<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY , 1996
REGISTRATION NO. 33-2081
811-4490
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 12 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
AMENDMENT NO. 12 [X]
----------------
JOHN HANCOCK VARIABLE SERIES TRUST I
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
----------------
JOHN HANCOCK PLACE
P.O. BOX 111
BOSTON, MASSACHUSETTS 02117
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(617) 572-5060
(REGISTRANT'S TELEPHONE NUMBER)
FRANCIS C. CLEARY, JR., ESQUIRE
JOHN HANCOCK PLACE
P.O. BOX 111
BOSTON, MASSACHUSETTS 02117
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
THOMAS C. LAUERMAN, ESQUIRE
FREEDMAN, LEVY, KROLL & SIMONDS
1050 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
----------------
It is proposed that this filing will become effective (check appropriate
box)
[_] immediately upon filing pursuant to paragraph (b) of Rule 485
[_] on (date) pursuant to paragraph (b) of Rule 485
[_] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[_] on (date) pursuant to paragraph (a)(1) of Rule 485
[X] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[_] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate check the following box
[_]this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
----------------
PURSUANT TO THE PROVISIONS OF RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF
1940, REGISTRANT HAS REGISTERED AN INDEFINITE AMOUNT OF SECURITIES UNDER THE
SECURITIES ACT OF 1933, AND REGISTRANT'S RULE 24F-2 NOTICE FOR FISCAL YEAR
ENDED DECEMBER 31, 1995 WAS FILED ON FEBRUARY , 1996.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
JOHN HANCOCK VARIABLE SERIES TRUST I
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM NO. SECTION IN PROSPECTUS
------------------ ---------------------
<C> <S> <C>
1. Cover Page........................ Prospectus Cover Page
2. Synopsis.......................... Synopsis of Expense Information
3. Condensed Financial Information... Financial Highlights
4. General Description of Registrant. General Information; Investment
Objectives and Policies; Investment
Practices; Investment Restrictions
5. Management of the Fund............ Management of the Fund
6. Capital Stock and Other........... Shares, Taxes, and Dividends;
Prospectus Cover Page
7. Purchase of Securities Being General Information; Purchase and
Offered.......................... Redemption of Shares; Net Asset
Value; Investment Performance
8. Redemption of Repurchase.......... Purchase and Redemption of Shares
9. Pending Legal Proceedings......... Not Applicable
<CAPTION>
SECTION IN STATEMENT OF
FORM N-1A ITEM NO. ADDITIONAL INFORMATION
------------------ -----------------------
<C> <S> <C>
10. Cover Page........................ Cover Page
11. Table of Contents................. Table of Contents
12. General Information and History... Business History
13. Investment Objectives and Investment Techniques; Types of
Policies......................... Investment Instruments and Ratings;
Investment Restrictions; Portfolio
Transactions and Brokerage Allocation
14. Management of the Fund............ Board of Trustees and Officers of the
Fund
15. Control Persons and Principal
Holders of Securities............ Control Person and Principal Holders
of Securities
16. Investment Advisory and Other Investment Advisory and Other Services
Services.........................
17. Brokerage Allocation.............. Portfolio Transactions and Brokerage
Allocation
18. Capital Stock and Other The Trust's Organization and Shares;
Securities....................... Voting Rights
19. Purchase, Redemption, and Pricing
of Securities Being Offered...... Redemption and Pricing of Shares
20. Tax Status........................ Taxes
21. Underwriters...................... Investment Advisory and Other Services
22. Calculation of Yield Quotations of
Money Market Funds............... Calculation of Yield Quotations of the
Money Market Portfolio
23. Financial Statements.............. Financial Statements
</TABLE>
<PAGE>
JOHN HANCOCK VARIABLE SERIES TRUST I
JOHN HANCOCK PLACE, BOSTON, MASSACHUSETTS 02117
1-800-REAL LIFE
John Hancock Variable Series Trust I ("Fund") is an open-end management
investment company composed of the following nine Portfolios:
Growth & Income Portfolio (formerly called the Stock Portfolio): to achieve
intermediate and long-term growth of capital with income as a secondary
consideration, through investment principally in common stocks of companies
believed to offer growth potential over both the intermediate and the long-
term.
Sovereign Bond Portfolio (formerly called the Bond Portfolio): to provide as
high a level of long-term total rate of return as is consistent with prudent
investment risk through investment primarily in a diversified portfolio of
freely marketable debt securities.
Money Market Portfolio: to provide maximum current income consistent with
capital preservation and liquidity, through investment in high quality money
market instruments. An investment in this Portfolio is neither insured nor
guaranteed by the U.S. Government and there can be no assurance that the
Portfolio will be able to maintain a stable net asset value of $10.00 per
share.
Large Cap Growth Portfolio (formerly called the Select Stock Portfolio): to
achieve above-average capital appreciation through the ownership of common
stocks (and securities convertible into or with rights to purchase common
stocks) of companies believed to offer above-average capital appreciation
opportunities.
Managed Portfolio: to achieve maximum long-term return consistent with
prudent investment risk, through investment in common stocks, convertible
debentures, convertible preferred stocks, bonds, and money market instruments.
Real Estate Equity Portfolio: to provide above-average income and long-term
growth of capital by investment principally in equity securities of companies
in the real estate and related industries.
International Equities Portfolio (formerly called the International
Portfolio): to achieve long-term growth of capital by investing primarily in
foreign equity securities.
Short-Term U.S. Government Portfolio: to provide a high level of current
income consistent with the maintenance of principal, through investment in a
portfolio of short-term U.S. Treasury securities and U.S. government agency
securities.
Special Opportunities Portfolio: to achieve long-term capital appreciation
by emphasizing investments in equity securities of issuers of various economic
sectors.
Equity Index Portfolio: to provide investment results that correspond to the
total return of the U.S. market as represented by the S&P 500 utilizing common
stocks that are publicly traded in the United States.
Large Cap Value Portfolio: to provide substantial dividend income, as well
as long-term capital appreciation, through investment in the common stocks of
established companies believed to offer favorable prospects for increasing
dividends and capital appreciation.
Mid Cap Growth Portfolio: to provide long-term growth of capital through a
non-diversified portfolio investing primarily in common stocks of medium
capitalization companies.
Mid Cap Value Portfolio: to provide long-term growth of capital primarily
through investment in the common stocks of medium capitalization companies
believed to sell at a discount to their intrinsic value.
Small Cap Growth Portfolio: to provide long-term growth of capital through a
diversified portfolio investing primarily in common stocks of small
capitalization emerging growth companies.
Small Cap Value Portfolio: to provide long-term growth of capital by
investing in a well diversified portfolio of equity securities of small
capitalization companies exhibiting value characteristics.
Strategic Bond Portfolio: to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity, from a portfolio of
domestic and international fixed income securities.
International Opportunities Portfolio: to provide capital appreciation
through investments in common stocks of primarily well-established, non United
States companies.
International Balanced Portfolio: to maximize total U.S. dollar return,
consisting of capital appreciation and current income, through investment in
non-U.S. equity and fixed income securities.
This Prospectus sets forth concisely information that a prospective investor
ought to know before investing. A Statement of Additional Information for the
Fund has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. This Statement is available upon request and
without charge from the Fund at the address or telephone number above.
This Prospectus should be read and retained for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The Date of This Prospectus is May 1, 1996
The Date of The Statement of Additional Information is May 1, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
GENERAL INFORMATION....................................................... 1
SYNOPSIS OF EXPENSE INFORMATION........................................... 2
FINANCIAL HIGHLIGHTS...................................................... 3
INVESTMENT OBJECTIVES AND POLICIES........................................ 13
Growth & Income Portfolio (formerly called the Stock Portfolio)......... 13
Sovereign Bond Portfolio (formerly called the Bond Portfolio)........... 13
Money Market Portfolio.................................................. 14
Large Cap Growth Portfolio (formerly called the Select Stock Portfolio). 14
Managed Portfolio....................................................... 15
Real Estate Equity Portfolio............................................ 15
International Equities Portfolio (formerly called the International
Portfolio)............................................................. 16
Short-Term U.S. Government Portfolio.................................... 17
Special Opportunities Portfolio......................................... 17
Equity Index Portfolio.................................................. 18
Large Cap Value Portfolio............................................... 19
Mid Cap Growth Portfolio................................................ 19
Mid Cap Value Portfolio................................................. 20
Small Cap Growth Portfolio.............................................. 20
Small Cap Value Portfolio............................................... 20
Strategic Bond Portfolio................................................ 21
International Opportunities Portfolio................................... 21
International Balanced Portfolio........................................ 22
BROKERAGE COMMISSIONS AND PORTFOLIO TURNOVER.............................. 23
RISK FACTORS.............................................................. 23
INVESTMENT RESTRICTIONS................................................... 28
INVESTMENT PRACTICES...................................................... 28
Repurchase Agreements................................................... 28
Covered Call and Protective Put Options................................. 29
Hedging Strategies...................................................... 30
Risks of Options and Futures Transactions............................... 32
Other Options and Futures Transactions by the Sovereign Bond, Short-Term
U.S. Government, Special Opportunities, Mid Cap Growth, Small Cap
Growth, Strategic Bond, and International Balanced Portfolios.......... 32
Foreign Currency Management Strategies.................................. 34
Rule 144A Securities.................................................... 36
When Issued Securities and Forward Commitments.......................... 36
Portfolio Lending....................................................... 36
The S&P 500............................................................. 37
MANAGEMENT OF THE FUND.................................................... 37
SHARES, TAXES, AND DIVIDENDS.............................................. 43
PURCHASE AND REDEMPTION OF SHARES......................................... 44
NET ASSET VALUE........................................................... 45
INVESTMENT PERFORMANCE.................................................... 45
CHANGES IN INTERNATIONAL EQUITIES PORTFOLIO'S INVESTMENT OBJECTIVE AND
POLICIES................................................................. 46
</TABLE>
THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE
AN OFFERING IN ANY JURISDICTION WHERE SUCH OFFERING MAY NOT LAWFULLY BE MADE.
NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS ABOUT THE FUND OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL
INFORMATION.
<PAGE>
GENERAL INFORMATION
John Hancock Variable Series Trust I is an open-end management investment
company reorganized as a business trust under the laws of Massachusetts
effective April 29, 1988. It is the successor to John Hancock Variable Series
Fund I, Inc., which was incorporated under the laws of Maryland on September
23, 1985. The Fund has eighteen Portfolios (Growth & Income (formerly called
the Stock Portfolio), Sovereign Bond (formerly called the Bond Portfolio),
Money Market, Large Cap Growth (formerly called the Select Stock Portfolio),
Managed, Real Estate Equity, International Equities (formerly called the
International Portfolio), Short-Term U.S. Government, Special Opportunities,
Equity Index, Large Cap Value, Mid Cap Growth, Mid Cap Value, Small Cap Growth,
Small Cap Value, Strategic Bond, International Opportunities, and International
Balanced), each with a separate series of shares. With the exception of the
Special Opportunities, Mid Cap Growth, and International Balanced Portfolios,
each of these Portfolios is a "diversified" Portfolio within the meaning of the
Investment Company Act of 1940, as amended. Under the Fund's Declaration of
Trust, the Board of Trustees is authorized to create additional Portfolios or
delete Portfolios.
Shares of the Fund currently are sold to John Hancock Variable Life Accounts
U, V, and S to fund variable life insurance policies issued by John Hancock
Variable Life Insurance Company ("JHVLICO"); to John Hancock Variable Annuity
Accounts U and V to fund variable annuity contracts issued by John Hancock
Mutual Life Insurance Company ("John Hancock"); to John Hancock Variable
Annuity Account I to fund variable annuity contracts issued by JHVLICO; and to
John Hancock Mutual Variable Life Insurance Account UV to fund variable life
insurance policies issued by John Hancock. In the future, shares may be sold to
other separate investment accounts of JHVLICO and John Hancock. Each of these
accounts of JHVLICO and John Hancock is hereinafter referred to as a "Separate
Account". JHVLICO and John Hancock currently do not foresee any disadvantages
to contractholders arising out of the fact that the Fund offers its shares to
JHVLICO's variable life insurance policies and variable annuity contracts and
John Hancock's variable life insurance policies and variable annuity contracts.
However, should a material irreconcilable conflict arise between the Separate
Accounts, the conflict could result in one of the Separate Accounts terminating
its relationship with the Fund thus necessitating the liquidation of Portfolio
securities and thereby having an adverse impact on the net asset value of the
Fund. The Fund's Board of Trustees monitors events to identify any possible
material conflicts and to determine what action should be taken to prevent any
negative effect on the Fund.
If the ultimate purchasers of policies or contracts whose benefits are funded
by the Portfolios (collectively, "contractholders") show minimal interest in
any one or more of the Portfolios, the Fund may eliminate such Portfolio or
Portfolios or substitute shares of another investment company for those held by
the Portfolio or Portfolios.
Because Fund shares will be held in Separate Accounts of JHVLICO or John
Hancock, any reference in this Prospectus or in the Statement of Additional
Information to shareholders of the Fund refers to those insurance companies,
and not to contractholders who may have an indirect interest in the Fund. The
rights of such contractholders are described in the appropriate Separate
Account Prospectus attached at the front of this Prospectus.
1
<PAGE>
SYNOPSIS OF EXPENSE INFORMATION
<TABLE>
<CAPTION>
SHORT-
REAL TERM
GROWTH SOVEREIGN MONEY LARGE CAP INTERNATIONAL ESTATE U.S. SPECIAL
& INCOME BOND MARKET GROWTH MANAGED EQUITIES EQUITY GOVERNMENT OPPORTUNITIES
FEE TABLE PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- --------- --------- --------- --------- --------- --------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONTRACTHOLDER
TRANSACTION
EXPENSES
Maximum Sales
Load Imposed on
Purchases (as a
percentage of
offering price). 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Maximum Sales
Load Imposed on
Reinvested
Dividends (as a
percentage of
offering price). 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Deferred Sales
Load (as a
percentage of
original
purchase price
or redemption
proceeds, as
applicable)..... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Redemption Fees
(as a percentage
of amount
redeemed, if
applicable)..... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Exchange Fee..... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
ANNUAL FUND
OPERATING
EXPENSES AFTER
EXPENSE
REIMBURSEMENT (AS
A PERCENTAGE OF
AVERAGE NET
ASSETS)
Management Fees.. 0.25% 0.25% 0.25% 0.40% 0.34% 0.60% 0.60% 0.50% 0.75%
Other Expenses... 0.03% 0.05% 0.10% 0.07% 0.04% 0.25%* 0.13% 0.25%* 0.25%*
Total Fund
Operating
Expenses........ 0.28% 0.30% 0.35% 0.47% 0.38% 0.85% 0.73% 0.75% 1.00%
<CAPTION>
EQUITY LARGE CAP MID CAP MID CAP SMALL CAP SMALL CAP STRATEGIC INTERNATIONAL INTERNATIONAL
INDEX VALUE GROWTH VALUE GROWTH VALUE BOND OPPORTUNITIES BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- --------- --------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONTRACTHOLDER
TRANSACTION
EXPENSES
Maximum Sales
Load Imposed on
Purchases (as a
percentage of
offering price). 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Maximum Sales
Load Imposed on
Reinvested
Dividends (as a
percentage of
offering price). 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Deferred Sales
Load (as a
percentage of
original
purchase price
or redemption
proceeds, as
applicable)..... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Redemption Fees
(as a percentage
of amount
redeemed, if
applicable)..... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Exchange Fee..... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
ANNUAL FUND
OPERATING
EXPENSES AFTER
EXPENSE
REIMBURSEMENT (AS
A PERCENTAGE OF
AVERAGE NET
ASSETS)
Management Fees.. 0.25% 0.75% 0.85% 0.80% 0.75% 0.80% 0.75% 1.00% 0.85%
Other Expenses+.. 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Total Fund
Operating
Expenses........ 0.50% 1.00% 1.10% 1.05% 1.00% 1.05% 1.00% 1.25% 1.10%
</TABLE>
* John Hancock reimburses a Portfolio when the Portfolio's Other Expenses,
excluding taxes, brokerage and the like, exceed 0.25% of its average daily net
asset value. This was done for the year ended December 31, 1995 with respect to
the International, Special Opportunities, and Short-Term U.S. Government
Portfolios. Absent the reimbursement, the Other Expenses percentages for the
International Equities, Special Opportunities, and Short-Term U.S. Government
Portfolios would have been .87%, 1.91%, and 1.83%, respectively.
2
<PAGE>
+"Other Expenses" for the Equity Index, Large Cap Value, Mid Cap Growth, Mid
Cap Value, Small Cap Growth, Small Cap Value, Strategic Bond, International
Opportunities, and International Balanced Portfolios are based upon estimates
for the current fiscal year.
EXAMPLES FOR EACH OF THE PORTFOLIOS
<TABLE>
<CAPTION>
A contractholder would bear the following
expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end 1 YEAR 3 YEARS 5 YEARS 10 YEARS
of each time period: ------ ------- ------- --------
<S> <C> <C> <C> <C>
Growth & Income............................... $ 3 $ 9 $16 $36
Sovereign Bond................................ 3 10 17 38
Money Market.................................. 4 11 20 44
Large Cap Growth.............................. 5 15 26 59
Managed....................................... 4 12 21 48
International Equities........................ 9 27 47 105
Real Estate Equity............................ 7 23 41 91
Short-Term U.S. Government.................... 8 24 42 93
Special Opportunities......................... 10 32 55 123
Equity Index.................................. 5 16 NA NA
Large Cap Value............................... 10 32 NA NA
Mid Cap Growth................................ 11 35 NA NA
Mid Cap Value................................. 11 34 NA NA
Small Cap Growth.............................. 10 32 NA NA
Small Cap Value............................... 11 34 NA NA
Strategic Bond................................ 10 32 NA NA
International Opportunities................... 13 40 NA NA
International Balanced........................ 11 35 NA NA
</TABLE>
- --------
The Examples above are based on the above Fee Table information but should not
otherwise be considered representations of past or future expenses and actual
expenses may be greater or lesser than those shown above.
