ $ 15.15 $ 20.38 $ 20.38
Shares Outstanding..... 2,687,308 45,570,323 47,567,669
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
CAPITAL GROWTH INVESTMENT QUALITY FOR
BOND TRUST BOND TRUST REORGANIZATION
-------------- ------------------ --------------
<S> <C> <C> <C>
DECEMBER 31, 1998
Net Assets............. $65,111,946 $312,110,744 $ 377,222,690
Net Asset Value Per
Share................ $ 12.09 $ 12.46 $ 12.46
Shares Outstanding..... 5,386,315 25,049,137 30,274,815
</TABLE>
29
<PAGE> 34
VOTING INFORMATION
Proxies from the shareholders of each Transferor Portfolio are being
solicited by the Board for the Special Meeting of Shareholders to be held on
April 27, 1999 at 73 Tremont Street, Boston, Massachusetts 02108, 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 Plan. Approval of the Plan
will require a majority of the outstanding voting securities of each Transferor
Portfolios.
Voting instructions may be revoked at any time prior to the voting of the
shares represented thereby by: (i) mailing written instructions addressed to the
Secretary of the Trust at 116 Huntington Avenue, Boston, Massachusetts 02116 or
(ii) signing and returning a new voting instructions form, in each case if
received by the Trust by April 26, 1999. ALL PROPERLY EXECUTED VOTING
INSTRUCTIONS RECEIVED BY APRIL 26, 1999 WILL BE VOTED AS SPECIFIED IN THE VOTING
INSTRUCTIONS, OR, IF NO SPECIFICATION IS MADE, IN FAVOR OF THE PROPOSALS
REFERRED TO IN THIS PROSPECTUS/PROXY STATEMENT.
In the event the necessary quorum to transact business or the vote required
to approve a Proposal is not obtained at the Meeting, the persons named as
proxies may propose one or more adjournments of the Meeting in accordance with
applicable law, to permit further solicitation of proxies. Any such adjournment
as to a matter will require the affirmative vote of the holders of a majority of
the Trust's shares present in person or by proxy at the Meeting and entitled to
vote thereon. The persons named as proxies will vote in favor of such
adjournment those proxies which they are entitled to vote in favor of the
Proposals and will vote against any such adjournment those proxies to be voted
against the Proposals.
Abstentions are counted as shares eligible to vote at the Meeting in
determining whether a quorum is present, but do not count as votes cast with
respect to the Reorganization proposal. Under the 1940 Act, the affirmative vote
necessary to approve a matter under consideration may be determined with
reference to a percentage of votes present at the Meeting, which would have the
effect of treating abstentions as if they were votes against the Reorganization
proposal.
The cost of the preparation and distribution of these proxy materials will
be borne by the Transferor Portfolios and the Acquiring Portfolios. In addition
to the solicitation of proxies by the use of the mails, proxies may be solicited
by officers and employees of the Trust, 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
30
<PAGE> 35
authorization for the execution of proxies. For those services, they will be
reimbursed by the Transferor Portfolios and the Acquiring Portfolios for their
out-of-pocket expenses.
Under the Plan, shareholders of each Transferor Portfolio will receive
shares of the corresponding Acquiring Portfolio, as described above, with an
aggregate net asset value equal to the value of the shareholder's investment in
each Transferor 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 Transferor Portfolio may redeem shares at the then-current net asset value
prior to the Exchange Date.
Shareholders of the Transferor Portfolios of record at the close of
business on February 28, 1999 (the "Record Date") will be entitled to vote at
the Meeting or any adjournment of the Meeting. The holders of 30% of the shares
outstanding of each such Transferor 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 under "Information About the
Reorganization -- Agreement and Plan of Reorganization," a majority of the
outstanding voting securities of each Transferor 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 Transferor Portfolios are sold only to Manulife North
America, Manulife New York, Manufacturers America and Manufacturers U.S.A. and
to the separate accounts of these insurance companies mentioned earlier.
Although, as of the Record Date, Manulife North America, Manulife New York,
Manufacturers America and Manufacturers U.S.A. legally owned all of the shares
of the Transferor Portfolios, the companies will vote all shares of the
Transferor Portfolios issued to such companies in proportion to the timely
instructions received from owners of the contracts participating in the separate
accounts described above which are registered under the 1940 Act.
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<PAGE> 36
As of the Record Date, the number of votes eligible to be cast at the
Meeting with respect to each Transferor Portfolio is as follows:
<TABLE>
<CAPTION>
VOTES HELD BY
VOTES HELD BY VOTES HELD BY MANUFAC-
NUMBER OF MANULIFE MANULIFE TURERS
PORTFOLIO ELIGIBLE VOTES* NORTH AMERICA NEW YORK AMERICA
- --------- ---------------------- ---------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Worldwide Growth
Trust.............. 2,615,332 2,325,091 165,607 124,634
---------------- ---------------- ------------- -------------
Capital Growth Bond
Trust.............. 5,371,413 939,991 71,069 4,358,270
---------------- ---------------- ------------- -------------
<CAPTION>
VOTES HELD
BY
MANUFAC-
TURERS
PORTFOLIO U.S.A.
- --------- ---------------
<S> <C>
Worldwide Growth
Trust.............. --
---------
Capital Growth Bond
Trust.............. 2,083
---------
</TABLE>
- ---------------
* Represents number of shares issued and outstanding as of February 28, 1999.
Trustees and officers of the Trust, in the aggregate, own, or have the
right to provide voting instructions for, less than 1% of each portfolio's
outstanding shares.
As of February 28, 1999, (i) Manulife North America and Manulife New York
owned 88.9% and 6.3% of the Worldwide Growth Trust's shares, respectively, and
(ii) Manulife North America and Manufacturers America owned 17.5% and 81.2% of
the Capital Growth Bond Trust's shares, respectively.
The votes of the shareholders of the Acquiring Portfolios are not being
solicited to approve the Reorganization, since their approval or consent is not
required with respect to the Reorganization.
The Plan was approved for the Transferor Portfolios and the Acquiring
Portfolios by unanimous vote of the Board, including in each case all of the
Trustees then serving who were not interested persons of the Trust (other than
in their capacity as Trustees of the Trust).
ADDITIONAL INFORMATION ON INVESTMENT POLICIES
AND TECHNIQUES AND RISK FACTORS
INVESTMENT RESTRICTIONS GENERALLY. The Trust is subject to a number of
restrictions in pursuing its investment objectives and policies. 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 portfolios and to the Trust are set forth in the
32
<PAGE> 37
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 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 of a portfolio.
INDUSTRY CONCENTRATION. As a matter of fundamental policy, each Acquiring
Portfolio and Transferor Portfolio 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
certain other obligations).
BORROWING. As a matter of fundamental policy, each Acquiring Portfolio and
Transferor Portfolio 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 the portfolio at the time the borrowing is
made. In addition, each Acquiring Portfolio and Transferor Portfolio 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 portfolio. A portfolio will not purchase securities
while borrowings (other than reverse repurchase agreements, mortgage dollar
rolls and similar transactions) exceed 5% of total assets.
ISSUER DIVERSIFICATION. As a matter of fundamental policy, each Acquiring
Portfolio and Transferor Portfolio is prohibited from purchasing securities of
any issuer if the purchase would cause more than 5% of the value of a
portfolio's total assets to be invested in the securities of any one issuer
(excluding U.S. Government securities) or cause more than 10% of the voting
securities of the issuer to be held by a portfolio, except that up to 25% of the
value of each Acquiring Portfolio or Transferor Portfolio's total assets may be
invested without regard to this restriction.
INVESTMENTS IN REAL ESTATE-RELATED SECURITIES. As a matter of fundamental
policy, each Acquiring Portfolio and Transferor Portfolio may not purchase or
sell real estate, except that each Acquiring Portfolio and Transferor Portfolio
may invest in mortgages and mortgage backed securities and securities issued by
companies which invest in real estate or interests therein.
INVESTMENTS IN COMMODITIES. As a matter of fundamental policy, each
Acquiring Portfolio and Transferor Portfolio may not purchase or sell com-
33
<PAGE> 38
modities or commodity contracts except that each Acquiring Portfolio and
Transferor Portfolio may purchase and sell futures contracts on financial
instruments and indices and options on such futures contract and futures
contracts on foreign currencies and options on such futures contracts.
INVESTMENTS IN ILLIQUID SECURITIES. Restrictions that apply to the
Acquiring Portfolios and the Transferor Portfolios and that are not fundamental
include prohibitions on knowingly investing more than 15% of the net assets of
any portfolio in "illiquid" securities (including repurchase agreements maturing
in more than seven days but excluding master demand notes).
PLEDGING ASSETS. Restrictions that apply to the Acquiring Portfolios and
the Transferor Portfolios and that are not fundamental include prohibitions on
pledging, hypothecating, mortgaging or transferring more than 10% of the total
assets of any portfolio as security for indebtedness (except that the applicable
percent is 15% in the case of the Worldwide Growth Trust).
INVESTMENTS IN OTHER FUNDS. Restrictions that apply to the Acquiring
Portfolios and the Transferor Portfolios and that are not fundamental include
prohibitions on purchasing 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 portfolio's total assets to be
invested in investment company securities.
HIGH YIELD (HIGH RISK) SECURITIES.
GENERAL
The Investment Quality Bond Trust, unlike the Capital Growth Bond Trust,
may invest up to 20% 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.
Certain of the debt securities in which the Investment Quality Bond Trust may
invest may have, or be considered comparable to securities having, the lowest
ratings for non-subordinated debt instruments assigned by Moody's or Standard &
Poor's (i.e., rated Caa or lower by Moody's or CCC or lower by Standard &
Poor's). These securities are considered to have extremely poor prospects of
ever attaining any real investment standing, to have a current identifiable
vulnerability to default, to be unlikely to have the capacity to pay interest
and repay principal when due in the event of adverse
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<PAGE> 39
business, financial or economic conditions, and/or to be in default or not
current in the payment of interest or principal. 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 Investment Quality Bond Trust with a
commensurate effect on the value of the Investment Quality Bond Trust's shares.
Because the Investment Quality 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 Investment
Quality Bond Trust, unlike the Capital Growth Bond 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
35
<PAGE> 40
economic and political conditions within the relevant country. Countries such as
those in which the Investment Quality Bond Trust 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
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, the Investment Quality Bond Trust may have
limited legal recourse against the issuer and/or guarantor. Remedies
36
<PAGE> 41
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 Investment Quality Bond Trust may
invest will not be subject to similar restructuring arrangements or to requests
for new credit which may adversely affect its 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.
FOREIGN SECURITIES. Each of the Acquiring Portfolios and the Transferor
Portfolios, to the extent stated above under the description of such portfolios,
may invest in securities of foreign issuers. Such foreign securities may be
denominated in foreign currencies. The Global Equity Trust may, without
limitation, invest up to 100% of its assets in securities issued by foreign
entities and/or denominated in foreign currencies.
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 Acquiring Portfolios
37
<PAGE> 42
and Transferor 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 the Trust -- 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 the
Acquiring Portfolios and the Transferor 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
Acquiring Portfolios and the Transferor Portfolios 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 intervention, speculation and other factors.
The Acquiring Portfolios and the Transferor 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 the Trust to obtain or to enforce a judgment against the
issuer.
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<PAGE> 43
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
portfolio is uninvested and no return is earned thereon. The inability of a
portfolio to make intended security purchases due to settlement problems could
cause the portfolio to miss attractive investment opportunities. Inability to
dispose of portfolio securities due to settlement problems could result in
losses to a portfolio due to subsequent declines in values of the portfolio
securities or, if the 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 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 portfolio of any
restrictions on investments.
In addition to the foreign securities listed above, the Worldwide Growth
Trust and the Investment Quality Bond Trust may also invest in foreign sovereign
debt securities, which involve certain additional risks. See "Additional
Information on Investment Policies and Techniques and Risk Factors," and High
Yield (High Risk) Securities -- Foreign Sovereign Debt Securities" above.
SMALL COMPANY AND EMERGING GROWTH SECURITIES. The Worldwide Growth Trust
may invest in small-sized and emerging growth companies (collectively,
"small-sized companies"). Investing in securities of small-sized companies may
involve greater risks since these securities may have limited marketability and,
thus, may be more volatile. Because small-sized companies normally have fewer
shares outstanding than larger companies, it may be more difficult to buy or
sell significant amounts of such shares without an unfavorable impact on
prevailing prices. In addition, small-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-sized companies than for larger, more established
companies. Companies with small market capitalizations may also be dependent
upon a single proprietary product or market niche, may have limited product
lines, markets or financial resources, or may depend on a limited management
group. Although investing in securities of small-sized companies 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 a
portfolio that invests in small-sized company securities may
39
<PAGE> 44
involve a greater degree of risk than an investment in other mutual funds that
seek capital appreciation by investing in better-known, larger companies.
WARRANTS. Subject to certain restrictions, each of the Acquiring
Portfolios and the Transferor Portfolios may purchase warrants, including
warrants traded independently of the underlying securities. Warrants are rights
to purchase securities at specific prices valid for a specific period of time.
Their prices do not necessarily move parallel to the prices of the underlying
securities, and warrant holders receive no dividends and have no voting rights
or rights with respect to the assets of an issuer. Warrants cease to have value
if not exercised prior to the expiration date.
LENDING SECURITIES. Each Acquiring Portfolio and Transferor Portfolio may
lend its securities so long as such loans do not represent in excess of 33 1/3%
of a portfolio's total assets. This is a fundamental policy. The procedure for
lending securities is for the borrower to give the lending portfolio collateral
consisting of cash, cash equivalents or securities issued or guaranteed by the
U.S. government or its agencies or instrumentalities. The lending 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. The Trust
anticipates that its securities will be loaned only under the following
conditions: (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 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 Acquiring Portfolios and
the Transferor 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 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 portfolio purchasing securities on a when-issued or
forward delivery basis will take delivery of the securities, but the portfolio
may sell the securities before the settlement date, if such action is deemed
advisable. In general, a portfolio does not pay for the securities or start
earning interest on them until the obligations are scheduled
40
<PAGE> 45
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 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 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 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 portfolio's total assets that may be committed
to such transactions.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Each of the
Acquiring Portfolios and the Transferor Portfolios may enter into repurchase
agreements and reverse repurchase agreements. Repurchase agreements involve the
acquisition by a portfolio of debt securities subject to an agreement to resell
them at an agreed-upon price. Under a repurchase agreement, at the time the
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 Trustees) 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 Trustees have adopted procedures that establish certain
creditworthiness, asset and collateralization requirements for the
counterparties to a portfolio's repurchase agreements. The Trustees will
regularly monitor the use of repurchase agreements and the subadvisers will,
pursuant to procedures adopted by the Trustees, 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 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
41
<PAGE> 46
value of the collateral is at least equal to the value of the repurchase
obligation, including the interest accrued thereon.
Each Acquiring Portfolio and Transferor Portfolio may enter into "reverse"
repurchase agreements. Under a reverse repurchase agreement, a portfolio may
sell a debt security and agree to repurchase it at an agreed upon time and at an
agreed upon price. The portfolio retains record ownership of the security and
the right to receive interest and principal payments thereon. At an agreed upon
future date, the portfolio repurchases the security by remitting the proceeds
previously received, plus interest. The difference between the amount the
portfolio receives for the security and the amount it pays on repurchase is
deemed to be payment of interest. The 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
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 portfolio's net asset value per share,
each portfolio will cover the transaction as described above.
MORTGAGE DOLLAR ROLLS. Each Acquiring Portfolio and Transferor Portfolio
may enter into mortgage dollar rolls. Under a mortgage dollar roll, a 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 portfolio forgoes principal and interest paid on the
mortgage-backed securities. A 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 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 portfolio's net asset value per share, each portfolio will
cover the transaction as described above.
HEDGING AND OTHER STRATEGIC TRANSACTIONS. Each of the Acquiring Portfolios
and the Transferor Portfolios may be authorized to use a variety of investment
strategies described below for hedging purposes only, including
42
<PAGE> 47
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 portfolio. The description in this
Prospectus/Proxy Statement of each Acquiring Portfolio and each Transferor
Portfolio indicates which, if any, of these types of transactions may be used by
each such portfolio. Limitations on the portion of a 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 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 (including stock index futures), 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 portfolio's interest rate transactions may
take the form of swaps, caps, floors and collars, and a 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 portfolio resulting from
securities markets or currency exchange rate fluctuations;
- to protect a 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 portfolio's securities;
and
- to establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities.
A 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 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 portfolio's securities. None of the
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<PAGE> 48
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 or appropriate portfolio management purposes and not
for speculative purposes. The use of certain Hedging and Other Strategic
Transactions will require that a portfolio segregate cash, liquid high grade
debt obligations or other assets to the extent a 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 Acquiring Portfolios and the Transferor
Portfolios is precluded from investing in excess of 15% of its net assets in
securities that are not readily marketable. Investment in illiquid securities
involves the risk that, because of the lack of consistent market demand for such
securities, the Trust may be forced to sell them at a discount from the last
offer price.
Excluded from the 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 the
Trust's investment restriction is a determination to be made by the subadvisers
subject to the Trustees' oversight and for which the Trustees are ultimately
responsible. The subadvisers will also monitor the liquidity of Rule 144A
securities held by the portfolios for which they are responsible. To the extent
Rule 144A securities held by a portfolio should become illiquid because of a
lack of interest on the part of qualified institutional investors, the overall
liquidity of the portfolio could be adversely affected.
ADDITIONAL INFORMATION ABOUT THE TRUST
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE. The following discussion sets
forth information regarding the performance of each Transferor Portfolio and
Acquiring Portfolio for the period ended December 31, 1998.
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<PAGE> 49
There are several ways to evaluate a portfolio's historical performance. One can
look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. WITH RESPECT TO ALL
PERFORMANCE INFORMATION PRESENTED, IT IS IMPORTANT TO UNDERSTAND THAT PAST
PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. RETURN AND PRINCIPAL FLUCTUATE,
AND SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PERFORMANCE TABLES
The following performance table for each Transferor Portfolio and Acquiring
Portfolio shows two types of total return information: CUMULATIVE TOTAL RETURN
AND AVERAGE ANNUAL TOTAL RETURN. A CUMULATIVE TOTAL RETURN is an expression of a
portfolio's total change in share value in percentage terms over a set period of
time -- one, five and ten years (or since the portfolio's inception if less than
the applicable period). An AVERAGE ANNUAL TOTAL RETURN takes the portfolio's
cumulative total return for a time period greater than one year and shows what
would have happened if the portfolio had performed at a constant rate each year.
Because each of the Global Equity Trust and the Investment Quality Bond
Trust has had a portfolio management change, the performance table for each
portfolio shows an average annual total return for the period since the current
portfolio manager assumed responsibility. THE TABLES SHOW ALL CUMULATIVE AND
AVERAGE ANNUAL TOTAL RETURNS, NET OF FEES AND EXPENSES OF THE TRUST, BUT DO NOT
REFLECT THE INSURANCE (SEPARATE ACCOUNT) EXPENSES (INCLUDING A POSSIBLE
CONTINGENT DEFERRED SALES CHARGE) OF THE VARIABLE ANNUITY AND VARIABLE LIFE
PRODUCTS THAT INVEST IN THE TRUST. IF THESE WERE INCLUDED, PERFORMANCE WOULD BE
LOWER.
GRAPHS -- CHANGE IN VALUE OF $10,000 INVESTMENT AND COMPARATIVE INDICES
The following performance graph for each Transferor Portfolio and Acquiring
Portfolio shows the change in value of a $10,000 investment over the life of
each portfolio. Each portfolio's performance is compared with the performance of
one or more broad-based securities indices as a "benchmark." All performance
information includes the reinvestment of dividends and capital gain
distributions, as well as the deduction of ongoing management fees and portfolio
operating expenses. The benchmarks used for comparison are unmanaged and include
reinvestment of dividends and capital gain distributions, if any, but do not
reflect any fees or expenses. Portfolios that invest in multiple asset classes
are compared with a customized benchmark.
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<PAGE> 50
This benchmark is comprised of a set percentage allocation from each of the
asset classes in which the portfolio invests.
PORTFOLIO MANAGER'S COMMENTARY
Following is a commentary by the portfolio manager regarding each
Transferor Portfolio's and Acquiring Portfolio's performance during the period
ended December 31, 1998. The views expressed are those of the portfolio manager
as of December 31, 1998, and are subject to change based on market and other
conditions. Information about a portfolio's holdings, asset allocation or
country diversification is historical and is no indication of future portfolio
composition, which will vary.
The following information regarding the Worldwide Growth Trust was included
in the Trust's Annual Report dated December 31, 1998:
WORLDWIDE GROWTH TRUST
INVESTMENT OBJECTIVE & POLICIES: To achieve long-term growth of capital by
investing, under normal circumstances, at least 65% of the Trust's total assets
in equity securities of growth companies in a variety of markets throughout the
world. The portfolio may purchase securities in any foreign country, as well as
the US, emphasizing common stocks of both emerging and established growth
companies that generally have proven performance records and strong market
positions.
SUBADVISER: Founders Asset Management, LLC
PORTFOLIO MANAGER: Michael W. Gerding
INCEPTION DATE: January 1, 1997
46
<PAGE> 51
CHANGE IN VALUE OF $10,000 INVESTMENT AND COMPARATIVE INDICES
[LINE GRAPH]
<TABLE>
<CAPTION>
WORLDWIDE GROWTH TRUST MSCI WORLD INDEX
---------------------- ----------------
<S> <C> <C>
December 1996 10000 10000
10120 10122
10208 10240
March 1997 10208 10040
10320 10370
10912 11012
June 1997 11176 11563
11624 12097
11176 11290
September 1997 11696 11905
11288 11280
11224 11482
December 1997 11329 11623
11547 11949
12136 12759
March 1998 12491 13300
12636 13432
12878 13265
June 1998 12781 13582
12733 13562
11022 11756
September 1998 10909 11966
11256 13049
11716 13827
December 1998 12287 14505
</TABLE>
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Return Cumulative Total Return
Since Since
Periods Ending December 31, 1998 1 Year Inception Inception
<S> <C> <C> <C>
MSCI World Index* 24.80% 20.44% 45.05%
Worldwide Growth Trust (at net asset
value) 8.46% 10.88% 22.87%
</TABLE>
* All since inception returns for the indices begin on the month-end closest to
the actual inception date of the Trust.
PORTFOLIO MANAGER'S COMMENTARY
PERFORMANCE: The Worldwide Growth Trust gained 8.46%, while the MSCI World
Index gained 24.80% for the year.
ENVIRONMENT: We have been dramatically underweight in the US compared to
the benchmark MSCI World Index. Long-term, we believe the US is still one of the
most attractive places to invest. However, we have remained cautious based on
our concerns about company valuations relative to their growth rates. Many US
companies have had tremendous runs during the current eight-year economic
expansion and it is only natural that it may become more difficult for them to
sustain earnings growth going forward. We are already seeing indications of
slowing earnings growth on a company-by-company basis. We long believed that the
European economy would grow faster than the US in 1998; we think that this trend
will continue. But we are watching the European economy carefully since it
continues to deal with high
47
<PAGE> 52
unemployment and still has higher interest rates than many other countries. Our
Japanese weighting is now 9.0%. We believe things are slowly changing in the
Japanese economy, and we have found several companies there with reasonable
valuations that appear to be able to grow their businesses again.
OUTLOOK: Looking ahead, we believe 1999 may be dominated by deflation
throughout the world. It may weigh more heavily in the US, particularly if the
domestic economy slows. We will continue to use hands-on research to focus on
those companies with unique products and market niches, as well as those with
quality management that can control costs. We will continue to pay close
attention to the quality of a company's earnings.
The following information regarding the Capital Growth Bond Trust was
included in the Trust's Annual Report dated December 31, 1998:
CAPITAL GROWTH BOND TRUST
INVESTMENT OBJECTIVE & POLICIES: To achieve growth of capital by investing in
fixed income securities of medium grade or better, with income as a secondary
consideration. This portfolio differs from most bond funds in that its primary
objective is capital appreciation, not income. It is expected that at least 75%
of the portfolio's total investment in corporate fixed income securities,
excluding commercial paper, will be represented by investment grade fixed income
securities.
SUBADVISER: Manufacturers Adviser Corporation
PORTFOLIO MANAGER: Cathy Addison
INCEPTION DATE: June 26, 1984
48
<PAGE> 53
CHANGE IN VALUE OF $10,000 INVESTMENT AND COMPARATIVE INDICES
[LINE GRAPH]
<TABLE>
<CAPTION>
SALOMON BROTHERS BIG LEHMAN BROTHERS AGGREGATE
CAPITAL GROWTH BOND TRUST BOND INDEX-CORPORATE BOND INDEX
------------------------- -------------------- -------------------------
<S> <C> <C> <C>
Jun. 1984 10000 10000 10000
Dec. 1984 11373 11682 11711
Jun. 1985 12859 12998 12995
Dec. 1985 14345 14282 14301
Jun. 1986 15949 15574 15596
Dec. 1986 17554 16489 16488
Jun. 1987 17405 16443 16461
Dec. 1987 17257 16917 16941
Jun. 1988 17873 17783 17786
Dec. 1988 18489 18268 18278
Jun. 1989 19772 19956 19958
Dec. 1989 21055 20906 20933
Jun. 1990 21747 21497 21524
Dec. 1990 22440 22807 22806
Jun. 1991 24278 23827 23824
Dec. 1991 26117 26448 26455
Jun. 1992 28885 27201 27173
Dec. 1992 27665 28455 28414
Jun. 1993 29115 30459 30376
Dec. 1993 30575 31270 31184
Jun. 1994 29889 30099 29977
Dec. 1994 29202 30379 30274
Jun. 1995 32157 33875 33739
Dec. 1995 35112 36016 35868
Jun. 1996 34307 35561 35429
Dec. 1996 35989 37318 37164
Jun. 1997 36881 38459 38319
Dec. 1997 39126 40908 40763
Jun. 1998 40523 42532 42360
Dec. 1998 42233 44476 44299
</TABLE>
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual Total Return Cumulative Total Return
Since Since
Periods Ending December 31, 1996 1 Year 5 Year 10 Year Inception 5 Year 10 Year Inception
<S> <C> <C> <C> <C> <C> <C> <C>
Salomon Brothers BIG Bond Index
(Corporate)+* 8.72% 7.30% 9.31% 10.84% 42.23% 145.47% 344.76%
Lehman Brothers Aggregate Bond
Index 8.67% 7.27% 9.26% 10.81% 42.06% 142.37% 342.99%
Capital Growth Bond Trust (at net
asset value) 7.95% 6.67% 8.61% 10.44% 38.08% 128.44% 322.33%
</TABLE>
+ Salomon Brothers Broad Investment Grade Index -- Corporate Component.