The purpose of the above Fee Table and Examples is to assist the
contractholder in understanding the various costs and expenses of the Fund
that the contractholder will bear directly or indirectly. For a more complete
description of the investment advisory fee charged each Portfolio and of the
annual operating expenses of each Portfolio, see "Management of the Fund".
Note that the above Fee Table and Examples do not illustrate all the
expenses which may be charged to a contractholder, and reference should be
made to the Separate Account prospectus attached to this Prospectus for a
description of additional expenses and charges.
FINANCIAL HIGHLIGHTS
The following tables give information regarding income, expenses, and
capital changes in the Portfolios for a share outstanding throughout the
periods indicated, and other supplementary data. The tables have been audited
by Ernst & Young LLP, independent auditors of the Fund, whose report thereon,
and on the financial statements of the Fund for the year ended December 31,
1995, is incorporated by reference into the Statement of Additional
Information. These tables should be read in conjunction with the Fund's
financial statements and notes thereto. A copy of the Annual Report to
contractholders which contains the information referred to above and further
information about the performance of the Portfolios may be obtained, without
charge, by writing to the Fund at the address appearing on the cover page of
this prospectus.
Management's Discussion and Analysis of each portfolio is contained in the
annual report of the Fund and available at no charge upon request of the Fund
at the address or telephone number on the cover page of this prospectus. No
Management's Discussion and Analysis, financial statements or financial
highlights are provided for the Equity Index, Large Cap Value, Mid Cap Growth,
Mid Cap Value, Small Cap Growth, Small Cap Value, Strategic Bond,
International Opportunities, and International Balanced Portfolios because
they did not have any assets, and had not commenced operations at December 31,
1995.
3
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------------
+1995 +1994 +1993 +1992 +1991 +1990 1989 1988 1987 1986
----- ----- ----- ----- ----- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STOCK PORTFOLIO--
SELECTED DATA
FOR EACH SHARE
OF BENEFICIAL
INTEREST
OUTSTANDING
THROUGHOUT THE
YEAR INDICATED:
Net Asset Value,
Beginning of
Year............ $ 11.50 $ 12.39 $ 11.99 $ 12.10 $ 10.58 $ 10.70 $ 10.15 $ 8.95 $ 10.03 $ 8.94
---------- ---------- ---------- -------- -------- -------- -------- -------- -------- --------
Net Investment
Income.......... .36 .34 .32 .34 .41 .44 .51 .38 .39 .34
Net Realized and
Unrealized Gain
(Loss) on
Investments**... 3.53 ( .41) 1.27 .71 2.29 2.13 1.20 .06 1.04
---------- ---------- ---------- -------- -------- -------- -------- -------- -------- --------
Total From
Investment
Operations..... 3.89 ( .07) 1.59 1.05 2.70 .44 2.64 1.58 .45 1.38
Less
Distributions:
From Net
Investment
Income......... ( .36) ( .34) ( .32) ( .34) ( .41) ( .44) ( .51) ( .38) ( .39) ( .29)(f)
From Net
Realized Gains
on Investments. ( 1.09) ( .48) ( .87) ( .82) ( .77) ( .12) ( 1.58) ( 1.14)
---------- ---------- ---------- -------- -------- -------- -------- -------- -------- --------
Total
Distributions.. ($ 1.45) ($ .82) ($ 1.19) ($ 1.16) ($ 1.18) ($ .56) ($ 2.09) ($ .38) ($ 1.53) ($ .29)
========== ========== ========== ======== ======== ======== ======== ======== ======== ========
Net Asset Value,
End of Year..... $ 13.94 $ 11.50 $ 12.39 $ 11.99 $ 12.10 $ 10.58 $ 10.70 $ 10.15 $ 8.95 $ 10.03
========== ========== ========== ======== ======== ======== ======== ======== ======== ========
Number of shares
outstanding
(000's
omitted)(d)..... 114,666 97,361 84,788 71,833 61,958 55,009 50,815 41,547 39,650 14,134
Total Investment
Return(i)*...... 34.21% ( .56%) 13.33% 8.90% 26.00% 4.10% 26.00% 17.65% 4.49% 15.44%
SIGNIFICANT
RATIOS AND
SUPPLEMENTAL
DATA
Net Assets, End
of year
(000's
Omitted)(i).... $1,598,585 $1,119,864 $1,050,349 $861,516 $749,836 $581,789 $543,846 $421,549 $354,785 $141,722
Operating
expenses to
average net
assets......... .28% .27% .28% .30% .30% .30% .36% .31% .25% .25%
Net investment
income to
average net
assets......... 2.70% 2.80% 2.56% 2.85% 3.49% 4.21% 4.49% 3.87% 3.64% 3.69%
Portfolio
turnover rate.. 73.54% 64.12% 70.27% 84.28% 77.57% 85.34% 168.12% 164.96% 131.91% 235.64%
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BOND PORTFOLIO--
SELECTED DATA
FOR EACH SHARE
OF BENEFICIAL
INTEREST
OUTSTANDING
THROUGHOUT THE
YEAR INDICATED:
Net Asset Value,
Beginning of
Year............ $ 9.19 $ 10.14 $ 9.84 $ 9.89 $ 9.23 $ 9.40 $ 9.16 $ 9.26 $ 9.95 $ 9.42
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Net Investment
Income.......... .71 .70 .73 .77 .81 .82 .85 .85 .85 .84
Net Realized and
Unrealized Gain
(Loss) on
Investments**... 1.03 ( .95) .30 ( .05) .66 ( .17) .24 ( .10) ( .62) .38
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total From
Investment
Operations..... 1.74 ( .25) 1.03 .72 1.47 .65 1.09 .75 .23 1.22
Less
Distributions:
From Net
Investment
Income......... ( .71) ( .70) ( .73) ( .77) ( .81) ( .82) ( .85) ( .85) ( .85) ( .69)(f)
From Net
Realized Gains
on Investments. ( .09) ( .07)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total
Distributions.. ($ .80) ($ .70) ($ .73) ($ .77) ($ .81) ($ .82) ($ .85) ($ .85) ($ .92) ($ .69)
======== ======== ======== ======== ======== ======== ======== ======== ======== =======
Net Asset Value,
End of Year..... $ 10.13 $ 9.19 $ 10.14 $ 9.84 $ 9.89 $ 9.23 $ 9.40 $ 9.16 $ 9.26 $ 9.95
======== ======== ======== ======== ======== ======== ======== ======== ======== =======
Number of shares
outstanding
(000's
omitted)(d)..... 69,148 63,907 61,046 52,671 44,192 37,331 32,677 28,787 24,327 9,123
Total Investment
Return(i)*...... 19.55% ( 2.57%) 10.77% 7.70% 16.70% 6.90% 11.90% 8.10% 2.31% 12.95%
SIGNIFICANT
RATIOS AND
SUPPLEMENTAL
DATA
Net Assets, End
of year
(000's
Omitted)(i).... $700,309 $587,077 $619,200 $518,341 $437,110 $344,629 $307,235 $263,544 $225,151 $90,731
Operating
expenses to
average net
assets......... .30% .29% .28% .30% .30% .30% .31% .28% .25% .25%
Net investment
income to
average net
assets......... 7.20% 7.27% 7.22% 7.85% 8.54% 9.06% 9.06% 9.19% 8.59% 9.34%
Portfolio
turnover
rate(c)........ 63.31% 21.80% 21.05% 19.66% 20.18% 34.46% 36.47% 25.13% 42.15% 44.12%
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET
PORTFOLIO--
SELECTED DATA
FOR EACH SHARE
OF BENEFICIAL
INTEREST
OUTSTANDING
THROUGHOUT THE
YEAR INDICATED:
Net Asset Value,
Beginning of
Year............ $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 9.80
--------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Net Investment
Income.......... .57 .40 .30 .36 .58 .80 .89 .73 .64 .67
--------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Total From
Investment
Operations..... .57 .40 .30 .36 .58 .80 .89 .73 .64 .67
Less Distribu-
tions:
From Net Invest-
ment Income.... ( .57) ( .40) ( .30) ( .36) ( .58) ( .80) ( .89) ( .73) ( .64) ( .47)(f)
--------- -------- -------- -------- -------- -------- -------- -------- ------- -------
From Net Real-
ized Gains on
Investments.... ( .57) ($ .40) ($ .30) ($ .36) ($ .58) ($ .80) ($ .89) ($ .73) ($ .64) ($ .47)(f)
========= ======== ======== ======== ======== ======== ======== ======== ======= =======
Net Asset Value,
End of Year..... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
========= ======== ======== ======== ======== ======== ======== ======== ======= =======
Number of shares,
outstanding
(000's
omitted)(d)..... 18,591 14,867 11,618 12,521 13,780 14,032 12,022 10,984 8,878 3,751
Total Investment
Return(i)*...... 5.78% 4.03% 3.06% 3.60% 6.00% 8.00% 8.90% 7.30% 6.40% 6.84%
SIGNIFICANT
RATIOS AND
SUPPLEMENTAL
DATA
Net Assets, End
of year
(000's
omitted)(i).... $ 185,909 $148,668 $116,190 $125,212 $137,795 $140,319 $120,220 $109,843 $88,783 $37,508
Operating
expenses to
average net
assets......... .35% .32% .35% .34% .33% .33% .34% .30% .25% .25%
Net investment
income to
average net
assets......... 5.62% 4.05% 3.01% 3.58% 5.81% 7.96% 9.09% 7.55% 6.14% 6.38%
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Period from
March 31,(a)
Year Ended December 31, to
---------------------------------------------------------------------------------- December 31,
1995 +1994 +1993 +1992 +1991 +1990 1989 1988 1987 1986
---- ----- ----- ----- ----- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SELECT STOCK
PORTFOLIO--SELECTED
DATA FOR EACH SHARE
OF BENEFICIAL
INTEREST OUTSTANDING
THROUGHOUT THE
PERIOD INDICATED:
Net Asset Value,
Beginning of Period. $ 14.41 $ 15.38 $ 14.43 $ 13.86 $ 12.07 $ 11.75 $ 10.92 $ 9.91 $ 9.88 $ 10.00
-------- -------- -------- ------- ------- ------- ------- ------- ------- -------
Net Investment In-
come................ .44 .39 .33 .37 .42 .46 .50 .36 .34 .26
Net Realized and
Unrealized Gain
(Loss) on
investments**....... 4.06 ( .54) 1.64 .99 2.62 .32 2.69 1.12 .36 ( .12)
-------- -------- -------- ------- ------- ------- ------- ------- ------- -------
Total from Invest-
ment Operations.... 4.50 ( .15) 1.97 1.36 3.04 .78 3.19 1.48 .70 .14
Less Distributions:
From Net Investment
Income............. ( .44) ( .39) ( .33) ( .37) ( .42) ( .46) ( .50) ( .36) ( .34) ( .26)
From Net Realized
Gains on Invest-
ments.............. ( 1.10) ( .43) ( .69) ( .42) ( .83) ( 1.86) ( .11) ( .33)
-------- -------- -------- ------- ------- ------- ------- ------- ------- -------
Total Distributions. ($ 1.54) ($ .82) ($ 1.02) ($ .79) ($ 1.25) ($ .46) ($ 2.36) ($ .47) ($ .67) ($ .26)
======== ======== ======== ======= ======= ======= ======= ======= ======= =======
Net Asset Value, End
of Period........... $ 17.37 $ 14.41 $ 15.38 $ 14.43 $ 13.86 $ 12.07 $ 11.75 $ 10.92 $ 9.91 $ 9.88
======== ======== ======== ======= ======= ======= ======= ======= ======= =======
Number of shares out-
standing
(000's omitted)..... 21,895 15,546 9,833 6,097 3,973 2,384 1,728 1,102 787 282
Total Investment
Return(i)*.......... 31.64% ( .98%) 13.80% 9.90% 25.50% 6.60% 29.20% 14.93% 7.09% 1.38%(e)
SIGNIFICANT RATIOS
AND SUPPLEMENTAL
DATA
Net Assets, End of
Period
(000's Omitted)(i). $380,276 $223,957 $151,207 $87,952 $55,065 $28,777 $20,303 $12,040 $7,800 $2,790
Operating expenses
to average net
assets(b).......... .47% .47% .50% .52% .55% .63% .73% .64% .40% .40%(e)
Net investment in-
come to average net
assets............. 2.70% 2.69% 2.21% 2.70% 3.15% 4.01% 4.00% 3.44% 3.21% 2.58%(e)
Portfolio turnover
rate............... 90.18% 80.51% 61.53% 65.88% 88.38% 88.50% 222.38% 192.20% 182.79% 221.13%
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------
1995 +1994 +1993 +1992 +1991 +1990 1989 1988 1987
---- ----- ----- ----- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MANAGED
PORTFOLIO--
SELECTED DATA
FOR EACH SHARE
OF BENEFICIAL
INTEREST
OUTSTANDING
THROUGHOUT THE
PERIOD
INDICATED:
Net Asset Value,
Beginning of
Period.......... $ 11.96 $ 12.81 $ 12.41 $ 12.36 $ 10.93 $ 11.19 $ 10.66 $ 10.18 $ 10.23
---------- ---------- ---------- ---------- -------- -------- -------- -------- -------
Net Investment
Income.......... .62 .55 .52 .56 .64 .68 .71 .60 .52
Net Realized and
Unrealized Gain
(Loss) on
Investments**... 2.56 ( .83) .90 .37 1.70 ( .26) 1.31 .59 .29
---------- ---------- ---------- ---------- -------- -------- -------- -------- -------
Total From
Investment
Operations..... 3.18 ( .28) 1.42 .93 2.34 .42 2.02 1.19 .81
Less Distribu-
tions:
From Net Invest-
ment Income.... ( .62) ( .55) ( .52) ( .56) ( .64) ( .68) ( .71) ( .60) ( .52)
From Net
Realized Gains
on Investments. ( .79) ( .02) ( .50) ( .32) ( .27) ( .78) ( .11) ( .34)
---------- ---------- ---------- ---------- -------- -------- -------- -------- -------
Total Distribu-
tions........... ($ 1.41) ($ .57) ($ 1.02) ($ .88) ($ .91) ($ .68) ($ 1.49) ($ .71) ($ .86)
---------- ---------- ========== ========== ======== ======== ======== ======== =======
Net Asset Value,
End of Period... $ 13.73 $ 11.96 $ 12.81 $ 12.41 $ 12.36 $ 10.93 $ 11.19 $ 10.66 $ 10.18
========== ========== ========== ========== ======== ======== ======== ======== =======
Number of shares
outstanding
(000's omitted). 152,544 134,588 116,985 82,805 54,687 40,625 29,078 17,477 8,954
Total Investment
Return(i)*...... 27.09% ( 2.23%) 11.60% 7.70% 22.00% 3.80% 18.90% 11.68% 7.92%
SIGNIFICANT
RATIOS AND
SUPPLEMENTAL
DATA
Net Assets, End
of Period
(000's
Omitted)(i).... $2,093,964 $1,609,939 $1,498,876 $1,027,746 $676,186 $443,969 $325,356 $186,339 $91,174
Operating
expenses to
average net
assets......... .38% .37% .38% .43% .45% .46% .48% .45% .40%
Net investment
income to
average net
assets......... 4.66% 4.50% 4.07% 4.56% 5.49% 6.34% 6.28% 5.84% 5.28%
Portfolio turn-
over rate...... 187.67% 90.41% 63.74% 84.27% 105.80% 136.39% 327.66% 245.20% 98.13%
<CAPTION>
Period from
March 31,(a) to
December 31,
1986
----
<S> <C>
MANAGED
PORTFOLIO--
SELECTED DATA
FOR EACH SHARE
OF BENEFICIAL
INTEREST
OUTSTANDING
THROUGHOUT THE
PERIOD
INDICATED:
Net Asset Value,
Beginning of
Period.......... $ 10.00
---------------
Net Investment
Income.......... .42
Net Realized and
Unrealized Gain
(Loss) on
Investments**... .23
---------------
Total From
Investment
Operations..... .65
Less Distribu-
tions:
From Net Invest-
ment Income.... ( .42)
From Net
Realized Gains
on Investments.