* All since inception returns for the indices begin on the month-end closest to
the actual inception date of the Trust.
PORTFOLIO MANAGER'S COMMENTARY
PERFORMANCE: For 1998, the Capital Growth Bond Trust returned 7.95%
compared to 8.67% for the Lehman Brothers Aggregate Index.
ENVIRONMENT: The positive performance due to the portfolio's long duration
position was offset by the overweight position in corporate bonds, as spreads
widened due to flight to quality trades and a deteriorating economic outlook.
Crumbling global markets and their expected adverse impact on the US economy
accelerated the downward trend in yields in the second half of the year. The
"Asian Flu" combined with the Russian default resulted in higher borrowing costs
and liquidity shortages for the emerging markets. The Federal Reserve cut
interest rates by 75 basis points to contain the global financial decline and to
stave off threats of an impending US recession. The
49
<PAGE> 54
last quarter saw the reversal of the flight to quality trades as investors
regained their appetite for risky assets.
OUTLOOK: Buoyed by relentless consumer spending, the US continues its
steady economic growth and low inflation. The manufacturing sector is suffering
due to weak external economies, sustained wage pressure, and lack of pricing
power. With steady domestic growth, low inflation and worldwide deflation in
commodities, the bond market seems poised for lower rates. Barring a major
crisis, we see the Federal Reserve moving rates lower toward the second half of
the year. Corporate spreads should tighten modestly given the continued economic
strength in a low inflationary environment. The portfolio will continue to
maintain a long duration versus the index in anticipation of a further interest
rate drop, and an overweight position in corporate bonds in anticipation of
their better relative performance.
The following information regarding the Global Equity Trust was included in
the Trust's Annual Report dated December 31, 1998:
GLOBAL EQUITY TRUST
INVESTMENT OBJECTIVE & POLICIES: To achieve long-term capital appreciation by
investing the portfolio's assets primarily in equity securities of issuers
throughout the world, including United States issuers and emerging markets.
SUBADVISER: Morgan Stanley Asset Management Inc.
PORTFOLIO MANAGER: Frances Campion
INCEPTION DATE: March 18, 1988+
50
<PAGE> 55
CHANGE IN VALUE OF $10,000 INVESTMENT AND COMPARATIVE INDICES
[LINE GRAPH]
<TABLE>
<CAPTION>
GLOBAL EQUITY TRUST MSCI WORLD INDEX
------------------- ----------------
<S> <C> <C>
February 1988 10000 10000
9890 10000
10000 10128
9761 9927
9870 9915
9681 10104
9252 9550
9771 9957
10209 10622
10110 10994
December 1988 10120 11095
10568 11498
10439 11428
10279 11356
10528 11620
10658 11337
10887 11211
11775 12480
11924 12180
12383 12526
12024 12110
12183 12596
December 1989 12532 13002
12014 12397
11864 11868
11745 11153
11338 10994
12421 12154
12594 12070
12891 12182
11757 11043
10531 9882
11093 10806
11052 10630
December 1990 11226 10854
11593 11254
12462 12297
12094 11937
12125 12032
12342 12307
11618 11549
12156 12097
12073 12060
12208 12379
12373 12582
11877 12035
December 1991 12663 12914
12746 12677
12818 12460
12363 11876
12718 12043
13315 12524
12948 12106
12707 12140
12749 12437
12456 12326
12110 11994
12561 12211
December 1992 12571 12312
12613 12355
12791 12650
13567 13386
14306 14009
15102 14334
14975 14216
15357 14511
16196 15178
16281 14900
16568 15313
15538 14450
December 1993 16706 15159
17704 16162
17747 15955
17205 15270
17709 15745
17450 15788
17644 15747
18065 16049
18659 16535
17979 16103
18206 16564
17029 15849
December 1994 16996 16005
16068 15768
16057 16001
16694 16775
17096 17363
17130 17515
17073 17513
18062 18393
17926 17986
18108 18514
17687 18226
17812 18862
December 1995 18301 19417
18494 19772
18665 19896
19108 20231
19767 20710
19582 20732
19570 20840
18484 20107
18912 20342
19085 21143
18981 21294
20206 22491
December 1996 20610 22135
20656 22405
21176 22667
21003 22222
21197 22953
22674 24373
23792 25593
24781 26776
23573 24988
24845 26350
23920 24967
24036 25413
December 1997 24896 25726
25012 26447
26964 28241
28442 29438
28738 29730
28409 29361
28025 30062
27573 30019
23267 26020
23925 26485
26160 28883
27189 30606
December 1998 27943 32105
</TABLE>
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual Total Return Cumulative Total Return
Periods Ending Since Since
December 31, 1998 1 Year 5 Year 10 Year Inception Oct. 1, 1996 5 Year 10 Year Inception
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MSCI World Index* 24.80% 16.19% 11.21% 11.46% 20.40% 193.83% 478.38% 221.05%
Global Equity Trust
(at net asset value) 12.24% 10.84% 10.69% 10.00% 18.49% 67.27% 176.13% 179.43%
</TABLE>
+ Current subadviser assignment became effective October 1, 1996.
* All since inception returns for the indices begin on the month-end closest to
the actual inception date of the Trust.
PORTFOLIO MANAGER'S COMMENTARY
PERFORMANCE: For the year, the Global Equity Trust returned 12.24%, lagging
the MSCI World Index return of 24.80%.
ENVIRONMENT: Stock selection in the US was the major cause of the
portfolio's underperformance for the year, as the value discipline kept the
portfolio out of the large growth stocks (particularly in the technology sector)
which drove the market. The overweight in continental Europe was a positive
contributor as Europe rallied strongly ahead because of the Euro conversion. The
portfolio's Japanese stocks performed well, although Japanese and other Asian
markets underperformed the US and Europe.
OUTLOOK: The flight to growth and liquidity in 1998 has meant that the
large cap/mid cap valuation premium has reached historic proportions. We expect
that patient exploitation of this valuation anomaly will be rewarded
51
<PAGE> 56
over time. The portfolio is managed to reflect our bottom up value discipline.
The price to cash flow ratio of the portfolio is less than 9 times, versus 14.2
times for the MSCI World Index. This provides some comfort in what seems, after
the fourth quarter rally, once again an expensive equity world. Overall, the
portfolio is defensively positioned for a continuation of volatile financial
market conditions in 1999. The slowdown in global growth occurring outside the
US, particularly in Japan, but increasingly in Europe, suggests caution is
warranted. Indeed, despite aggressive global easing in monetary policy, led by
the Federal Reserve, it seems a near certainty that earnings expectations for
1999 are far too optimistic.
The following information regarding the Investment Quality Bond Trust
included in the Trust's Annual Report dated December 31, 1998:
INVESTMENT QUALITY BOND TRUST
INVESTMENT OBJECTIVE & POLICIES: To provide a high level of current income
consistent with the maintenance of principal and liquidity by investing
primarily in a diversified investment grade corporate bonds and US Government
bonds with intermediate to long term maturities.
SUBADVISER: Wellington Management Company, LLP
PORTFOLIO MANAGER: Thomas L. Pappas
INCEPTION DATE: June 18, 1985**
52
<PAGE> 57
CHANGE IN VALUE OF $10,000 INVESTMENT AND COMPARATIVE INDICES
[LINE GRAPH]
<TABLE>
<CAPTION>
INVESTMENT QUALITY BOND LEHMAN BROTHERS AGGREGATE
TRUST BOND INDEX CUSTOMIZED BENCHMARK
----------------------- ------------------------- --------------------
<S> <C> <C> <C>
May 1985 10000 10000 10000
9978 10000 10000
10330 9965 9965
10458 10152 10165
10518 10213 10201
10664 10428 10421
10802 10678 10670
Dec. 1985 10872 11005 11007
10906 11066 11077
11182 11502 11564
11386 11860 11931
11392 11923 11989
11251 11695 11785
11408 12002 12088
11810 12108 12158
11996 12410 12455
11921 12287 12340
12130 12465 12529
12341 12640 12691
Dec. 1986 12313 12688 12760
12521 12867 12968
12635 12956 13051
12954 12897 12987
12568 12544 12613
12495 12495 12557
12679 12667 12722
12640 12657 12691
12565 12589 12620
12275 12321 12320
12720 12759 12765
12909 12861 12864
Dec. 1987 12596 13036 13063
12992 13495 13532
13179 13656 13697
13086 13527 13568
13069 13454 13484
12999 13364 13399
13232 13686 13708
13162 13615 13645
13151 13651 13688
13419 13959 13985
13606 14221 14230
13454 14049 14078
Dec. 1988 13489 14065 14124
13606 14267 14318
13583 14165 14220
13606 14226 14284
13788 14523 14581
14055 14905 14953
14480 15358 15424
14735 15685 15736
14492 15453 15519
14650 15532 15588
14990 15914 15969
15063 16065 16101
Dec. 1989 15014 16108 16124
14638 15917 15909
14686 15968 15948
14104 15979 15953
13938 15832 15800
14291 16300 16276
14522 16563 16543
14645 16791 16743
14278 16566 16493
14128 16704 16610
14060 16916 16783
14346 17280 17142
Dec. 1990 14604 17549 17396
14740 17767 17600
15039 17918 17800
15053 18042 17955
15006 18236 18171
15066 18342 18269
15036 18333 18255
15171 18588 18495
15605 18989 18919
16024 19375 19312
16173 19590 19489
16308 19770 19682
Dec. 1991 16951 20357 20339
16667 20080 20053
16802 20211 20189
16682 20098 20087
16761 20242 20200
17169 20625 20612
17404 20910 20920
17828 21336 21463
17985 21552 21647
18204 21808 21930
17906 21518 21577
17906 21522 21576
Dec. 1992 18173 21865 21957
18581 22284 22447
18942 22674 22929
19067 22770 23007
19168 22929 23184
19168 22959 23186
19547 23374 23725
19630 23508 23882
20026 23919 24446
20108 23984 24522
20174 24072 24630
19894 23868 24343
Dec. 93 19993 23997 24462
20257 24321 24867
19762 23897 24310
19184 23307 23663
18978 23121 23456
18960 23118 23398
18926 23068 23341
19272 23527 23851
19307 23555 23867
19012 23209 23477
18960 23188 23442
18908 23137 23402
Dec. 1994 19064 23296 23570
19410 23758 24039
19843 24323 24644
19982 24471 24822
20283 24814 25195
21115 25774 26296
21281 25962 26515
21207 25905 26408
21466 26219 26775
21688 26473 27062
22058 26817 27443
22409 27219 27919
Dec. 1995 22779 27601 28348
22890 27783 28526
22428 27299 27896
22243 27108 27662
22051 26956 27458
21992 26902 27410
22267 27263 27789
22326 27337 27850
22286 27290 27776
22699 27765 28301
23151 28381 28998
23603 28867 29561
Dec. 1996 23367 28598 29206
23426 28687 29243
23485 28759 29325
23190 28439 28941
23574 28866 29369
23785 29140 29661
24102 29487 30038
24864 30283 31014
24568 30026 30631
24969 30470 31129
25265 30912 31596
25392 31054 31765
Dec. 1997 25646 31368 32100
26090 31769 32532
26048 31744 32483
26132 31852 32588
26251 32017 32764
26519 32321 33128
26721 32596 33439
26788 32665 33449
27021 33197 33963
27795 33974 34972
27571 33794 34643
27772 33986 34974
Dec. 1998 27884 34088 35063
</TABLE>
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual Total Return Cumulative Total Return
Periods Ending Since Since** Since
December 31, 1998 1 Year 5 Year 10 Year Inception Apr. 23, 1991 5 Year 10 Year Inception
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Customized
Benchmark+* 9.23% 7.47% 9.52% 9.74% 8.95% 43.34% 148.26% 250.63%
Lehman Brothers
Aggregate Bond Index 8.67% 7.27% 9.26% 9.51% 8.50% 42.06% 142.37% 240.88%
Investment Quality
Bond Trust (at net
asset value) 8.73% 6.88% 7.88% 8.12% 8.49% 39.47% 113.52% 178.84%
</TABLE>
** Current subadviser assignment became effective April 23, 1991.
+ Customized Benchmark is comprised of 50% of the return of the Lehman Brothers
Government Bond Index and 50% of the return of the Lehman Brothers Corporate
Bond Index.
* All since inception returns for the indices begin on the month-end closest to
the actual inception date of the Trust.
PORTFOLIO MANAGER'S COMMENTARY
PERFORMANCE: For the year, the Investment Quality Bond Trust returned 8.73%
versus 9.23% for the customized benchmark of 50% Lehman Brothers Government Bond
Index and 50% Lehman Brothers Corporate Bond Index.
ENVIRONMENT: Low inflation and growth prospects helped Treasury yields
pierce below 6.0%, but from there Treasuries left other sectors behind rallying
another 1.0% or so. Investors searched for safety in a volatile world
environment as hedge funds collapsed and some foreign issuers threatened
defaults. This all triggered a massive flight to quality never seen before.
Corporate
53
<PAGE> 58
bonds lagged Treasuries as credit fundamentals weakened in investors' eyes and
with lower rates came increased prepayment risk to the detriment of mortgage
prices.
OUTLOOK: Looking forward, we believe the panic buying of Treasuries since
July, driven by fears of a worldwide recession, will reverse itself over time,
especially as we cycle into a new year. Corporates, including high yield, and
mortgages -- two areas which have lagged against Treasuries -- are set up to
deliver much better performance. In fact, high quality corporates and mortgages
offer attractive yields over 1% higher than comparable Treasuries, and many
decent high yield issues yield upwards of 10% on a nominal basis. Though
maintaining relative high quality in the portfolio, we will continue to search
for attractively priced alternatives to Treasuries.
54
<PAGE> 59
TAX MATTERS. For more information regarding the tax implications for the
purchaser of a variable annuity or life insurance contracts who allocates
investments to a portfolio of the Trust, please refer to the prospectus for the
contract. The following 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 advisors. 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, possibly with
retroactive effect.
TAX STATUS
The Trust intends to take the steps necessary to qualify each portfolio as
a regulated investment company under Subchapter M of the Code and believes that
each Acquiring Portfolio and Transferor Portfolio will so qualify. As a result
of qualifying as a regulated investment company, each portfolio will not be
subject to U.S. Federal income tax on its net investment income (i.e., its
investment company taxable income, as that term is defined in the Code,
determined without regard to the deduction for dividends paid) and net capital
gain (i.e., the excess of its net realized long-term capital gain over its net
realized short-term capital loss), if any, that it distributes to its
shareholders in each taxable year, provided that it distributes to its
shareholders at least 90% of its net investment income for such taxable year.
Each portfolio is subject to a nondeductible 4% excise tax calculated as a
percentage of certain undistributed amounts of ordinary income and capital gain
net income. To the extent possible, each portfolio intends to make sufficient
distributions to avoid the application of both corporate income and excise
taxes. Under current law, distributions of net investment income and net capital
gain are not taxed to a life insurance company to the extent applied to increase
the reserves for the company's variable annuity and life insurance contracts.
SOURCES OF GROSS INCOME
To qualify as a regulated investment company, a portfolio must, among other
things, derive its income from certain sources. Specifically, in each taxable
year a 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.
55
<PAGE> 60
DIVERSIFICATION OF ASSETS
To qualify as a regulated investment company, a portfolio must also satisfy
certain requirements with respect to the diversification of its assets. A
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 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 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 portfolio controls and which are engaged in the same or
similar trades or businesses or related trades or businesses.
Because only insurance company separate accounts will own shares in the
Acquiring Portfolios, each insurance company separate account will be treated as
owning its proportionate share of the assets of any portfolio in which it
invests, provided that the portfolio qualifies as a regulated investment
company. Therefore, each Acquiring Portfolio intends to meet the additional
diversification requirements that are applicable to insurance company separate
accounts under Subchapter L of the Code. These requirements generally provide
that no more than 55% of the value of the assets of a 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
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 imposed at a rate between 10%
and 35%. The investment yield of any portfolio that invests in foreign
securities or currencies will be reduced by these foreign taxes. A portfolio
investing in securities of a passive foreign investment company may be subject
to U.S. federal income taxes and interest charges (and the investment yield of a
portfolio making such an investment will be reduced by these taxes and interest
charges) on a portion of its distributions on and gain with respect to shares of
the passive foreign investment company even if such amounts are paid as a
dividend to its shareholders. Shareholders will bear the cost of these taxes and
interest charges. Alternatively, a portfolio may elect to (i) treat the
56
<PAGE> 61
passive foreign investment company as a "qualified electing fund" (assuming the
company agrees to provide certain information to the Internal Revenue Service)
and include annually in income its proportionate share of the company's ordinary
earnings and capital gains (whether or not distributed) or (ii) mark to market
its stock in the passive foreign investment company and thereby recognize as
ordinary income any increase in the value of such shares, and as ordinary loss
any decrease in such value to the extent of prior increases.
ADDITIONAL TAX CONSIDERATIONS
If a portfolio failed to qualify as a regulated investment company, owners
of contracts based on the portfolio (i) would be treated as owning shares of the
portfolio (rather than their proportionate share of the assets of such
portfolio) for purposes of the diversification requirements under Subchapter L
of the Code, and as a result might be taxed currently on the investment earnings
under their contracts and thereby lose the benefit of tax deferral, and (ii) the
portfolio would incur regular corporate federal income tax on its taxable income
for that year and be subject to certain distribution requirements upon
requalification. In addition, if a portfolio failed to comply with the
diversification requirements of the regulations under Subchapter L of the Code,
owners of contracts based on the portfolio might 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 the
Manulife Securities and the subadvisers and it is intended that the 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 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 that subadvisers might
otherwise believe to be desirable.
OTHER INFORMATION.
DIVIDENDS
The Trust intends to declare as dividends substantially all of the net
investment income, if any, of each portfolio. Dividends from the net investment
income and the net capital gain, if any, for each portfolio will be declared not
less frequently than annually and reinvested in additional full and fractional
shares of that portfolio or paid in cash.
CUSTODIAN
State Street Bank and Trust Company ("State Street") 225 Franklin Street,
Boston, Massachusetts 02110, currently acts as custodian and book-
57
<PAGE> 62
keeping agent of all the Trust assets. 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.
ADDITIONAL INFORMATION
Additional information concerning the operations and management of the
Trust (including the Transferor Portfolios and the Acquiring Portfolios) is
incorporated herein by reference from its current prospectus and current
statement of additional information, each dated May 1, 1998, copies of which may
be obtained without charge by contacting the Trust at the address or telephone
number set forth on the cover page of this Prospectus/Proxy Statement.
The Trust is subject to the informational requirements of the Securities
and Exchange Act of 1934 and the 1940 Act, and in accordance therewith, files
reports, proxy material and other information about each of the Transferor
Portfolios and Acquiring Portfolios with the Securities and Exchange Commission.
Such reports, proxy material and other information filed by the Trust 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 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 the Trust may be obtained from the Commission's Internet
address at http://www.sec.gov.
THE TRUST WILL FURNISH, WITHOUT CHARGE, A COPY OF THE TRUST'S ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 TO A SHAREHOLDER UPON REQUEST. TO
OBTAIN A REPORT, PLEASE CONTACT THE TRUST AT THE ADDRESS OR TELEPHONE NUMBER SET
FORTH ON THE COVER PAGE OF THIS PROSPECTUS/PROXY STATEMENT.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements and financial highlights of the Acquiring
Portfolios and the Transferor Portfolios for the fiscal year ended December 31,
1998 included and incorporated by reference into this Prospectus/Proxy Statement
have been so included and incorporated herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, One Post Office
58
<PAGE> 63
Square, Boston, Massachusetts 02109, given on the authority of said firm as
experts in accounting and auditing.
LEGAL MATTERS
Certain matters concerning the issuance of shares of the Acquiring
Portfolios will be passed upon by James D. Gallagher, Secretary of the Trust.
Certain tax consequences of the Reorganization will be passed upon by Simpson
Thacher & Bartlett, 425 Lexington Avenue, New York, New York 10017.
59
<PAGE> 64
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.
A-1
<PAGE> 65
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.
A-2
<PAGE> 66
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
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.
A-3
<PAGE> 67
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.
A-4
<PAGE> 68
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Plan") made this 26th day
of February, 1999, by Manufacturers Investment Trust (the "Trust"), a
Massachusetts business trust, on behalf of the Worldwide Growth Trust and the
Capital Growth Bond Trust (collectively, the "Transferor Portfolios") and the
Global Equity Trust and the Investment Quality Bond Trust (collectively, the
"Acquiring Portfolios").
The following table depicts each specific Transferor Portfolio and the
corresponding Acquiring Portfolio into which such Transferor Portfolio will be
merged:
<TABLE>
<CAPTION>
TRANSFEROR PORTFOLIO ACQUIRING PORTFOLIO
- -------------------- -------------------
<S> <C>
Worldwide Growth Trust Global Equity Trust
Capital Growth Bond Trust Investment Quality Bond Trust
</TABLE>
WHEREAS, the Board of Trustees of the Trust has determined that the
transfer of all of the assets and liabilities of each Transferor Portfolio to
the corresponding Acquiring Portfolio, noted above, is in the best interests of
each Transferor Portfolio and the corresponding Acquiring Portfolio, as well as
the best interests of shareholders and holders of variable life and annuity
contracts funded by shares of the Transferor Portfolios and the Acquiring
Portfolios, and that the interests of existing shareholders and contract owners
would not be diluted as a result of this transaction;
WHEREAS, the Trust intends to provide for the reorganization of the
Transferor Portfolios (the "Reorganization") through the acquisition by the
Acquiring Portfolios of all of the assets, subject to all of the liabilities, of
the Transferor Portfolios in exchange for shares of beneficial interest, par
value $.01 per share, of the Acquiring Portfolios (the "Acquiring Portfolio
Shares"), the liquidation of the Transferor Portfolios and the distribution to
Transferor Portfolio shareholders of such Acquiring Portfolio Shares, all
pursuant to the provisions of Section 368(a)(1) of the Internal Revenue Code of
1986, as amended (the "Code");
<PAGE> 69
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the Transferor Portfolios and the Acquiring Portfolios hereto agree as follows:
1. TRANSFER OF ASSETS OF THE TRANSFEROR PORTFOLIOS IN EXCHANGE FOR THE ACQUIRING
PORTFOLIO SHARES AND LIQUIDATION OF THE TRANSFEROR PORTFOLIOS
(a) Plan of Reorganization.
(i) The Trust on behalf of each Transferor Portfolio listed above, will
convey, transfer and deliver the assets of each Transferor Portfolio to the
Acquiring Portfolio set forth opposite its name in the table above (each such
Acquiring Portfolio being the "Corresponding Acquiring Portfolio" of the
Transferor Portfolio set forth opposite its name, and each such Transferor
Portfolio being the "Corresponding Transferor Portfolio" of the Acquiring
Portfolio set forth opposite its name) all of the then existing assets of such
Transferor Portfolio (consisting, without limitation, of portfolio securities
and instruments, dividend and interest receivables, cash and other assets). In
consideration thereof, the Trust on behalf of each Acquiring 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 Transferor Portfolio and (B)
issue and deliver to the Corresponding Transferor Portfolio full and fractional
shares of beneficial interest of the Corresponding Acquiring Portfolio, with
respect to each Corresponding Acquiring Portfolio equal to that number of full
and fractional Acquiring Portfolio Shares as determined in Section 1(c) hereof.
Any shares of capital stock (if any), par value $.01 per share, of the
Transferor Portfolios ("Transferor Portfolio Shares") held in the treasury of
the Trust at the Effective Time of the Reorganization shall thereupon be
retired. Such transactions shall take place on the date provided for in Section
1(b) hereof (the "Exchange Date"). All computations for the Transferor
Portfolios and the Acquiring Portfolios shall be performed by State Street Bank
and Trust Company (the "Custodian"), as custodian and pricing agent for the
Transferor Portfolios and the Acquiring 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 Transferor
Portfolio will liquidate and distribute pro rata to its shareholders of record
("Transferor Portfolio shareholders") as of the Effective Time of the
Reorganization the Acquiring Portfolio Shares received by such Transferor
Portfolio pursuant to Section 1(a)(i) in actual or constructive exchange for the
shares of the Transferor Portfolio held by the Transferor Portfolio sharehold-
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ers. Such liquidation and distribution will be accomplished by the transfer of
the Corresponding Acquiring Portfolio Shares then credited to the account of
each Transferor Portfolio on the books of the Corresponding Acquiring Portfolio,
to open accounts on the share records of the Corresponding Acquiring Portfolio
in the names of the Transferor Portfolio shareholders and representing the
respective pro rata number of the Acquiring Portfolio Shares due such
shareholders. The Acquiring Portfolios will not issue certificates representing
the Acquiring Portfolio Shares in connection with such exchange.
(iii) As soon as practicable after the Effective Time of the
Reorganization, the Trust shall take all the necessary steps under Massachusetts
law, the Trust's Declaration of Trust and any other applicable law to effect a
complete dissolution of the Transferor Portfolios.
(b) Exchange Date and Effective Time of the Reorganization.
(i) Subject to the satisfaction of the conditions to the Reorganization
specified in this Plan, the Reorganization 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 "Exchange Date") which is the later of
(A) the final adjournment of the meeting of the holders of Transferor Portfolio
shares at which this Plan will be considered, (B) April 30, 1999 and (C) such
later day as the parties may mutually agree.