---------------
Total Distribu-
tions........... ($ .42)
===============
Net Asset Value,
End of Period... $ 10.23
===============
Number of shares
outstanding
(000's omitted). 1,650
Total Investment
Return(i)*...... 6.50%(e)
SIGNIFICANT
RATIOS AND
SUPPLEMENTAL
DATA
Net Assets, End
of Period
(000's
Omitted)(i).... $16,872
Operating
expenses to
average net
assets......... .40%(e)
Net investment
income to
average net
assets......... 4.64%(e)
Portfolio turn-
over rate...... 120.89%
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended December 31, May 16, 1988(a)
------------------------------------------------------------- to December 31,
1995 1994 1993 1992 +1991 +1990 1989 1988
---- ---- ---- ---- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE EQUITY
PORTFOLIO--SELECTED
DATA FOR EACH SHARE OF
BENEFICIAL INTEREST
OUTSTANDING THROUGHOUT
THE PERIOD INDICATED:
Net Asset Value, Begin-
ning of Period......... $ 11.16 $ 11.52 $ 10.27 $ 9.36 $ 7.42 $ 10.11 $10.15 $10.00
-------- -------- ------- ------- ------ ------- ------ ------
Net Investment Income... .77 .66 .52 .49 .52 .57 .59 .35
Net Realized and
Unrealized Gain (Loss)
on Investments**....... .54 ( .34) 1.26 .96 1.94 ( 2.69) .14 .15
-------- -------- ------- ------- ------ ------- ------ ------
Total From Investment
Operations............ 1.31 .32 1.78 1.45 2.46 ( 2.12) .73 .50
Less Distributions:
From Net Investment In-
come.................. ( .77) ( .66) ( .52) ( .49) ( .52) ( .57) ( .59) ( .35)
From Net Realized Gains
on Investments........ ( .00) ( .02) ( .01) ( .05) ( .18)
-------- -------- ------- ------- ------ ------- ------ ------
Total Distributions.... ($ .77) ($ .68) ($ .53) ($ .54) ($ .52) ($ .57) ($ .77) ($ .35)
======== ======== ======= ======= ====== ======= ====== ======
Net Asset Value, End of
Period................. $ 11.70 $ 11.16 $ 11.52 $ 10.27 $ 9.36 $ 7.42 $10.11 $10.15
======== ======== ======= ======= ====== ======= ====== ======
Number of shares out-
standing (000's omit-
ted)................... 9,301 10,178 7,061 1,672 875 587 467 153
Total Investment Re-
turn*.................. 12.31% 2.86% 17.29% 16.00% 33.50% (21.00%) 7.20% 5.00%(e)
SIGNIFICANT RATIOS AND
SUPPLEMENTAL DATA
Net Assets, End of Pe-
riod (000's Omitted).. $108,782 $113,545 $81,306 $17,176 $8,184 $4,360 $4,726 $1,553
Operating expenses to
average net assets(h). .73% .71% .83% .85% .84% .86% .86% .75%(e)
Net investment income
to average net assets. 6.85% 5.94% 4.80% 5.31% 5.88% 6.67% 5.93% 5.14%(e)
Portfolio turnover
rate.................. 19.81% 22.36% 9.79% 16.24% 11.84% 17.17% 19.10% 3.89%
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended December 31, May 2, 1988(a)
------------------------------------------------------------- to December 31,
1995 +1994(c) +1993 +1992 +1991 +1990 1989 1988
---- -------- ----- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTERNATIONAL
PORTFOLIO--SELECTED DATA
FOR EACH SHARE OF
BENEFICIAL INTEREST
OUTSTANDING THROUGHOUT
THE PERIOD INDICATED:
Net Asset Value,
Beginning of Period..... $ 14.62 $ 15.85 $ 12.25 $ 12.57 $10.37 $11.63 $ 10.43 $10.00
-------- -------- ------- ------- ------ ------ ------- ------
Net Investment Income... .17 .12 .03 .11 .20 .35 .13 .09
Net Realized and
Unrealized Gain(Loss) on
Investments**........... .99 ( 1.10) 3.91 ( .32) 2.20 ( 1.26) 1.35 .43
-------- -------- ------- ------- ------ ------ ------- ------
Total From Investment
Operations............. 1.16 ( .98) 3.94 ( .21) 2.40 ( .91) 1.48 .52
Less Distributions:
From Net Investment
Income................. ( .17) ( .12) ( .03) ( .11) ( .20) ( .35) ( .13) ( .09)
From Net Realized Gains
on Investments......... ( .13) ( .31) ( .15)
-------- -------- ------- ------- ------ ------ ------- ------
Total Distributions.... ($ .17) ($ .25) ($ .34) ($ .11) ($ .20) ($ .35) ($ .28) ($ .09)
======== ======== ======= ======= ====== ====== ======= ======
Net Asset Value, End of
Period.................. $ 15.61 $ 14.62 $ 15.85 $ 12.25 $12.57 $10.37 $ 11.63 $10.43
======== ======== ======= ======= ====== ====== ======= ======
Number of shares
outstanding
(000's omitted)........ 8,123 8,162 3,574 1,202 792 588 209 79
Total Investment
Return*................ 8.01% (6.26%) 32.08% (1.60%) 23.40% (7.80%) 6.70% 5.20%(e)
SIGNIFICANT RATIOS AND
SUPPLEMENTAL DATA:
Net Assets, End of
Period (000's omitted). $126,803 $119,331 $56,652 $14,722 $9,954 $6,095 $2,431 $828
Operating expenses to
average net assets(g).. .84% .85% .85% .85% .84% .79% .94% .78%(e)
Net investment income
to average net assets.. 1.34% .85% .26% .90% 1.75% 3.29% 1.30% 1.17%(e)
Portfolio turnover
rate................... 65.82% 78.21% 65.57% 110.79% 86.70% 80.19% 140.00% 63.30%
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended May 1, 1994(a)
December 31, to December 31,
1995 1994
------------ ---------------
<S> <C> <C>
SHORT-TERM U.S. GOVERNMENT PORTFOLIO--SELECTED
DATA FOR EACH SHARE OF BENEFICIAL INTEREST
OUTSTANDING THROUGHOUT THE PERIOD INDICATED:
Net Asset Value, Beginning of Period.............. $ 9 .66 $10.00
------- ------
Net Investment Income............................. .50 .37
Net Realized and Unrealized Gain (Loss) on
Investments**..................................... .59 ( .34)
------- ------
Total From Investment Operations................. 1.09 .03
Less Distributions:
From Net Investment Income....................... ( .50) ( .37)
From Net Realized Gains (Losses) on Investments.. ( .02)
------- ------
Total Distributions.............................. ($ .52) ($ .37)
======= ======
Net Asset Value, End of Period.................... $ 10.23 $ 9.66
======= ======
Number of shares outstanding (000's omitted)..... 1,750 178
Total Investment Return*......................... 11.49% .33%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)........ $17,911 $1,718
Operating expenses to average net assets(j)...... .75% .75%(e)
Net investment income to average net assets...... 5.52% 5.82%(e)
Portfolio turnover rate.......................... 109.77% 11.22%
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended May 6, 1994(a)
December 31, to December 30,
1995 1994
------------ ---------------
<S> <C> <C>
SPECIAL OPPORTUNITIES--SELECTED DATA FOR EACH
SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT THE PERIOD INDICATED:
Net Asset Value, Beginning of Period.............. $ 9.94 $10.00
------- ------
Net Investment Income............................. ( .01) .11
Net Realized and Unrealized Loss on Investments**. 3.58 ( .06)
------- ------
Total From Investment Operations................. 3.57 .05
Less Distributions:
From Net Investment Income....................... ( .33) ( .11)
------- ------
Total Distributions.............................. ($ .33) ($ .11)
======= ======
Net Asset Value, End of Period.................... $ 13.18 $ 9.94
======= ======
Number of shares outstanding (000's omitted)..... 4,133 722
Total Investment Return*......................... 35.96% .56%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)........ $54,486 $7,181
Operating expenses to average net assets(k)...... 1.00% 1.00%(e)
Net investment income to average net assets...... ( .11)% 1.51%(e)
Portfolio turnover rate.......................... 139.13% 26.54%
</TABLE>
- ----
(a) Date funds first allocated to Portfolio.
(b) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been .66% for the year in 1990.
(c) See "Changes in the International Equity Portfolio's Investment Objective
and Policies."
(d) Per share amounts have been adjusted to reflect the issuance of
10,254,925.2 shares of the Stock Portfolio, 6,404,442.4 shares of the Bond
Portfolio, and 3,797,464.2 shares of the Money Market Portfolio at a net
asset value of $10.00 per share on March 28, 1986, in exchange for the
investment portfolios of certain predecessor Separate Accounts. Per share
amounts for the year ended December 31, 1986 were computed as though the
reorganization was effective January 1, 1986.
(e) Annualized.
(f) For the year ended December 31, 1986, distributions of net investment
income have been made from the date of reorganization, March 28, 1986.
Accumulated undistributed net investment income and realized capital gains
of the former separate accounts were included in net assets exchanged for
shares of the Fund at the date of reorganization.
(g) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been .87% .87%, 1.13%, 1.30%,
1.67%, 2.61% and 4.25% for the years ended December 31, 1995, 1994, 1993,
1992, 1991, 1990, and 1989, respectively.
(h) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.06%, 1.24%, 1.73%, and 1.71%
for the years ended December 31, 1992, 1991, 1990, and 1989, respectively.
(i) Total Investment Return and Net Assets for the year ended December 31,
1986 has been calculated, based upon the actual net return and the net
assets in the three corresponding variable life managed separate accounts,
the predecessors to the Fund, as if the Fund had been in existence prior
to March 28, 1986, the date of its reorganization.
(j) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made, the expense ratio would have been 13.60% for the period ended
December 31, 1994, and 1.83% for the year ended December 31, 1995.
(k) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made, the expense ratio would have been 6.05% for the period ended
December 31, 1994, and 1.91% for the year ended December 31, 1995.
(l) Not Annualized.
+ Effective January 1, 1990, foreign taxes withheld are presented as income
deductions and not as expenses.
* The performance of the portfolios shown in these Financial Highlights does
not reflect expenses and charges of the applicable separate accounts and
variable products, all of which vary to a considerable extent and are
described in your product prospectus.
** The amount shown at this caption for each share outstanding throughout the
period, may not accord with the change in the aggregate gains and losses in
the portfolio securities for the period, because of the timing of purchases
and withdrawals of shares in relation to the fluctuating market values of
the portfolio.
12
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Portfolio of the Fund has a different investment objective, which it
pursues through the separate investment policies described below. Additional
investment practices of some or all of the Portfolios are discussed below under
"Investment Practices." The differences in objectives, policies, and practices
among the various Portfolios can be expected to affect each Portfolio's
investment return as well as the degree of market and financial risks to which
each Portfolio is subject. Please refer to "Risk Factors" below for a
discussion of certain risks applicable to each Portfolio.
Growth & Income (formerly called the Stock Portfolio): The investment
objective of the Growth & Income Portfolio is to achieve intermediate and long-
term growth of capital, with income as a secondary consideration. This
objective will be pursued by investments principally in common stocks (and in
securities convertible into or with rights to purchase common stocks) of
companies believed to offer growth potential over both the intermediate and the
long-term.
The policy of the Portfolio is to diversify investments among a number of
companies without concentration in any particular industry. The Portfolio may
temporarily maintain a portion of its assets in cash or invest in preferred
stocks, non-convertible bonds, notes, government securities, or other fixed-
income securities. However, in pursuing its objective of capital growth, the
Portfolio's management may place emphasis on the selection of securities of
progressive companies with aggressive and experienced management.
Although the Portfolio will not make a practice of short-term trading,
purchases and sales of securities will be made whenever believed necessary to
achieve the objective of the Portfolio without regard to resulting brokerage
costs.
Sovereign Bond Portfolio (formerly called the Bond Portfolio): The investment
objective of the Sovereign Bond Portfolio is to provide as high a level of
long-term total rate of return as is consistent with prudent investment risk,
through investment primarily in a diversified portfolio of freely marketable
debt securities. Total rate of return consists of current income, including
interest and discount accruals, and capital appreciation.
The Portfolio will purchase only (a) corporate debt securities which are
issued by United States or Canadian corporations, (b) debt securities which are
issued by other foreign corporations, denominated in United States dollars, and
publicly traded in the United States or Europe and (c) governmental securities,
domestic and foreign. It is the Portfolio's present intent to purchase
principally those governmental securities which are issued or guaranteed by the
United States government and its agencies or instrumentalities and by the
Government of Canada or any Canadian province, municipality or governmental
agency. Canadian and other foreign securities will be purchased only if they
are payable in United States dollars. It is anticipated that, under normal
conditions, the Portfolio will not invest more than 25% of its total assets in
foreign corporate securities (excluding U.S. dollar denominated Canadian
corporate securities).
The Portfolio may not purchase securities unless the issuer or any company on
whose credit the purchase was based has a record of at least three years of
continuous operation, except for investments which in the aggregate taken at
cost do not exceed 5% of the Portfolio's total assets taken at market value.
As set forth more fully in the Statement of Additional Information under
"Sovereign Bond Portfolio Securities," it is contemplated that at least 75% of
the Sovereign Bond Portfolio's debt securities (other than
13
<PAGE>
commercial paper) will have a rating at the time of their purchase within the
four highest grades as determined by Moody's Investors Service, Inc., or
Standard & Poor's Corporation or be unrated debt securities considered to be of
comparable quality. Debt securities within the four highest grades are commonly
referred to as investment grade. Investments in lower-rated ("high yield")
securities are subject to greater risks of loss. The meanings of these ratings
are further discussed under "Types of Investment Instruments and Ratings--
Corporate Bond Ratings" in the Statement of Additional Information.
When management believes it would be beneficial to the Portfolio, the
Sovereign Bond Portfolio intends to engage in short-term trading of its
securities. (See "Short-Term Trading" in the Statement of Additional
Information.)
Money Market Portfolio: The investment objective of the Money Market
Portfolio is to provide maximum current income consistent with capital
preservation and liquidity. The Portfolio seeks to achieve this objective by
investing in a managed portfolio of high quality money market instruments while
ensuring that the weighted average to maturity of portfolio securities does not
exceed 90 days, including:
(1) obligations issued or guaranteed as to principal or interest by the
United States Government, or any agency or authority thereof;
(2) obligations (including certificates of deposit and bankers
acceptances) of U.S. banks and savings and loan associations which at the
date of the investment have capital, surplus and undivided profits (as of
the date of their most recent published financial statements) in excess of
$100,000,000, including obligations of foreign branches of United States
banks and United States branches of foreign banks if such banks meet the
stated qualifications;
(3) commercial paper which at the date of the investment is rated A-1 by
Standard & Poor's Corporation, P-1 by Moody's Investors Service, Inc., or
F-1 by Fitch's Investors Service or, if not rated, is issued by a company
which at the date of the investment has an outstanding debt issue rated AAA
or AA by Standard & Poor's or Aaa or Aa by Moody's; and
(4) corporate obligations maturing in one year or less which at the date
of the investment are rated A or higher by Standard & Poor's or A or higher
by Moody's.
(For a more complete description of these money market obligations and ratings,
please refer to "U.S. Government Obligations," "Other Money Market Portfolio
Securities," "Commercial Paper Ratings," and "Corporate Bond Ratings" under
"Types of Investment Instruments and Ratings," in the Statement of Additional
Information).
By limiting the maturity of its investments, the Money Market Portfolio seeks
to lessen the changes in the value of its assets caused by market factors. The
Portfolio will endeavor to maintain a constant net asset value of $10.00 per
share. Nevertheless, no assurances can be given that it will be able to do so
or that the per share net asset value of this Portfolio may not vary at times.
The Portfolio, consistent with its investment objective, will attempt to
maximize yield through portfolio trading. For this reason, and because the
Portfolio's investments will have relatively short maturities, the Portfolio
may have a significant turnover.
Large Cap Growth Portfolio (formerly called the Select Stock Portfolio): The
investment objective of the Large Cap Growth Portfolio is above-average capital
appreciation through the ownership of common stocks
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(and securities convertible into or with rights to purchase common stocks) of
companies believed to offer above-average capital appreciation opportunities.
Current income is not an objective of the Portfolio. In pursuing its investment
objective, the Portfolio will generally purchase securities of well-managed
companies believed to offer growth potential through their increasing earnings
but will also invest in other companies where unusual appreciation
opportunities may exist.
Under normal circumstances, at least 65% of the value of the Portfolio's
total assets will consist of equity investments in large capitalization ("large
cap") companies. This is a non-fundamental policy that may be changed without
shareholder approval. The Fund's current definition of "large cap" companies is
set forth on page 25 below under "Market Capitalization Risk."
While this Portfolio generally will sell securities only after owning them
for more than six months, shorter term considerations may also govern the
purchase and sale of securities. Accordingly, the Portfolio may realize short-
term gains or losses as well as long-term gains or losses.
Considering that the Portfolio will be aggressively managed and that the
investments which are believed to have the greatest growth potential may
present significant risks, an investment in this Portfolio involves a higher
degree of risk than more conservative large capitalization common stock funds
such as the Growth & Income and Equity Index Portfolios. In economic and market
environments that are considered favorable for achievement of capital
appreciation, the Large Cap Growth Portfolio will invest in securities more
volatile than the overall market. When poor market conditions exist, however,
the sub-investment manager may seek to reduce potential losses by holding
meaningful amounts of cash and short-term instruments, perhaps up to as much as
50% of the Portfolio.
Managed Portfolio: The investment objective of the Managed Portfolio is to
achieve maximum long-term total return consistent with prudent investment risk.
Total return consists of income, including interest, dividends and discount
accruals, and capital appreciation.
The Portfolio will invest in the following investment sectors:
(1) Common stocks, convertible debentures and convertible preferred
stock, and other equity investments, including the types of securities in
which the Growth & Income and Large Cap Growth Portfolios invest;
(2) Bonds and other fixed income securities with maturities generally in
excess of twelve months, including the types of securities in which the
Sovereign Bond Portfolio invests; and
(3) Money market instruments, such as U.S. government obligations,
certificates of deposit and commercial paper, and other debt securities
with maturities generally not in excess of twelve months, including the
types of securities in which the Money Market Portfolio invests.
The sub-investment manager of this Portfolio (see "Management of the Fund,"
below) will make ongoing decisions as to the mix of investments of the
Portfolio among the three investment sectors in order to capitalize on short
and intermediate-term market trends and to improve the long-term overall return
of the Portfolio.
Real Estate Equity Portfolio: The investment objective of the Real Estate
Equity Portfolio is to provide above-average income and long-term growth of
capital by investment principally in equity securities of companies in the real
estate and related industries.
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Under ordinary economic conditions, the major part of the Portfolio's
investments will be invested in the equity investments of equity real estate
investment trusts which own commercial and multi-family residential real
estate, commercial property companies and companies primarily engaged in the
real estate business, such as real estate development companies, commercial and
residential brokerage companies and natural resource companies.
Investments may also be made in companies with activities related to the real
estate industry, such as mortgage real estate investment trusts which make
construction, development and long-term mortgage loans; financial institutions,
including thrift institutions and mortgage banking companies, which originate
or service mortgage loans; manufacturers and distributors of building supplies,
manufactured housing and mobile homes; and hotel companies, entertainment
companies, retailers, railroads and other companies engaged in non-real estate
businesses but whose real estate holdings are significant in relation to the
market value of their common stock.
The securities purchased will be principally common stocks (and securities
convertible into or with rights to purchase common stocks) but a portion of the
Portfolio may be invested in preferred stock, in commercial mortgage securities
(debt obligations secured by commercial property) and in collateralized
mortgage obligations (mortgage pass-through securities secured by commercial
mortgage pools) which will primarily be of investment grade quality as defined
above under "Sovereign Bond Portfolio". The Portfolio may also invest in master
limited partnerships from time to time.
Although the Portfolio will not make a practice of short-term trading,
purchases and sales of securities will be made whenever believed necessary to
achieve the objectives of the Portfolio, giving secondary consideration to
resulting brokerage costs.
International Equities (formerly called the International Portfolio): The
investment objective of the International Equities Portfolio is to achieve
long-term growth of capital by investing primarily in foreign equity
securities.
Under normal circumstances, at least 80% of the Portfolio's total assets will
be invested in equity securities of issuers located in various countries around
the world. Generally, the Portfolio will contain securities of issuers from at
least three countries other than the United States. The Portfolio normally will
invest substantially all of its assets in equity securities, such as common
stock, preferred stock and securities convertible into common and preferred
stock. However, if deemed advisable by the sub-investment managers, the
Portfolio may invest in any other type of security, including warrants, bonds,
notes and other debt securities (including Eurodollar securities) or
obligations of domestic or foreign governments and their political
subdivisions, or domestic or foreign corporations. It is the intention of the
Portfolio generally to invest in debt securities only for defensive purposes.
The Portfolio will maintain a flexible investment policy and will invest in a
diversified portfolio of securities of companies and governments located
throughout the world. In making the allocation of assets among various
countries and geographic regions, the sub-investment managers ordinarily
consider such factors as prospects for relative economic growth among foreign
countries; expected levels of inflation and interest rates; government policies
influencing business conditions; and other pertinent financial, tax, social,
political and national factors--all in relation to the prevailing prices of the
securities in each country or region.
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In choosing investments for the Portfolio, the sub-investment managers
generally look for companies whose earnings show a strong growth trend or
companies whose current market value per share is undervalued. The Portfolio
will not restrict its investments to any particular size company and,
consequently, the portfolio may include the securities of small and relatively
less well-known companies.
Short-Term U.S. Government Portfolio: The investment objective of the Short-
Term U.S. Government Portfolio is to provide a high level of current income
consistent with the maintenance of principal, through investment in a portfolio
of short-term U.S. Treasury securities and U.S. Government agency securities.
The Portfolio will invest substantially in high-quality U.S. Government
securities. These securities include U.S. Treasury notes, bills, and bonds
which are direct obligations of the U.S. Government and, as such, backed by the
full faith and credit of the United States. These securities also include U.S.
Government agency securities which also represent a low credit risk because
they are sponsored or guaranteed by Federal agencies or instrumentalities; U.S.
Government agency securities may or may not be backed by the full faith and
credit of the United States.
The Portfolio will invest only in U.S. Government securities with maturities
of five years or less. The Portfolio can also make investments of less than one
year when, in the judgment of the sub-investment manager, potential returns
hold a relative advantage over longer maturities.
The Portfolio would be suitable for investors seeking to enhance their income
and returns above those available from money market funds. In low interest rate
environments, the higher returns are attractive. In rising interest rate
environments, a short-term U.S. Government portfolio offers greater stability
and defensive characteristics than a longer maturity bond account.
Special Opportunities Portfolio: The investment objective of the Special
Opportunities Portfolio is to achieve long-term capital appreciation by
emphasizing investments in equity securities of issuers in various economic
sectors. This is a non-diversified Portfolio.
The Portfolio seeks to achieve its investment objective by varying the
relative weighting of its portfolio securities among various economic sectors
based upon both macroeconomic factors and the outlook for each particular
sector. The sub-investment manager selects equity securities for the Fund from
various economic sectors, including, but not limited to, the following:
automotive and housing, consumer goods and services, defense and aerospace,
energy, financial services, health care, heavy industry, leisure and
entertainment, machinery and equipment, precious metals, retailing, technology,
transportation, utilities, foreign, and environmental. These sectors may be
modified at any time by the sub-investment manager without notice.
Under normal market conditions, at least 90% of the Portfolio's equity
investments will be in the equity securities of issuers in five or fewer of the
sectors. Subject to the Portfolio's policy of investing not more than 25% of
its total assets in any one industry, issuers in any one sector may represent
all of the Portfolio's assets. However, the Portfolio retains the flexibility
to invest its assets in a broader group of sectors in response to changes in
economic and market conditions. The Portfolio may not hold securities of
issuers in all of the sectors at any given time.
In selecting securities, the sub-investment manager will determine the
allocation of assets among equity securities, fixed income securities, and
cash; the sectors that will be emphasized at any given time; the distribution
of securities among the various sectors; the specific industries within each
sector and the specific
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securities within each industry. In making the sector analysis, the sub-
investment manager considers the general economic environment, the outlook for
real economic growth in the United States and abroad, trends and developments
within specific sectors, and the outlook for interest rates and the securities
markets. A sector is a "special opportunity" when in the opinion of the sub-
investment manager the issuers in that sector have a high earnings potential.
In selecting particular issuers, the sub-investment manager considers
price/earnings ratios, ratios of market to book value, earnings growth, product
innovation, market share, management quality, and capitalization.
The Portfolio's investments may include securities of both large widely-
traded companies and smaller, less well-known issuers. The Portfolio seeks
investments in growth companies that either (1) occupy a dominant position in a
small emerging or established industry or (2) have a significant, growing
market share in a large, fragmented industry.
The equity securities in which the Special Opportunities Portfolio invests
consist primarily of common stocks of U.S. and foreign issuers but may also
include preferred stocks, convertible debt securities and warrants.
The Portfolio may also invest in the following fixed income securities: U.S.
Government securities and convertible and non-convertible corporate preferred
stocks and debt securities. The Portfolio may purchase fixed income debt
securities with stated maturities of up to thirty years. The corporate fixed
income securities in which the Portfolio may invest will be of investment grade
quality (as defined above under "Sovereign Bond Portfolio").
Equity Index Portfolio: The investment objective of the Equity Index
Portfolio is to provide investment results that correspond to the total return
of the U.S. market as represented by the Standard & Poor's 500 Composite Price
Index (S&P 500) utilizing common stocks that are publicly traded in the United
States. The Portfolio attempts to achieve this objective by investing in U.S.
traded and denominated stocks that have characteristics similar to the S&P 500.
For additional information about the S&P 500, see "Investment Practices--The
S&P 500" below.
The Portfolio seeks to approximately replicate the investment results of the
S&P 500, while minimizing transactional costs and other expenses. The Portfolio
will purchase the common stock of those companies included in the S&P 500 which
the sub-investment manager believes will closely replicate the aggregate risk
characteristics and industry diversification of the entire S&P 500. The
Portfolio will be managed to attempt to minimize the degree to which the
investment results of the Portfolio differ from the results of the S&P 500. The
sub-investment manager will use a portfolio optimizer (mathematical algorithm)
to create a portfolio of stocks. The resulting portfolio will have a similar,
but not an identical risk profile as compared to the S&P 500.
There is no fixed number of stocks in which the Portfolio will invest.
However, it is anticipated that under normal circumstances the Portfolio will
hold between 300 and 350 stocks. The Portfolio may purchase and sell stock
index futures, purchase options on stock indexes and purchase options on stock
index futures to maintain market exposure and manage cash flows. The Portfolio
may also invest in Standard & Poor's Depository Receipts. The Portfolio may
temporarily maintain cash balances for liquidity purposes or pending
investment, in short-term high quality debt instruments, including commercial
paper, bank obligations and U.S. Government securities.
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As changes are made to the S&P 500 during the year, they will be reflected in
the Portfolio as soon as deemed advisable. The Portfolio will, to the extent
feasible, remain fully invested. The Portfolio's ability to match the
performance of the S&P 500 will be affected to some extent by the size and
timing of cash flows into and out of the Portfolio. The Portfolio will be
managed to reduce such effects. Although the Portfolio will attempt to achieve
a high correlation with the target S&P 500, it cannot guarantee that a high
correlation will be achieved. Other factors that will affect the Portfolio's
ability to approximate the target index return are: commission expenses, other
operating expenses, the size of the bid-ask spread associated with stocks that
are traded in the over-the-counter market, portfolio management expenses
incurred, and the degree of success of the techniques employed by the
Portfolio's sub-investment manager.
Large Cap Value Portfolio: The investment objective of the Large Cap Value
Portfolio is to provide substantial dividend income, as well as long-term
capital appreciation, through investment in the common stocks of established
companies believed to offer favorable prospects for increasing dividends and
capital appreciation. The Portfolio will invest primarily in the common stocks
of established companies paying above average dividends. Under normal
circumstances, at least 65% of the value of the Portfolio's total assets will
consist of equity securities of large capitalization ("large cap") companies.
The Fund's current definition of "large cap" companies is set forth on page 25
below under "Market Capitalization Risk."
The Portfolio will tend to take a value approach and invest in stocks and
other securities that appear to be temporarily undervalued by various measures,
such as price/earnings ratios. The Portfolio will generally consider companies
with the following characteristics: established operating histories; above
average curing dividend yields relative to the S&P 500 Index; low
price/earnings ratios relative to the S&P 500 Index; sound balance sheet and
other financial characteristics; and stock price relative to company's
underlying value measured by assets, earnings, cash flow, or business
franchises.
Most of the assets will be invested in U.S. common stocks. However, the
Portfolio may also purchase other types of securities: for example, foreign
securities, convertible securities, money market securities and other short-
term securities, and warrants, when considered consistent with the Portfolio's
investment objective and program.
Mid Cap Growth Portfolio: The investment objective of the Mid Cap Growth
Portfolio is to provide long-term growth of capital through a non-diversified
portfolio investing primarily in common stocks of medium capitalization ("mid
cap") companies. The Fund's current definition of "mid cap" companies is set
forth on page 25 below under "Market Capitalization Risk." The Portfolio may
also invest in smaller or larger issuers, although, under normal circumstances,
at least 65% of the value of its total assets will consist of equity
investments in mid-cap companies. Realization of income is not a significant
investment consideration. Any income realized by the Portfolio's investments
will be incidental to its primary objective.
The sub-investment manager takes a stock-by-stock approach to building the
Portfolio by seeking to identify individual companies with earnings growth
potential that may not be recognized by the market at large. Securities are
selected without regard to any defined industry sector or other similarly
defined selection procedure. For foreign securities, the Portfolio invests in
companies with earnings growth potential, regardless of country of organization
or place of principal business activity.
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Most of the assets normally will be invested in U.S. common stocks. However,
the Portfolio may also purchase other types of securities: for example, foreign
securities, convertible securities, preferred stocks, cash and short-term
securities, and warrants, when considered consistent with the Portfolio's
investment objective and program.
Mid Cap Value Portfolio: The investment objective of the Mid Cap Value
Portfolio is to provide long-term growth of capital primarily through
investment in the common stocks of medium capitalization companies believed to
sell at a discount to their intrinsic value. The Portfolio may also invest in
larger or smaller issuers, although, under normal circumstances, at least 65%
of the value of its total assets will consist of equity investments in mid-cap
companies. The Fund's current definition of "mid cap" companies is set forth on
page 25 below under "Market Capitalization Risk." The Portfolio seeks capital
growth through an investment approach that is intended to increase capital with
the intention of not subjecting the Portfolio to unreasonable risk.
Its investment strategy is to invest in securities believed to be undervalued
based on strong fundamentals, including low price/earnings ratios, strong
balance sheet and financial positions, recent company restructuring with the
potential to realize hidden values, strong management, consistent cash flow, or
low price/book value.
Most of the assets normally will be invested in U.S. common stocks. However,
the Portfolio may also purchase other types of securities: for example, foreign
securities, convertible securities, cash and short-term securities, and
warrants, when considered consistent with the Portfolio's investment objective
and program.
Small Cap Growth Portfolio: The investment objective of the Small Cap Growth
Portfolio is to provide long-term growth of capital through a diversified
portfolio investing primarily in common stocks of small capitalization ("small
cap") emerging growth companies. The potential for growth of capital is the
sole basis for selection of securities, with current income not a factor in the
security selection process.
The management expects that common stocks of rapidly growing smaller
companies that tend to be in an emerging growth stage of development generally
offer the most attractive growth prospects. However, the Portfolio may also
invest in equity securities of larger, more established companies that the
management believes offer superior growth potential. Nevertheless, under normal
circumstances, at least 65% of the value of the Portfolio's total assets will
consist of equity investments in small cap companies. The Fund's current
definition of "small cap" companies is set forth on page 25 below under "Market
Capitalization Risk." The Portfolio will be invested in securities that
management believes will offer growth potential higher than average for all
companies.
Most of the assets normally will be invested in U.S. common stocks. However,
the Portfolio may also purchase other types of securities: for example, foreign
securities, convertible securities, cash and short-term securities, and
warrants, when considered consistent with the Portfolio's investment objective
and program.
Small Cap Value Portfolio: The investment objective of the Small Cap Value
Portfolio is to provide long-term growth of capital by investing in a well
diversified portfolio of equity securities of small capitalization companies
exhibiting value characteristics. Under normal circumstances, the Portfolio
will invest at least 65% of the value of it's total assets in the equity
securities of U.S. small cap companies. The Fund's current definition of "small
cap" companies is set forth on page 25 below under "Market Capitalization
Risk." However, the Portfolio may invest to a lesser degree in equity
securities of companies whose capitalizations exceed that of small cap
companies. The Portfolio normally will be highly diversified, containing 150 to
250 securities.
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In managing the Portfolio, the sub-investment manager will apply a
combination of quantitative strategies and traditional stock selection methods
to a very broad universe of stocks of small companies in order to uncover the
best possible values. Typically, over 2,500 stocks will be examined
quantitatively for their exposure to certain factors. The sub-investment
manager has identified specific factors which it believes are helpful in
selecting equities which may provide superior performance. These factors may
include earnings-to-price ratios, book value-to-price ratios, earnings estimate
revision momentum, relative market strength compared to competitors,
inventory/sales trend and financial leverage. Once an initial suggested
portfolio is generated through an optimization process, traditional fundamental
analysis is used to provide a final review before stocks are selected for
purchase for the Portfolio.
Most of the assets normally will be invested in U.S. common stocks. However,
the Portfolio may also purchase other types of securities: for example, foreign
securities, convertible securities, cash and short-term securities, and
warrants, when considered consistent with the Portfolio's investment objective
and program.
Strategic Bond Portfolio: The investment objective of the Strategic Bond
Portfolio is to provide a high total return consistent with moderate risk of
capital from a portfolio that invests in the debt obligations primarily of U.S.
issuers and to a more limited extent foreign issuers, including issuers in
emerging market countries. Total return will consist of income plus realized
and unrealized capital gains and losses. Although the net asset value of the
Portfolio will fluctuate, the Portfolio attempts to preserve the value of its
investments to the extent consistent with its objective.
The sub-investment manager actively manages the Portfolio's duration, the
allocation of securities across market sectors, the allocation of securities
across countries, and the selection of specific securities within sectors
and/or countries. Based on fundamental, economic, and capital markets research,
the sub-investment manager adjusts the duration of the Portfolio in light of
market conditions and the sub-investment manager's interest rate outlook. For
non-U.S. investments, the Portfolio's assets are primarily allocated to
securities of developed countries.
The sub-investment manager also actively allocates the Portfolio's assets
among the broad sectors of the fixed income market including, but not limited
to, debt obligations of governments, agencies and supranational organizations,
corporate securities, 144A securities, and asset-backed and mortgage-related
securities. Specific securities which the sub-investment manager believes are
undervalued are selected for purchase within the sectors using advanced
quantitative tools, analysis of credit risk, the expertise of a dedicated
trading desk, and the judgment of fixed income portfolio managers and analysts.
It is a current policy of the Portfolio that, under normal circumstances, its
assets primarily will consist of securities that are of at least investment
grade quality (as defined above under "Sovereign Bond Portfolio.").
International Opportunities Portfolio: The investment objective of the
International Opportunities Portfolio is to provide capital appreciation
through investment in common stocks of primarily well-established non-United
States companies. The Portfolio expects to diversify broadly among countries
throughout the world, including developed, newly-industrialized and to a
moderate degree in emerging markets. The Portfolio expects, under normal
circumstances, to invest substantially all of its assets in common stocks
outside the United States. However, the Portfolio may also invest in a variety
of other equity-related securities, such as common stocks, preferred stocks,
warrants, and convertible securities, as well as money market and short-term
securities.
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In determining the appropriate distribution of investments among various
countries and geographic regions, the sub-investment manager ordinarily
considers the following factors: prospects for relative economic growth between
foreign countries; expected levels of inflation; government policies
influencing business conditions; the outlook for currency relationships; and
the range of individual investment opportunities available to international
investors.
In analyzing companies for investment, the sub-investment manager ordinarily
looks for one or more of the following characteristics: an above average
earnings growth per share; high return on invested capital; a healthy balance
sheet; sound financial and accounting policies and overall financial strength;
strong competitive advantages; effective research and product development and
marketing; efficient service; pricing flexibility; strength of management; and
general operating characteristics which will enable the companies to compete
successfully in their market place. While current dividend income is not a
prerequisite in the selection of portfolio companies, the companies in which
Portfolio invests normally will have a record of paying dividends, and will
generally be expected to increase the amounts of such dividends in future years
as earnings increase.
Most of the assets normally will be invested in non-U.S. equity-related
securities. However, the Portfolio may also purchase other types of securities:
for example, domestic securities, cash and short-term securities, when
considered consistent with the Portfolio's investment objective and program.
International Balanced Portfolio: The investment objective of the
International Balanced Portfolio is to provide maximum total U.S. dollar
return, consisting of capital appreciation and current income. The Portfolio
seeks to achieve its objective by pursuing active asset allocation strategies
across non-U.S. equity and fixed income markets and active security selection
within each market. This is a non-diversified portfolio.
The sub-investment manager's investment perspective for the Portfolio is to
determine fundamental value (i.e., whether an investment is fairly priced)
based on long-term sustainable future cash flows associated with given asset
classes and securities. The sub-investment manager will focus on comparing
current market prices to fundamental values, rather than on either forecasts of
future price changes or extrapolations of historical price relationships. In
determining fundamental value, the sub-investment manager takes into
consideration broadly based indices representing asset classes or markets and
various economic variables such as productivity, inflation and global
competitiveness. The valuation of asset classes reflects an integrated,
fundamental analysis of non-U.S. markets. The sub-investment manager believes
that, over the long term, investing across non-U.S. equity and fixed income
markets based upon discrepancies between market prices and fundamental values
may achieve enhanced return.
It is expected that the Portfolio will invest its assets primarily in
developed equity markets other than the U.S. and in developed fixed income
markets other than the U.S. and to a lesser extent invest in equity and debt
securities of issuers in emerging markets. Under normal circumstances, fixed
income senior securities will constitute at least 25% of the value of the
Portfolio's total assets and the Portfolio will invest in issuers of at least
three different countries other than the United States.