(ii) All acts taking place on the Exchange Date 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 Exchange 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
Acquiring Portfolios or the Transferor Portfolios is impracticable, the Exchange
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) On the Exchange Date, portfolio securities of the Transferor
Portfolios shall be transferred by the Custodian to the accounts of the
Corresponding Acquiring 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 Acquiring Portfolio and the
net value of the assets of each Corresponding Transferor Portfolio to be
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transferred in exchange therefore shall be determined as of the Effective Time
of the Reorganization. The net asset value of the Acquiring 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 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 Transferor Portfolio to be
transferred shall be computed by the Custodian by calculating the value of the
assets transferred by the Transferor Portfolio and by subtracting therefrom the
amount of the liabilities assigned and transferred to the Corresponding
Acquiring Portfolio, said assets and liabilities to be valued in the manner set
forth in the Trust's Declaration of Trust or By-laws and then current prospectus
and statement of additional information.
(ii) The number of Acquiring Portfolio Shares to be issued (including
fractional shares, if any) by each Acquiring Portfolio in exchange for the
Corresponding Transferor Portfolio's assets shall be determined by an exchange
ratio computed by dividing the net value of such Transferor Portfolio's assets
by the net asset value per share of such Acquiring Portfolio, both as determined
in accordance with Section 1(c)(i).
(iii) All computations of value shall be made by the Custodian in
accordance with its regular practice as pricing agent for the Acquiring
Portfolios and the Transferor Portfolios.
2. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRING PORTFOLIOS
Each of the Acquiring Portfolios represents and warrants as follows:
(a) Organization, Existence, etc. The Trust is a business trust that is
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. Each Acquiring Portfolio is a validly existing series of
shares of such business trust representing interests therein under the laws of
Massachusetts. Each Acquiring Portfolio and 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
Investment Company Act of 1940, as amended (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 May 1, 1998, as amended,
included in the Trust's registration statement on Form N-1A filed
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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 January 15,
1999 there were outstanding the following numbers of shares of the Acquiring
Portfolios: 45,422,874 shares of the Global Equity Trust and 25,146,929 shares
of the Investment Quality Bond Trust, and no shares of such portfolios were held
in the treasury of the Trust. 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 a Trust portfolio could, under certain
circumstances, be held personally liable for the obligations of such Trust
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 each of the Acquiring Portfolios 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, 1998, which have been audited by
PricewaterhouseCoopers LLP, fairly present the financial position of the
Acquiring Portfolios as of the dates thereof and the respective results of
operations and changes in net assets for each of the periods indicated in
accordance with generally accepted accounting principles ("GAAP").
(f) Shares to be Issued Upon Reorganization. The Acquiring 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 a Trust portfolio
could, under certain circumstances, be held personally liable for the
obligations of such portfolio).
(g) Authority Relative to this Plan. The Trust, on behalf of the Acquiring
Portfolios, has the power to enter into this Plan and to carry out its
obligations hereunder. The execution and delivery of this Plan 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 Plan are necessary to author-
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ize its officers to effectuate this Plan 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 Plan in accordance with its terms.
(h) Liabilities. There are no liabilities of the Acquiring 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 with respect to the Acquiring Portfolios and liabilities incurred in
the ordinary course of business subsequent to December 31, 1998 or otherwise
previously disclosed to the Trust with respect to the Acquiring Portfolios, none
of which has been materially adverse to the business, assets or results of
operations of the Acquiring Portfolios.
(i) No Material Adverse Change. Since December 31, 1998, there has been no
material adverse change in the financial condition, results of operations,
business, properties or assets of the Acquiring Portfolios, 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 Acquiring Portfolios' 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 or the Acquiring Portfolios and, to the knowledge of the
Trust, there are no regulatory investigations of the Trust or the Acquiring
Portfolios, 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, on behalf of any Acquiring Portfolio, is subject.
(l) Taxes. The federal income tax returns of the Trust with respect to
each Acquiring Portfolio, and all other income tax returns required to be filed
by the Trust with respect to each Acquiring Portfolio, have been filed for all
taxable years to and including December 31, 1997, 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 with respect to the Acquiring
Portfolios have been paid so far as due. The Trust and each
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Acquiring Portfolio currently are, and will continue to be up until and at the
Exchange Date, in compliance with Section 817(h) of the Code.
(m) No Approvals Required. Except for the Registration Statement (as
defined in Section 4(a) hereof) and the approval of the Transferor Portfolios'
shareholders (referred to in Section 6(a) hereof), the exemptive relief
requested in the Exemptive Application (as defined in Section 4(e) 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 TRANSFEROR PORTFOLIOS
Each of the Transferor Portfolios represents and warrants as follows:
(a) Organization, Existence, etc. The Trust is a business trust that is
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. Each Transferor Portfolio is a validly existing series
of shares of such business trust representing interests therein under the laws
of Massachusetts. Each Transferor Portfolio and 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 May 1, 1998, as amended,
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 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 January 15,
1999 there were outstanding the following numbers of shares of the Transferor
Portfolios: 2,779,692 shares of the Worldwide Growth Trust and 5,432,114 shares
of the Capital Growth Bond Trust, and no shares of such portfolios were held in
the treasury of the Trust. All of the outstanding shares of the Trust have been
duly authorized and are validly issued, fully paid and
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nonassessable (except as disclosed in the Trust's prospectus and recognizing
that under Massachusetts law, shareholders of a Trust portfolio could, under
certain circumstances, be held personally liable for the obligations of such
Trust 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 such
shares will, at the Exchange Date, be held by the shareholders of record of the
Transferor Portfolios as set forth on the books and records of the Trust in the
amounts set forth therein, and as set forth in any list of shareholders of
record provided to the Acquiring Portfolios for purposes of the Reorganization,
and no such shareholders of record will have any preemptive rights to purchase
any Transferor Portfolio shares, and the Transferor Portfolios do not have
outstanding any options, warrants or other rights to subscribe for or purchase
any Transferor Portfolio shares (other than any existing dividend reinvestment
plans of the Transferor Portfolios or as set forth in this Plan), nor are there
outstanding any securities convertible into any shares of the Transferor
Portfolios (except pursuant to any existing exchange privileges described in the
current prospectus and statement of additional information of the Trust). All of
each Transferor 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 Trust's Financial Statements fairly present
the financial position of the Transferor Portfolios as of the dates thereof and
the respective results of operations and changes in net assets for each of the
periods indicated in accordance with GAAP.
(f) Authority Relative to this Plan. The Trust, on behalf of the
Transferor Portfolios, has the power to enter into this Plan and to carry out
its obligations hereunder. The execution and delivery of this Plan 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 Plan are necessary to authorize its officers
to effectuate this Plan 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 Plan in accordance
with its terms.
(g) Liabilities. There are no liabilities of the Transferor Portfolios,
whether actual or contingent and whether or not determined or determinable,
other than liabilities disclosed or provided for in the Trust's Financial
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Statements with respect to the Transferor Portfolios and liabilities incurred in
the ordinary course of business subsequent to December 31, 1998 or otherwise
previously disclosed to the Trust with respect to the Transferor Portfolios,
none of which has been materially adverse to the business, assets or results of
operations of the Transferor Portfolios.
(h) No Material Adverse Change. Since December 31, 1998, there has been no
material adverse change in the financial condition, results of operations,
business, properties or assets of the Transferor Portfolios, 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 Trust, threatened which would adversely affect the
Trust or the Transferor Portfolios' 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 or the Transferor Portfolios and, to the knowledge of the
Trust, there are no regulatory investigations of the Trust or the Transferor
Portfolios, pending or threatened, other than routine inspections and audits.
(j) Contracts. The Trust, on behalf of the Transferor Portfolios, is not
subject to any contracts or other commitments (other than this Plan) which will
not be terminated with respect to the Transferor Portfolios without liability to
the Trust or the Transferor Portfolios as of or prior to the Effective Time of
the Reorganization.
(k) Taxes. The federal income tax returns of the Trust with respect to
each Transferor Portfolio, and all other income tax returns required to be filed
by the Trust with respect to each Transferor Portfolio, have been filed for all
taxable years to and including December 31, 1997, 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 with respect to the Transferor
Portfolios have been paid so far as due. The Trust and each Transferor Portfolio
currently are, and will continue to be up until and at the Exchange Date, in
compliance with Section 817(h) of the Code.
(l) No Approvals Required. Except for the Registration Statement (as
defined in Section 4(a) hereof) and the approval of the Transferor Portfolios'
shareholders referred to in Section 6(a) hereof, the exemptive relief requested
by the Exemptive Application, no consents, approvals, authorizations,
registrations or exemptions under federal or state laws are necessary for the
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consummation by the Trust of the Reorganization, except such as have been
obtained as of the date hereof.
4. COVENANTS OF THE ACQUIRING PORTFOLIOS
Each of the Acquiring Portfolios covenants to the following:
(a) Registration Statement. On behalf of the Acquiring Portfolios, the
Trust shall file with the Commission a Registration Statement on Form N-14 (the
"Registration Statement") under the Securities Act relating to the Acquiring
Portfolio Shares issuable hereunder and the proxy statement of the Transferor
Portfolios relating to the meeting of the Transferor Portfolios' shareholders
referred to in Section 5(a) herein. 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
Transferor Portfolios 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.
(b) Cooperation in Effecting Reorganization. The Acquiring Portfolios
agree 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 Acquiring Portfolios shall furnish such
data and information relating to each Acquiring Portfolio as shall be reasonably
requested for inclusion in the information to be furnished to the Transferor
Portfolio shareholders in connection with the meeting of the Transferor
Portfolios' shareholders for the purpose of acting upon this Plan and the
transactions contemplated herein.
(c) Operations in the Ordinary Course. Except as otherwise contemplated by
this Plan, each of the Acquiring Portfolios 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.
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(d) Exemptive Application. The Acquiring Portfolios shall use all
reasonable efforts to cause the Commission to grant the exemptive relief
requested in the Exemptive Application filed on November 13, 1998 by the Trust
(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 TRANSFEROR PORTFOLIOS
Each of the Transferor Portfolios covenants to the following:
(a) Meeting of the Transferor Portfolios' Shareholders. The Trust shall
call and hold a meeting of the shareholders of each Transferor Portfolio for the
purpose of acting upon this Plan and the transactions contemplated herein. The
Trust 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 Transferor 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 Trust's books. At least five (5) business days
prior to the Exchange Date, each Transferor Portfolio will provide the Trust,
for the benefit of each Corresponding Acquiring Portfolio, with a list of its
assets and a list of its stated liabilities. Each Transferor Portfolio shall
have the right to sell any of the securities or other assets shown on the list
of assets prior to the Exchange Date but will not, without the prior approval of
the Trust, on behalf of the Corresponding Acquiring Portfolio, respectively,
acquire any additional securities other than securities which the Corresponding
Acquiring 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 any Transferor Portfolio holds
any investments that its Corresponding Acquiring Portfolio would not be
permitted to hold, the Transferor Portfolio will dispose of such securities
prior to the Exchange Date 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 Trust will prepare and deliver immediately prior
to the Effective Time of the Reorganization, a Statement of Assets and
Liabilities of each Transferor Portfolio, prepared in accordance with GAAP
(each, a "Schedule"). All securities to be listed in the Schedule for a
Transferor Portfolio as of the Effective Time of the Reorganization will be
owned by such Transferor Portfolio free and clear of any liens, claims, charges,
options and
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encumbrances, except as indicated in such Schedule, 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 Transferor Portfolios will cooperate with the
Acquiring Portfolios and will furnish to the Trust the information relating to
the Transferor Portfolios 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
Transferor Portfolios, (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
Transferor Portfolios' 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 Transferor
Portfolios, 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 Transferor Portfolios for use in the Registration
Statement, Prospectus or Statement of Additional Information as provided in this
Section 5(c).
(d) Cooperation in Effecting Reorganization. The Transferor Portfolios
agree 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 Plan, each of the Transferor Portfolios 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 Manulife Securities
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and (i) Founders Asset Management, LLC ("Founders"), but only with respect to
the Worldwide Growth Trust and (ii) Manufacturers Adviser Corporation ("MAC"),
but only with respect to the Capital Growth Bond Trust, shall each be
terminated, such termination to be effective prior to or as of the Effective
Time of the Reorganization.
(g) Exemptive Application. The Transferor Portfolios 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 Exchange Date, the Trust on behalf of each
Transferor Portfolio, shall prepare a statement of the earnings and profits of
each Transferor Portfolio for federal income tax purposes, and of any capital
loss carryovers and other items that the Acquiring Portfolios will succeed to
and take into account as a result of Section 381 of the Code.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE
TRANSFEROR PORTFOLIOS
The obligations of each Transferor Portfolio with respect to the consummation of
the Reorganization are subject to the satisfaction of the following conditions:
(a) Approval by the Transferor Portfolios' Shareholders. This Plan and the
transactions contemplated by the Reorganization shall have been approved by the
requisite vote of the shares of each Transferor Portfolio entitled to vote on
the matter ("Transferor Shareholder Approval").
(b) Covenants, Warranties and Representations. Each of the Acquiring
Portfolios 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 each of the Acquiring Portfolios
since December 31, 1998.
(c) Regulatory Approval. The Registration Statement shall 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 consid-
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ered to be necessary shall have been obtained (collectively, the "Regulatory
Approvals").
(i) Tax Opinion. The Trust shall have received the opinion of Simpson
Thacher & Bartlett, dated on or before the Exchange Date, addressed to and in
form and substance satisfactory to the Trust, as to certain of the federal
income tax consequences under the Code of the Reorganization, insofar as it
relates to each Transferor Portfolio and its Corresponding Acquiring Portfolio,
and to shareholders of each Transferor 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 Plan, the Prospectus and Statement of Additional
Information, and upon such other written representations as the President or
Treasurer of 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 Transferor Portfolio and its
Corresponding Acquiring Portfolio; (ii) no gain or loss will be recognized by
any of the Transferor Portfolios or the Corresponding Acquiring Portfolios upon
the transfer of all the assets and liabilities, if any, of each Transferor
Portfolio to its Corresponding Acquiring Portfolio solely in exchange for shares
of the Acquiring Portfolio or upon the distribution of the shares of the
Acquiring Portfolio to the holders of the shares of the Transferor Portfolio
solely in exchange for all of the shares of the Transferor Portfolio; (iii) no
gain or loss will be recognized by shareholders of any of the Transferor
Portfolios upon the exchange of shares of such Transferor Portfolio solely for
shares of the Corresponding Acquiring Portfolio; (iv) the holding period and tax
basis of the shares of the Acquiring Portfolio received by each holder of shares
of the Transferor Portfolio pursuant to the Reorganization will be the same as
the holding period and tax basis of shares of the Transferor Portfolio held by
the shareholder (provided the shares of the Transferor Portfolio were held as a
capital asset on the date of the Reorganization) immediately prior to the
Reorganization; and (v) the holding period and tax basis of the assets of each
of the Transferor Portfolios acquired by the Corresponding Acquiring Portfolio
will be the same as the holding period and tax basis of those assets to each of
the Transferor Portfolios immediately prior to the Reorganization.
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7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING PORTFOLIOS
The obligations of each Acquiring Portfolio with respect to the consummation of
the Reorganization are subject to the satisfaction of the following conditions:
(a) Approval by the Transferor Portfolios' Shareholders. The Transferor
Shareholder Approval shall have been obtained.
(b) Covenants, Warranties and Representations. Each of the Transferor
Portfolios 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 3(h) in the financial condition, results of
operations, business, properties or assets of each of the Transferor Portfolios
since December 31, 1998.
(c) Portfolio Securities. All securities to be acquired by each Acquiring
Portfolio in the Reorganization shall have been approved for acquisition by
Manulife Securities as consistent with the investment policies of such Acquiring
Portfolio.
(d) Regulatory Approval. The Regulatory Approvals shall have been
obtained.
(e) Contract Terminations. The agreements referred to in Section 5(f)
shall have been terminated as provided therein.
(f) Distribution of Income and Gains. The Trust on behalf of the
Transferor Portfolios shall have distributed to the shareholders of each
Transferor Portfolio all of such Transferor Portfolio's investment company
taxable income (without regard to the deductions for dividends paid) as defined
in Section 852(b)(2) of the Code for its taxable year ending on the Exchange
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 Exchange Date.
(g) Tax Opinion. The Trust shall have received the Tax Opinion.
8. AMENDMENTS; TERMINATIONS; NO SURVIVAL OF COVENANTS, WARRANTIES AND
REPRESENTATIONS
(a) Amendments. The parties hereto may, by agreement in writing authorized
by the Board of Trustees amend this Plan at any time before or after approval
hereof by the shareholders of the Transferor Portfolios, but after
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<PAGE> 83
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 Transferor Portfolios or the Acquiring Portfolios 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 conditions set forth in Sections 6(c) and 7(d) may
not be waived.
(c) Termination by the Transferor Portfolios. The Trust, on behalf of the
Transferor Portfolios, may terminate this Plan with respect to one or more of
the Transferor Portfolios at any time prior to the Effective Time of the
Reorganization by notice to the Acquiring Portfolios, the Trust and Manulife
Securities if (i) a material condition to the performance of one or more of the
Transferor Portfolios hereunder or a material covenant of one or more of the
Acquiring Portfolios 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 Plan shall be made by one or more of the Acquiring
Portfolios.
(d) Termination by the Acquiring Portfolios. The Trust, on behalf of the
Acquiring Portfolios, may terminate this Plan with respect to one or more of the
Acquiring Portfolios at any time prior to the Effective Time of the
Reorganization by notice to the Transferor Portfolios, the Trust and Manulife
Securities if (i) a material condition to the performance of one or more of the
Acquiring Portfolios hereunder or a material covenant of one or more of the
Transferor Portfolios 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 Plan shall be made by one or more of the Transferor
Portfolios.
(e) Termination by the Trust. This Plan may be terminated by the Trust at
any time prior to the Effective Time of the Reorganization, whether before or
after approval of this Plan by the shareholders of the Transferor Portfolios,
without liability on the part of any party hereto, its Directors, Trustees,
officers or shareholders or Manulife Securities, on notice to the other parties
in the event that the Board of Trustees determines that proceeding with this
Plan is not in the best interests of the shareholders or contract owners of the
Transferor Portfolios or the Acquiring Portfolios.
(f) Unless the parties hereto shall otherwise agree in writing, this Plan
shall terminate without liability as of the close of business on September 1,
1999 if the Effective Time of the Reorganization is not on or prior to such
date.
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(g) Survival. No representations, warranties or covenants in or pursuant
to this Plan, except for the provisions of Section 5(h) and Section 9 of this
Plan, shall survive the Reorganization.
9. EXPENSES; INSURANCE
The expenses of the Reorganization will be borne by the Transferor
Portfolios and the Acquiring Portfolios. Such expenses include, without
limitation, (i) expenses incurred in connection with the entering into and the
carrying out of the provisions of this Plan; (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 of the Acquiring
Portfolio shares registered thereby, which shall be payable by the respective
Acquiring 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 Plan 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:
if to the Trust (for itself or on
behalf of the Transferor
Portfolios or the Acquiring Portfolios):
73 Tremont Street
Boston, Massachusetts 02108
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
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11. RELIANCE
All covenants and agreements made under this Plan shall be deemed to have
been material and relied upon by the Transferor Portfolios, the Acquiring
Portfolios 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 Plan are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Plan.
(b) This Plan may be executed in any number of counterparts, each of which
shall be deemed an original.
(c) This Plan shall be governed by and construed in accordance with the
laws of The Commonwealth of Massachusetts.
(d) This Plan shall bind and inure to the benefit of the Trust, the
Transferor Portfolios and the Acquiring Portfolios 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 Plan.
(e) The name "Manufacturers Investment 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.
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IN WITNESS WHEREOF, the undersigned have executed this Plan as of the date
first above written.
MANUFACTURERS INVESTMENT TRUST
on behalf of the Transferor Portfolios
BY: /s/ JOHN D. DESPREZ III
------------------------------------------------
Name: John D. DesPrez III
Title: President
MANUFACTURERS INVESTMENT TRUST
on behalf of the Acquiring Portfolios
BY: /s/ JAMES BOYLE
------------------------------------------------
Name: James Boyle
Title: Treasurer
19
<PAGE> 87
[THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA]
[THE MANUFACTURERS LIFE INSURANCE COMPANY OF NEW YORK]
[THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA]
VOTING INSTRUCTIONS FORM
VOTING PURSUANT TO THESE INSTRUCTIONS WILL BE AS SPECIFIED. IF NO SPECIFICATION
IS MADE AS TO AN ITEM, VOTING WILL BE FOR SUCH ITEM.
A SEPARATE VOTING INSTRUCTION FORM IS PROVIDED FOR EACH MANUFACTURERS
INVESTMENT TRUST PORTFOLIO IN WHICH YOUR CONTRACT VALUES WERE INVESTED AS OF
FEBRUARY 28, 1999. PLEASE SIGN, DATE AND RETURN ALL VOTING INSTRUCTION FORMS
RECEIVED IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
VOTING INSTRUCTIONS MUST BE RECEIVED BY APRIL 26, 1999 TO BE VOTED FOR
THE MEETING TO BE HELD ON APRIL 27, 1999.
[NAME OF TRANSFEROR PORTFOLIO]
THESE VOTING INSTRUCTIONS ARE SOLICITED BY THE [MANUFACTURERS LIFE
INSURANCE COMPANY OF NORTH AMERICA] [THE MANUFACTURERS LIFE INSURANCE COMPANY
OF NEW YORK] [THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA] IN
CONNECTION WITH A SOLICITATION OF PROXIES BY THE BOARD OF TRUSTEES OF
MANUFACTURERS INVESTMENT TRUST.
The undersigned hereby instructs [The Manufacturers Life Insurance Company of
North America] [The Manufacturers Life Insurance Company of New York] [The
Manufacturers Life Insurance Company of America] to vote the shares of
Manufacturers Investment Trust (the "Trust") attributable to his or her contract
at the Special Meeting of Shareholders to be held at 73 Tremont Street, Boston,
Massachusetts 02108 at 10:00 a.m., April 27, 1999, and any adjournments thereof,
as indicated below.
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, including 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
<PAGE> 88
INDICATE YOUR VOTE BELOW BY FILLING IN THE APPROPRIATE BOX
- --------------------------------------------------------------------------------
THIS VOTING INSTRUCTION, IF PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED BY THE CONTRACT HOLDER. IF NO DIRECTION IS MADE, THIS VOTING
INSTRUCTION WILL BE VOTED FOR THE PROPOSAL. PLEASE REFER TO THE
PROSPECTUS/PROXY STATEMENT FOR A DISCUSSION OF THE PROPOSAL.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
1. Approval of Agreement and Plan of
Reorganization. [ ] [ ] [ ]
2. To transact such other business as may
properly come before the Meeting.
</TABLE>
- --------------------------------------------------------------------------------
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.
<PAGE> 89
MANUFACTURERS INVESTMENT TRUST
STATEMENT OF ADDITIONAL INFORMATION
MARCH 16, 1999
This Statement of Additional Information is available to the shareholders
of the Worldwide Growth Trust and the Capital Growth Bond Trust in connection
with the proposed transfer of all of the assets and liabilities of the Worldwide
Growth Trust and the Capital Growth Bond Trust to, and in exchange for shares
of, the Global Equity Trust and the Investment Quality Bond Trust, respectively.
This Statement of Additional Information includes the Statement of Additional
Information of the Trust dated May 1, 1998.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus/Proxy Statement dated March 16, 1999
(the "Prospectus/Proxy Statement"), which may be obtained without charge by
writing to Manufacturers Investment Trust (the "Trust") at 116 Huntington
Avenue, Boston, Massachusetts 02116, or by calling toll free 1-800-344-1029.
<PAGE> 90
TABLE OF CONTENTS FOR PART B
<TABLE>
<S> <C>
Statement of Additional Information of the Trust, dated May
1, 1998
Manufacturers Investment Trust -- Capital Growth Bond Trust
and Investment Quality Bond Trust
Pro Forma Combining Statement of Assets and
Liabilities -- December 31, 1998 (Unaudited)
Pro Forma Combining Statement of Operations -- For the
Year Ended December 31, 1998 (Unaudited)
Pro Forma Combining Schedule of Portfolio
Investments -- December 31, 1998 (Unaudited)
Notes to the Pro Forma Financial Statements -- December
31, 1998 (Unaudited)
</TABLE>
<PAGE> 91
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
MANUFACTURERS INVESTMENT TRUST
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Trust's Prospectus dated May 1, 1998 which may be
obtained from Manufacturers Investment Trust, 116 Huntington Avenue, Boston,
Massachusetts, 02116.
The date of this Statement of Additional Information is May 1, 1998.
<PAGE> 92
TABLE OF CONTENTS
INVESTMENT POLICIES ...................................................... 3
Money Market Instruments ............................................ 3
Other Instruments ................................................... 5
HEDGING AND OTHER STRATEGIC TRANSACTIONS ................................. 11
General Characteristics of Options................................... 11
General Characteristics of Futures Contracts and Options on Futures
Contracts ........................................................... 13
Options on Securities Indices and Other Financial Indices ........... 14
Currency Transactions ............................................... 14
Combined Transactions ............................................... 15
Swaps, Caps, Floors and Collars ..................................... 15
Eurodollar Instruments .............................................. 16
Risk Factors ........................................................ 16
Risks of Hedging and Other Strategic Transactions Outside the
United States ....................................................... 17
Use of Segregated and Other Special Accounts ........................ 17
Other Limitations ................................................... 18
INVESTMENT RESTRICTIONS .................................................. 18
Fundamental ......................................................... 18
Nonfundamental ...................................................... 19
PORTFOLIO TURNOVER ....................................................... 21
MANAGEMENT OF THE TRUST .................................................. 22
Compensation of Trustees ............................................ 23
INVESTMENT MANAGEMENT ARRANGEMENTS ....................................... 24
The Advisory Agreement .............................................. 25
The Subadvisory Agreements .......................................... 27
Agreement with Prior Subadviser ..................................... 29
PORTFOLIO BROKERAGE ...................................................... 30
PURCHASE AND REDEMPTION OF SHARES ........................................ 34
DETERMINATION OF NET ASSET VALUE ......................................... 34
PERFORMANCE DATA ......................................................... 36
ORGANIZATION OF THE TRUST ................................................ 37
Shares of the Trust ................................................. 38
Principal Holders of Securities ..................................... 38
ADDITIONAL INFORMATION CONCERNING TAXES .................................. 39
REPORTS TO SHAREHOLDERS .................................................. 40
INDEPENDENT ACCOUNTANTS .................................................. 40
LEGAL COUNSEL ............................................................ 40
ADDITIONAL INFORMATION REGARDING SUBADVISERS ............................. 40
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<PAGE> 93
INVESTMENT POLICIES
The following discussion supplements "Investment Objectives and Policies"
set forth in the Prospectus of Manufacturers Investment Trust (the "Trust").