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BROKERAGE COMMISSIONS AND PORTFOLIO TURNOVER
To the extent that brokerage commissions (or dealer "spreads" or "mark-ups")
are incurred in buying and selling portfolio securities, the rate of portfolio
turnover could affect each Portfolio's net asset value. The historical rates of
portfolio turnover for the Growth & Income, Sovereign Bond, Large Cap Growth,
Managed, Real Estate Equity, International Equities, Short-Term U.S.
Government, and Special Opportunities Portfolios are set forth under "Financial
Highlights", above. The approximate annual portfolio turnover rate for the
Equity Index Portfolio is expected to be 25%; for the Large Cap Value
Portfolio, 50%; for the Mid Cap Growth Portfolio, 200%; for the Mid Cap Value
Portfolio, it is generally not expected to exceed, 100%; for the Small Cap
Growth Portfolio, 100%; for the Small Cap Value Portfolio, generally not more
than 100%; for the Strategic Bond Portfolio, 300%; for the International
Opportunities Portfolio, 50%; and, for the International Balanced Portfolio,
greater than 100% for the equity component and 100% for the debt component. As
discussed under "Taxes" in the Statement of Additional Information, the
Portfolios' turnover rates may be limited by a tax law requirement that not
more than 30% of their aggregate gross income result from sales or other
dispositions of securities held for less than three months.
Certain option and futures contract strategies which may be employed, in
varying degrees, by all of the Portfolios except the Growth & Income, Money
Market, and Real Estate Equity can increase the turnover rate and commission
expenses and entail other risks to those Portfolios employing such strategies.
See "Investment Practices," below.
RISK FACTORS
The difference in objectives, policies, and practices the various Portfolios
can be expected to affect each Portfolio's investment return as well as the
degree of market and financial risks to which each Portfolio is subject.
Financial risk refers to the ability of an issuer of a debt security to pay
principal and interest on such security; and it refers to the earnings
stability and overall financial soundness of an issuer of an equity security.
Market risk refers to the volatility of the conditions in the securities
markets in general and, with particular reference to debt securities, how
changes in the overall level of interest rates affect their prices.
In addition to the general risks discussed in the paragraphs that follow,
risks relating to certain specific investment practices in which a Portfolio
may engage are discussed below under "Investment Practices" and under "Types of
Investment Instruments and Ratings" in the Statement of Additional Information.
RISKS OF MONEY MARKET INSTRUMENTS
The Money Market Portfolio invests exclusively in money market instruments;
all the other Portfolios may invest in these instruments to some extent. Money
market instruments generally do not have maturities that exceed thirteen
months. Such securities can include short-term paper such as certificates of
deposit and commercial paper, and U.S. government obligations and other debt
securities with maturities generally not in excess of thirteen months. Money
market instruments offer investors liquidity. Although money market instruments
are subject to decreases and increases in market value resulting from changes
in interest rates, for the most part these changes are small due to the
instruments' short term to maturity.
RISKS OF OTHER DEBT SECURITIES
The following Portfolios are primarily invested in non-money market debt
securities: the Sovereign Bond, Short-Term U.S. Government, and Strategic Bond.
The Managed and International Balanced Portfolios can vary their holdings of
these securities within a broad range. All the other Portfolios (except the
Money Market Portfolio) may invest in these securities to some extent.
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Interest Rate Risk: In general, debt securities having longer maturities than
money market instruments have exposure to interest rate risk. Changes in
generally prevailing market interest rates alter a debt security's market value
and introduce volatility into the rate of return of a Portfolio that invests in
such securities. This sensitivity of the market value of a debt security to
changes in interest rates is generally related to the duration of the
instrument. The market value of a shorter-term fixed income security is
generally less sensitive to interest rate moves than that of a longer-term
security. The interest rate risk of the Short-Term U.S. Government Portfolio,
although moderate, is well below that of traditional intermediate or long-term
bond portfolios.
Credit Risk: The value of a fixed income security may also change as a result
of market perceptions regarding its default or credit risk, defined as the
ability of the borrower to repay its debts. The market value of a fixed income
security can fall when the market perceives the borrower to be less credit
worthy. Conversely, the market value of a fixed income security can increase
due to its borrower being perceived as financially stronger. All Portfolios
that invest in non-money market debt securities may have some exposure to
credit risk. The Money Market and Short-Term U.S. Government Portfolios have
negligible exposure to credit risk.
Risk of Lower-Quality Instruments: High-yield/high-risk bonds (or "junk"
bonds) are debt securities rated below investment grade as defined above under
"Investment Objectives and Policies--Sovereign Bond Portfolio." The value of
lower rated securities generally is more subject to credit risk than is the
case for higher rated securities, and their values tend to respond more to
changes in generally prevailing interest rates. These debt securities may also
have less liquid markets than higher rated securities. Investments in companies
issuing high-yield securities are considered to be more speculative than higher
quality instruments. As such, these securities typically pay a higher interest
rate than investment grade securities. The Portfolios most likely to invest a
significant portion of their assets in high-yield securities are the Sovereign
Bond, Managed, Large Cap Value, Strategic Bond, and International Balanced
Portfolios. In contrast, the Special Opportunities Portfolio will not invest in
debt securities that are not at least investment grade at the time of purchase.
However, all Portfolios (other than the Money Market, Short-Term U.S.
Government, and Equity Index Portfolios) that invest in debt securities may at
times have some exposure to high yield securities.
Although not customarily referred to as "high yield" securities or "junk
bonds," debt securities that fall in the lowest rating within the investment
grade category are considered medium grade securities that have some
speculative characteristics. Accordingly, to a lesser degree, they may present
the same risks discussed above with respect to high yield securities.
Prepayment Risk: Prepayment risk is the risk that a borrower of a debt
security repays an outstanding loan before it is due. Such prepayment is most
likely to occur when interest rates have declined and a borrower can refinance
the debt at a lower interest rate level. Most mortgage backed, asset backed,
other public bond debt securities and 144A securities are exposed to this risk.
U.S. Government securities have minimal exposure to this risk. Issuers of
public debt securities may be required to pay a penalty in order to exercise
this prepayment right. Generally, a Portfolio reinvests the proceeds resulting
from prepayments in a lower yielding instrument. This results in a decrease in
the Portfolio's current yield. The values of securities that are subject to
prepayment risk also tend to increase less in response to declining interest
rates and decrease more in response to increasing interest rates than would the
value of otherwise similar securities that do not have prepayment features. The
Portfolios most likely to invest a significant position of their assets in debt
securities with prepayment features are the Sovereign Bond, Managed, Real
Estate Equity, Short-Term U.S. Government, Strategic Bond, and International
Balanced Portfolios. However, all Portfolios that invest in debt securities
(other than the Money Market Portfolio) may at times have some exposure to
prepayment risk.
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Risks of "Zero Coupon" Instruments: All of the Portfolios may, in varying
degrees, invest in debt instruments that provide for payment of interest at the
maturity date of the instrument rather than periodically over the life of the
instrument. The values such instruments tend to respond more to changes in
interest rates than do otherwise comparable debt obligations that provide for
periodic interest payments. The Portfolios most likely to invest a significant
amount of their assets in instruments that are subject to this volatility risk
are the Sovereign Bond, Managed, Real Estate Equity, Short-Term U.S.
Government, Money Market, Strategic Bond, and International Balanced
Portfolios. However, all Portfolios that invest in debt securities may at times
have some exposure to this risk.
RISKS OF EQUITY SECURITIES:
All of the Portfolios intend to invest to some degree in common stock or
other equity securities, except for the Sovereign Bond, Money Market, Short-
Term U.S. Government and Strategic Bond Portfolios. All of the Portfolios that
invest in equity securities expect to make such securities their primary
investment (except for the Managed Portfolio, which may nevertheless do so in
the discretion of its sub-investment manager). The Managed Portfolio and
International Balanced Portfolio, though investing in equity securities, expect
under normal conditions also to have a substantial amount of their assets
invested in debt obligations.
Equity Risk: Investments in common stock or other equity securities may offer
a higher rate of return than those in money market instruments and longer term
debt securities. However, the risks associated with investments in equity
securities may also be higher, because the investment performance of equity
securities depends upon factors which are difficult to predict. Such factors
include overall market price trends for securities and operating results of
particular issuers. The fundamental risk associated with any equity portfolio
is the risk that the value of the investments it holds might decrease in value.
Equity security values may fluctuate in response to the activities of an
individual company or in response to general market and/or economic conditions.
Historically, equity securities have provided greater long-term returns and
have entailed greater short-term risks than other investment choices.
Market Capitalization Risk: Another indication of the relative risk of a
common stock investment is defined by the size of the company, which is
typically referred to as its market capitalization. Market capitalization is
computed by multiplying current market price of a share of the company's stock
by the total number of its shares outstanding. Investing in larger
capitalization companies generally involves a lesser degree of risk than
investing in smaller capitalization companies.
Companies with market capitalizations of greater than $2 billion qualify as
large capitalization ("large cap") companies that are the primary focus of the
Large Cap Growth and Large Cap Value Portfolios. Companies with market
capitalizations of less than $1 billion qualify as small capitalization ("small
cap") companies that are the primary focus of the Small Cap Growth and Small
Cap Value Portfolios. Companies qualify as medium capitalization ("mid cap")
companies that are the primary focus of the Mid Cap Growth and Mid Cap Value
Portfolios, if they have market capitalizations that range from $250 million to
$6 billion. A company will continue to qualify as a large cap, mid cap or small
cap company even though, sometime after a Portfolio invests in it, the company
ceases to be within the definition.
The equity securities of the Growth & Income, Large Cap Growth, Managed,
Equity Index, and Large Cap Value Portfolios to invest primarily in companies
that qualify as large cap issuers. These Portfolios also may invest in the
equity securities of companies that qualify as small and mid cap issuers.
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The equity securities of the Mid Cap Growth, and Mid Cap Value Portfolios are
generally expected to represent primarily companies that qualify as mid cap
issuers. These Portfolios also may invest in the equity securities of companies
that qualify as small or large cap issuers.
The equity securities of the Real Estate Equity Portfolio are generally
expected to represent primarily companies that qualify as mid cap issuers. The
Portfolio also may invest significant amounts in the equity securities of
companies that qualify as small cap or mid cap issuers.
Small Cap Risk: The very nature of investing in the equity securities of
smaller companies involves greater risks and potential rewards than investing
in larger, more established companies. Emerging growth companies often have
limited product lines, markets or financial resources, and they may depend upon
a small group of inexperienced managers. Investments in such companies can be
both more volatile and more speculative. These securities may have limited
marketability and are subject to more abrupt or erratic market movements than
securities of larger companies or the market in general. The Small Cap Growth
and Small Cap Value Portfolios are generally expected to invest primarily in
equity securities of companies that qualify as small cap issuers. Although
these Portfolios also may invest significant amounts in the equity securities
of companies that qualify as mid cap issuers, it is expected that they would
only rarely invest in the equity securities of companies that qualify only as
large cap issuers.
REAL ESTATE RISK
Investments in the Real Estate Equity Portfolio will be affected by risks
related to the direct ownership of real estate, as well as by market risks due
to changes in interest rates and by the overall volatility of the equities
markets. The market value of shares in equity real estate investment trusts and
commercial property companies in particular is heavily dependent upon the value
of their underlying properties. Overbuilding, declines in local or regional
economic conditions, financial difficulties on the part of major tenants and
increases in real estate taxes and operating expenses all could decrease the
value of the real estate investments. In addition to the Real Estate Portfolio,
all of the other Portfolios (except for the Money Market and U.S. Short-Term
Government Portfolios) may have some exposure to real estate risks through
investments in companies engaged in real estate related businesses or
investments in debt instruments secured by real estate.
RISKS OF FOREIGN SECURITIES
The following Portfolios invest primarily in foreign securities: the
International Equities, International Opportunities, and International
Balanced. The Strategic Bond, Managed, and Special Opportunities Portfolios can
vary their holdings of these securities within a broad range. All the other
Portfolios can invest in these securities to some extent, except for the Real
Estate Equity and Short-Term U.S. Government Portfolios. The International
Equities, Special Opportunities, Strategic Bond, International Opportunities,
and International Balanced Portfolios may invest in developing countries
commonly known as "emerging markets."
Currency Risk: Portfolios that invest in foreign securities typically buy the
local currency when they acquire foreign securities and sell the local currency
when they dispose of these securities. As long as Portfolios hold a security
denominated or quoted in a foreign currency, the security's value will be
affected by the value of the local currency relative to that of the U.S.
dollar. In other words, when Portfolios sell a foreign security, the security's
value may be worth more or less in U.S. dollars. Currency risk may be greater
in emerging markets. Strategies that some Portfolios may use to manage their
foreign currency exposure also present certain risks. See "Foreign Currency
Management Strategies," below.
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Political and Economic Risk: Foreign securities are subject to heightened
political and economic risks, particularly in underdeveloped or developing
countries, which may have relatively unstable governments and economies based
on only a few industries. Foreign governments may take over the assets or
operations of a company, may impose additional taxes, or may place limits on
the removal of the Portfolio's assets from that country. However, investments
in foreign securities also offer the opportunity to diversify equity holdings
and to invest in economies whose growth may outpace that of the United States.
Regulatory Risk: Generally, there is less government supervision of foreign
markets. Foreign issuers generally are not subject to uniform accounting,
auditing, and financial reporting standards and practices applicable to
domestic issuers. There may be less publicly available information about
foreign issuers than domestic issuers. These risks may be greater in emerging
markets.
Market Risk: Foreign securities markets, particularly those of underdeveloped
or developing countries, may be less liquid and more volatile than domestic
markets. Certain markets may require payments for securities before delivery
and delays may be encountered in settling securities transactions. In some
foreign markets, there may not be protection against failures by other parties
to complete transactions. There may be limited legal recourse against an issuer
in the event of a default on a debt instrument.
Transaction Costs: Transaction costs of buying and selling foreign
securities, including brokerage, tax, and custody costs, are generally higher
than those involved in domestic transactions.
Limitation: No Portfolio may at any time have more than 20% of its net asset
value invested at any time in issuers located in any one foreign country
(except that this limitation may be increased to 35% for any one, but not at
any time more than one, of the following countries: Australia, Canada, Japan,
the United Kingdom or Germany).
RISKS OF REALLOCATION
The continual reallocation of assets among the major asset classes (e.g.,
stocks, bonds, and cash) involves the risk that the investment manager may
reduce the Portfolio's holdings in an asset class whose value increases
unexpectedly, or may increase the Portfolio's holdings in an asset class just
prior to it experiencing a loss of value. The Managed and International
Balanced Portfolios tend to exercise broad discretion in reallocating assets
across asset classes. The Strategic Bond Portfolio intends to exercise
discretion to reallocate assets across domestic and international fixed income
asset classes. All of the other Portfolios generally allow the sub-investment
manager some latitude to allocate across asset classes, with the exception of
Money Market and Short-Term U.S. Government Portfolio. Nevertheless, this
latitude is expected to be exercised to a lesser degree than in the case of the
Managed and International Balanced Portfolios.
RISKS OF FULL INVESTMENT
The Equity Index Portfolio expects to invest substantially all of this assets
in equity securities within investment objective and policies at all times.
Accordingly, this Portfolio may carry more risk in times of declining equity
markets than Portfolios that are more likely to adopt a defensive investment
posture in such circumstances by reallocating their assets in a manner
different from that contemplated by their primary investment objective and
policies. Except for the Short-Term U.S. Government and Money Market
Portfolios, all of the Portfolios have authority to assume such a defensive
position, and they may or may not do so, in the discretion of the sub-
investment managers. However, the Equity Index Portfolio is less likely to
assume such a defensive position that any of such other Portfolios.
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RISKS OF NON-DIVERSIFIED PORTFOLIOS
The Special Opportunities, Mid Cap Growth, and International Balanced
Portfolios are non-diversified Portfolios. A "non-diversified" portfolio has
the ability to take larger positions in a smaller number of issuers than
"diversified" portfolios. Because the appreciation or depreciation of a single
security may have a greater impact on the net asset value of a non-diversified
portfolio, its share price can be expected to fluctuate more than a comparable
diversified portfolio. Non-diversified Portfolios are less restricted in the
extent to which they may invest more than 5% of their assets in any issuer or
purchase more than 10% of the voting securities of any issuer. Because a
relatively high percentage of a non-diversified Portfolios' assets may be
invested in the obligations of a limited number of issuers, the value of these
Portfolios' shares may be more susceptible to any single economic, political,
or regulatory event, and to credit and market risks associated with a single
issuer, than would the shares of a diversified portfolio. Non-diversified
Portfolios, like the other Portfolios, are subject to certain federal income
tax law requirements that limit the amounts invested in a single issuer or in a
small group of issuers. See "Taxes" in the Statement of Additional Information.
INVESTMENT RESTRICTIONS
The following is a abbreviated summary of certain restrictions on the
investments of each Portfolio's assets. (A more complete statement of these and
other restrictions is included in the Statement of Additional Information under
"Investment Restrictions.") No Portfolio will: (1) purchase real estate or any
interest in real estate, but investments of the type permitted in the Real
Estate Equity Portfolio are not deemed interests in real estate for the
purposes of this restriction; (2) make loans, other than as described below
under "Investment Practices--Portfolio Lending"; (3) invest in commodities,
commodity contracts, puts, or calls, except within certain limits, the
Sovereign Bond, Large Cap Growth, Managed, Short-Term U.S. Government, Special
Opportunities, Equity Index, Small Cap Growth, Small Cap Value, Large Cap
Value, Mid Cap Growth, Mid Cap Value, International Opportunities,
International Balanced, and Strategic Bond Portfolios; (4) engage in the
underwriting of securities of other issuers; (5) borrow money except from banks
as a temporary measure; (6) purchase securities subject to delays or
restrictions on resale, subject to certain exceptions; (7) purchase securities
on margin; (8) invest for control purposes; or (9) issue senior securities.