MONEY MARKET INSTRUMENTS
The 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 portfolios in accordance with their investment policies
and all portfolios may purchase such instruments to invest otherwise idle cash
or for defensive purposes, except that the U.S. Government Securities Trust and
the 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
3
<PAGE> 94
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 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 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.
Trust 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 portfolio, as lender, and the borrower. These
notes permit daily changes in the amounts borrowed. The 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 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
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 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 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
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 portfolio to earn a
return on cash which is only temporarily available. Repurchase agreements
entered into by the portfolio will be with banks, brokers or dealers. However, a
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 portfolio decrease below the resale price.
In selecting sellers with whom the portfolio will enter into repurchase
transactions, the Trustees have 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 Trustees reserve the right to change the criteria
used to select such financial institutions and broker/dealers. The Trustees will
regularly monitor the use of repurchase agreements and the Subadviser will,
pursuant to
4
<PAGE> 95
procedures adopted by the Trustees, 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 portfolio, if any, would be the
difference between the repurchase price and the underlying obligation's market
value. A portfolio might also incur certain costs in liquidating the underlying
obligation. Moreover, if bankruptcy or other insolvency proceedings should be
commenced with respect to the seller, realization upon the underlying obligation
by the Trust 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 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
portfolio receives monthly scheduled payments of principal and interest, and may
receive unscheduled principal payments representing prepayments on the
underlying mortgages. When a 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 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 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 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 portfolio would likely
decrease. Also, the 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 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
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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 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 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 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 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 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
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(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on the portfolio's
yield to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the 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 this Prospectus, like other debt instruments, will tend to move in
the opposite direction to interest rates. Accordingly, the Trust believes that
investing in IOs, in conjunction with the other mortgage securities described
herein, will contribute to a portfolio's relatively stable net asset value.
In addition to the stripped mortgage securities described above, the
Strategic Bond, High Yield and Value Trusts 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 IOs and IOettes are similar in nature to those associated with IOs. The
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 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 portfolio.
INVERSE FLOATERS. The Strategic Bond, High Yield and Value Trusts 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 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 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
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 portfolio
must reinvest the prepaid amounts in securities the yields of which reflect
interest rates prevailing at the time. Therefore, a 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 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 portfolio will not limit its investments to
asset-backed securities with credit enhancements. Although asset-backed
securities are not
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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. The Trust will not pay any additional fees for
such credit support, although the existence of credit support may increase the
price of a security.
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 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 portfolio may be required to distribute income
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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.
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 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 portfolios may also invest in debt securities with variable rates
of interest or which involve equity features, such 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
The Strategic Bond, Investment Quality Bond and High Yield Trusts expect
that a significant portion of their emerging market governmental debt
obligations will consist of "Brady Bonds." In addition, the Worldwide Growth,
International Small Cap, Moderate Asset Allocation and Aggressive Asset
Allocation Trusts 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. The Trusts 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, the
Trusts 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, the
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
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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.
The Trusts 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 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.
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 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 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 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 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.
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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
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 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 portfolio.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
As described in the Prospectus under "Hedging and Other Strategic
Transactions," an individual 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 portfolio (such
investment strategies and transactions are referred to herein as "Hedging and
Other Strategic Transactions"). The description in the Prospectus of each
portfolio indicates which, if any, of these types of transactions may be used by
the portfolio.
A detailed discussion of Hedging and Other Strategic Transactions follows
below. No portfolio which is authorized to use any of these investment
strategies will be obligated, however, to pursue any of such strategies and no
portfolio makes any representation as to the availability of these techniques at
this time or at any time in the future. In addition, a 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 considerations.
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 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 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 portfolio's purchase of a
call option on a security, financial futures contract, index, currency or other
instrument might be intended to protect the 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
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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 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.
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 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 portfolio or fails to make a cash
settlement payment due in accordance with the terms of that option, the
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 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 portfolio
and the amount of the portfolio's obligation pursuant to an OTC option sold by
the 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 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 portfolio or
will increase the portfolio's income. Similarly, the sale of put options can
also provide portfolio gains.
If and to the extent authorized to do so, a 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 portfolio must be
"covered" (that is, the portfolio must own the securities
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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 portfolio will receive the option premium to help protect it
against loss, a call sold by the portfolio will expose the 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
portfolio to hold a security or instrument that it might otherwise have sold.
Each 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 portfolio's investment objective and the restrictions set
forth herein.
If and to the extent authorized to do so, a 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
portfolio will not sell put options if, as a result, more than 50% of the
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 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 portfolio may trade financial
futures contracts (including stock index futures contracts which are described
below) 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 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.
A 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 to
attempt to increase income or gains. Maintaining a futures contract or selling
an option on a futures contract will typically require a 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 portfolio. If a 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 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 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 portfolio (adjusted for the historical volatility
relationship between such portfolio and the contracts) will not exceed the total
market value of the 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."
STOCK INDEX FUTURES. A stock index futures contract (an "Index Future") is
a contract to buy an integral number of units of the relevant index at a
specified future date at a price agreed upon when the contract is made. A unit
is the value at a given time of the relevant index.
In connection with a portfolio's investment in common stocks, a portfolio
may invest in Index Futures while the subadviser seeks favorable terms from
brokers to effect transactions in common stocks selected for purchase. A
portfolio may also invest in Index Futures when a subadviser believes that there
are not enough attractive common stocks available to
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maintain the standards of diversity and liquidity set for the portfolio's
pending investment in such stocks when they do become available. Through the use
of Index Futures, a portfolio may maintain a pool of assets with diversified
risk without incurring the substantial brokerage costs which may be associated
with investment in multiple issuers. This may permit a portfolio to avoid
potential market and liquidity problems (e.g., driving up or forcing down the
price by quickly purchasing or selling shares of a portfolio security) which may
result from increases or decreases in positions already held by a portfolio. A
portfolio may also invest in Index Futures in order to hedge its equity
positions.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
If and to the extent authorized to do so, a portfolio may purchase and
sell call and put options on securities indices and other financial indices. In
so doing, the 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 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 portfolio may enter into currency transactions only with
Counterparties that are deemed creditworthy by the subadviser.
A 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 portfolio, which will generally arise in connection with the
purchase or sale of the 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 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 securities held by the 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 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 portfolio has or in which the
portfolio expects to have exposure. To reduce the effect of currency
fluctuations on the value of existing or anticipated holdings of its securities,
a portfolio may also engage in proxy hedging. Proxy hedging is often used when
the currency to which a 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 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 portfolio's securities denominated in linked currencies.
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Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under "Risk Factors." If a portfolio enters
into a currency hedging transaction, the 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 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 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 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 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
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 portfolio anticipates
purchasing at a later date. A 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 portfolio
may be obligated to pay. Interest rate swaps involve the exchange by a 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 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 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, (the "1940 Act") and, thus, will not be treated as being subject to the
portfolio's borrowing restrictions. A 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 portfolio
may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially 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 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.
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Each portfolio will maintain cash and appropriate liquid assets in a
segregated custodial account to cover its current obligations under swap
agreements. If a 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
portfolio's accrued obligations under the swap agreement over the accrued amount
the portfolio is entitled to receive under the agreement. If a 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 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 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 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 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 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
portfolio could create the possibility that losses on the hedging instrument are
greater than gains in the value of the 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 portfolio might not be able to close out a transaction without incurring
substantial losses. Although a 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 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 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 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 portfolio if it is
unable to deliver or receive currency or monies in settlement of obligations and
could 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 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.
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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 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 portfolio will
require, among other things, that the portfolio segregate cash, liquid high
grade debt obligations or other assets with its custodian, or a designated
sub-custodian, to the extent the 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 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
portfolio, for example, will require the 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 portfolio on an index will require the
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 portfolio will require the portfolio to segregate liquid high grade
debt obligations equal to the exercise price. Except when a 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 portfolio to buy
or sell a foreign currency will generally require the portfolio to hold an
amount of that currency or liquid securities denominated in that currency equal
to a portfolio's obligations or to segregate liquid high grade debt obligations
equal to the amount of the portfolio's obligations.
OTC options entered into by a 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 portfolio
will not be required to do so. As a result, when a 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 portfolio other
than those described above generally settle with physical delivery, and the
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
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
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 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 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 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
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
portfolio. Moreover, instead of segregating assets if it holds a futures
contracts or forward contract, a portfolio could purchase a put option on the
same futures contract or forward contract with a
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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 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 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 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 portfolio may utilize Hedging and Other Strategic
Transactions may also be affected by certain provisions of the Code.
INVESTMENT RESTRICTIONS
There are two classes of investment restrictions to which the Trust is
subject in implementing the investment policies of the portfolios: fundamental
and nonfundamental. Nonfundamental restrictions are subject to change by the
Trustees of the Trust 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 the Trust's outstanding voting securities, the matter shall be
deemed to have been effectively acted upon with respect to a particular
portfolio if a majority of the outstanding voting securities of the 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 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
the Trust.
All of the restrictions through restriction (8) are fundamental.
Restrictions (9) through (15) are nonfundamental.
FUNDAMENTAL
The Trust 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 portfolio is specifically excepted
by the terms of a restriction, each 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 Real Estate Securities Trust and the
Lifestyle Trusts. (The Trust has determined to forego the exclusion from
the above policy of obligations of domestic branches of U.S. savings and
loan associations and to limit the exclusion of obligations of domestic
branches of U.S. banks to the 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.
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(2) Purchase the securities of any issuer if the purchase would cause more
than 5% of the value of the 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 portfolio, except that up to 25% of the value of each
portfolio's total assets may be invested without regard to these
restrictions. The Global Government Bond Trust, the Emerging Growth Trust
and the Lifestyle Trusts are not subject to these restrictions.
(3) Borrow money, except that each portfolio may borrow (i) for temporary or
emergency purposes (not for leveraging) up to 33 1/3% of the value of the
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 the Trust may be
considered an underwriter under the Securities Act of 1933 in selling
portfolio securities.
(5) Purchase or sell real estate, except that each portfolio may invest in
securities issued by companies which invest in real estate or interests
therein and each of the portfolios other than the Money Market Trust may
invest in mortgages and mortgage backed securities.
(6) Purchase or sell commodities or commodity contracts except that each
portfolio other than the Money Market Trust may purchase and sell futures
contracts on financial instruments and indices and options on such futures
contracts and each portfolio other than the Money Market Trust and U.S.
Government Securities 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 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 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 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 (A) in reliance on
Section 12(d)(1)(G) of the 1940 Act, or (B) if the purchase would cause
more than 10% of the value of the 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 portfolio or more than 5% of the value of
the 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 of
this restriction, privately issued
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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 1940 Act, (c) operate under general
exemptive orders exempting them from all provisions of the 1940 Act, and
(d) are not registered or regulated under the 1940 Act as investment
companies. This restriction (13) shall not apply to the Lifestyle Trusts.
(14) Pledge, hypothecate, mortgage or transfer (except as provided in
restriction (8)) as security for indebtedness any securities held by the
portfolio except in an amount of not more than 10% (33 1/3% in the case of
the Small Company Value, Blue Chip Growth, Equity-Income, International
Stock and Science & Technology Trusts, 15% in the case of the
International Small Cap, Growth, Balanced and Worldwide Growth Trusts and
50% in the case of the Value Trust) of the value of the 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) the Aggressive
Asset Allocation Trust may invest up to 35% of its assets in such
securities; (B) the Growth, Balanced and Science & Technology Trusts may
each invest up to 30% of its assets in such securities, (C) the
Equity-Income and Moderate Asset Allocation Trusts may each invest up to
25% of its assets in such securities; (D) the Pilgrim Baxter Growth and
Conservative Asset Allocation Trusts each may invest up to 15% of its
assets in such securities; (E) the Value Trust may invest up to 5% of its
assets in foreign securities; (F) each other portfolio other than the U.S.
Government Securities and Equity Index Trusts may invest up to 20% of its
total assets in such securities (in the case of the Small/Mid Cap, Growth,
Balanced and Value Trusts, ADRs and U.S. dollar-denominated securities are
not included in the applicable percentage limit); and (G) the foregoing
restriction shall not apply to the Small Company Value, International
Small Cap, Worldwide Growth, Global Equity, Pacific Rim Emerging Markets,
International Stock, High Yield, Global Government Bond, International
Growth and Income, Strategic Bond, Capital Growth Bond, Real Estate
Securities and Quantitative Equity Trusts.
*State Street Bank and Trust Company ("State Street"), the Trust's custodian,
pursuant to an agreement with the Trust provides a security lending service to
the Trust. In connection with the service, collateral from securities lent may
be invested in the Navigator Trust. The Navigator Trust is a registered
investment company managed by State Street that is sold only to mutual fund
lending clients of State Street. In connection with the creation of the
Navigator Trust, State Street received from the Securities and Exchange
Commission exemption from certain provisions of the 1940 Act in order to permit
its mutual fund clients to invest in the Navigator Trust. State Street received
exemption from Section 12(d)(1) of the 1940 Act and various provisions of
Section 17 of the 1940 Act.
In addition to the above policies, the 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 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
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 Money Market Trust where the percentage limitation of restriction (9) must
be met at all times.
20
<PAGE> 111
PORTFOLIO TURNOVER
The annual rate of portfolio turnover will normally differ for each
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 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 (100% or more) generally involves correspondingly greater
brokerage commission expenses, which must be borne directly by the portfolio. No
portfolio turnover rate can be calculated for the 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. The portfolio turnover rates
for the portfolios of the Trust for the years ended December 31, 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------
<S> <C> <C>
Pacific Rim Emerging Markets Trust 63% 48%
Science & Technology Trust 121% N/A
International Small Cap Trust 74% 50%*
Emerging Growth Trust 120% N/A
Pilgrim Baxter Growth Trust 63% N/A
Small/Mid Cap Trust 151% 67%*
International Stock Trust 43% N/A
Worldwide Growth Trust 84% N/A
Global Equity Trust 33% 169%
Small Company Value Trust 81%* N/A
Equity Trust 224% 223%
Growth Trust 179% 215%*
Quantitative Equity Trust 114% 105%
Equity Index Trust 7% 27%*
Blue Chip Growth Trust 37% 159%
Real Estate Securities Trust 148% 231%
Value Trust 43% N/A
International Growth and Income Trust 166% 148%
Growth and Income Trust 34% 49%
Equity-Income Trust 25% 158%
Balanced Trust 219% N/A
Aggressive Asset Allocation Trust 91% 75%
High Yield Trust 75% N/A
Moderate Asset Allocation Trust 78% 78%
Conservative Asset Allocation Trust 86% 73%
Strategic Bond Trust 131% 165%
Global Government Bond Trust 160% 167%
Capital Growth Bond Trust 73% 58%
Investment Quality Bond Trust 47% 68%
U.S. Government Securities Trust 110% 178%
Money Market Trust N/A N/A
Lifestyle Aggressive 1000 Trust 67% N/A
Lifestyle Growth 820 Trust 51% N/A
Lifestyle Balanced 640 Trust 44% N/A
Lifestyle Moderate 460 Trust 39% N/A
Lifestyle Conservative 260 Trust 38% N/A
</TABLE>
*Annualized
Prior rates of portfolio turnover do not provide an accurate guide as to
what the rate will be in any future year, and prior rates are not a limiting
factor when it is deemed appropriate to purchase or sell securities for a
portfolio. Each portfolio of
21
<PAGE> 112
the Trust intends to comply with the various requirements of the Code so as to
qualify as a "regulated investment company" thereunder.
MANAGEMENT OF THE TRUST
The Trustees and officers of the Trust, together with information as to
their principal occupations during the past five years, are listed below:
<TABLE>
<CAPTION>
================================================================================
POSITION WITH PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE THE TRUST DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------
<S> <C> <C>
Don B. Allen Trustee Senior Lecturer, William E.
136 Knickerbocker Road Simon Graduate School of
Pittsford, NY 14534 Business Administration,
Age: 68 University of Rochester
- --------------------------------------------------------------------------------
John D. DesPrez III President Senior Vice President,
73 Tremont Street Annuities, Manulife Financial,
Boston, MA 02108 September 1996 to date;
Age: 41 President and Director,
Manulife North America,
September 1996 to date;
President, North American
Funds, March 1993 to September
1996; Vice President and
General Counsel, Manulife
North America, 1991 to 1994
- --------------------------------------------------------------------------------
Charles L. Bardelis Trustee President and Executive
297 Dillingham Ave. Officer, Island Commuter Corp.
Falmouth, MA 02540 (Marine Transport)
Age: 56
- --------------------------------------------------------------------------------
Samuel Hoar Trustee Senior Mediator, Judicial
73 Tremont Street Arbitration Mediation Services
Boston, MA 02108 "JAMS/Endispute," June 1994 to
Age: 70 date; Partner, Goodwin,
Proctor and Hoar, prior to
June 1994
- --------------------------------------------------------------------------------
John D. Richardson* Chairman of Executive Vice President and
200 Bloor Street East Trustees General Manager, U.S.
Toronto, Ontario, Canada Operations, Manulife
M4W 1E5 Financial, January 1995 to
Age: 60 date; Senior Vice President
and General Manager, Canadian
Operations, Manulife
Financial, June 1992 to
January 1995
- --------------------------------------------------------------------------------
F. David Rolwing Trustee Chairman, President and CEO,
17810 Meeting House Road Montgomery Mutual Insurance
Sandy Spring, MD 20860 Company, 1991 to date
Age: 63
- --------------------------------------------------------------------------------
Robert J. Myers Trustee Consulting Actuary
9610 Wire Avenue (self-employed), April 1983 to
Silver Springs, MD 20921 date; Member, Prospective
Age: 85 Payment Assessment Commission,
June 1993 to date
- --------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 113
<TABLE>
<CAPTION>
================================================================================
POSITION WITH PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE THE TRUST DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------
<S> <C> <C>
John G. Vrysen Vice President Vice President, Chief
73 Tremont Street Financial Officer, U.S.
Boston, MA 02108 Operations,Manulife
Age: 42 Financial, January 1996 to
date; Vice President and
Actuary, Manulife North
America, January 1986 to date
- --------------------------------------------------------------------------------
James D. Gallagher Secretary Vice President, Legal
73 Tremont Street Services, Manulife Financial,
Boston, MA 02108 January 1996 to date; Vice
Age: 43 President, Secretary and
General Counsel, Manulife
North America, June 1994 to
date; Vice President and
Associate General Counsel, The
Prudential Insurance Company
of America, 1990 to 1994
- --------------------------------------------------------------------------------
Richard C. Hirtle Vice President Vice President, Strategic Development,
73 Tremont Street and Treasurer Annuities, Manulife Financial, December
Boston, MA 02108 1997 to date; Vice President, Strategic
Age: 42 Development, Manulife North America,
December 1997 to date, Vice President,
Chief Financial Officer, Annuities,
Manulife Financial, January 1996 to
December 1997; Vice President,
Treasurer and Chief Financial
Officer, Manulife North
America, November 1988 to
December 1997
================================================================================
</TABLE>
*Trustee who is an "interested person," as defined in the 1940 Act.
COMPENSATION OF TRUSTEES
The Trust does not pay any remuneration to its Trustees who are officers
or employees of the Adviser or its affiliates. Trustees not so affiliated
receive an annual retainer of $30,000, a fee of $7,500 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 the Trust
pursuant to the Advisory Agreement described below and receive no compensation
from the Trust. These officers spend only a portion of their time on the affairs
of the Trust.
<TABLE>
<CAPTION>
===========================================================================================
NAMES OF PERSON, POSITION AGGREGATE COMPENSATION FROM TOTAL COMPENSATION FROM TRUST
TRUST FOR PRIOR FISCAL YEAR* COMPLEX FOR PRIOR FISCAL YEAR*#
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Don B. Allen, Trustee $57,500 $62,000
- -------------------------------------------------------------------------------------------
Charles L. Bardelis, Trustee 57,500 62,000
- -------------------------------------------------------------------------------------------
Samuel Hoar, Trustee 57,500 62,000
- -------------------------------------------------------------------------------------------
Robert J. Myers, Trustee 57,500 62,000
- -------------------------------------------------------------------------------------------
John D. Richardson, Trustee -- --
- -------------------------------------------------------------------------------------------
F. David Rolwing, Trustee 57,500 62,000
===========================================================================================
</TABLE>
23
<PAGE> 114
*Compensation received for services as Trustee.
#Trust Complex includes all portfolios of the Trust as well as all portfolios of
North American Funds (from January 1, 1997 to September 30, 1997) of which the
predecessor to Manufacturers Securities Services, LLC was the investment
adviser.
INVESTMENT MANAGEMENT ARRANGEMENTS
The following information supplements the material appearing in the
Prospectus under the caption "Management of the Trust." Copies of the Advisory
and Subadvisory Agreements discussed below have been filed with and are
available from the Securities and Exchange Commission.
The Trust, 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, the Trust 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 the
Trust. Effective December 31, 1996, Manulife Series Fund, Inc., a registered
management investment company with nine portfolios, was merged into the Trust.
The net assets of four of the portfolios of Manulife Series Fund, Inc. were
transferred to comparable portfolios of the Trust, and the remaining five
portfolios -- the Pacific Rim Emerging Markets, Real Estate Securities, Common
Stock, Capital Growth and Equity Index Portfolios -- were transferred to the
Trust and reconstituted as new portfolios of the Trust.
Manufacturers Securities Services, LLC ("MSS" or the "Adviser"), the
successor to NASL Financial Services, Inc., is a Delaware limited liability
corporation whose principal offices are located at 73 Tremont Street, Boston,
Massachusetts 02108. MSS 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, MSS serves as principal underwriter of
certain contracts issued by The Manufacturers Life Insurance Company of North
America ("Manulife North America") and The Manufacturers Life Insurance Company
of New York.
The Advisory Agreement and each Subadvisory Agreement (except those
described below) were approved by the Trustees on September 28, 1995 and by the
shareholders of the portfolios on December 5, 1995. These approvals occurred in
connection with the change of control of MSS as a result of the merger of North
American Life Assurance Company, the ultimate controlling parent of MSS, with
The Manufacturers Life Insurance Company ("Manulife Financial") on January 1,
1996.
On December 15, 1995, the Trustees appointed Fred Alger Management, Inc.
("Alger") pursuant to a new Subadvisory Agreement with Alger ("Alger Subadvisory
Agreement") to manage the Small/Mid Cap Trust. The Alger Subadvisory Agreement
and an amendment to the Advisory Agreement, both to provide for the management
of the Small/Mid Cap Trust, were approved by the Trustees, including a majority
of the Trustees who are not parties to the agreements or interested persons of
any party to such agreements. The Alger Subadvisory Agreement and the related
amendment to the Advisory Agreement have been approved by the sole shareholder
of the Small/Mid Cap Trust.
Effective October 1, 1996, Oechsle International Advisors, L.P. ("Oechsle
International"), Wellington Management Company, LLP, Goldman Sachs Asset
Management and Roger Engemann Management Co., Inc., the Subadvisers of the
Global Equity, Money Market, Equity-Income and Blue Chip Growth Trusts,
respectively, resigned their positions as Subadvisers of those portfolios. On
September 27, 1996, the Trustees (i) appointed Morgan Stanley Asset Management
Inc. ("Morgan Stanley") pursuant to a new Subadvisory Agreement with Morgan
Stanley ("Morgan Stanley Subadvisory Agreement") to manage the Global Equity
Trust, (ii) appointed T. Rowe Price Associates, Inc. ("T. Rowe Price") pursuant
to a new Subadvisory Agreement with T. Rowe Price ("T. Rowe Price Subadvisory
Agreement") to manage the Blue Chip Growth and Equity-Income Trusts, and (iii)
appointed Manufacturers Adviser Corporation ("MAC") pursuant to a new
Subadvisory Agreement with MAC ("MAC Subadvisory Agreement") to manage the Money
Market Trust. All such Subadvisory Agreements were approved by the Trustees,
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 (with
an effective date of October 1, 1996) and by the shareholders of the respective
portfolios on December 20, 1996.
24
<PAGE> 115
Also on September 27, 1996, the Trustees (i) appointed Miller Anderson &
Sherrerd, LLP ("MAS") pursuant to a new Subadvisory Agreement with MAS ("MAS
Subadvisory Agreement") to manage the Value and High Yield Trusts, (ii)
appointed Warburg Pincus Asset Management, Inc. ("Warburg") pursuant to an
agreement with Warburg ("Warburg Subadvisory Agreement") to manage the Emerging
Growth Trust, (iii) appointed T. Rowe Price pursuant to the T. Rowe Price
Subadvisory Agreement to also manage the Science & Technology Trust, (iv)
appointed Rowe Price-Fleming International, Inc. ("Price-Fleming") pursuant to a
new Subadvisory Agreement with Price Fleming ("Price-Fleming Subadvisory
Agreement") to manage the International Stock Trust, (v) appointed Pilgrim
Baxter & Associates, Ltd. ("PBA") to manage the Pilgrim Baxter Growth Trust
pursuant to an agreement with PBA ("PBA Subadvisory Agreement"), (vi) appointed
MAC pursuant to the MAC Subadvisory Agreement to also manage the Pacific Rim
Emerging Markets, Real Estate Securities, Quantitative Equity, Capital Growth
Bond and Equity Index Trusts and (vii) appointed the Adviser to manage the
Lifestyle Trusts pursuant to an amendment to the Advisory Agreement. 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 Trustees, 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.
On December 13, 1996, the Trustees appointed MAC pursuant to the amended
MAC Subadvisory Agreement to also manage each of the Lifestyle Trusts. The
amended MAC Subadvisory Agreement was approved by the Trustees, including a
majority of the Trustees who are not parties to the agreement or interested
persons of any party to such agreement, on December 13, 1996. The amended MAC
Subadvisory Agreement was approved by the sole shareholder of each of the
Lifestyle Trusts.
On September 26, 1997, the Trustees appointed Rosenberg Institutional
Equity Management ("Rosenberg") to manage the Small Company Value Trust pursuant
to an agreement with Rosenberg. This subadvisory agreement and an amendment to
the Advisory Agreement, both to provide for the management of the Small Company
Value Trust were approved by the Trustees, including a majority of the Trustees
who are not parties to the agreement or interested persons of any party to such
agreement, on September 26, 1997.
On November 17, 1997, the Trustees appointed Salomon Brothers Asset
Management Inc ("SBAM") pursuant to a new subadvisory agreement with SBAM ("SBAM
Subadvisory Agreement") to manage the U.S. Government Securities and Strategic
Bond Trusts. In addition, on that date the Trustees approved a new subadvisory
consulting agreement with Salomon Brothers Asset Management Limited ("SBAM
Limited") ("Subadvisory Consulting Agreement") to provide certain advisory
services to SBAM with regard to currency transactions and investments in
non-dollar denominated debt securities for the benefit of the Strategic Bond
Trust. The SBAM Subadvisory Agreement and Subadvisory Consulting Agreement were
approved by the Trustees, including a majority of the Trustees who are not
parties to the agreements or interested persons of any party to such agreements,
on November 17, 1997. SBAM had previously managed the U.S. Government Securities
and Strategic Bond Trusts pursuant to a Subadvisory Agreement dated January 1,
1996. SBAM Limited had previously provided certain advisory services to SBAM
with regard to currency transactions and investments in non-dollar denominated
debt securities for the benefit of the Strategic Bond Trust pursuant to a
Subadvisory Consulting Agreement dated January 1, 1996.
On December 11, 1997, the Trustees appointed Founders Asset Management LLC
("Founders") pursuant to a new Subadvisory Agreement with Founders ("Founders
Subadvisory Agreement") to manage the International Small Cap, Growth, Worldwide
Growth and Balanced Trusts. The Founders Subadvisory Agreement was approved by
the Trustees, including a majority of the Trustees who are not parties to the
agreement or interested persons of any party to such agreement, on December 11,
1997. The predecessor to Founders, Founder Asset Management, Inc., previously
managed these Trusts pursuant to a Subadvisory Agreement dated January 4, 1996,
as amended June 20, 1996 and December 31, 1996.
THE ADVISORY AGREEMENT
Under the terms of the Advisory Agreement, the Adviser administers the
business and affairs of the Trust. The Adviser is responsible for performing or
paying for various administrative services for the Trust, including providing at
the Adviser's expense (i) office space and all necessary office facilities and
equipment, (ii) necessary executive and other personnel for managing the affairs
of the Trust 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
25
<PAGE> 116
documents required to comply with the Federal securities laws. The Adviser pays
the cost of any advertising or sales literature relating solely to the Trust,
the cost of printing and mailing Prospectuses to persons other than current
holders of Trust shares or of variable contracts funded by Trust shares and the
compensation of the Trust's officers and Trustees that are officers, directors
or employees of the Adviser or its affiliates. In addition, advisory fees are
reduced or the Adviser reimburses the Trust 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 the Trust's business) applicable to a
portfolio exceeds an annual rate of .75% in the case of the International Small
Cap, Global Equity, Global Government Bond, Worldwide Growth, International
Growth and Income, International Stock and Pacific Rim Emerging Markets Trusts,
.50% in the case of all other portfolios except for the Equity Index Trust, or
.15% in the case of the Equity Index Trust of the average annual net assets of
such portfolio. The expense limitation will continue in effect from year to year
unless otherwise terminated at any year end by the Adviser on 30 days' notice to
the Trust. In addition, in the case of the Lifestyle Trusts, the Adviser has
voluntarily agreed to pay the expenses of the Lifestyle Trusts (other than the
expenses of the Underlying Trusts). This voluntary expense reimbursement may be
terminated at any time.
In addition to providing the services and expense limitation described
above, the Adviser selects, contracts with and compensates subadvisers to manage
the investment and reinvestment of the assets of the Trust portfolios, except
for the Lifestyle Trusts. The Adviser monitors the compliance of such
subadvisers with the investment objectives and related policies of each
portfolio and reviews the performance of such subadvisers and reports
periodically on such performance to the Trustees of the Trust.
As compensation for its services, the Adviser receives a fee from the
Trust computed separately for each portfolio. The fee for each portfolio is
stated as an annual percentage of the current value of the net assets of such
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 portfolio by the value of its net assets at the close of
business on the previous business day of the Trust. The management fees each
portfolio currently is obligated to pay the Adviser is as set forth in the
Prospectus. No management fees are currently payable by the Lifestyle Trusts.
For the years ended December 31, 1997, 1996 and 1995 the aggregate
investment advisory fee paid by the Trust under the fee schedule then in effect,
absent the expense limitation provision, was $70,977,648, $46,515,018 and
$33,808,255 allocated among the portfolios as follows:
<TABLE>
<CAPTION>
PORTFOLIO 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pacific Rim Emerging Markets Trust .. $ 229,135 N/A N/A
Science & Technology Trust .......... 369,324 N/A N/A
International Small Cap Trust ....... 1,347,708 $ 492,152(1) N/A
Emerging Growth Trust ............... 2,331,739 N/A N/A
Pilgrim Baxter Growth Trust ......... 502,149 N/A N/A
Small/Mid Cap Trust ................. 2,145,327 756,997(1) N/A
International Stock Trust ........... 860,656 N/A N/A
Worldwide Growth Trust .............. 124,952 N/A N/A
Global Equity Trust ................. 7,256,254 6,234,116 $ 5,513,312
Small Company Value Trust ........... 134,688(2) N/A N/A
Equity Trust ........................ 10,703,211 8,774,975 5,643,363
Growth Trust ........................ 935,029 119,620(3) N/A
Quantitative Equity Trust ........... 913,996 N/A N/A
Equity Index Trust .................. 42,212 N/A N/A
Blue Chip Growth Trust .............. 5,156,008 3,317,165 2,115,434
Real Estate Securities Trust ........ 831,191 N/A N/A
Value Trust ......................... 523,446 N/A N/A
International Growth and Income Trust 1,965,899 1,327,151 450,200(4)
Growth and Income Trust ............. 10,037,637 6,298,799 3,922,671
Equity-Income Trust ................. 6,141,959 3,939,929 2,459,247
Balanced Trust ...................... 1,261,070 N/A N/A
Aggressive Asset Allocation Trust ... 1,766,662 1,656,217 1,463,421
</TABLE>
26
<PAGE> 117
<TABLE>
<CAPTION>
PORTFOLIO 1997 1996 1995
================================================================================
<S> <C> <C> <C>
High Yield Trust .................. 314,373 N/A N/A
Moderate Asset Allocation Trust ... 4,584,121 4,764,110 4,667,061
Conservative Asset Allocation Trust 1,521,047 1,643,494 1,639,903
Strategic Bond Trust .............. 2,240,478 1,298,996 767,448
Global Government Bond Trust ...... 1,837,451 1,934,856 1,757,909
Capital Growth Bond Trust ......... 315,701 N/A N/A
Investment Quality Bond Trust ..... $1,047,782 $ 965,766 $ 798,045
U.S. Government Securities Trust .. 1,401,568 1,401,130 1,291,668
Money Market Trust ................ 2,134,875 1,589,545 1,318,573
Lifestyle Aggressive 1000 Trust ... N/A N/A N/A
Lifestyle Growth 820 Trust ........ N/A N/A N/A
Lifestyle Balanced 640 Trust ...... N/A N/A N/A
Lifestyle Moderate 460 Trust ...... N/A N/A N/A
Lifestyle Conservative 280 Trust .. N/A N/A N/A
</TABLE>
(1) For the period March 4, 1996 (commencement of operations) to December 31,
1996.
(2) For the period October 1, 1997 (commencement of operations) to December
31, 1997.
(3) For the period July 15, 1996 (commencement of operations) to December 31,
1996.
(4) For the period January 9, 1995 (commencement of operations) to December 31,
1995.
For the years ended December 31, 1996 and 1995, the aggregate investment
advisory fee paid by the portfolios below to MAC under the fee schedule then in
effect was as follows:
<TABLE>
<CAPTION>
PORTFOLIO 1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Pacific Rim Emerging Markets Trust $161,272 $ 95,770
Quantitative Equity Trust..... 380,315 232,477
Equity Index Trust............ 11,227 N/A
Real Estate Securities Trust.. 292,384 232,449
Capital Growth Bond Trust..... 215,033 198,316
</TABLE>
Prior to January 1, 1997, the predecessor to the Trust, Manulife Series Fund,
Inc., had a direct investment advisory arrangement with MAC on behalf of the
Pacific Rim Emerging Markets, Quantitative Equity, Equity Index, Real Estate
Securities and Capital Growth Bond Portfolios. As of that date, the existing
investment advisory agreement was replaced by a subadvisory arrangement between
MAC and MSS whereby MAC serves as subadviser to the Portfolios.
THE SUBADVISORY AGREEMENTS
Under the terms of each of the current subadvisory agreements, including
the SBAM Limited Consulting Agreement (collectively "Subadvisory Agreements"),
the Subadviser manages the investment and reinvestment of the assets of the
assigned portfolios, subject to the supervision of the Trust's Trustees. The
Subadviser formulates a continuous investment program for each such portfolio
consistent with its investment objectives and policies outlined in the
Prospectus. Each Subadviser implements such programs by purchases and sales of
securities and regularly reports to the Adviser and the Trustees of the Trust
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
portfolios.
As compensation for their services, the Subadvisers receive fees from the
Adviser computed separately for each portfolio. The fee for each portfolio is
stated as an annual percentage of the current value of the net assets of the
portfolio. The fees are calculated on the basis of the average of all valuations
of net assets of each portfolio made at the close of business on each business
day of the Trust during the period for which such fees are paid. Once the
average net assets of a portfolio exceed
27
<PAGE> 118
specified amounts, the fee is reduced with respect to such excess. The schedule
of the management fees the Adviser currently is obligated to pay the Subadvisers
out of the advisory fee it receives from each portfolio is as set forth in the
Prospectus.
The Prospectus refers to a subadvisory consulting agreement between SBAM
and SBAM Limited which is subject to certain conditions as set forth in the
Prospectus. Under that agreement SBAM Limited provides certain investment
advisory services to SBAM relating to currency transactions and investments in
non-dollar denominated debt securities for the benefit of the Strategic Bond
Trust. SBAM pays SBAM Limited, as full compensation for all services provided
under the subadvisory consulting agreement, a portion of its subadvisory fee,
such amount being an amount equal to the fee payable under SBAM's subadvisory
agreement multiplied by the current value of the net assets of the portion of
the assets of the Strategic Bond Trust that SBAM Limited has been delegated to
manage divided by the current value of the net assets of the portfolio. The
Trust will not incur any expenses in connection with SBAM Limited's services.
SBAM Limited is a wholly owned subsidiary of Salomon Brothers Europe Limited
("SBEL"). Salomon (International) Finance A G ("SIF") owns 100% of SBEL's
Convertible Redeemable Preference Shares and 36.8% of SBEL's Ordinary Shares,
while the remaining 63.2% of SBEL's Ordinary Shares are owned by Salomon
Brothers Holding Company Inc. ("SBH"). SIF is wholly owned by SBH, which is in
turn, a wholly owned subsidiary of Salomon Inc.
For the years ended December 31, 1997, 1996 and 1995, the Adviser paid
aggregate subadvisory fees of $26,369,969, $15,882,911 and $12,007,940,
respectively, allocated among the portfolios as follows:
<TABLE>
<CAPTION>
PORTFOLIO 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Pacific Rim Emerging Markets Trust $ 107,828 N/A N/A
Science & Technology Trust ....... 201,450 N/A N/A
International Small Cap Trust .... 760,136 $ 284,403(1) N/A
Emerging Growth Trust ............ 1,221,387 N/A N/A
Pilgrim Baxter Growth Trust ...... 286,942 N/A N/A
Small/Mid Cap Trust .............. 1,078,894 385,464(1) N/A
International Stock Trust ........ 487,128 N/A N/A
Worldwide Growth Trust ........... 74,971 N/A N/A
Global Equity Trust .............. 3,045,314 2,677,373 $2,415,918
Small Company Value Trust ........ 76,634(2) N/A N/A
Equity Trust ..................... 3,354,190 2,256,365 1,628,673
Growth Trust ..................... 495,015 63,328(3) N/A
Quantitative Equity Trust ........ 318,784 N/A N/A
Equity-Index Trust ............... 16,885 N/A N/A
Blue Chip Growth Trust ........... 2,298,963 1,452,025 978,146
Real Estate Securities Trust ..... 292,169 N/A N/A
Value Trust ...................... 233,286 N/A N/A
International Growth and Income
Trust ............................ 951,446 653,719 232,320(4)
Growth and Income Trust .......... 2,507,394 1,761,319 1,267,236
Equity-Income Trust .............. 1,785,490 1,235,667 864,812
Balanced Trust ................... 537,310 N/A N/A
Aggressive Asset Allocation Trust 831,665 622 181 560,019
High Yield Trust ................. 138,181 N/A N/A
Moderate Asset Allocation Trust .. 1,722,433 1,454,194 1,433,417
Conservative Asset Allocation
Trust ............................ 631,791 618,391 616,971
Strategic Bond Trust ............. 847,735 + 527,906 ++ 322,077+++
Global Government Bond Trust ..... 801,544 845,379 771,716
Capital Growth Bond Trust ........ 109,281 N/A N/A
Investment Quality Bond Trust .... 362,694 334,303 276,246
U.S. Government Securities Trust . 473,424 473,786 442,603
Money Market Trust ............... 319,605 237,108 197,786
Lifestyle Aggressive 1000 Trust .. N/A N/A N/A
Lifestyle Growth 820 Trust ....... N/A N/A N/A
Lifestyle Balanced 640 Trust ..... N/A N/A N/A
</TABLE>
28
<PAGE> 119
<TABLE>
<CAPTION>
PORTFOLIO 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Lifestyle Moderate 460 Trust ..... N/A N/A N/A
Lifestyle Conservative 280 Trust . N/A N/A N/A
</TABLE>
(1) For the period March 4, 1996 (commencement of operations) to December 31,
1996.
(2) For the period October 1, 1997 (commencement of operations) to December 31,
1997.
(3) For the period July 15, 1996 (commencement of operations) to December 31,
1996.
(4) For the period January 9, 1995 (commencement of operations) to December 31,
1995.
+ Of this amount, $211,934 was paid by SBAM to SBAM Limited under the
Subadvisory Consulting Agreement
++ Of this amount, $131,977 was paid by SBAM to SBAM Limited under the
Subadvisory Consulting Agreement.
+++ Of this amount, $63,231 was paid by SBAM to SBAM Limited under the
Subadvisory Consulting Agreement.
Subject to the expense limitations discussed above, the Trust is
responsible for the payment of all expenses of its organization, operations and
business, except those which the Adviser or Subadvisers have agreed to pay
pursuant to the Advisory or Subadvisory Agreements. Expenses borne by the Trust
include charges and expenses of the custodian, independent accountants and
transfer, bookkeeping and dividend disbursing agent appointed by the Trust;
brokers' commissions and issue and transfer taxes on securities transactions to
which the Trust is a party; taxes and fees payable by the Trust; and legal fees
and expenses in connection with the affairs of the Trust, 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 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 portfolio only so long as such continuance is specifically approved at
least annually either by the Trustees or by the vote of a majority of the
outstanding voting securities of the Trust, 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 portfolio if a majority of the outstanding voting
securities of the series of shares of beneficial interest of that 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 portfolio affected by the Agreement or (ii) all of the portfolios of the
Trust.
If the holders of any series of shares of beneficial interest of any
portfolio fail to approve any continuance of the Advisory Agreement or the
Subadvisory Agreement, the Adviser or Subadviser (including SBAM Limited) may
continue to act as investment adviser or subadviser with respect to such
portfolio pending the required approval of the continuance of such Agreement, of
a new contract with the Adviser or Subadviser or different adviser or
subadviser, or other definitive action. In the case of the Adviser, the
compensation received in respect of such a portfolio during such period will be
no more than its actual costs incurred in furnishing investment advisory and
management services to such portfolio or the amount it would have received under
the Advisory Agreement in respect of such portfolio, whichever is less. In the
case of the Subadvisers, the compensation received in respect of such a
portfolio during such period will be no more than that permitted by Rule 15a-4
under the 1940 Act.
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 the Trust in the case of the
Subadvisory Agreements, (i) by the Trustees of the Trust; (ii) by the vote of a
majority of the outstanding voting securities of the Trust, or with respect to
any portfolio, by the vote of a majority of the outstanding voting securities of
the series of shares of beneficial interest of such portfolio; and (iii) by the
Adviser, 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 the Trust and the Adviser and the
Subadvisory Agreements by the Adviser and respective Subadvisers provided such
amendment is specifically approved by the vote of a majority of the outstanding
voting securities of the Trust (except as noted below) and by the vote of a
majority of the Trustees of the Trust who are not interested persons of the
Trust, the Adviser or the applicable Subadviser (including SBAM Limited) cast in
person at a
29
<PAGE> 120
meeting called for the purpose of voting on such approval. The required
shareholder approval of any amendment shall be effective with respect to any
portfolio if a majority of the outstanding voting securities of that 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 portfolio affected by the amendment or (ii) all the portfolios of the
Trust. As noted under "Subadvisory Arrangements" in the Prospectus, the Trust
has received an order from the Securities and Exchange Commission permitting the
Adviser to appoint a subadviser (other than an Affiliated Subadviser) or change
a subadvisory fee (other than for an Affiliated Subadviser) pursuant to an
agreement that is not approved by shareholders.
AGREEMENT WITH PRIOR SUBADVISER
The Conservative, Moderate and Aggressive Asset Allocation Trusts for
which Sass Investors acted as Subadviser up until December 13, 1991, and the
Bond Trust (now Investment Quality Bond Trust) for which Sass Investors acted as
Subadviser up until April 23, 1991, acquired certain taxable revenue bonds, the
value of which has declined substantially due to the default of the bonds caused
by the Conservatorship of Executive Life Insurance Company. The Trust retained
legal counsel to advise it as to any potential claims it may have arising out of
its purchase of such bonds. On the basis of the advice received and, to avoid
any prejudice resulting from the passage of time, the Trust has sought to obtain
agreements from certain persons which would toll the running of statutes of
limitations that might in time bar the assertion of any claims related to its
purchase of the bonds. In February 1991 the Trust entered into an agreement with
Sass Investors, its principals and affiliated companies concerning any claims
the Trust may have arising out of Sass Investors' performance under the Sass
Subadvisory Agreement in connection with the purchase or sale of the
aforementioned bonds. The parties agreed that the running of time under any
statute of limitations or by way of laches with respect to any claims or
defenses arising out of such purchase or sale would be tolled until thirty days
after termination of the agreement by either party giving written notice to the
other.
PORTFOLIO BROKERAGE
Pursuant to the Subadvisory Agreements, the Subadvisers are responsible
for placing all orders for the purchase and sale of portfolio securities of the
Trust. The Subadvisers have no formula for the distribution of the Trust'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 the Trust. The cost of securities transactions for each
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 the Trust and any other accounts managed by the Subadviser, could result in
the Trust 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 the
Trust 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.
30
<PAGE> 121
To the extent research services are used by the Subadvisers in rendering
investment advice to the Trust, 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 the Trust
will be available also for the benefit of other portfolios managed by the
Subadvisers.
The Subadvisers manage a number of accounts other than the Trust's
portfolios. Although investment recommendations or determinations for the
Trust's 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 Trust's 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 Trust's portfolios and other accounts. In such circumstances, the
Subadvisers may determine that orders for the purchase or sale of the same
security for the Trust's 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 Trust Portfolios and such other accounts. While in some instances combined
orders could adversely affect the price or volume of a security, the Trust
believes that its participation in such transactions on balance will produce
better overall results for the Trust.
For the years ended December 31, 1997, 1996 and 1995, the Trust paid
brokerage commissions in connection with portfolio transactions of $14,209.750,
$13,006,480 and $6,609,957, respectively, allocated among the portfolios as
follows:
<TABLE>
<CAPTION>
PORTFOLIO 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Pacific Rim Emerging Markets
Trust ............................. $ 148,339 N/A N/A
Science & Technology Trust ........ 71,708 N/A N/A
International Small Cap Trust ..... 420,472 $349,869(1) N/A
Emerging Growth Trust ............. 490,019 N/A N/A
Pilgrim Baxter Growth Trust ....... 73,688 N/A N/A
Small/Mid Cap Trust ............... 645,611 237,777(1) N/A
International Stock Trust ......... 424,132 N/A N/A
Worldwide Growth Trust ............ 73,362 N/A N/A
Global Equity Trust ............... 1,147,235 2,398,805 $2,684,254
Small Company Value Trust ......... 111,6732 N/A N/A
Equity Trust ...................... 5,018,862 4,407,265 861,497
Growth Trust ...................... 352,035 110,510(3) N/A
Quantitative Equity Trust ......... 307,370 N/A N/A
Equity-Index Trust ................ 266 N/A N/A
Blue Chip Growth Trust ............ 449,346 966,411 388,904
Real Estate Securities Trust ...... 736,968 N/A N/A
Value Trust ....................... 210,067 N/A N/A
International Growth and Income
Trust ............................. 700,640 871,203 374,962(4)
Growth and Income Trust ........... 1,129,311 1,084,722 697,618
Equity-Income Trust ............... 472,154 2,021,601 606,918
Balanced Trust .................... 588,464 N/A N/A
Aggressive Asset Allocation Trust . 214,279 177,940 286,517
High Yield Trust .................. N/A N/A N/A
Moderate Asset Allocation Trust ... 366,800 320,288 604,766
Conservative Asset Allocation Trust 56,949 60,089 104,521
Strategic Bond Trust .............. N/A N/A N/A
Global Government Bond Trust ...... N/A N/A N/A
Capital Growth Bond Trust ......... N/A N/A N/A
Investment Quality Bond Trust ..... N/A N/A N/A
U.S. Government Securities Trust .. N/A N/A N/A
Money Market Trust ................ N/A N/A N/A
Lifestyle Aggressive 1000 Trust ... N/A N/A N/A
Lifestyle Growth 820 Trust ........ N/A N/A N/A
</TABLE>
31
<PAGE> 122
<TABLE>
<CAPTION>
PORTFOLIO 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Lifestyle Balanced 640 Trust ...... N/A N/A N/A
Lifestyle Moderate 460 Trust ...... N/A N/A N/A
Lifestyle Conservative 280 Trust .. N/A N/A N/A
</TABLE>
(1) For the period March 4, 1996 (commencement of operations) to December 31,
1996.
(2) For the period October 1, 1997 (commencement of operations) to December
31, 1997.
(3) For the period July 15, 1996 (commencement of operations) to
December 31, 1996.
(4) For the period January 9, 1995 (commencement of operations)
to December 31, 1995.
Goldman Sachs & Co., prior to October 1, 1996, was an affiliated broker of
the Equity-Income Trust due to the position of Goldman Sachs Asset Management as
subadviser to this Trust portfolio. Salomon Brothers Inc. is an affiliated
broker of the U.S. Government Securities and Strategic Bond Trusts due to the
position of SBAM as subadviser to these Trust portfolios. J.P. Morgan Securities
Inc. and J.P. Morgan Securities Ltd. are affiliated brokers of the International
Growth and Income Trust due to the position of J.P. Morgan Investment Management
Inc. as subadviser to this Trust portfolio. Dresdner Bank is an affiliated
broker of the Global Equity (prior to October 1, 1996) and Global Government
Bond Trusts due to the position of Oechsle International as subadviser to these
Trust portfolios. Fidelity Capital Markets is an affiliated broker of the Equity
and Asset Allocation Trusts due to the position of Fidelity Management Trust
Company as subadviser to these Trust portfolios. Morgan Stanley & Co.
Incorporated and Morgan Stanley International are affiliated brokers of the
Global Equity Trust (since October 1, 1996) due to the position of Morgan
Stanley as subadviser to this Trust portfolio. Fred Alger & Company is an
affiliated broker of the Small/Mid Cap Trust due to the position of Fred Alger
Management, Inc. as the subadviser to the Small/Mid Cap Trust.
For the period January 1, 1996 to September 30, 1996 and for the year
ended December 31, 1995, brokerage commissions were paid to GOLDMAN, SACHS & CO.
by the Equity-Income portfolio as follows:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31, 1996
% of
aggregate
% of Portfolio's Brokerage $ amount of
Commissions Represented transactions
Portfolio Commissions for the period for the period
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity-Income Trust........... $75,615 3.74% 0.01%
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
% of
aggregate
% of Portfolio's Brokerage $ amount of
Commissions Represented transactions
Portfolio Commissions for the period for the period
- -------------------------------------------------------------------------------------
Equity-Income Trust........... $63,836 10.52% 0.19%
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, no brokerage
commissions were paid to SALOMON BROTHERS INC. by either the U.S. Government
Securities or Strategic Bond portfolios.
For the years ended December 31, 1997, 1996 and 1995, brokerage
commissions were paid to J.P. MORGAN SECURITIES by the International Growth and
Income portfolio as follows:
32
<PAGE> 123
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
% of
aggregate
% of Portfolio's Brokerage $ amount of
Commissions Represented transactions
Portfolio Commissions for the period for the period
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Growth and
Income Trust............... $516 0.07% 0.34%
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
% of
aggregate
% of Portfolio's Brokerage $ amount of
Commissions Represented transactions
Portfolio Commissions for the period for the period
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Growth and
Income Trust............... N/A N/A N/A
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
% of
aggregate
% of Portfolio's Brokerage $ amount of
Commissions Represented transactions
Portfolio Commissions for the period for the period
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Growth and
Income Trust............... $554* 0.15% 0.41%
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, no brokerage
commissions were paid to DRESDNER BANK by either the Global Equity (prior to
October 1, 1996) or the Global Government Bond portfolios.