The Portfolios' investment restrictions described under "Investment
Restrictions" in the Statement of Additional Information are considered
"fundamental," in that they may not be changed without the approval of a
"majority" of outstanding voting shares of each affected Portfolio, as defined
in the Investment Company Act of 1940. Nor may the investment objectives and
policies that are set forth above under "Investment Objectives and Policies"
for the Growth & Income, Sovereign Bond, Money Market, Large Cap Growth,
Managed, Real Estate Equity, International Equities, Short-Term U.S.
Government, and Special Opportunities Portfolios be changed without such a
vote, unless otherwise there indicated. Such investment objectives and policies
of any other Portfolio may, however, be changed without a vote, to the extent
permitted by its fundamental investment restrictions and applicable law.
INVESTMENT PRACTICES
REPURCHASE AGREEMENTS
A repurchase agreement is a contract under which a Portfolio would acquire a
security for a relatively short period, e.g. 7 days, subject to the seller's
obligation to repurchase the security at a fixed time and price
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(representing the Portfolio's cost plus interest). Repurchase agreements will
be entered into only with member banks of the Federal Reserve System and with
"primary dealers" in United States government securities. The Growth & Income,
Sovereign Bond, Money Market, Large Cap Growth, Managed, and Real Estate Equity
Portfolios may not invest in repurchase agreements maturing in more than 7
days. No more than 15% (10% as to the Money Market, International Equities,
Short-Term U.S. Government, and Special Opportunities Portfolios) of the net
assets of any other Portfolio will be invested in repurchase agreements
maturing in more than 7 days.
The Sovereign Bond, International Equities, Special Opportunities, and Small
Cap Growth Portfolios, along with other registered investment companies having
a management contract with John Hancock Advisers, Inc. ("Advisers"), an
indirect wholly-owned subsidiary of John Hancock and a sub-investment manager
of the Sovereign Bond, International Equities, Special Opportunities, and Small
Cap Growth Portfolios, may participate in a joint repurchase agreement pursuant
to an exemptive order issued by the Securities and Exchange Commission ("SEC").
Aggregate cash balances are invested in one or more repurchase agreements,
whose underlying securities are obligations of the U.S. Government and/or its
agencies. The Fund's custodian bank with respect to the assets of the Sovereign
Bond and International Equities Portfolios receives delivery of the underlying
securities for the joint account. Advisers is responsible for ensuring that the
agreement is fully collateralized at all times.
All of the Portfolios may enter into repurchase agreements.
In addition, the Growth & Income, Money Market, Large Cap Growth, Managed,
and Real Estate Equity Portfolios have entered into a joint trading account
pursuant to an SEC exemptive order. Under this arrangement, John Hancock is
responsible for investing the aggregate cash balances into one or more
repurchase agreements, as described above, or in other money market
instruments. In the case of repurchase agreements acquired pursuant to this
arrangement, John Hancock is responsible for ensuring that the agreement is
fully collateralized at all times. Other Portfolios and investment companies
for which John Hancock is the investment adviser may also participate in any
such joint trading account. The Mid Cap Growth Portfolio also may participate
in any similar joint trading account established pursuant to an SEC exemptive
order for investment companies advised by that Portfolio's sub-investment
manager.
COVERED CALL AND PROTECTIVE PUT OPTIONS
The Large Cap Growth, Managed, Short-Term U.S. Government, Special
Opportunities, Equity Index, Small Cap Value, Small Cap Growth, Large Cap
Value, Mid Cap Value, Mid Cap Growth, Strategic Bond, International
Opportunities, and International Balanced Portfolios may write "covered" call
options on National Securities Exchanges. In such transactions, the Portfolio
receives an option "premium" in return for which it agrees to sell specific
securities held in its portfolio for a specified "exercise" price at any time
prior to the expiration period of the option. Although the premium represents
income to the Portfolio, the Portfolio in effect foregoes the benefit of any
appreciation in the price of the security in excess of the exercise price
during the option period.
The Large Cap Growth, Managed, Short-Term U.S. Government, Special
Opportunities, Equity Index, Small Cap Value, Small Cap Growth, Large Cap
Value, Mid Cap Value, Mid Cap Growth, Strategic Bond, International
Opportunities, and International Balanced Portfolios also may purchase
"protective" put options on National Securities Exchanges. In such
transactions, the Portfolio pays a "premium" for the right to sell particular
securities held by it for a specified "exercise" price at any time prior to the
expiration of the
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option period. If, over such period, the market value of such underlying
securities remains above the exercise price, the Portfolio will, in effect,
lose the premium it has paid. The Portfolio, however, avoids the risk of loss
on the underlying securities, to the extent that the market value of the
underlying security falls below the exercise price of the put option.
With respect to the Large Cap Growth and Managed Portfolios, no covered call
option will be written or protective put option will be purchased if,
immediately thereafter, more than one-third of the Portfolio's total assets
would be subject to such call and put options. The Portfolios intend to write
and purchase options only if adequate liquidity exists. If for any reason a
Portfolio cannot, however, close out its open option position when deemed
advisable, the Portfolio's investment performance could be adversely affected.
HEDGING STRATEGIES
The Large Cap Growth, Managed, Large Cap Value, Mid Cap Value, Small Cap
Value, and International Opportunities Portfolios may use exchange-traded
financial futures contracts and options thereon solely as a hedge to protect
against possible changes in interest rates, currency exchange rates, and stock
prices. These Portfolios also may purchase exchange-traded put or call options
on stock indexes solely for hedging purposes. The Sovereign Bond, Short-Term
U.S. Government, Special Opportunities, Mid Cap Growth, Small Cap Growth,
Strategic Bond, and International Balanced Portfolios also may engage in these
types of hedging transactions, in addition to certain other transactions
described below under "Other Options and Futures Transactions by the Sovereign
Bond, Short-Term U.S. Government, Special Opportunities, Mid Cap Growth, Small
Cap Growth, Strategic Bond, and International Balanced Portfolios."
The Equity Index Portfolio may purchase and sell stock index futures and may
purchase options on such futures contracts or on stock indexes to maintain
market exposure and manage cash flows.
Financial Futures Contracts. Financial futures contracts consist of interest
rate futures contracts, stock index futures contracts, and currency futures
contracts. An interest rate futures contract is a contract to buy or sell
specified debt securities at a future time for a fixed price. A stock index
futures contract is similar in economic effect, except that rather than being
based on specified debt securities, it is based on a specified index of stocks.
A currency futures contract is a contract to buy or sell a specified currency
at a future time for a fixed price.
To hedge against the possibility that increases in interest rates may
adversely affect the market values of debt securities held by them, the
Sovereign Bond, Large Cap Growth, Managed, Short-Term U.S. Government, Special
Opportunities, Large Cap Value, Mid Cap Growth, Mid Cap Value, Small Cap
Growth, Small Cap Value, Strategic Bond, International Opportunities, and
International Balanced Portfolios may enter into interest rate futures sale
contracts. Similarly, to hedge against the possibility that interest rates or
other factors may result in a general decline in prices of equity securities of
a type owned by them, these Portfolios may sell stock index futures contracts.
Assuming that any decline in the securities being hedged is accompanied by a
decline in the stock index or debt instrument chosen, the futures sale
contracts on that index or instrument may generate gains which can wholly or
partially offset any decline in the value of the Portfolio securities which
have been hedged.
If the Sovereign Bond, Large Cap Growth, Managed, Short-Term U.S. Government,
Special Opportunities, Large Cap Value, Mid Cap Growth, Mid Cap Value, Small
Cap Growth, Small Cap Value, Strategic Bond, International Opportunities, and
International Balanced Portfolios wish to hedge against the
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possibility of lower interest rates or increases in equity prices, they may
purchase financial futures contracts. Except as discussed below under "Other
Options and Futures Transactions by the Sovereign Bond, Short-Term U.S.
Government, Special Opportunities, Mid Cap Growth, Small Cap Growth, Strategic
Bond, and International Balanced Portfolios," these Portfolios may purchase
futures contracts only (a) when they intend to purchase securities or wish to
establish or maintain market exposure to securities that the Portfolio would be
authorized to purchase and (b) the values of such securities are expected to
change by approximately the same amount as the value of the futures contracts
used to hedge them. When an increase in the price of the securities is matched
by a similar increase in the value of the financial futures contracts, then the
gains so generated will achieve the Portfolio's objective for the hedge
transaction.
Each of the Large Cap Growth, Managed, Short-Term U.S. Government, Special
Opportunities, Large Cap Value, Mid Cap Growth, Mid Cap Value, Small Cap
Growth, Small Cap Value, Strategic Bond, International Opportunities, and
International Balanced Portfolios may use foreign currency futures contracts to
manage their exposure to foreign currencies. Foreign currency futures contracts
could be used by a Portfolio for this purpose in any manner that such Portfolio
could use forward currency contracts as described under "Foreign Currency
Management Strategies" below.
Options on Futures Contracts and on Stock Indexes. The Large Cap Growth,
Managed, Short-Term U.S. Government, Special Opportunities, Large Cap Value,
Mid Cap Growth, Mid Cap Value, Small Cap Growth, Small Cap Value, Strategic
Bond, International Opportunities, and International Balanced Portfolios also
may purchase options on appropriate financial futures contracts and stock
indexes in connection with the above hedging strategies. Similarly, the
Sovereign Bond Portfolio may purchase options on financial futures contracts in
connection with such strategies. An option on a financial futures contract
gives the purchaser the right to assume a position in the underlying futures
contract, and therefore can serve the same hedging function as owning the
futures contract directly. Purchase of an option on a stock index has a very
similar economic effect.
The purchase of a put or call option entails the payment by a Portfolio of a
non-refundable option premium. The use of options for hedging purposes is in
this sense more costly to the Fund than the purchase of futures contracts
directly. Nevertheless, if a Portfolio purchases an option, the maximum loss it
can suffer is the option premium plus commission costs. The potential loss on a
futures contract transaction is not so limited, because the Portfolio would be
obligated, as the case may be, to purchase or sell the full amount of the
securities or index amount on which the futures contract is based.
Limitations. None of the Large Cap Growth, Equity Index, Managed, Large Cap
Value, Mid Cap Value, Small Cap Value, or International Opportunities
Portfolios will enter into any financial futures contract or purchase any
option thereon, if, immediately thereafter, the total amount of its assets
required by commodities exchanges to be on deposit as margin to secure its
obligations under futures contracts, plus the amount of premiums paid by the
Portfolio for outstanding options to purchase futures contracts, exceeds 5% of
the market value of the Portfolio's total assets. For more information about
margin deposits, see "Financial Futures Contracts" in the Statement of
Additional Information.
Nor will any of the Large Cap Growth, Managed, Large Cap Value, Mid Cap
Value, or Small Cap Value, Portfolios enter into any transaction in interest
rate, stock index or currency futures, or options thereon, or stock index
options, if the value of the securities being hedged by all of such instruments
would immediately thereafter be more than one-third of the value of the
Portfolio's total assets. Nor will any Portfolio consider as "hedging" any
transaction that is intended to leverage the Portfolio's investment exposure to
the type of
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security being hedged or to leverage the Portfolio's currency exposure.
Additional limitations may occur as a result of the tax treatment of these
hedging strategies.
RISKS OF OPTIONS AND FUTURES TRANSACTIONS
If, after a Portfolio establishes a hedge position, the value of the
securities or currencies being hedged moves in the opposite direction from that
anticipated, the Portfolio as a whole will perform less well than it would have
had it not entered into the futures or options positions.
The success of the Portfolios in using hedging techniques depends, among
other things, on the sub-investment manager's ability to predict the direction
and volatility of price movements in the futures or options markets, as well as
the securities markets and, in some cases, currency markets, and on the sub-
investment manager's ability to select the proper type, time and duration of
hedges. The sub-investment managers have limited experience in utilizing these
hedging techniques and there can be no assurance that these techniques will
produce their intended result. Also, use of these techniques may complicate
management of the Portfolios and make compliance with the Portfolios' tax and
other restrictions more difficult.
The prices of the futures and options contracts used for hedging may not vary
as contemplated in relation to changes in the price of the securities or
currencies being hedged. Accordingly, there is a risk that transactions in
these instruments, if used by a Portfolio, may not in fact offset the impact of
adverse market developments in the manner or to the extent contemplated or that
such transactions may result in losses to the Portfolio which would not be
offset by gains with respect to corresponding portfolio securities owned or to
be purchased by that Portfolio. Although the Portfolios intend to establish
appropriate positions in these instruments only when there appears to be an
active market, there is no assurance that a liquid market will exist at a time
when the Portfolio seeks to close a particular futures or option position.
Hedging transactions also may be more, rather than less, favorable to a
Portfolio than originally anticipated.
To the extent discussed below, the Sovereign Bond, Short-Term U.S.
Government, Special Opportunities, Mid Cap Growth, Small Cap Growth, Strategic
Bond, and International Balanced Portfolios may engage in types of options and
futures transactions not permitted to any other Portfolios, including over-the-
counter options, writing covered put options, and non-hedging (speculative)
transactions. Also, even as to options and futures transactions of a type that
are permitted to other Portfolios, the Sovereign Bond, Short-Term U.S.
Government, Special Opportunities, Mid Cap Growth, Small Cap Growth, Strategic
Bond, and International Balanced Portfolios are, in certain cases, not as
limited regarding the amount of their assets that may be so employed. To the
extent that the Sovereign Bond, Short-Term U.S. Government, Special
Opportunities, Mid Cap Growth, Small Cap Growth, Strategic Bond, and
International Balanced Portfolios exercise their broader authority to enter
into options and futures transactions, they may incur greater risks than the
other Portfolios.
OTHER OPTIONS AND FUTURES TRANSACTIONS BY THE SOVEREIGN BOND, SHORT-TERM U.S.
GOVERNMENT, SPECIAL OPPORTUNITIES, MID CAP GROWTH, SMALL CAP GROWTH, STRATEGIC
BOND, AND INTERNATIONAL BALANCED PORTFOLIOS
In addition to the transactions described above under "Covered Call and
Protective Put Options", the Short-Term U.S. Government, Special Opportunities,
Mid Cap Growth, Small Cap Growth, Strategic Bond, and International Balanced
Portfolios may also write "covered" put options on securities. A put option
written by a Portfolio will be deemed to be "covered" if the Portfolio
maintains in a segregated account with
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its custodian cash, U.S. Government securities or other high-grade liquid debt
securities with a value at all times at least equal to the exercise price of
the put. Put and call options written by the Short-Term U.S. Government,
Special Opportunities, Mid Cap Growth, Small Cap Growth, Strategic Bond, and
International Balanced Portfolios will also be considered to be "covered" to
the extent that the Portfolio's liabilities under these options are fully
offset by its rights under put or call options purchased by the Portfolio.
Although a Portfolio receives a "premium" for writing a covered put option, it
incurs the risk that the put will be exercised and the Portfolio will be
required to purchase the securities subject to the put for a price that is
higher than the then-current market value of such securities.
The Mid Cap Growth, Small Cap Growth, Strategic Bond, and International
Balanced Portfolios also may purchase put and call options (in addition to the
protective put options described above under "Covered Call and Protective Put
Options") on securities in which they may invest. The Short-Term U.S.
Government, Special Opportunities, Mid Cap Growth, Small Cap Growth, Strategic
Bond, and International Balanced Portfolios may also purchase put and call
options (in addition to those discussed above under "Hedging Strategies--
Options on Futures Contracts and on Stock Indexes") on indexes composed of
securities in which the Portfolio may invest. In purchasing a put or call
option, the Portfolio may lose up to the entire amount of the premium that it
pays for the option, if the price of the securities or index subject to the
option moves adversely to the Portfolio's position so that the option cannot be
profitably exercised prior to its expiration. None of these Portfolios may
invest more than 5% of its total assets, taken at market value at the time of
investment, in call and put options on domestic and foreign securities and
indexes, excluding protective put options purchased on securities and index
options purchased as part of hedging strategies.
Each of the the Short-Term U.S. Government, Special Opportunities, Mid Cap
Growth, Small Cap Growth, Strategic Bond, and International Balanced Portfolios
may also write put or call options on indexes composed of securities in which
the Portfolio may invest, in any manner that such Portfolio would be permitted
to write such options on specific securities.
These Portfolios may also use options on securities and options on indexes that
are traded "over-the-counter" and on foreign exchanges in any manner that they
are otherwise permitted to use such options.
These Portfolios will engage in over-the-counter options only with member
banks of the Federal Reserve System and primary dealers in U.S. Government
securities. These Portfolios will treat purchased over-the-counter options and
assets used to cover written over-the-counter options as illiquid securities.
However, with respect to options written with primary dealers in U.S.
Government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of illiquid securities may be
calculated with reference to the formula price.
The Sovereign Bond, Short-Term U.S. Government, Special Opportunities, Mid
Cap Growth, Small Cap Growth, Strategic Bond, and International Balanced
Portfolios may use futures contracts on securities or on market indexes, and
options on such futures contracts, to hedge against changes in securities
prices, interest rates, and currency exchange rates (including the hedging
practices described above under "Hedging Strategies") or for non-hedging
(speculative) purposes. Such futures and options contracts will in all cases be
traded on U.S. commodity exchanges, boards of trade, or other recognized
exchanges and may be based upon various securities, financial instruments or
indexes thereof. None of these Portfolios may purchase, sell or write futures
contracts or options other than for "bona-fide" non-hedging purposes (as
defined by the U.S. Commodity Futures Trading Commission) if immediately
thereafter the Portfolio's initial margin deposits
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on such outstanding non-hedging futures and options positions and the amount of
premiums paid by the Portfolio for such outstanding non-hedging options on
futures contracts exceeds 5% of the market value of the Portfolio's net assets.
For the purpose of this calculation, any amount by which an option is "in the
money" at the time of its purchase is excluded from the premium paid therefor.
There is no specific overall limit on the amount of the assets of the
Sovereign Bond, Short-Term U.S. Government, Special Opportunities, Mid Cap
Growth, Small Cap Growth, Strategic Bond, and International Balanced Portfolios
that may be exposed to the risks of financial futures contracts and options
thereon that are used for non-hedging purposes. Nevertheless (except through
the purchase of options, as discussed below) the Portfolios will not use these
techniques for purpose of "leveraging" the Portfolio's exposure to the
securities underlying any futures contract or option thereon or its exposure to
foreign currencies. Although this limitation does not apply to options on
futures contracts that are purchased by a Portfolio, the total amount of
premiums paid by a Portfolio for such options is, as discussed above, limited
to 5% of the Portfolio's net assets, and the Portfolio will have no liability
in connection with such options beyond payment of the option premium and
commisions thereon.