For the years ended December 31, 1997, 1996 and 1995, brokerage
commissions were paid to FIDELITY CAPITAL MARKETS by the Equity and Asset
Allocation portfolios as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
% of
aggregate
% of Portfolio's Brokerage $ amount of
Commissions Represented transactions
Portfolio Commissions for the period for the period
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Trust .......................$13,286 0.26% 0.08%
Aggressive Asset Allocation Trust .. N/A N/A N/A
Moderate Asset Allocation Trust .... N/A N/A N/A
Conservative Asset Allocation Trust N/A N/A N/A
</TABLE>
33
<PAGE> 124
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
% of
aggregate
% of Portfolio's Brokerage $ amount of
Commissions Represented transactions
Portfolio Commissions for the period for the period
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Trust ....................... N/A N/A N/A
Aggressive Asset Allocation Trust .. N/A N/A N/A
Moderate Asset Allocation Trust .... N/A N/A N/A
Conservative Asset Allocation Trust N/A N/A N/A
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
% of
aggregate
% of Portfolio's Brokerage $ amount of
Commissions Represented transactions
Portfolio Commissions for the period for the period
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Trust ...................... N/A N/A N/A
Aggressive Asset Allocation Trust . $3,240 1.13% 0.08%
Moderate Asset Allocation Trust ... 8,815 1.46% 0.07%
Conservative Asset Allocation Trust 1,920 1.84% 0.05%
</TABLE>
For the years ended December 31, 1997 and 1996, brokerage commissions were
paid to MORGAN STANLEY by the Global Equity portfolio as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
% of
aggregate
% of Portfolio's Brokerage $ amount of
Commissions Represented transactions
Portfolio Commissions for the period for the period
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity Trust........... $93,584 8.16% 0.28%
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
% of
aggregate
% of Portfolio's Brokerage $ amount of
Commissions Represented transactions
Portfolio Commissions for the period for the period
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity Trust........... $487,347 20.32% 0.02%
</TABLE>
For the year ended December 31, 1997 and the period March 4, 1996
(commencement of operations of the Small/Mid Cap Trust) to December 31, 1996,
brokerage commissions were paid to FRED ALGER & COMPANY as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
% of
aggregate
% of Portfolio's Brokerage $ amount of
Commissions Represented transactions
Portfolio Commissions for the period for the period
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small/Mid Cap Trust........... $637,395 98.73% 0.19%
</TABLE>
34
<PAGE> 125
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
% of
aggregate
% of Portfolio's Brokerage $ amount of
Commissions Represented transactions
Portfolio Commissions for the period for the period
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small/Mid Cap Trust........... $221,408 93.12% 0.02%
</TABLE>
PURCHASE AND REDEMPTION OF SHARES
The Trust will redeem all full and fractional portfolio shares for cash at
the net asset value per share of each portfolio. Payment for shares redeemed
will generally be made within seven days after receipt of a proper notice of
redemption. However, the Trust 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 the Trust of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Trust fairly to
determine the value of its net assets; or (c) the Commission by order so permits
for the protection of security holders of the Trust.
DETERMINATION OF NET ASSET VALUE
The following supplements the discussion of the valuation of portfolio
assets set forth in the Prospectus under the caption "Purchase and Redemption of
Shares."
Securities held by the portfolios, except for debt instruments with
remaining maturities of 60 days or less, all debt instruments held by the Money
Market Trust and shares of the Underlying Portfolios held by the Lifestyle
Trusts, 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 Trustees. Shares of the Underlying
Portfolios held by the Lifestyle Trusts are valued at their net asset value as
described in the Prospectus under "Purchase and Redemption of Shares."
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 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 portfolio's net asset value. For instance, if a fund with portfolio
securities primarily listed on foreign exchanges which trade on Saturdays or
other customary U.S. national business holidays, does not price on these days,
the portfolio will trade and the net asset value of the fund's redeemable
securities may be significantly affected on days when the investor has no access
to the fund. 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 Trustees.
Debt instruments with a remaining maturity of 60 days or less held by each
of the portfolios other than the Money Market Trust, and all instruments held by
the 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, the Trust 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.
35
<PAGE> 126
The Money Market Trust uses the amortized cost valuation method in
reliance upon Rule 2a-7 under the 1940 Act. As required by the Rule, the Money
Market Trust will maintain a dollar weighted average maturity of 90 days or
less. In addition, the Money Market Trust is permitted to purchase only
securities that the Trustees determine 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 Money Market Trust
will invest only in obligations that have remaining maturities of thirteen
months or less.
The Trustees have established procedures designed to stabilize, to the
extent reasonably possible, the 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 the Adviser 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 the Adviser that requires that on determining net asset value per
share based upon available market quotations, the 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 Trustees,
although the actual calculations may be made by persons acting pursuant to the
direction of the Trustees. 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 Trustees of the Trust, of the fair
value of securities held by the Money Market Trust for which market quotations
are not readily available for purposes of enabling the Money Market Trust's
Custodian to calculate net asset value. The Adviser, with the Subadviser's
assistance, periodically (but no less frequently than annually) shall prepare a
written report to the Trustees 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, the Adviser shall promptly call a special
meeting of the Trustees to determine what, if any, action should be initiated.
Where the Trustees believe the extent of any deviation from the 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
Trustees 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 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 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 Manulife North
America.
PERFORMANCE DATA
Each of the 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 portfolio, including its
predecessor prior to the reorganization of the Fund on December 31, 1988, became
available for investment. In the case of the Pacific Rim Emerging Markets, Real
Estate Securities, Quantitative Equity, Capital Growth Bond and Equity Index
Trusts, such quotations will be for periods that include the performance of the
predecessor portfolios of Manulife Series Fund, Inc. 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 the Trust and all Trust expenses are reflected in
the calculations. There are no non-recurring fees such as sales loads, surrender
charges or account fees charged by the Trust. 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.
36
<PAGE> 127
<TABLE>
<CAPTION>
TOTAL ANNUALIZED RETURN
- -------------------------------------------------------------------------------------------------------------
Trust One Year Ended Five Year Ended Since Inception or 10 Years, Date first
12/31/97 12/31/97 whichever is shorter through Available
12/31/97
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pacific Rim Emerging
Markets# -34.12% N/A -8.01% 10/04/94
Science and Technology N/A N/A 10.71% 01/01/97
International Small Cap 0.79% N/A 5.40% 03/04/96
Emerging Growth N/A N/A 18.23% 01/01/97
Pilgrim Baxter Growth N/A N/A 0.00% 01/01/97
Small/Mid Cap 15.26% N/A 12.17% 03/04/96
International Stock N/A N/A 1.38% 01/01/97
Worldwide Growth N/A N/A 13.29% 01/01/97
Global Equity 20.80% 14.64% 9.77% 03/18/88
Small Company Value Trust N/A N/A -4.48% 10/01/97
Equity 19.25% 18.80% 15.14%** 06/18/85
Growth 25.35% N/A 25.03% 07/15/96
Quantitative Equity # 29.83% 16.54% 15.12%** 04/30/87
Equity Index # 33.53% N/A 25.56% 02/14/96
Blue Chip Growth 26.94% 13.12% 12.81% 12/11/92
Real Estate Securities # 18.41% 15.97% 15.88%** 04/30/87
Value N/A N/A 22.14% 01/01/97
International Growth and
Income -0.08% N/A 6.43% 01/09/95
Growth and Income 32.83% 18.90% 17.27% 04/23/91
Equity-Income 29.71% N/A 17.79% 02/19/93
Balanced N/A N/A 17.79% 01/01/97
Aggressive. Asset
Allocation 19.09% 12.60% 9.87% 08/03/89
High Yield N/A N/A 12.68% 01/01/97
Moderate Asset Allocation 15.87% 10.74% 8.95% 08/03/89
Conservative Asset
Allocation 11.44% 8.55% 7.72% 08/03/89
Strategic Bond 10.98% N/A 9.46% 02/19/93
Global Government Bond 2.95% 9.95% 8.88% 03/18/88
Capital Growth Bond # 8.72% 7.19% 8.53%** 06/26/84
Investment Quality Bond 9.75% 7.13% 5.75%** 06/18/85
</TABLE>
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<PAGE> 128
<TABLE>
<CAPTION>
TOTAL ANNUALIZED RETURN
- -------------------------------------------------------------------------------------------------------------
Trust One Year Ended Five Year Ended Since Inception or 10 Years, Date first
12/31/97 12/31/97 whichever is shorter through Available
12/31/97
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Securities 8.47% 6.62% 7.24% 03/18/88
Money Market# 5.15% 4.47% 5.45%** 06/18/85
Lifestyle Aggressive 1000 N/A N/A 10.89% 01/07/97
Lifestyle Growth 820 N/A N/A 13.84% 01/07/97
Lifestyle Balanced 640 N/A N/A 14.11% 01/07/97
Lifestyle Moderate 460 N/A N/A 13.70% 01/07/97
Lifestyle Conservative 280 N/A N/A 12.15% 01/07/97
</TABLE>
* Aggregate total return from October 1, 1997 (inception date) to December 31,
1997.
** 10 Years
# Performance presented for these Trust portfolios is based upon the performance
of their respective predecessor Manulife Series Fund, Inc. portfolios for
periods prior to the consummation of the reorganization effective December 31,
1996. Performance presented for each of these Trust portfolios is based on the
historical expenses and performance of its predecessor Manulife Series Fund,
Inc. portfolio and, therefore, does not reflect for periods prior to December
31, 1996, the current Trust expenses that an investor would incur as a holder of
shares of such Trust portfolio.
The Trust 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 the Trust, 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 THE TRUST
SHARES OF THE TRUST
The Declaration of Trust authorizes the Trustees of the Trust 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. The Trust currently has thirty-six series of
shares as described in the Prospectus. The shares of each 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 portfolio are entitled to redeem
their shares as set forth under "Purchase and Redemption of Shares." The Trust
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 portfolio and upon
liquidation in the net assets of such 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 portfolio will be allocated in the manner determined by the
Trustees. Accrued liabilities which are not clearly allocable to one or more
portfolios will also be allocated among the portfolios in the manner determined
by the Trustees.
Shareholders of each portfolio of the Trust 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 portfolio.
All shares entitled to vote are voted by series, except that when voting for the
election of Trustees and when otherwise permitted by the 1940 Act, shares are
voted in the aggregate and not by series. Only shares of a particular portfolio
are entitled to vote on matters determined by the
38
<PAGE> 129
Trustees to affect only the interests of that portfolio. Pursuant to the 1940
Act and the rules and regulations thereunder, certain matters approved by a vote
of a majority of all the shareholders of the Trust may not be binding on a
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 the Trust may remove a Trustee by a vote
cast in person or by proxy at a meeting called for such purpose. Shares of the
Trust do not have cumulative voting rights, which means that the holders of more
than 50% of the Trust'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 the Trust could, under certain
circumstances, be held personally liable for the obligations of the Trust. The
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of the Trust and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by
the Trustees or any officer of the Trust. The Declaration of Trust provides for
indemnification out of the property of a Trust portfolio for all losses and
expenses of any shareholder held personally liable for the obligations of such
portfolio. The Declaration of Trust also provides that the Trust shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Trust and satisfy any judgment thereon, but only out of
the property of a particular portfolio. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which a particular portfolio would be unable to meet its
obligations.
PRINCIPAL HOLDERS OF SECURITIES
The Trust currently has four shareholders: Manulife North America, The
Manufacturers Life Insurance Company of New York, The Manufacturers Life
Insurance Company of America ("Manufacturers America") and The Manufacturers
Life Insurance Company (U.S.A.). Each shareholder holds Trust shares
attributable to variable and variable life contracts in their separate accounts.
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
Code and regulations thereunder, the By-laws of the Trust provide that shares of
the Trust may be purchased only by the following eligible shareholders: (a)
separate accounts of Manulife North America or of other insurance companies; (b)
Manulife North America; (c) MSS; (d) any corporation related in a manner
specified in section 267(b) of the Code to Manulife North America or to MSS, and
(e) any trustee of a qualified pension or retirement plan. As a matter of
operating policy, shares of the Trust may be purchased only by the eligible
shareholders of categories (a), (b) and (d).
ADDITIONAL INFORMATION CONCERNING TAXES
The following discussion is a general and abbreviated summary of certain
additional tax considerations affecting a portfolio and its shareholders. No
attempt is made to present a detailed explanation of all Federal, state, local
and foreign tax concerns, and the discussions set forth here and in the
Prospectus do not constitute tax advice. Investors are urged to consult their
own tax advisors with specific questions relating to Federal, state and local or
foreign taxes.
The Trust believes that each portfolio will qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). As a result of qualifying as a regulated investment
company, each portfolio will not be subject to U.S. Federal income tax on its
net investment income (i.e., its investment company taxable income, as that term
is defined in the Code, determined without regard to the deduction for dividends
paid) and net capital gain (i.e., the excess of its net realized long-term
capital gain over its net realized short-term capital loss), if any, that it
distributes to its shareholders in each taxable year, provided that it
distributes to its shareholders at least 90% of its net investment income for
such taxable year.
A portfolio will be subject to a non-deductible 4% excise tax to the
extent that the portfolio does not distribute by the end of each calendar year
(a) at least 98% of its ordinary income for the calendar year; (b) at least 98%
of its capital gain net income for the one-year period ending, as a general
rule, on October 31 of each year; and (c) 100% of the undistributed ordinary
income and capital gain net income from the preceding calendar years (if any)
pursuant to the
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<PAGE> 130
calculations in (a) and (b). For this purpose, any income or gain retained by a
portfolio that is subject to corporate tax will be considered to have been
distributed by year-end. Each portfolio intends to make sufficient distributions
to avoid imposition of both the corporate level tax and the excise tax.
A portfolio may make investments that produce income that is not matched
by a corresponding cash distribution to the portfolio, such as investments in
pay-in-kind bonds or in obligations such as certain Brady Bonds and zero-coupon
securities having original issue discount (i.e., an amount in excess of the
stated redemption price of the security at maturity over its issue price), or
market discount (i.e., an amount equal to the excess of the stated redemption
price at maturity of the security over its basis immediately after it was
acquired) if the portfolio elects to accrue market discount on a current basis.
In addition, income may continue to accrue for Federal income tax purposes with
respect to a non-performing investment. Any such income would be treated as
income earned by a portfolio and therefore would be subject to the distribution
requirements of the Code. Because such income may not be matched by a
corresponding cash distribution to a portfolio, such portfolio may be required
to borrow money or dispose of other securities to be able to make distributions
to its investors. In addition, if an election is not made to currently accrue
market discount with respect to a market discount bond, all or a portion of any
deduction for any interest expense incurred to purchase or hold such bond may be
deferred until such bond is sold or otherwise disposed.
Certain of the portfolios may engage in hedging or derivatives
transactions involving foreign currencies, forward contracts, options and
futures contracts (including options, futures and forward contracts on foreign
currencies) and short- sales (see "HEDGING AND OTHER STRATEGIC TRANSACTIONS").
Such transactions will be subject to special provisions of the Code that, among
other things, may affect the character of gains and losses realized by a
portfolio (that is, may affect whether gains or losses are ordinary or capital),
accelerate recognition of income of a portfolio and defer recognition of certain
of the portfolio's losses. These rules could therefore affect the character,
amount and timing of distributions to shareholders. In addition, these
provisions (1) will require a portfolio to "mark-to-market" certain types of
positions in its portfolio (that is, treat them as if they were closed out) and
(2) may cause a portfolio to recognize income without receiving cash with which
to pay dividends or make distributions in amounts necessary to satisfy the
distribution requirement and avoid the 4% excise tax. Each portfolio intends to
monitor its transactions, will make the appropriate tax elections and will make
the appropriate entries in its books and records when it acquires any option,
futures contract, forward contract or hedged investment in order to mitigate the
effect of these rules.
If a portfolio purchases shares in a "passive foreign investment company"
(a "PFIC"), the portfolio may be subject to U.S. Federal income tax on a portion
of any "excess distribution" or gain from the disposition of such shares even if
such income is distributed as a taxable dividend by the portfolio to its
shareholders. Additional charges in the nature of interest may be imposed on the
portfolio in respect of deferred taxes arising from such distributions or gains.
If a portfolio were to invest in a PFIC and elected to treat the PFIC as a
"qualified electing fund" under the Code, in lieu of the foregoing requirements,
the portfolio would be required to include in income each year a portion of the
ordinary earnings and net capital gain of the qualified electing fund, even if
not distributed to the portfolio. Alternatively, under recently enacted
legislation, a portfolio can elect to mark-to-market at the end of each taxable
year its shares in a PFIC; in this case, the portfolio would recognize as
ordinary income any increase in the value of such shares, and as ordinary loss
any decrease in such value to the extent it did not exceed prior increases
included in income. Under either election, a portfolio might be required to
recognize in a year income in excess of its distributions from PFICs and its
proceeds from dispositions of PFIC stock during that year, and such income would
nevertheless be subject to the distribution requirements and would be taken into
account for purposes of the 4% excise tax.
Since the portfolios' shareholders are the separate accounts of insurance
companies, no discussion is included herein as to the U.S. Federal income tax
consequences to the holder of a variable annuity or life insurance contract who
allocates investments to a portfolio. For information concerning the U.S.
Federal income tax consequences to such holders, see the prospectus for such
contract. Holders of variable annuity or life insurance contracts should consult
their tax advisors about the application of the provisions of the tax law
described in this Statement of Additional Information in light of their
particular tax situations.
40
<PAGE> 131
REPORTS TO SHAREHOLDERS
The financial statements of the Trust at December 31, 1997 are
incorporated herein by reference from its annual report to shareholders filed
with the Securities and Exchange Commission pursuant to Section 30(b) of the
1940 Act and Rule 30b2-1.
INDEPENDENT ACCOUNTANTS
The financial statements of the Trust at December 31, 1997, including the
related Financial Highlights which appear in the Prospectus, have been audited
by Coopers & Lybrand L.L.P., independent accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon said
report given on the authority of said firm as experts in accounting and
auditing. Coopers & Lybrand has offices at One Post Office Square, Boston, MA
02109.
LEGAL COUNSEL
Messrs. Jones & Blouch L.L.P., 1025 Thomas Jefferson Street, N.W.,
Washington, DC 20007, have passed upon certain legal matters relating to the
Federal securities laws.
ADDITIONAL INFORMATION REGARDING SUBADVISERS
ROSENBERG INSTITUTIONAL EQUITY MANAGEMENT
INVESTMENT PHILOSOPHY. Rosenberg believes that stock prices do not
perfectly reflect the "fundamental value" of companies but rather the market's
assessment of how well the company is positioned to generate future earnings
and/or future cash flow. Rosenberg identifies and purchases those stocks which
are undervalued (i.e., stocks which are currently cheaper than similar stocks
with the same characteristics.) Rosenberg believes that the market will over
time recognize the "better value" and that the mispricing will be corrected as
the stocks in the Small Company Value Trust are purchased by other investors.
In determining whether or not a stock is attractive, Rosenberg considers
the company's current estimated fundamental value as determined by Rosenberg's
proprietary appraisal model, the company's future earnings, and investor
sentiment toward the stock. The Small Company Value Trust is composed of
undervalued stocks from every sector represented in the benchmark (currently,
the Russell 2000 Index).
STOCK SELECTION. Fundamental valuation of stocks is key to Rosenberg's
investment process, and the heart of the valuation process lies in Rosenberg's
proprietary appraisal model.
An important feature of the appraisal model is the classification of
companies into one or more of 166 groups of "similar" businesses. Each company
is broken down into its individual business segments, and each segment is
compared with similar business operations of other companies. Rosenberg
appraises the company's assets, operating earnings and sales within each
business segment, accepting the market's valuation of that category of business
as fair. Rosenberg then integrates the segment appraisals into balance sheet,
income statement, and sales valuation models for the total company, and
simultaneously adjusts the segment appraisals to include appraisals for
variables which are declared only for the total company, such as taxes, capital
structure, and pension funding.
The difference between Rosenberg's appraisal and the market price is
believed to represent an opportunity for profit. For each stock, Rosenberg
develops "appraisal alphas" (i.e., the expected rate of extraordinary return) by
adjusting for the rate at which the market has corrected for such valuations in
the past.
A second sphere of analysis is captured by Rosenberg's proprietary
earnings change model, which analyzes more than 20 variables to predict
individual company earnings over a one year horizon. The value of the projected
earnings change is converted to an "earnings change alpha" by multiplying the
projected change by the market's historical response to changes of that
magnitude.
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<PAGE> 132
Finally, Rosenberg's proprietary investor sentiment model quantifies
investor sentiment about features of stocks which influence price. This model
measures company quality and also captures market enthusiasm towards individual
stocks by looking at broker recommendations and analyst estimates. Investor
sentiment alphas are developed by multiplying the model's sentiment scores by
the market's historical response to such scores.
Each company's earnings change alpha and investor sentiment alpha is added
to its appraisal alpha to arrive at a total company alpha. Stocks with large
positive total company alphas are candidates for purchase. Stocks held in a
portfolio with total company alphas that are only slightly positive, zero or
negative are candidates for sale.
Before trading, Rosenberg systematically analyzes the short-term price
behavior of individual stocks to determine the timing of trades. Rosenberg
develops a "trading alpha" for each stock (i.e., the expected short-term
extraordinary return) which is designed to enable the Small Company Value Trust
to purchase stocks from supply and to sell stocks into demand, greatly reducing
trading costs.
OPTIMIZATION. Rosenberg's portfolio optimization system seeks to optimize
the trade-off between risk and reward relative to the benchmark. It exploits the
information developed by Rosenberg's stock selection models to maximize return
relative to the benchmark. The optimizer recommends positions in companies which
in aggregate constitute the most efficient portfolio. The optimizer
simultaneously considers total company alphas, trading alphas, and risk and
quantifies the expected "net benefit" to the portfolio of each recommended
transaction. A stock is considered for sale when a higher alpha stock with
complementary risk characteristics has been identified. In the U.S. markets,
portfolios are reoptimized continuously throughout the day, allowing Rosenberg
to respond immediately to investment opportunities, subject to certain
limitations on short-term trading applicable by virtue of the Small Company
Value Trust's intention to qualify as a regulated investment company under the
Code.
TRADING. Rosenberg's trading system aggregates the recommended transaction
for the Small Company Value Trust and determines the feasibility of each
recommendation in light of the stock's liquidity, the expected transaction
costs, and general market conditions. Trades are executed through any one of
four trading strategies: traditional brokerage, networks, accommodation, and
package or "basket" trades designed to facilitate large volume trading with
little or no price disturbance.
Rosenberg continuously monitors trading costs to determine the impact of
commission and price disturbance on the Small Company Value Trust.
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<PAGE> 133
Pro Forma Financial Statements
<PAGE> 134
MANUFACTURERS INVESTMENT TRUST -- CAPITAL GROWTH BOND TRUST
MANUFACTURERS INVESTMENT TRUST -- INVESTMENT QUALITY BOND TRUST
PRO FORMA COMBINING STATEMENT OF ASSETS
AND LIABILITIES -- DECEMBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CAPITAL INVESTMENT
GROWTH BOND QUALITY BOND PRO FORMA PRO FORMA
TRUST TRUST ADJUSTMENTS COMBINED
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at value (See
accompanying portfolio of investments)..... $65,199,949 $371,158,253 $436,358,202
Cash......................................... 60 998 1,058
Receivables:
Fund shares sold........................... 92,685 689,154 781,839
Dividends and interest..................... 1,068,524 5,412,268 6,480,792
Other assets................................. 272 1,068 1,340
----------- ------------ ------------
Total assets........................ 66,361,490 377,261,741 443,623,231
----------- ------------ ------------
LIABILITIES
Payables:
Investments purchased...................... -- 74,665 74,665
Dividend and interest withholding tax...... 2,251 583 2,834
Custodian fee.............................. 2,542 10,859 13,401
Securities lending......................... 1,238,220 65,034,495 66,272,715
Other accrued expenses..................... 6,531 30,395 36,926
----------- ------------ ------------
Total liabilities................... 1,249,544 65,150,997 66,400,541
----------- ------------ ------------
NET ASSETS................................... $65,111,946 $312,110,744 $377,222,690
=========== ============ ============
Net assets consist of:
Undistributed net investment income (Note
2)....................................... $ 3,404,123 $ 17,104,902 $ 20,509,025
Accumulated undistributed net realized loss
on investments........................... (952,030) (1,905,310) (2,857,340)
Unrealized appreciation on investments..... 2,930,856 6,062,763 8,993,619
Capital shares at par value of $.01 (Note
3)....................................... 53,863 250,491 $ (1,606)(A) 302,748
Additional paid-in capital................. 59,675,134 290,597,898 1,606(A) 350,274,638
----------- ------------ --------- ------------
Net assets.......................... $65,111,946 $312,110,744 $377,222,690
=========== ============ ============
Capital shares outstanding (Note 3).......... 5,386,315 25,049,137 (160,637)(B) 30,274,815
----------- ------------ --------- ------------
Net asset value, offering price and
redemption price per share................. $ 12.09 $ 12.46 $ 12.46
=========== ============ ============
Investments in securities, at identified cost
(Note 2)................................... $62,269,093 $365,095,490 $427,364,583
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 135
MANUFACTURERS INVESTMENT TRUST -- CAPITAL GROWTH BOND TRUST
MANUFACTURERS INVESTMENT TRUST -- INVESTMENT QUALITY BOND TRUST
PRO FORMA COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CAPITAL INVESTMENT
GROWTH BOND QUALITY BOND PRO FORMA PRO FORMA
TRUST TRUST ADJUSTMENTS COMBINED
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Investment Income:
Interest...................................... $3,831,261 $18,819,640 $22,650,901
Dividends..................................... -- 37,714 37,714
---------- ----------- -----------
Total income........................... 3,831,261 18,857,354 22,688,615
---------- ----------- -----------
Expenses:
Investment adviser fee........................ 384,100 1,610,817 1,994,917
Custodian fee................................. 26,138 123,974 150,112
Audit and legal fees.......................... 5,187 19,340 24,527
Printing and postage fees..................... 5,986 24,721 30,707
Registration and filing fees.................. 1,012 4,180 5,192
Trustee fees and expenses..................... 1,988 7,437 9,425
Miscellaneous................................. 762 4,566 5,328
---------- ----------- -----------
Total expenses......................... 425,173 1,795,035 2,220,208
---------- ----------- -----------
Net investment income.................. 3,406,088 17,062,319 20,468,407
---------- ----------- -----------
Realized and unrealized gain(loss)on
investments:
Net realized gain(loss) on investments........ (94,997) 1,251,275 1,156,278
Change in unrealized appreciation on
investments................................. 1,239,956 2,352,727 3,592,683
---------- ----------- -----------
Net gain on investments................ 1,144,959 3,604,002 4,748,961
---------- ----------- -----------
Net increase in net assets resulting from
operations.................................... $4,551,047 $20,666,321 $25,217,368
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 136
MANUFACTURERS INVESTMENT TRUST -- CAPITAL GROWTH BOND TRUST
MANUFACTURERS INVESTMENT TRUST -- INVESTMENT QUALITY BOND TRUST
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998 (UNAUDITED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- ------------------------------------------- --------------------------
CAPITAL INVESTMENT CAPITAL INVESTMENT
GROWTH QUALITY PRO FORMA GROWTH QUALITY
BOND BOND COMBINED SECURITY DESCRIPTION BOND BOND
---- ---- -------- -------------------- ---- ----
<C> <C> <C> <S> <C> <C>
COMMON STOCKS -- 0.03%
INDUSTRIALS -- 0.00%
$ 629 $ 629 SF Holding Group $ 1,258
------------
PUBLISHING -- 0.03%
1,380 1,380 Primedia, Incorporated 133,170
------------
TELECOMMUNICATIONS SERVICES -- 0.00%
35 35 American Mobile Satellite Corporation 1,148
425 425 KMC Telecom Holdings, Incorporated 1,115
------------
2,263
TELEPHONE -- 0.00%
63 63 Viatel, Incorporated 6,946
------------
TOTAL COMMON STOCKS
(Cost: $137,172) $ 143,637
============
PREFERRED STOCK -- 0.08%
INDUSTRIALS -- 0.02%
17 17 SF Holding Group 73,525
MINING -- 0.06%
270 270 Fairfield Manufacturing, Incorporated 259,875
------------
TOTAL PREFERRED STOCK
(Cost: $432,450) $ 333,400
============
WARRANTS -- 0.00%
SOFTWARE -- 0.00%
Concentric Network Corporation
40 40 (Expiration Date 12/15/2007, strike price
$10.86) 4,805
------------
TOTAL WARRANTS
(Cost: $0) $ 4,805
============
U.S. TREASURY OBLIGATIONS -- 31.57%
U.S. TREASURY BONDS -- 26.74%
$2,995,000 $ 2,995,000 6.375% due 08/15/2027 $ 3,442,363
1,065,000 1,065,000 6.625% due 02/15/2027 1,259,693
235,000 235,000 6.750% due 08/15/2026 281,523
-----------
$ 9,000,000 9,000,000 7.500% due 11/15/2016 11,179,710
11,500,000 11,500,000 11.875% due 11/15/2003 15,009,340
56,000,000 56,000,000 12.000% due 08/15/2013 85,496,320
------------
4,983,579 111,685,370
U.S. TREASURY NOTES -- 4.83%
1,000,000 1,000,000 4.625% due 11/30/2000 1,000,620
3,000,000 3,000,000 5.875% due 02/28/1999 3,005,610
6,100,000 6,100,000 6.125% due 08/15/2007 6,662,359
1,000,000 1,000,000 6.375% due 05/15/1999 1,006,250
5,600,000 5,600,000 6.500% due 08/31/2001 5,856,368
800,000 800,000 7.250% due 05/15/2004 896,624
1,500,000 1,500,000 7.500% due 02/15/2005 1,717,500
800,000 800,000 7.875% due 11/15/2004 926,872
-----------
21,072,203
TOTAL U.S. TREASURY OBLIGATIONS
(Cost: $133,000,379) $26,055,782 $111,685,370
=========== ============
<CAPTION>
VALUE
------------
PRO FORMA
COMBINED
--------
<S> <C>
$ 1,258
------------
133,170
------------
1,148
1,115
------------
2,263
6,946
------------
$ 143,637
============
73,525
259,875
------------
$ 333,400
============
4,805
------------
$ 4,805
============
3,442,363
1,259,693
281,523
11,179,710
15,009,340
85,496,320
------------
116,668,949
1,000,620
3,005,610
6,662,359
1,006,250
5,856,368
896,624
1,717,500
926,872
------------
21,072,203
$137,741,152
============
</TABLE>
<PAGE> 137
MANUFACTURERS INVESTMENT TRUST -- CAPITAL GROWTH BOND TRUST
MANUFACTURERS INVESTMENT TRUST -- INVESTMENT QUALITY BOND TRUST
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998 (UNAUDITED) -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- ------------------------------------------- --------------------------
CAPITAL INVESTMENT CAPITAL INVESTMENT
GROWTH QUALITY PRO FORMA GROWTH QUALITY
BOND BOND COMBINED SECURITY DESCRIPTION BOND BOND
---- ---- -------- -------------------- ---- ----
<C> <C> <C> <S> <C> <C>
U.S. TREASURY NOTES -- CONTINUED
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 12.17%
FEDERAL HOME LOAN MORTGAGE
CORPORATION -- 2.72%
$ 6,509,100 $ 6,509,100 6.000% due 02/01/2003 - 11/01/2013 $ 6,533,152
400,000 400,000 6.300% due 03/15/2023 408,124
1,221,845 1,221,845 6.500% due 08/17/2011 - 06/25/2019 1,231,682
3,579,597 3,579,597 7.500% due 06/01/2010 - 05/01/2028 3,677,202
------------
11,850,160
FEDERAL NATIONAL MORTGAGE
ASSOCIATION -- 3.80%
1,000,000 1,000,000 5.900% due 10/25/2019 999,060
13,486,567 13,486,567 6.000% due 06/01/2028 - 12/01/2028 13,309,489
1,496,241 1,496,241 6.447% due 01/01/2008 1,570,742
685,704 685,704 7.085% due 08/01/2003 700,275
------------
16,579,566
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION -- 5.65%
4,852,510 4,852,510 6.000% due 08/15/2008 - 12/15/2013 4,901,263
155,105 155,105 6.500% due 07/15/2008 - 05/15/2009 157,931
9,347,495 9,347,495 7.000% due 04/15/2023 - 04/15/2026 9,565,612
6,878,939 6,878,939 7.500% due 04/15/2002 - 07/15/2028 7,097,637
1,632,069 1,632,069 8.000% due 06/15/2023 - 10/15/2023 1,702,444
1,166,636 1,166,666 8.500% due 09/15/2016 - 04/15/2022 1,243,998
778 778 9.500% due 10/15/2009 836
------------
24,669,721
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost: $52,439,238) $ 53,099,447
============
FOREIGN GOVERNMENT OBLIGATIONS -- 0.78%
GOVERNMENT OF CANADA -- 0.78%
2,000,000 2,000,000 Province of Quebec, 8.625% due 01/19/2005 2,286,780
$1,000,000 1,000,000 Province of Quebec, 8.800% due 04/15/2003 $ 1,122,130
-----------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS (Cost:
$3,351,542) $ 1,122,130 $ 2,286,780
=========== ============
CORPORATE BONDS -- 33.45%
AIR TRAVEL -- 0.91%
150,000 150,000 Argo-Tech Corporation,
8.625% due 10/01/2007 142,500
915,000 915,000 Continental Airlines,
6.648% due 09/15/2017 900,470
1,300,000 1,300,000 6.900% due 01/02/2018 1,305,174
1,600,000 1,600,000 SCL Term Aereo Santiago SA,
6.950% due 07/01/2012 1,600,000
------------
3,948,144
APPAREL & TEXTILES -- 0.01%
25,000 25,000 Collins & Aikman Products Company,
11.50% due 04/15/2006 26,000
------------
AUTOMOBILES -- 0.75%
2,000,000 2,000,000 Chrysler Corporation,
7.450% due 02/01/2097 2,274,480
1,000,000 1,000,000 Ford Motor Credit Corporation,
6.375% due 04/15/2000 1,013,220
-----------
3,287,700
<CAPTION>
VALUE
------------
PRO FORMA
COMBINED
--------
<S> <C>
$ 6,533,152
408,124
1,231,682
3,677,202
------------
11,850,160
999,060
13,309,489
1,570,742
700,275
------------
16,579,566
4,901,263
157,931
9,565,612
7,097,637
1,702,444
1,243,998
836
------------
24,669,721
$ 53,099,447
============
2,286,780
1,122,130
------------
$ 3,408,910
============
142,500
900,470
1,305,174
1,600,000
------------
3,948,144
26,000
------------
2,274,480
1,013,220
------------
3,287,700
</TABLE>
<PAGE> 138
MANUFACTURERS INVESTMENT TRUST -- CAPITAL GROWTH BOND TRUST
MANUFACTURERS INVESTMENT TRUST -- INVESTMENT QUALITY BOND TRUST
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998 (UNAUDITED) -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- ------------------------------------------- --------------------------
CAPITAL INVESTMENT CAPITAL INVESTMENT
GROWTH QUALITY PRO FORMA GROWTH QUALITY
BOND BOND COMBINED SECURITY DESCRIPTION BOND BOND
---- ---- -------- -------------------- ---- ----
<C> <C> <C> <S> <C> <C>
AUTO PARTS -- 0.07%
$ 95,000 $ 95,000 Accuride Corporation,
9.250% due 02/01/2008 $ 95,000
210,000 210,000 LDM Technologies, Incorporated
10.750% due 01/15/2007 205,800
------------
300,800
BANKING -- 4.15%
1,475,000 1,475,000 BankAmerica Corporation,
9.625% due 02/13/2001 1,596,275
$1,000,000 1,000,000 Bank of New York, Incorporated
6.625% due 06/15/2003 $ 1,043,800
1,000,000 1,000,000 Bank of Nova Scotia Halifax,
9.00% due 10/01/1999 1,026,725
1,000,000 1,000,000 Citicorp, 7.125% due 06/01/2003 1,057,390
1,300,000 1,300,000 Credit National, 7.00% due 11/14/2005 1,326,000
1,550,000 1,550,000 Export-Import Bank of Korea,
6.375% due 02/15/2006 1,319,453
530,000 530,000 First Financial Caribbean Corporation,
7.840% due 10/10/2006 556,166
825,000 825,000 First Republic Bank, San Francisco,
7.750% due 09/15/2012 807,209
120,000 120,000 Grove Worldwide LLC/Capital, Incorporated
9.250% due 05/01/2008 108,000
715,000 715,000 Korea Development Bank,
7.125% due 09/17/2001 677,591
965,000 965,000 Liberty Financial Companies, Incorporated,
6.750% due 11/15/2008 996,440
1,000,000 1,000,000 National Westminster Bank PLC,
9.450% due 05/01/2001 1,088,650
2,000,000 2,000,000 NBD Bancorp, 8.250% due 11/01/2024 2,451,800
900,000 900,000 Norwest Corporation,
6.000% due 03/15/2000 906,120
1,000,000 1,000,000 Republic New York Corporation,
9.500% due 04/15/2014 1,305,890
-----------
1,745,000 1,745,000 Sprint Capital Corporation,
6.875% due 11/15/2028 1,813,578
------------
4,433,805 13,647,282
BROADCASTING -- 0.37%
250,000 250,000 Adelphia Communications Corporation
8.375% due 02/01/2008 256,250
Century Communications Corporation,
600,000 600,000 Zero coupon due 01/15/2008 307,500
20,000 20,000 8.875% due 01/15/2007 22,100
60,000 60,000 EchoStar DBS Corporation
12.500% due 07/01/2002 69,000
180,000 180,000 Echostar Satellite Broadcast Corporation,
Step up to 13.125% due 03/15/2004 179,550
Falcon Holding Group LP,
75,000 75,000 Series B, 8.375% due 04/15/2010 75,375
150,000 150,000 Series B, Step up to 9.285% due 04/15/2010 103,125
125,000 125,000 Frontiervision Holdings LP,
Step up to 11.875% due 09/15/2007 104,375
125,000 125,000 Frontiervision LP/Capital,
Step up to 11.875% due 09/15/2007 104,531
175,000 175,000 Granite Broadcasting Corporation,
8.875% due 05/15/2008 166,250
55,000 55,000 Jacor Communications Company,
8.750% due 06/15/2007 59,675
<CAPTION>
VALUE
------------
PRO FORMA
COMBINED
--------
<S> <C>
$ 95,000
205,800
------------
300,800
1,596,275
1,043,800
1,026,725
1,057,390
1,326,000
1,319,453
556,166
807,209
108,000
677,591
996,440
1,088,650
2,451,800
906,120
1,305,890
1,813,578
------------
18,081,087
256,250
307,500
22,100
69,000
179,550
75,375
103,125
104,375
104,531
166,250
59,675
</TABLE>
<PAGE> 139
MANUFACTURERS INVESTMENT TRUST -- CAPITAL GROWTH BOND TRUST
MANUFACTURERS INVESTMENT TRUST -- INVESTMENT QUALITY BOND TRUST
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998 (UNAUDITED) -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- ------------------------------------------- --------------------------
CAPITAL INVESTMENT CAPITAL INVESTMENT
GROWTH QUALITY PRO FORMA GROWTH QUALITY
BOND BOND COMBINED SECURITY DESCRIPTION BOND BOND
---- ---- -------- -------------------- ---- ----
<C> <C> <C> <S> <C> <C>
BROADCASTING -- CONTINUED
$ 125,000 $ 125,000 Revlon Consumer Products Corporation
8.625% due 02/01/2008 $ 113,750
50,000 50,000 Young Broadcasting, Incorporated
8.750% due 06/15/2007 50,250
------------
1,611,731
BUSINESS SERVICES -- 0.29%
1,000,000 1,000,000 Federal Express Corporation
6.720% due 01/15/2022 1,047,760
65,000 65,000 Silgan holdings, Incorporated
9.00% due 06/01/2009 65,812
150,000 150,000 World Color Press, Incorporated
8.375% due 11/15/2008 150,000
------------
1,263,572
CHEMICALS -- 0.08%
95,000 95,000 Huntsman Corporation,
9.500% due 07/01/2007 94,763
100,00 100,000 Pioneer Americas Acquisition Corporation,
9.250% due 06/15/2007 80,000
75,000 75,000 Sovereign Specialty Chemicals,
9.500% due 08/01/2007 74,625
120,000 120,000 Texas-Petro Chemical Corporation,
11.125% due 07/01/2006 117,600
------------
366,988
COAL -- 0.09%
400,000 400,000 P&L Coal Holdings Corporation,
Series B, 9.625% due 05/15/2008 404,000
------------
COMPUTERS & BUSINESS EQUIPMENT -- 0.04%
125,000 125,000 Concentric Network Corporation,
12.750% due 12/15/2007 127,500
100,000 100,000 Decisionone Corporation,
9.750% due 08/01/2007 46,000
------------
173,500
COSMETICS & TOILETRIES -- 0.02%
160,000 160,000 Revlon Worldwide Corporation,
Series B, zero coupon due 03/15/2001 92,000
------------
DRUGS & HEALTH CARE -- 1.48%
2,830,000 2,830,000 Allegiance Corporation,
7.000% due 10/15/2026 2,994,565
Columbia/HCA Healthcare Corporation
5,000 5,000 7.000% due 07/01/2007 4,770
195,000 195,000 7.250% due 05/20/2008 187,317
300,000 300,000 Dailey International, Incorporated,
9.500% due 02/15/2008 138,000
2,000,000 2,000,000 Healthsouth Corporation,
6.875% due 06/15/2005 1,914,700
225,000 225,000 Owens & Minor, Incorporated,
10.875% due 06/01/2006 241,031
850,000 850,000 Tenet Healthcare Corporation,
7.875% due 01/15/2003 867,000
120,000 120,000 Universal Hospital Services,
10.25% due 03/01/2008 102,300
------------
6,449,683
ELECTRICAL EQUIPMENT -- 0.20%
130,000 130,000 Classic Cable, Incorporated
9.875% due 08/01/2008 135,850
225,000 225,000 Costilla Energy, Incorporated,
10.250% due 10/01/2006 157,500
325,000 325,000 Energy Corporation of America, Incorporated,
9.500% due 05/15/2007 303,875
<CAPTION>
VALUE
------------
PRO FORMA
COMBINED
--------
<S> <C>
$ 113,750
50,250
------------
1,611,731
1,047,760
65,812
150,000
------------
1,263,572
94,763
80,000
74,625
117,600
------------
366,988
404,000
------------
127,500
46,000
------------
173,500
92,000
------------
2,994,565
4,770
187,317
138,000
1,914,700
241,031
867,000
102,300
------------
6,449,683
135,850
157,500
303,875
</TABLE>
<PAGE> 140
MANUFACTURERS INVESTMENT TRUST -- CAPITAL GROWTH BOND TRUST
MANUFACTURERS INVESTMENT TRUST -- INVESTMENT QUALITY BOND TRUST
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998 (UNAUDITED) -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- ------------------------------------------- --------------------------
CAPITAL INVESTMENT CAPITAL INVESTMENT
GROWTH QUALITY PRO FORMA GROWTH QUALITY
BOND BOND COMBINED SECURITY DESCRIPTION BOND BOND
---- ---- -------- -------------------- ---- ----
<C> <C> <C> <S> <C> <C>
ELECTRICAL EQUIPMENT -- CONTINUED
$ 120,000 $ 120,000 Fairchild Semiconductor Corporation,
10.125% due 03/15/2007 $ 120,000
150,000 150,000 Wesco Distribution, Incorporated,
9.125% due 06/01/2008 150,000
------------
867,225
ELECTRIC UTILITIES -- 1.34%
$1,000,000 1,000,000 Baltimore Gas and Electric Company,
6.125% due 07/01/2003 $ 1,027,870
150,000 150,000 Calpine Corporation,
8.750% due 07/15/2007 158,751
1,010,000 1,010,000 Cleveland Electric Illuminating Company,
7.19% due 07/01/2000 1,024,928
700,000 700,000 Duke Energy Company,
7.50% due 04/01/1999 703,780
1,000,000 1,000,000 Empresa Nacional De Electric,
7.325% due 02/01/2037 881,490
------------
1,000,000 1,000,000 Northern States Power Company of Minnesota
6.375% due 04/01/2003 1,031,300
1,000,000 1,000,000 Pacific Gas & Electric Company
6.25% due 08/01/2003 1,034,710
-----------
3,093,880 2,768,949
FINANCIAL SERVICES -- 10.21%
425,000 425,000 Ahmanson HF & Company,
7.875% due 09/01/2004 459,867
565,000 565,000 Allstate Financing, 7.83% due 12/01/2045 625,698
American General Finance Corporation,
1,000,000 1,000,000 6.54% due 08/12/2002 1,025,370
1,270,000 1,270,000 8.00% due 02/15/2005 1,303,376
1,000,000 1,000,000 Amerus Capital, 8.85% due 02/01/2027 1,029,310
100,000 100,000 Amresco Commerce Mortgage
9.875% due 03/15/2005 70,000
2,000,000 2,000,000 Amvescap, PLC, 6.60% due 05/15/2005 2,049,040
610,000 610,000 Associates Corporation of North America,
5.75 % due 11/01/2003 615,472
300,000 300,000 9.125% due 04/01/2000 313,335
BanPonce Financial Corporation,
2,150,000 2,150,000 6.75% due 08/09/2001 2,171,220
260,000 260,000 6.80% due 12/21/2005 262,137
1,000,000 1,000,000 Bear Stearns Capital Trust, Incorporated
7.00% due 01/15/2027 1,003,199
350,000 350,000 Beneficial Corporation, 8.40% due 05/15/2008 409,455
790,000 790,000 Cigna Corporation, 7.875% due 05/15/2027 845,371
1,000,000 1,000,000 Commercial Credit Group, Incorporated,
7.375% due 04/15/2005 1,087,650
200,000 200,000 Contifinancial Corporation, 8.125% due
04/01/2008 140,000
1,200,000 1,200,000 Dime Capital Trust, 9.33% due 05/06/2027 1,296,096
1,000,000 1,000,000 Donaldson Lufkin and Jenrette, Incorporated
5.625% due 02/15/2016 988,160
770,000 770,000 Equitable Companies, Incorporated
7.00% due 04/01/2028 800,153
680,000 680,000 Equitable Life Assured Society,
7.70% due 12/01/2015 756,038
1,000,000 1,000,000 Fifth Third Capital Trust, Incorporated,
Series A, 8.136% due 03/15/2027 1,130,050
600,000 600,000 Ford Credit Auto Owner Trust,
5.81% due 03/15/2002 604,122
600,000 600,000 General Electric Capital Corporation,
8.88% due 06/18/2003 684,012
250,000 250,000 Globalstar LP/Globalstar Capital,
10.75% due 11/01/2004 180,000
<CAPTION>
VALUE
------------
PRO FORMA
COMBINED
--------
<S> <C>
$ 120,000
150,000
------------
867,225
1,027,870
158,751
1,024,928
703,780
881,490
------------
1,031,300
1,034,710
------------
5,862,829
459,867
625,698
1,025,370
1,303,376
1,029,310
70,000
2,049,040
615,472
313,335
2,171,220
262,137
1,003,199
409,455
845,371
1,087,650
140,000
1,296,096
988,160
800,153
756,038
1,130,050
604,122
684,012
180,000
</TABLE>
<PAGE> 141
MANUFACTURERS INVESTMENT TRUST -- CAPITAL GROWTH BOND TRUST
MANUFACTURERS INVESTMENT TRUST -- INVESTMENT QUALITY BOND TRUST
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998 (UNAUDITED) -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- ------------------------------------------- --------------------------
CAPITAL INVESTMENT CAPITAL INVESTMENT
GROWTH QUALITY PRO FORMA GROWTH QUALITY
BOND BOND COMBINED SECURITY DESCRIPTION BOND BOND
---- ---- -------- -------------------- ---- ----
<C> <C> <C> <S> <C> <C>
FINANCIAL SERVICES -- CONTINUED
$1,000,000 $ 1,000,000 Household Finance Corporation,
7.75% due 06/01/1999 $ 1,009,340
$ 300,000 300,000 International Lease Finance Corporation,
6.00% due 06/15/2003 $ 303,441
225,000 225,000 Iridium Operating LLC/Iridium Capital,
11.25% due 07/15/2005 192,375
Japan Finance Corporation,
1,500,000 1,500,000 8.70% due 07/30/2001 1,618,695
500,000 500,000 9.125% due 10/11/2000 531,980
1,000,000 1,000,000 KFW International Finance, Incorporated
9.125% due 05/15/2001 1,086,890
Liberty Mutual Insurance Company,
550,000 55,0000 8.20% due 05/04/2007 630,289
700,000 700,000 8.50% due 05/15/2025 821,436
675,000 675,000 Lumbermans Mutual Casualty Company,
9.15% due 07/01/2026 788,656
100,000 100,000 Olympic Financial, Ltd.,
11.50% due 03/15/2007 76,000
Private Export Funding Corporation,
1,175,000 1,175,000 6.49% due 07/15/2007 1,265,792
2,000,000 2,000,000 6.62% due 10/01/2005 2,133,040
3,650,000 3,650,000 6.90% due 01/31/2003 3,880,388
200,000 200,000 7.30% due 01/31/2002 212,718
80,000 80,000 Rifkin Acquisitions Participation LP,
11.125% due 01/15/2006 88,000