FOREIGN CURRENCY MANAGEMENT STRATEGIES
The extent to which the several Portfolios may invest in foreign securities
is summarized above under "Risk Factors--Risks of Foreign Securities." Ways in
which some of these Portfolios may use forward currency contracts, and some may
use currency option contracts, to manage their currency exposure are discussed
below. Currency futures contracts and options thereon may also be used for
these purposes to the extent discussed above under "Hedging Strategies."
General. When any Portfolio enters into contracts for purchase or sale of a
security denominated in a foreign currency, it may be required to settle a
purchase transaction in the relevant foreign currency or receive the proceeds
of a sale in that currency. In either event, the Fund will be obliged to
acquire or dispose of such foreign currency as is presented by the transaction
by selling or buying an equivalent amount of United States dollars.
Furthermore, the Portfolio may wish to "lock in" the United States dollar value
of the transaction at or near the time of a purchase or sale of securities at
the exchange rate or rates then prevailing between the United States dollar and
the currency in which the foreign security is denominated. Therefore, certain
of the Portfolios may, for a fixed amount of United States dollars, enter into
a forward foreign exchange contract for the purchase or sale of the amount of
foreign currency involved in the underlying securities transaction. This
process is known as "transaction hedging." The Portfolios that may enter into
forward exchange contracts are the International Equities, Short-Term U.S.
Government, Special Opportunities, Large Cap Value, Mid Cap Growth, Mid Cap
Value, Small Cap Value, Small Cap Growth, Strategic Bond, International
Opportunities, and International Balanced Portfolios.
To effect the translation of the amount of foreign currencies involved in the
purchase and sale of foreign securities and to effect the "transaction hedging"
described above, the Portfolio may purchase or sell such foreign currencies on
a "spot" (i.e. cash) basis. Alternatively, the Portfolios listed in the
preceding paragraph may enter into forward exchange purchase or sale contracts,
whereby the Portfolio purchases or sells a specific amount of foreign currency,
at a price set at the time of the contract, for receipt or delivery at a
specified date which may be any fixed number of days in the future. Such spot
and forward foreign exchange transactions may also be utilized to reduce the
risk inherent in fluctuations in the exchange rate between the United States
dollar and the relevant foreign currency when foreign securities are purchased
or sold for settlement beyond customary settlement time. Neither type of
foreign currency transaction will eliminate
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fluctuations in the prices of the Portfolio's securities or prevent loss if the
price of such securities should decline.
Some portion of those Portfolios that can invest in foreign securities will
be denominated or quoted in foreign currencies. As a result, the value of each
Portfolio in United States dollars is subject to fluctuations in the exchange
rate between such foreign currencies and the United States dollar. When, in the
opinion of the sub-investment managers, it is desirable to limit or reduce
exposure in a foreign currency in order to moderate potential changes in the
United States dollar value of the Portfolio, certain of the Portfolios may
enter into a forward foreign currency exchange contract by which the United
States dollar value of all or part of the underlying foreign portfolio
securities can be approximately matched by an equivalent United States dollar
liability. This technique is known as "portfolio hedging" and moderates or
reduces the risk of change in the United States dollar value of the Portfolio's
securities only during the period before the maturity of the forward contract
(which will not be in excess of one year). The Portfolios that can engage in
this technique are those listed above that are authorized to enter into forward
currency contracts. Hedging against a decline in the value of currency does not
eliminate fluctuations in the prices of the Portfolio's securities or prevent
losses if the prices of such securities decline.
Mid Cap Growth and International Balanced Portfolios. In implementing the
above-described currency hedging techniques, the Mid Cap Growth Portfolio may
use a forward contract on a "proxy" currency, instead of the currency being
hedged. A proxy currency is one that the sub-investment manager believes will
bear a close relationship to the currency being hedged and believes will at
least equal the performance of such currency relative to the U.S. dollar.
Mid Cap Growth, Strategic Bond, International Opportunities and International
Balanced Portfolios. When the sub-investment manager for one of these
Portfolios believes that the currency of a particular country may suffer a
significant decline against the U.S. dollar or against another currency, the
Portfolio may enter into a currency contract to sell, for a fixed amount of
U.S. dollars or other appropriate currency, the amount of foreign currency
approximating the value of some or all of the Portfolio's securities
denominated in such foreign currency. The currency contract may call for the
Portfolio to receive a currency other than U.S. dollars, for example, if such
other currency is believed to be undervalued or necessary to bring the
Portfolio's overall exposure to various currencies into a more desirable
balance. For similar purposes, the Strategic Bond, International Opportunities,
and International Balanced Portfolios may also enter into contracts to
purchase, for a fixed amount of U.S. dollars, or other appropriate currency, an
amount of foreign currency corresponding to the value of some of the
Portfolio's securities. If a Portfolio is to receive a currency other than U.S.
dollars pursuant to a forward currency sales contract, or if the Portfolio
enters into a forward currency purchase contract, a risk exists that the value
of the currency to be received by the Portfolio could vary differently in
relation to the U.S. dollar than does the currency in which the related
securities are denominated. This could result in gains or losses to the
Portfolio.
The Mid Cap Growth, Strategic Bond, International Opportunities and
International Balanced Portfolios may also purchase and write put and call
options on foreign currencies (traded on U.S. and foreign exchanges or over-
the-counter markets) to manage the Portfolios' exposure to changes in currency
exchange rates. Call options on foreign currencies written by a Portfolio will
be "covered," which means that the Portfolio will own at all times an equal
amount of, or an offsetting position in, the underlying foreign currency. With
respect to put options on foreign currencies written by a Portfolio, the
Portfolio will establish a segregated account with its custodian bank
consisting of cash, U.S. Government securities or other high grade liquid debt
securities in an amount equal at all times to the amount the Portfolio would be
required to
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deliver upon exercise of the put. The characteristics and risks of these
currency option transactions are similar to those with respect to put and call
options on securities. See "Covered Call and Protective Put Options," "Risks of
Options and Futures Transactions," and "Other Options and Futures Transactions
by the Sovereign Bond, Short-Term U.S. Government, Special Opportunities, Mid
Cap Growth, Small Cap Growth, Strategic Bond, and International Balanced
Portfolios," above.
RULE 144A SECURITIES
The following Portfolios may purchase restricted securities eligible for
resale to "qualified institutional buyers" pursuant to Rule 144A under the
Securities Act of 1933: Sovereign Bond, Large Cap Value, Mid Cap Value, Mid Cap
Growth, Small Cap Growth, Small Cap Value, Strategic Bond, International
Opportunities, and International Balanced Portfolios. The Trustees have
directed the sub-investment manager of each of these Portfolios to determine on
a case-by-case basis whether each issue of Rule 144A securities owned by the
Portfolio is an illiquid security for purposes of the Portfolio's 15% limit on
the amount of its assets that may be invested in illiquid securities. The
Trustees have directed the sub-investment manager of each of these Portfolios
to carefully monitor the Portfolio's investments in these securities, focusing
on certain factors, including valuation, liquidity, and availability of
information. Purchasing this type of restricted security could have the effect
of increasing the level of illiquidity and volatility in the Portfolio.
WHEN ISSUED SECURITIES AND FORWARD COMMITMENTS
The Short-Term U.S. Government, International Equities, Special
Opportunities, Equity Index, Large Cap Value, Mid Cap Growth, Mid Cap Value,
Small Cap Growth, Small Cap Value, Strategic Bond, International Opportunities,
and International Balanced Portfolios may purchase securities on a when-issued
or delayed delivery basis. When such transactions are negotiated, the price of
such securities is fixed at the time of commitment, but delivery and payment
for the securities may take place a month or more after the date of the
commitment to purchase. The securities so purchased are subject to market
fluctuations, and no interest rate accrues to the purchaser during this period.
In addition, these Portfolios may make contracts to purchase securities for a
fixed price at a future date beyond customary settlement time ("forward
commitments") because new issues of securities are typically offered to
investors on that basis. Forward commitments involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date.
This risk is in addition to the risk of decline in value of the Portfolio's
other assets. Although the Portfolio will enter into such contracts with the
intention of acquiring the securities, the Portfolio may dispose of a
commitment prior to settlement if the sub-investment managers deem it
appropriate to do so. The Portfolio may realize short-term profits or losses
upon the sale of forward commitments.
Each Portfolio will maintain in a segregated account with its custodian cash
or liquid high grade debt securities that at all times equal the amount of its
when-issued and forward commitments.
PORTFOLIO LENDING
The Special Opportunities, Short-Term U.S. Government, Equity Index, Large
Cap Value, Mid Cap Growth, Mid Cap Value, Small Cap Growth, Small Cap Value,
Strategic Bond, International Opportunities, and International Balanced
Portfolios may lend portfolio securities to brokers, dealers, and financial
institutions if the loan is collateralized in accordance with applicable
regulatory requirements. When lending
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portfolio securities, there is a risk that the borrower may fail to return the
securities involved in the transactions, in which case the Portfolio may incur
a loss. It is a fundamental restriction of the Portfolio not to lend portfolio
securities having a total value in excess of 33 1/3% of the total assets of the
Portfolio from which the securities have been lent.
THE S&P 500
The Equity Index Portfolio seeks to provide investment results that
correspond to the total return of the U.S. market as represented by the S&P
500. The S&P 500 is an index that is constructed by the Standard & Poor's
Corporation ("Standard & Poor's" or "S&P"), which chooses stocks on the basis
of market values and industry diversification. Most of the largest 500
companies listed on the U.S. stock exchanges are included in the index.
Additional stocks that are not among the 500 largest stocks, by market value,
are included in the S&P 500 for diversification purposes. The index is
capitalization weighted--that is, stocks with a larger capitalization (shares
outstanding times current price) have a greater weight in the index. Selection
of a stock for inclusion in the S&P 500 Index in no way implies an opinion by
S&P as to its attractiveness as an investment. Standard & Poor's only
relationship to the Portfolio is the licensing of Standard & Poor's marks and
the S&P 500 Index, which is determined, composed and calculated by Standard &
Poor's without regard to the Portfolio. "Standard & Poor's(R), " "S&P(R), "S&P
500(R)," "Standard & Poor's 500," and "500" are trademarks of McGraw-Hill, Inc.
and have been licensed for use by John Hancock and the Fund. The Fund and the
insurance products supported by the Fund are not sponsored, endorsed, sold or
promoted by Standard & Poor's and Standard & Poor's makes no representation
regarding the advisability of investing in the Fund or such insurance products.
MANAGEMENT OF THE FUND
The Board of Trustees of the Fund is responsible for the administration of
the affairs of the Fund. The Board may exercise all powers of the Fund except
those powers which are conferred upon or reserved to the shareholders.
John Hancock administers the Fund and serves as its transfer agent, dividend
disbursing agent, principal underwriter, and investment manager. John Hancock's
offices are located at John Hancock Place, Boston, Massachusetts 02117.
Pursuant to four Investment Management Agreements (two dated as of April 12,
1988, one dated April 15, 1994, and one dated February 14, 1996), John Hancock,
a registered investment adviser under the Investment Advisers Act of 1940,
advises the Fund in connection with policy decisions; provides administration
of day-to-day operations; provides personnel, office space, equipment, and
supplies for the Fund; maintains records required by the Investment Company Act
of 1940, as amended; values assets and liabilities of the Fund; computes
income, net asset value, and yield of each Portfolio; and supervises activities
of the sub-investment managers referred to below.
John Hancock began providing investment advice to investment companies in
1972 when it organized a management separate account, invested primarily in
common stocks, for the purpose of funding individual variable annuity
contracts. Both before and after that date, John Hancock established a number
of separate accounts investing in common stocks, public bonds, or other
securities in connection with the funding of variable annuities and group
annuity contracts. Total assets under management by John Hancock and its
subsidiaries as of December 31, 1995, amounted to over $99 billion, of which
over $55 billion was owned by John Hancock.
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INVESTMENT ADVISORY FEES
The Fund will pay John Hancock an investment advisory fee at the following
rates:
(a) for the Growth & Income, Sovereign Bond, and Money Market Portfolios,
0.25% on an annual basis of the average daily net assets of each Portfolio;
(b) for the Large Cap Growth and Managed Portfolios, 0.40% on an annual
basis of the first $500,000,000 of the average daily net assets of each
Portfolio; 0.35% for that portion between $500,000,000 and $1,000,000,000;
and 0.30% for that portion in excess of $1,000,000,000;
(c) for the Short-Term U.S. Government Portfolio, 0.50% on an annual
basis of the first $250,000,000 of the average daily net assets; 0.45% for
that portion between $250,000,000 and $500,000,000; and 0.40% for that
portion in excess of $500,000,000;
(d) for the Real Estate Equity Portfolio, 0.60% on an annual basis of the
first $300,000,000 of the average daily net assets; 0.50% for that portion
between $300,000,000 and $800,000,000; and 0.40% for that portion in excess
of $800,000,000;
(e) for the International Equity Portfolio, 0.60% on an annual basis of
the first $250,000,000 of the average daily net assets, 0.55% for that
portion between $250,000,000 and $500,000,000; and 0.50% for that portion
in excess of $500,000,000; and
(f) for the Special Opportunities Portfolio, 0.75% on an annual basis of
the first $250,000,000 of the average daily net assets; 0.70% for that
portion between $250,000,000 and $500,000,000; and 0.65% for that portion
in excess of $500,000,000.
(g) for the Equity Index Portfolio, 0.25% on an annual basis of the
average daily net assets of such Portfolio;
(h) for the Large Cap Value and Small Cap Growth Portfolios, 0.75% on an
annual basis of the average daily net assets of each Portfolio;
(i) for the Mid Cap Growth Portfolio, 0.85% on an annual basis of the
first $100,000,000 of average daily net assets of such Portfolio; and 0.80%
on an annual basis of that portion in excess of $100,000,000;
(j) for Mid Cap Value Portfolio, 0.80% on an annual basis of the first
$250,000,000 of average daily net assets; 0.775% for that portion between
$250,000,000 and $500,000,000; 0.75% for that portion between $500,000,000
and $750,000,000; and 0.725% for that portion in excess of $750,000,000;
(k) for Small Cap Value Portfolio, 0.80% on an annual basis of the first
$100,000,000 of average daily net assets; 0.75% for that portion between
$100,000,000 and $200,000,000; and 0.65% on an annual basis of that portion
in excess of $200,000,000;
(l) for the Strategic Bond Portfolio, 0.75% on an annual basis of the
first $25,000,000 of average daily net assets; 0.65% for that portion
between $25,000,000 and $75,000,000; 0.55% for that portion between
$75,000,000 and $150,000,000; and 0.50% for that portion in excess of
$150,000,000;
(m) for the International Opportunities Portfolio, 1.00% on an annual
basis of the first $20,000,000 of average daily net assets; 0.85% for that
portion between $20,000,000 and $50,000,000; and 0.75% for that portion in
excess of $50,000,000; and
(n) for the International Balanced Portfolio, 0.85% on an annual basis of
the first $100,000,000 of average daily net assets and 0.70% for that
portion in excess of $100,000,000.
John Hancock has day-to-day responsibility for making investment decisions
and placing investment orders for the Money Market Portfolio.
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GROWTH & INCOME, LARGE CAP GROWTH, MANAGED, SHORT-TERM U.S. GOVERNMENT, REAL
ESTATE EQUITY, AND EQUITY INDEX PORTFOLIOS
With respect to these Portfolios, John Hancock has contracted for
Independence Investment Associates, Inc. ("IIA") a Delaware corporation, to
have day-to-day responsibility for making investment decisions and placing
investment orders and to perform recordkeeping functions as sub-investment
manager.
IIA, a registered investment adviser indirectly wholly-owned by John
Hancock, manages over $21 billion worth of stocks and bonds for various
clients. IIA's address is 53 State Street, Boston, Massachusetts 02109. IIA,
the Fund, and John Hancock have entered into a Sub-Investment Management
Agreement dated as of April 15, 1988, as to the Growth & Income, Large Cap
Growth, and Managed Portfolios and a Sub-Investment Management Agreement dated
as of April 15, 1994 as to the Short-Term U.S. Government Portfolio. Samuel A.
Otis is a Senior Vice President of IIA and has been the portfolio manager of
the Growth & Income, Large Cap Growth, and Managed Portfolios for over eight
years. He is assisted in the day-to-day management of these Portfolios by
Dalton J. Avery and Michael G. Trotsky. As to the Managed Portfolio, James M.
Quadros is primarily responsible for the management of the fixed income
portion. Thomas D. Spicer is primarily responsible for the Short-Term
U.S. Government Portfolio and is assisted in its management by Messrs. Otis,
Avery and Quadros. Messrs. Otis, Avery, Spicer, and Quadros also direct
investment management for pension advisory accounts of IIA.
As to the Real Estate Equity Portfolio, John Hancock has, by a Sub-
Investment Management Agreement dated as of April 15, 1994, contracted with
IIA to make investment decisions and place investment orders and to provide
certain recordkeeping functions. Dalton J. Avery is a Senior Vice President of
IIA and has been the portfolio manager of the Real Estate Equity Portfolio
since its organization in 1988.
As to the Equity Index Portfolio, John Hancock has, by a Sub-Investment
Management Agreement dated as of February, 1996, contracted with IIA to make
investment decisions and place investment orders and to provide certain
recordkeeping functions. The Equity Index Portfolio will be managed on a day-
to-day basis by Michael G. Trotsky. Mr. Trotsky is a Vice President of IIA
joined the firm in 1991 and began his investment career in 1991.