1,000,000 1,000,000 Southern Company Capital Trust, Incorporated
8.19% due 02/01/2037 1,105,770
-----------
1,500,000 1,500,000 Sun Canada Financial Company,
7.25% due 12/15/2015 1,658,265
80,000 80,000 Tembec Finance Corporation,
9.875% due 09/30/2005 83,600
1,600,000 1,600,000 Toyota Motor Credit Corporation,
5.625% due 11/13/2003 1,616,208
2,774,000 2,774,000 United States Bancorp, 7.50% due 06/01/2026 3,168,823
2,165,000 2,165,000 United States West Capital Funding,
Incorporated, 6.25% due 07/15/2005 2,239,195
275,000 275,000 Western Financial Savings,
8.875% due 08/01/2007 206,250
------------
6,324,169 38,242,113
FOOD & BEVERAGES -- 0.63%
50,000 50,000 Aurora Foods, 8.75% due 07/01/2008 52,000
50,000 50,000 9.875% due 02/15/2007 54,500
290,000 290,000 Del Monte Foods Company,
Step up to 12.50% due 12/15/2007 198,650
Joseph E. Seagram & Sons, Incorporated,
1,000,000 1,000,000 6.625% due 12/15/2005 994,380
1,350,000 1,350,000 7.50% due 12/15/2018 1,357,979
75,000 75,000 Tricon Global Restaurants, Incorporated,
7.65% due 05/15/2008 78,560
------------
2,736,069
FUNERAL SERVICES -- 0.23%
1,000,000 1,000,000 Service Corporation International,
6.75% due 06/01/2001 1,023,510
-----------
GAS & PIPELINE UTILITIES -- 0.72%
1,000,000 1,000,000 Columbia Gas Systems, Incorporated,
7.05% due 11/28/2007 1,042,660
2,000,000 2,000,000 Sonat, Incorporated, 6.875% due 06/01/2005 2,083,500
------------
1,042,660 2,083,500
<CAPTION>
VALUE
------------
PRO FORMA
COMBINED
--------
<S> <C>
$ 1,009,340
303,441
192,375
1,618,695
531,980
1,086,890
630,289
821,436
788,656
76,000
1,265,792
2,133,040
3,880,388
212,718
88,000
1,105,770
1,658,265
83,600
1,616,208
3,168,823
2,239,195
206,250
------------
44,566,282
52,000
54,500
198,650
994,380
1,357,979
78,560
------------
2,736,069
1,023,510
------------
1,042,660
2,083,500
------------
3,126,160
</TABLE>
<PAGE> 142
MANUFACTURERS INVESTMENT TRUST -- CAPITAL GROWTH BOND TRUST
MANUFACTURERS INVESTMENT TRUST -- INVESTMENT QUALITY BOND TRUST
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998 (UNAUDITED) -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- ------------------------------------------- --------------------------
CAPITAL INVESTMENT CAPITAL INVESTMENT
GROWTH QUALITY PRO FORMA GROWTH QUALITY
BOND BOND COMBINED SECURITY DESCRIPTION BOND BOND
---- ---- -------- -------------------- ---- ----
<C> <C> <C> <S> <C> <C>
HOMEBUILDERS -- 0.05%
$ 90,000 $ 90,000 Engle Homes, Incorporated,
9.25% due 02/01/2008 $ 90,000
115,000 115,000 Standard Pacific Corporation,
8.50% due 06/15/2007 116,725
------------
206,725
HOUSEHOLD PRODUCTS -- 0.30%
$1,000,000 1,000,000 Proctor & Gamble ESOP, Series A,
9.36% due 01/01/2021 $ 1,330,400
-----------
INDUSTRIAL MACHINERY -- 0.06%
240,000 240,000 Beckman Instruments, Incorporated,
7.10% due 03/04/2003 241,394
25,000 25,000 Numatics, Incorporated, 9.625% due
04/01/2008 23,375
------------
264,769
INDUSTRIALS -- 1.89%
270,000 270,000 Advanced Micro Devices, Incorporated,
11.00% due 08/01/2003 286,200
70,000 70,000 American Standard, Incorporated,
7.625% due 02/15/2010 70,700
75,000 75,000 AMSC Acquisition Company, Incorporated,
Series B, 12.25% due 04/01/2008 45,375
80,000 80,000 Arco Chemical Company, 9.80% due 02/01/2020 80,044
150,000 150,000 Armco, Incorporated, 8.875% due 12/01/2008 148,500
50,000 50,000 9.00% due 09/15/2007 50,500
150,000 150,000 Bayou Steel Corporation,
9.50% due 05/15/2008 141,000
870,000 870,000 Cincinnati Milacron, Incorporated,
7.875% due 05/15/2000 880,755
20,000 20,000 Consumers International, Incorporated,
10.25% due 04/01/2005 21,400
70,000 70,000 Container Corporation of America,
10.75% due 05/01/2002 72,800
Falcon Building Products, Incorporated,
165,000 165,000 9.50% due 06/15/2007 144,375
100,000 100,000 Series B, Step up to 10.50% due 06/15/2007 57,500
190,000 190,000 Fisher Scientific International,
Incorporated,
9.00% due 02/01/2008 188,100
75,000 75,000 Galey & Lord, Incorporated,
9.125% due 03/01/2008 65,250
150,000 150,000 Gaylord Container Corporation,
9.375% due 06/15/2007 127,500
55,000 55,000 ITC Delaware Tacom, Incorporated,
9.75% due 11/15/2008 56,925
85,000 85,000 Laroche Industry, Incorporated,
9.50% due 09/15/2007 68,000
400,000 400,000 Lin Holdings Corporation,
Step up to 10.00% due 03/01/2008 276,000
100,000 100,000 Mark IV Industries, Incorporated,
7.75% due 04/01/2006 99,020
150,000 150,000 Moog, Incorporated, 10.00% due 05/01/2006 153,750
180,000 180,000 Neenah Corporation, 11.125% due 05/01/2007 184,950
2,645,000 2,645,000 News America Holdings, Incorporated,
9.25% due 02/01/2013 3,276,441
55,000 55,000 Nortek, Incorporated, 8.875% due 08/01/2008 56,100
75,000 75,000 9.25% due 03/15/2007 76,875
100,000 100,000 Pindo Deli Finance Mauritius, Ltd.,
10.75% due 10/01/2007 54,375
45,000 45,000 Purina Mills, Incorporated,
9.00% due 03/15/2010 45,900
1,500,000 1,500,000 USA Waste Services, Incorporated,
6.125% due 07/15/2001 1,509,300
------------
8,237,635
<CAPTION>
VALUE
------------
PRO FORMA
COMBINED
--------
<S> <C>
$ 90,000
116,725
------------
206,725
1,330,400
------------
241,394
23,375
------------
264,769
286,200
70,700
45,375
80,044
148,500
50,500
141,000
880,755
21,400
72,800
144,375
57,500
188,100
65,250
127,500
56,925
68,000
276,000
99,020
153,750
184,950
3,276,441
56,100
76,875
54,375
45,900
1,509,300
------------
8,237,635
</TABLE>
<PAGE> 143
MANUFACTURERS INVESTMENT TRUST -- CAPITAL GROWTH BOND TRUST
MANUFACTURERS INVESTMENT TRUST -- INVESTMENT QUALITY BOND TRUST
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998 (UNAUDITED) -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- ------------------------------------------- --------------------------
CAPITAL INVESTMENT CAPITAL INVESTMENT
GROWTH QUALITY PRO FORMA GROWTH QUALITY
BOND BOND COMBINED SECURITY DESCRIPTION BOND BOND
---- ---- -------- -------------------- ---- ----
<C> <C> <C> <S> <C> <C>
INSURANCE -- 1.67%
$ 715,000 $ 715,000 Amerus Life Holdings, Incorporated,
6.95% due 06/15/2005 $ 719,561
1,300,000 1,300,000 Cigna Corporation, 7.40% due 05/15/2007 1,381,744
300,000 300,000 Conseco, Incorporated, 6.80% due 06/15/2005 280,320
1,000,000 1,000,000 Jackson National Life Insurance Company,
8.15% due 03/15/2027 1,148,430
1,150,000 1,150,000 Ohio National Life Insurance Company,
8.50% due 05/15/2026 1,355,206
1,150,000 1,150,000 Security Benefit Life Company,
8.75% due 05/15/2016 1,290,491
------------
$1,000,000 1,000,000 Zurich Reinsurance Centre Holdings
Incorporated
7.125% due 10/15/2023 $ 1,090,400
-----------
1,090,400 6,175,752
LEISURE TIME -- 0.23%
200,000 200,000 AMC Entertainment, Incorporated,
9.50% due 03/15/2009 204,000
195,000 195,000 Argosy Gaming Company,
13.25% due 06/01/2004 218,644
55,000 55,000 Fitzgerald's Gaming Corporation,
12.25% due 12/15/2004 29,700
110,000 110,000 Loews Cineplex Entertainment Corporation,
8.875% due 08/01/2008 113,025
175,000 175,000 Station Casinos, Incorporated,
8.875% due 12/01/2008 177,625
150,000 150,000 Time Warner Telecom LLC,
9.75% due 07/15/2008 156,750
120,000 120,000 True Temper Sports, Incorporated,
10.875% due 12/01/2008 119,400
------------
1,019,144
NEWSPAPERS -- 0.26%
1,000,000 1,000,000 News America Holdings, Incorporated
8.50% due 02/15/2005 1,122,270
-----------
PAPER -- 0.96%
185,000 185,000 American Pad & Paper Company,
13.00% due 11/15/2005 106,375
1,000,000 1,000,000 Boise Cascade Corporation,
9.90% due 10/01/2001 1,062,720
2,850,000 2,850,000 Boise Cascade Office Products Company,
7.05% due 05/15/2005 2,675,438
75,000 75,000 Domtar, Incorporated,
9.50% due 08/01/2016 75,359
120,000 120,000 Grupo Industrial Durango GIDUSA,
12.625% due 08/01/2003 105,000
275,000 275,000 Repap New Brunswick, Incorporated,
10.625% due 04/15/2005 184,250
------------
4,209,142
PETROLEUM SERVICES -- 0.94%
100,000 100,000 Abraxas Petro/CN Abraxas,
Series D, 11.50% due 11/01/2004 76,000
125,000 125,000 Cross Timbers Oil Company,
9.25% due 04/01/2007 115,625
1,000,000 1,000,000 Newfield Exploration Company,
7.45% due 10/15/2007 974,390
250,000 250,000 Petroleos Mexicanos,
8.85% due 09/15/2007 222,500
170,000 170,000 Plains Resources, Incorporated,
10.25% due 03/15/2006 170,000
<CAPTION>
VALUE
------------
PRO FORMA
COMBINED
--------
<S> <C>
$ 719,561
1,381,744
280,320
1,148,430
1,355,206
1,290,491
1,090,400
------------
7,266,152
204,000
218,644
29,700
113,025
177,625
156,750
119,400
------------
1,019,144
1,122,270
------------
106,375
1,062,720
2,675,438
75,359
105,000
184,250
------------
4,209,142
76,000
115,625
974,390
222,500
170,000
</TABLE>
<PAGE> 144
MANUFACTURERS INVESTMENT TRUST -- CAPITAL GROWTH BOND TRUST
MANUFACTURERS INVESTMENT TRUST -- INVESTMENT QUALITY BOND TRUST
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998 (UNAUDITED) -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- ------------------------------------------- --------------------------
CAPITAL INVESTMENT CAPITAL INVESTMENT
GROWTH QUALITY PRO FORMA GROWTH QUALITY
BOND BOND COMBINED SECURITY DESCRIPTION BOND BOND
---- ---- -------- -------------------- ---- ----
<C> <C> <C> <S> <C> <C>
PETROLEUM SERVICES -- CONTINUED
$1,000,000 $ 1,000,000 Ultramar Corporation,
8.00% due 03/15/2005 $ 1,084,490
-----------
$ 1,400,000 1,400,000 YPF Sociedad Anonima,
10.00% due 11/02/2028 $ 1,436,750
------------
1,084,490 2,995,265
PUBLISHING -- 0.42%
115,000 115,000 Big Flowers Press Holdings, Incorporated,
8.625% due 12/01/2008 116,150
300,000 300,000 Scholastic Corporation,
7.00% due 12/15/2003 312,207
270,000 270,000 Sullivan Graphics, Incorporated,
12.75% due 08/01/2005 274,050
1,035,000 1,035,000 Viacom, Incorporated, 7.75% due 06/01/2005 1,122,799
------------
1,825,206
REAL ESTATE -- 0.24%
1,000,000 1,000,000 MEPCO Finance, Incorporated
7.50% due 05/01/2003 1,065,210
-----------
RETAIL GROCERY -- 0.03%
90,000 90,000 Disco SA, 9.875% due 05/15/2008 76,725
65,000 65,000 Statler Brothers Holdings, Incorporated,
9.00% due 07/01/2004 63,050
------------
139,775
RETAIL TRADE -- 0.72%
300,000 300,000 Duane Reade, Incorporated,
9.25 % due 02/15/2008 309,000
120,000 120,000 Guitar Center Management Company,
Incorporated,
11.00% due 07/01/2006 126,000
2,500,000 2,500,000 J.C. Penney Company, Incorporated,
7.40% due 04/01/2037 2,717,900
------------
3,152,900
SANITARY SERVICES -- 0.02%
105,000 105,000 Allied Waste North America,
7.625% due 01/01/2006 105,788
------------
SOFTWARE -- 0.14%
Psinet, Incorporated,
250,000 250,000 10.00% due 02/15/2005 245,000
75,000 75,000 11.50% due 11/01/2008 78,562
190,000 190,000 Verio, Incorporated,
10.375% due 04/01/2005 185,250
100,000 100,000 11.25% due 12/01/2008 100,500
------------
609,312
STEEL -- 0.13%
75,000 75,000 Acindar Industria, Argentina,
11.25% due 02/15/2004 60,000
225,000 225,000 Alaska Steel Corporation,
9.125% due 12/15/2006 235,688
75,000 75,000 Amersteel Corporation, 8.75% due 04/15/2008 72,000
140,000 140,000 CSN Iron SA, 9.125% due 06/01/2007 85,400
115,000 115,000 Weirton Steel Corporation,
11.375% due 07/01/2004 102,350
------------
555,438
TELECOMMUNICATION SERVICES -- 1.20%
205,000 205,000 BTI Telecom Corporation,
10.50% due 09/15/2007 154,775
320,000 320,000 GCI, Incorporated,
9.75% due 08/01/2007 316,800
<CAPTION>
VALUE
------------
PRO FORMA
COMBINED
--------
<S> <C>
$ 1,084,490
1,436,750
------------
4,079,755
116,150
312,207
274,050
1,122,799
------------
1,825,206
1,065,210
------------
76,725
63,050
------------
139,775
309,000
126,000
2,717,900
------------
3,152,900
105,788
------------
245,000
78,562
185,250
100,500
------------
609,312
60,000
235,688
72,000
85,400
102,350
------------
555,438
154,775
316,800
</TABLE>
<PAGE> 145
MANUFACTURERS INVESTMENT TRUST -- CAPITAL GROWTH BOND TRUST
MANUFACTURERS INVESTMENT TRUST -- INVESTMENT QUALITY BOND TRUST
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998 (UNAUDITED) -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- ------------------------------------------- --------------------------
CAPITAL INVESTMENT CAPITAL INVESTMENT
GROWTH QUALITY PRO FORMA GROWTH QUALITY
BOND BOND COMBINED SECURITY DESCRIPTION BOND BOND
---- ---- -------- -------------------- ---- ----
<C> <C> <C> <S> <C> <C>
TELECOMMUNICATION SERVICES -- CONTINUED
$ 210,000 $ 210,000 GST Telecommunications, Incorporated,
12.75% due 11/15/2007 $ 195,300
200,000 200,000 Innova S De RL,
12.875% due 04/01/2007 130,000
105,000 105,000 ITC Deltacom, Incorporated,
8.875% due 03/01/2008 105,525
425,000 425,000 KMC Telecom Holdings, Incorporated,
Step up to 12.50% due 02/15/2008 204,000
425,000 425,000 NTL Incorporated,
Step up to 12.38% due 10/01/2008 263,500
105,000 105,000 Qwest Communications International,
Incorporated,
7.50% due 11/01/2008 109,069
Rogers Cantel, Incorporated,
100,000 100,000 8.30% due 10/01/2007 100,500
100,000 100,000 9.375% due 06/01/2008 105,500
Tele-Communications, Incorporated,
1,500,000 1,500,000 9.25% due 04/15/2002 1,667,925
533,000 533,000 9.65% due 10/01/2003 588,256
1,270,000 1,270,000 USA Networks, Incorporated,
6.75% due 11/15/2005 1,274,751
------------
5,215,901
TELEPHONE -- 2.10%
275,000 275,000 Allbritton Communications Company,
8.875% due 02/01/2008 277,062
$ 591,974 591,974 BellSouth Savings, ESOT
9.19% due 07/01/2003 $ 652,035
1,100,000 1,100,000 Comcast Cable Communications,
8.50% due 05/01/2027 1,350,932
1,000,000 1,000,000 Compania De Telecomunicaciones,
7.625% due 07/15/2006 953,280
175,000 175,000 E Spire Communications, Incorporated,
Step up to 10.625% due 07/01/2008 70,000
200,000 200,000 E Spire communications Insurance,
Step up to 12.75% due 04/01/2006 120,000
1,000,000 1,000,000 GTE Corporation,
8.75% due 11/01/2021 1,288,180
-----------
75,000 75,000 Hyperion Telecommunications, Incorporated,
Series B, 12.25% due 09/01/2004 75,750
Intermedia Communications, Incorporated,
80,000 80,000 8.60% due 06/01/2008 76,400
250,000 250,000 8.875% due 11/01/2007 241,250
200,000 200,000 IXC Communications, Incorporated,
9.00% due 04/15/2008 201,500
50,000 50,000 Jacor Communications Company,
9.75% due 12/15/2006 55,250
160,000 160,000 L 3 Communications Corporation,
8.00% due 08/01/2008 160,400
245,000 245,000 Level 3 Communications, Incorporated,
9.125% due 05/01/2008 242,856
50,000 50,000 MGC Communications, Incorporated,
13.00% due 10/01/2004 32,500
150,000 150,000 MJD Communications, Incorporated,
9.50% due 05/01/2008 147,750
250,000 250,000 MobileMedia Communications, Incorporated,
9.375% due 11/01/2007 25,000
775,000 775,000 NEXTEL Communications, Incorporated,
Step up to 9.75% due 10/31/2007 472,750
400,000 400,000 Nextlink Communications, Incorporated,
9.45% due 04/15/2008 230,000
200,000 200,000 Paging Network, Incorporated,
10.125% due 08/01/2007 192,000
<CAPTION>
VALUE
------------
PRO FORMA
COMBINED
--------
<S> <C>
$ 195,300
130,000
105,525
204,000
263,500
109,069
100,500
105,500
1,667,925
588,256
1,274,751
------------
5,215,901
277,062
652,035
1,350,932
953,280
70,000
120,000
1,288,180
75,750
76,400
241,250
201,500
55,250
160,400
242,856
32,500
147,750
25,000
472,750
230,000
192,000
</TABLE>
<PAGE> 146
MANUFACTURERS INVESTMENT TRUST -- CAPITAL GROWTH BOND TRUST
MANUFACTURERS INVESTMENT TRUST -- INVESTMENT QUALITY BOND TRUST
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998 (UNAUDITED) -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- ------------------------------------------- --------------------------
CAPITAL INVESTMENT CAPITAL INVESTMENT
GROWTH QUALITY PRO FORMA GROWTH QUALITY
BOND BOND COMBINED SECURITY DESCRIPTION BOND BOND
---- ---- -------- -------------------- ---- ----
<C> <C> <C> <S> <C> <C>
TELEPHONE -- CONTINUED
$ 150,000 $ 150,000 Price Communications Wireless,
9.125% due 12/15/2006 $ 150,750
160,000 160,000 RSL Communications PLC,
12.00% due 11/01/2008 164,800
160,000 160,000 Telecommunications Techniques Company,
9.75% due 05/15/2008 157,600
125,000 125,000 Viatel, Incorporated,
11.25% due 04/15/2008 127,813
1,575,000 1,575,000 World Common, Incorporated,
7.55% due 04/01/2004 1,717,506
------------
$ 1,940,215 7,243,149
TRANSPORTATION -- 0.28%
205,000 205,000 Iron Mountain, Incorporated,
8.75% due 09/30/2009 211,150
195,000 195,000 Johnstown American Industries, Incorporated,
11.75% due 08/15/2005 205,725
175,000 175,000 K& F Industry, Incorporated,
9.25% due 10/15/2007 176,750
100,000 100,000 MTL, Incorporated,
10.00% due 06/15/2006 97,000
470,000 470,000 Southern Railway Company,
8.75% due 10/15/2003 527,598
------------
1,218,223
TOYS, AMUSEMENTS & SPORTING GOODS -- 0.22%
$1,000,000 1,000,000 Brunswick Corporation,
7.125% due 08/01/2027 945,720
-----------
TOTAL CORPORATE BONDS
(Cost: $142,701,380) $27,784,429 $118,155,680
=========== ============
MUNICIPAL BONDS -- 1.49%
ALABAMA -- 0.23%
1,000,000 1,000,000 Huntsville, Alabama Solid Waste Disposal,
5.95% due 10/01/2003 1,012,240
CALIFORNIA -- 0.51%
2,000,000 2,000,000 Orange County, California Pension
Obligation,
7.36% due 09/01/2010 2,231,000
FLORIDA -- 0.26%
1,000,000 1,000,000 Miami Beach, Florida Redevelopment Agency,
8.95% due 12/01/2022 1,152,800
MARYLAND -- 0.17%
705,000 705,000 Baltimore, Maryland, Series B,
6.375% due 10/15/2002 727,031
MICHIGAN -- 0.32%
1,335,000 1,335,000 Detroit, Michigan, Downtown Development
Authority,
6.20% due 07/01/2008 1,386,397
------------
TOTAL MUNICIPAL BONDS
(Cost: $6,468,739) $ 6,509,468
============
<CAPTION>
VALUE
------------
PRO FORMA
COMBINED
--------
<S> <C>
$ 150,750
164,800
157,600
127,813
1,717,506
------------
9,183,364
211,150
205,725
176,750
97,000
527,598
------------
1,218,223
945,720
------------
$145,940,109
============
1,012,240
2,231,000
1,152,800
727,031
1,386,397
------------
$ 6,509,468
============
</TABLE>
<PAGE> 147
MANUFACTURERS INVESTMENT TRUST -- CAPITAL GROWTH BOND TRUST
MANUFACTURERS INVESTMENT TRUST -- INVESTMENT QUALITY BOND TRUST
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1998 (UNAUDITED) -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
- ------------------------------------------- --------------------------
CAPITAL INVESTMENT CAPITAL INVESTMENT
GROWTH QUALITY PRO FORMA GROWTH QUALITY
BOND BOND COMBINED SECURITY DESCRIPTION BOND BOND
---- ---- -------- -------------------- ---- ----
<C> <C> <C> <S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 0.46%
$1,000,000 $ 1,000,000 Residential Funding Mortgage Security I,
Incorporated, Series 1996-S1, Class A12,
7.25% due 01/25/2026 $ 1,024,961
971,317 971,317 Residential Funding Mortgage Security I,
Incorporated, Series 1996-S3, Class A5,
7.25% due 01/25/2026 995,454
-----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost: $1,974,241) $ 2,020,415
===========
ASSET BACKED SECURITIES -- 2.98%
$ 600,000 600,000 AESOP Funding II LLC, Series 1998-1, Class
A,
6.14% due 05/20/2006 $ 599,922
1,500,000 1,500,000 American Express Master Trust, Series 1992,
Class A,
6.60% due 05/15/2000 1,508,895
2,110,000 2,110,000 Asset Securitization Corporation,
6.66% due 02/14/2041 2,218,918
1,000,000 1,000,000 Carco Auto Loan Master Trust, Series 1997-1,
Class A,
6.689% due 08/15/2004 1,004,280
2,500,000 2,500,000 Chase Commercial Mortgage Securities
Corporation,
6.39% due 11/18/2008 2,582,725
530,000 530,000 Credit Suisse First Boston,
6.52% due 07/17/2007 552,822
1,000,000 1,000,000 Discover Card Master Trust I, Series 1997-2,
Class A,
6.792% due 04/16/2010 1,008,990
1,950,000 1,950,000 First Union-Lehman Brothers Commercial,
6.60% due 01/18/1999 2,026,694
500,000 500,000 Green tree Financial Corporation,
5.98% due 08/01/2008 501,195
------------
1,000,000 1,000,000 Mortgage Index Amortizing Trust, Series
1997-1, Class A-1,
6.682% due 08/25/2004 1,020,703
-----------
TOTAL ASSET BACKED SECURITIES
(Cost: $12,727,727) $ 3,033,973 $ 9,991,171
=========== ============
SHORT TERM INVESTMENTS -- 15.19%
1,238,220 65,034,495 66,272,715 Navigator Securities Lending Trust, 5.17% 1,238,220 65,034,495
----------- ------------
REPURCHASE AGREEMENTS -- 1.80%
3,914,000 3,914,000 Repurchase Agreement with Paribas
Corporation dated 12/31/1998 at 4.80% to
be repurchased at $3,916,087 on
01/04/1999, collateralized by $3,658,000
U.S. Treasury Notes, 7.75% due 02/15/2001
(valued at $3,990,277, including interest) 3,914,000
3,945,000 3,945,000 Repurchase Agreement with State Street Bank
& Trust Company dated 12/31/1998 at 4.80%
to be repurchased at $3,947,104 on
01/04/1999, collateralized by $3,840,000
U.S. Treasury Notes, 5.50% due 02/28/2003
(valued at $4,027,200, including interest) 3,945,000
TOTAL REPURCHASE AGREEMENTS $ 3,945,000 $ 3,914,000
=========== ============
TOTAL INVESTMENTS
(Cost: $427,364,583) $65,199,949 $371,158,253
=========== ============
<CAPTION>
VALUE
------------
PRO FORMA
COMBINED
--------
<S> <C>
$ 1,024,961
995,454
------------
$ 2,020,415
============
599,922
1,508,895
2,218,918
1,004,280
2,582,725
552,822
1,008,990
2,026,694
501,195
1,020,703
------------
$ 13,025,144
============
66,272,715
------------
3,914,000
3,945,000
$ 7,859,000
============
$436,358,202
============
</TABLE>
<PAGE> 148
MANUFACTURERS INVESTMENT TRUST
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 Manufacturers Investment Trust Investment
Quality Bond ("Investment Quality Bond") and Capital Growth Bond ("Capital
Growth Bond") Trusts, two of thirty six investment Portfolios offered by the
Manufacturers Investment Trust (the "Trust") for the year ended December 31,
1998. These statements have been derived from the books and records of each
Portfolio utilized in calculating daily net asset value at December 31, 1998.
The Pro Forma statements reflect the proposed transfer of the assets and
liabilities of Capital Growth Bond in exchange for shares of Investment Quality
Bond. Under generally accepted accounting principles ("GAAP"), the Investment
Quality Bond 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 Investment Quality Bond and Capital
Growth Bond incorporated by reference in the Statement of Additional
Information.
Manufacturers Securities Services, LLC ("MSS"), a wholly-owned subsidiary
of The Manufacturers Life Insurance Company of North America ("MNA"), serves as
investment adviser to Investment Quality Bond and Capital Growth Bond for which
it receives a fee for services, computed daily and paid monthly, at the annual
rate 0.65% of the average daily net assets of each Trust. MNA is controlled by
The Manufacturers Life Insurance Company ("Manulife Financial"), a mutual life
insurance company based in Toronto, Canada.
Pro Forma Adjustments:
(A) Adjustment to reflect amount allocated to capital shares ($0.01 par
value) for shares redeemed in reorganization.
(B) Adjustment to reflect reduction in outstanding shares relative to Net
Asset Value upon reorganization.