INTERNATIONAL EQUITIES PORTFOLIO
This Portfolio's investment management is provided under contracts dated as
of April 15, 1994 with John Hancock Advisers, Inc. ("Advisers") and John
Hancock Advisers International Limited ("International Advisers") as sub-
investment managers. Advisers, a Delaware corporation, is a registered
investment adviser indirectly wholly-owned by John Hancock. It was organized
in 1968 and presently has over $19 billion in assets under management in its
capacity as investment adviser to mutual funds and publicly traded investment
companies in the John Hancock fund complex. Its address is 101 Huntington
Avenue, Boston, Massachusetts 02199. International Advisers is a wholly-owned
subsidiary of Advisers, formed in 1987 to provide international investment
research and advisory services to United States institutional clients. It has
its offices at 34 Dover Street, London W1X 3RA, England. Its investment and
administrative staff have substantial experience in investment management of
foreign assets. It is registered as an investment adviser in the United
States. David Beckwith is a Vice President of Advisers and will be primarily
responsible for the International Equities Portfolio. He will be assisted in
the day-to-day management of the investment portfolio by a team of research
analysts. Mr. Beckwith also directs investment management for other equity
portfolios of Advisers and has been associated with Advisers since 1992.
Priorly he was an investment manager for Freedom Capital Management Company.
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SOVEREIGN BOND, SPECIAL OPPORTUNITIES, AND SMALL CAP GROWTH PORTFOLIOS
With respect to the Sovereign Bond Portfolio, John Hancock has, by a Sub-
Investment Management Agreement, dated March, 1995, contracted with Advisers to
make investment decisions, place investment orders, and perform certain
recordkeeping functions. James K. Ho is an Executive Vice President with
Advisers and the portfolio manager of the Sovereign Bond Portfolio. Mr. Ho is
assisted in the day-to-day management of the Portfolio's investments by a co-
manager and a team of credit analysts. Mr. Ho also directs all taxable fixed-
income investment management for Advisers and has been associated with Advisers
since 1985.
With respect to the Special Opportunities Portfolio, John Hancock has by a
Sub-Investment Management Agreement dated April 15, 1994 contracted with
Advisers to make investment decisions, place investment orders and perform
certain recordkeeping functions. Special Opportunities Portfolio will be
managed on a day-to-day basis by an investment team overseen by Michael P.
DiCarlo. This team represents the analytical expertise of sector and global
specialists from Adviser's equity group. Mr. DiCarlo also manages the Special
Equities, Multi-Sector Growth, and Special Opportunities Funds organized by
Advisers and serves as Advisers' chief equity strategist. Mr. DiCarlo is an
Executive Vice President of Advisers and has been associated with Advisers
since 1984.
With respect to the Small Cap Growth Portfolio, John Hancock, has by a Sub-
Investment Management Agreement, dated February, 1996, contracted with Advisers
to make investment decisions, place investment orders and perform certain
recordkeeping functions. The Small Cap Growth Portfolio will be managed on a
day-to-day basis by an investment team overseen by Michael P. DiCarlo. Mr.
DiCarlo is an Executive Vice President and serves as Adviser's chief equity
strategist and oversees the Small Capitalization Equity Fund organized by
Adviser.
LARGE CAP VALUE PORTFOLIO
With respect to this Portfolio, John Hancock, has by a Sub-Investment
Management Agreement, dated X, 1996, contracted with T. Rowe Price Associates,
Inc. ("T. Rowe Price") a Maryland corporation, to make investment decisions,
place investment orders and to perform certain recordkeeping functions. T. Rowe
Price, a registered investment adviser, and its affiliates currently manage
over $70 billion for over 4 million individual and institutional investors
accounts. T. Rowe Price's address is 100 East Pratt Street, Baltimore, Maryland
21202. The Large Cap Value Portfolio will be managed by an Investment Advisory
Committee. The Committee Chairman, Brian C. Rogers, has day-to-day
responsibility for managing the Portfolio and works with the Committee in
developing and executing the Portfolio's investment program. Mr. Rogers is a
Managing Director and portfolio manager for the T. Rowe Price Equity Income
Fund and the T. Rowe Price Value Fund. Mr. Rogers joined T. Rowe Price in 1982
and began his investment career in 1983.
INTERNATIONAL OPPORTUNITIES PORTFOLIO
With respect to this Portfolio, John Hancock, has by a Sub-Investment
Management Agreement, dated X, 1995, contracted with Rowe Price-Fleming
International, Inc. ("Rowe Price-Fleming") a Maryland corporation, to make
investment decisions, place investment orders and to perform certain
recordkeeping functions. Rowe Price-Fleming was incorporated in 1979 as a
corporate joint venture between T. Rowe Price and Robert Flemings Holdings
Limited. Rowe Price-Fleming, a registered investment adviser, currently manages
over $20 billion of international stocks and bonds for various clients. Rowe
Price-Fleming's address
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is 100 East Pratt Street, Baltimore, Maryland 21202. It has its offices in
Baltimore, London, Tokyo and Hong Kong. The International Opportunities
Portfolio will be managed by an Investment Advisory Group that has day-to-day
responsibility for managing the Portfolio and developing and executing its
investment policy. The senior member of the advisory group is Martin G. Wade,
who joined the firm in 1979 and began his investment career in 1979.
MID CAP GROWTH PORTFOLIO
With respect to this Portfolio, John Hancock, has by a Sub-Investment
Management Agreement, dated X, 1996, contracted with Janus Capital Corporation
("Janus") a Colorado corporation, to make investment decisions, place
investment orders and to perform certain recordkeeping functions. Janus, a
registered investment adviser, managed over $30 billion of assets as of
December 31, 1995, and has been in the investment advisory business since 1970.
Janus' address is 100 Fillmore Street, Denver, Colorado 80206. The Mid Cap
Growth Portfolio will be managed on a day-to-day basis by James P. Goff. Mr.
Goff is Executive Vice President and portfolio manager for the Janus Enterprise
Fund and co-portfolio manager for the Janus Venture Fund. Mr. Goff joined Janus
in 1988 and began his investment career in 1985.
MID CAP VALUE PORTFOLIO
With respect to this Portfolio, John Hancock, has by a Sub-Investment
Management Agreement, dated X, 1996, contracted with Neuberger & Berman
Management, L.P. ("Neuberger & Berman") a New York limited partnership, to make
investment decisions, place investment orders and to perform certain
recordkeeping functions. Neuberger & Berman, a registered investment adviser,
manages over $37 billion of global stocks and bonds and has been in the
investment advisory business since 1939. Neuberger & Berman's address is 605
Third Avenue, New York, New York 10158. The Mid Cap Value Portfolio will be
managed on a day-to-day basis by Michael M. Kassen and Robert I. Gendelman. Mr.
Kassen is a Partner and senior portfolio manager of the firm, as well as a co-
portfolio manager for The Partners Fund and The Advisers Management Trust
Partners Portfolio. Mr. Kassen joined Neuberger & Berman in 1990 and began his
investment career in 1978. Mr. Gendelman is an Assistant Vice President and
senior portfolio manager, as well as a co-portfolio manager for The Partners
Fund and The Advisers Management Trust Partners Portfolio. Mr. Gendelman joined
the firm in 1993 and began his investment career in 1984.
SMALL CAP VALUE PORTFOLIO
With respect to this Portfolio, John Hancock, has by a Sub-Investment
Management Agreement, dated X, 1996, contracted with INVESCO Management &
Research ("INVESCO") a Massachusetts corporation, to make investment decisions,
place investment orders and to perform certain recordkeeping functions.
INVESCO, a registered investment adviser, is part of a global firm that managed
approximately $74 billion as of June 30, 1995. The parent company, INVESCO PLC,
is based in London, with money managers located in Europe, North America, and
the Far East. INVESCO's address is 101 Federal Street, Boston, Massachusetts
02110. The Small Cap Value Portfolio will be managed on a day-to-day basis by
Stephen J. Kaszynski and Robert S. Slotpole. Mr. Kaszynski is a Vice President
of INVESCO and senior portfolio manager for a number of institutional
portfolios. Mr. Kaszynski joined INVESCO in 1982 and has been in the investment
business since 1979. Mr. Slotpole is a Senior Vice President of INVESCO and
Director of Equity Management and portfolio manager of the INVESCO Small
Company Fund. Mr. Slotpole joined INVESCO in 1993 and began his investment
career in 1975.
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STRATEGIC BOND PORTFOLIO
With respect to this Portfolio, John Hancock, has by a Sub-Investment
Management Agreement, dated X, 1996, contracted with J.P. Morgan Investment
Management Inc. ("J.P. Morgan") a Delaware corporation, to make investment
decisions, place investment orders and to perform certain recordkeeping
functions. J.P. Morgan, a registered investment adviser, manages over $150
billion of global stocks and bonds and, together with its predecessors, has
been in the investment advisory business for over 100 years. J.P. Morgan's
address is 522 Fifth Avenue, New York, New York 10036. The Strategic Bond
Portfolio will be managed using a disciplined collaborative approach for the
day-to-day responsibility for managing the Portfolio and developing and
executing its investment policy. The team includes: Christopher J. Durbin and
Lili B.L. Dung. Mr. Durbin is a Managing Director and head of the U.S. Fixed
Income Group, which is responsible for all fixed income products. Mr. Durbin
joined J.P. Morgan in 1975 and began his investment career in 1975. Ms. Dung is
a Vice President and portfolio manager in the Fixed Income Group. Ms. Dung
joined the firm in l987 and began her investment career in 1987.
INTERNATIONAL BALANCED PORTFOLIO
With respect to this Portfolio, John Hancock, has by a Sub-Investment
Management Agreement, dated X, 1996, contracted with Brinson Partners, Inc.
("Brinson") a Delaware corporation, to make investment decisions, place
investment orders and to perform certain recordkeeping functions. Brinson a
registered investment advisor, manages over $50 billion of global stocks and
bonds and has been in the investment advisor business since 1974. Brinson's
address is 209 South LaSalle Street, Chicago, Illinois 60604. The International
Balanced Portfolio will be managed using a team approach, with the team having
day-to-day responsibility for managing the Portfolio and developing and
executing its investment policy. The team includes: Richard C. Carr, Managing
Partner, is a member of the firm's Investment Committee, is Chairman of the
Non-U.S. Sub-Investment Committee, and began his investment career in 1964;
Norman D. Cumming, Partner and Director of Non-U.S. Fixed Income Team, was a
member of the Non-U.S. Sub-Investment Committee, began his investment career in
1977; M. Dale Fritz, Managing Partner and member of the Investment Committee
and Non-U.S. Sub-Investment Committee, began his investment career in 1971;
Susan M. Haroun, Partner and Director of Non-U.S. Equities, London, is a member
of the Non-U.S. Investment Sub-Committee and began her investment career in
1982; M. Susan O'Nan, Partner and Non-U.S. Equity Strategy Analyst, is a member
of the Non-U.S. Investment Sub-Committee and began her investment career in
1985; Anthony W. Robinson, Partner and member of the Non-U.S. Investment Sub-
Committee, began his investment career in 1973; and Dr. Dennis S. Karnosky,
PhD., Managing Partner and Chairman of the Asset Allocation Sub-Committee, is a
member of the firm's Investment Committee, and began his investment career in
1967.
----------------
John Hancock pays the fees of each of the sub-investment managers pursuant to
the agreements with each and Advisers likewise pays the fee of International
Advisers. Therefore, the sub-investment management arrangements result in no
additional charge to the Fund or to the contractholders. (Further discussion of
the Fund's management is included in the Statement of Additional Information
under "Board of Trustees and Officers of the Fund.")
John Hancock, IIA, Advisers, International Advisers, T. Rowe Price, Rowe
Price-Fleming, Janus, Neuberger & Berman, INVESCO, J.P. Morgan, and Brinson
also perform investment advisory services for a number of other accounts and
clients, none of which is given preference over the Fund in allocating
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investment opportunities. When opportunities occur which are consistent with
the investment objective of more than one account, it is the policy of each not
to favor any one account over another, and investment opportunities are
allocated in a manner deemed equitable to the particular accounts involved
based on such factors as their respective investment objectives and then
current investment and cash positions. Subject to these requirements, Fund
orders may be combined with orders of other accounts or clients advised by John
Hancock, IIA, Advisers, International Advisers, T. Rowe Price, Rowe Price-
Fleming, Janus, Neuberger & Berman, INVESCO, J.P. Morgan, and Brinson at prices
which are averaged.
Under the Investment Management Agreements, John Hancock provides the Fund
with office space, supplies and other facilities required for the business of
the Fund. It pays the compensation of Fund officers and employees and the
expenses of clerical services relating to the administration of the Fund.
Expenses not expressly assumed by John Hancock under the Investment Advisory
Agreement are paid by the Fund. These include, but are not limited to, taxes,
custodian and auditing fees, brokerage commissions, advisory fees, the
compensation of unaffiliated trustees, the cost of the Fund's fidelity bond and
printing and distributing to contractholders of annual and semi-annual reports
and voting materials, as well as tabulating votes, and other expenses related
to the Fund's operations. (A further discussion of the Fund expenses is
included in the Statement of Additional Information under "Investment
Management and Operating Expenses" and "Portfolio Transactions and Brokerage
Allocation.")
John Hancock is the indirect sole shareholder of John Hancock Freedom
Securities, Inc., and its subsidiaries two of which, Tucker Anthony,
Incorporated ("Tucker Anthony"), and Sutro & Co., Inc. ("Sutro"), are
registered broker-dealers. DST Systems, Inc. ("DSTS") is an indirect non-
wholly-owned subsidiary of a company of which Janus is a non-wholly-owned
subsidiary. DSTS is also a registered broker dealer. Tucker, Sutro, and DSTS
may be used to execute a transaction on behalf of the Portfolios but only if
the price and execution is as favorable as that which would be available from
an unaffiliated broker/dealer and no less favorable than the affiliated
broker/dealer's contemporaneous charges to its other most favored, but
unaffiliated, customers. The Fund may not engage in any transactions in which
John Hancock, any of the sub-investment managers, or any of their affiliates
acts as principal.
SHARES, TAXES, AND DIVIDENDS
The Fund issues a separate series of shares of beneficial interest for each
Portfolio. Each share issued with respect to a Portfolio has a pro rata
interest in the net assets of that Portfolio. Each share is entitled to one
vote on matters submitted to a vote of shareholders of the Fund. The votes of
all classes are cast on an aggregate basis, except that if the interests of the
Portfolios differ, voting is on a Portfolio-by-Portfolio basis. In the latter
case, approval or disapproval by the shareholders in one Portfolio would not
generally be a prerequisite of approval or disapproval by shareholders in
another Portfolio. All shares may be redeemed at any time. The assets of each
Portfolio are charged with the liabilities of that Portfolio and a
proportionate share of the general liabilities of the Fund. Because John
Hancock Variable Annuity Accounts U, V, and I; John Hancock Variable Life
Accounts U, V, and S; and John Hancock Mutual Variable Life Insurance Account
UV currently hold all of Fund's shares, those Separate Accounts may be deemed
to control the Fund.
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code ("Code"). It is the Fund's policy to
comply with the provisions of the Code regarding distribution of investment
income and capital gains so that the Fund will not be subject to Federal income
43
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tax on amounts distributed. The Fund expects to distribute to the Separate
Accounts owning its shares all or substantially all net investment income and
net realized capital gains, if any, from the sale of investments.
A dividend from the net investment income of the Money Market Portfolio will
be declared and distributed daily. Dividends from net investment income of the
other Portfolios, except for the Special Opportunities Portfolio, will be
declared and distributed monthly. Dividends, if any, from net investment income
of the Special Opportunities Portfolio will be declared and distributed
annually. The Fund will distribute all of its net realized capital gains
annually. Dividends and capital gains distributions will normally be reinvested
in additional full or fractional shares of the Portfolio to which they relate
and will be appropriately credited to investment performance under John Hancock
and JHVLICO variable life insurance and annuity contracts. (A more complete
discussion of taxes and dividends is included in the Statement of Additional
Information under "Redemption and Pricing of Shares" and "Taxes.")
It is the policy of each of the Portfolios to comply with certain investment
diversification requirements set forth in Treasury Department regulations. A
variable life insurance policy or annuity contract investing in a Portfolio
that failed to meet these diversification requirements would, unless and until
the failure can be corrected in a procedure afforded by the Internal Revenue
Service, subject contractholders to taxation of income in the contract or
policy for that or any subsequent period. For a discussion of the tax
implications of owning a variable annuity contract or a variable life insurance
policy for which the Fund serves as the investment medium, please refer to the
Prospectus for such contract or policy attached at the front of this
Prospectus.
Those Portfolios that invest substantial amounts of their assets in foreign
securities may make an election to pass through John Hancock or JHVLICO any
taxes withheld by foreign taxing jurisdictions on foreign source income. Such
an election will result in additional taxable income and income tax to John
Hancock. The amount of additional income tax, however, may be more than offset
by credits for the foreign taxes withheld, which are also passed through. These
credits may provide a benefit to John Hancock or JHVLICO.
PURCHASE AND REDEMPTION OF SHARES
Shares of beneficial interest of each Portfolio of the Fund are offered only
to the corresponding subaccount of a Separate Account to which premiums have
been allocated by the owner of an insurance policy or an annuity contract.
Shares are sold at their net asset value as next determined after receipt of a
net premium by the Separate Account, without the addition of any selling
commission or sales load.
Shares are redeemed at their net asset value as next determined after receipt
of a surrender request by the Separate Account. No fee is charged on
redemption. Redemption payments will usually be paid within seven days after
receipt of the redemption request, except that the right of redemption may be
suspended or payments postponed whenever permitted by applicable law and
regulations. Fund shares are also purchased and redeemed as a result of
transfer requests, loans, loan repayments, and similar Separate Account
transactions, in each case without any sales load or commission and at the net
asset value per share computed for the day as of which such Separate Account
transactions are effected. (Further discussion of the purchase and redemption
of shares is included in the Statement of Additional Information under
"Redemption and Pricing of Shares.")
44
<PAGE>
NET ASSET VALUE
The net asset value per share of each Portfolio is determined once daily,
after the declaration of dividends, if any, as of 4:00 p.m., New York City
time, on each business day the New York Stock Exchange ("Exchange") is open for
unrestricted trading. In 1996, net asset value will not be determined, even
though the Exchange may be open, on any of the following national, state or
local holidays: New Year's Day, Memorial Day, Independence Day, Labor Day,
Veteran's Day, Thanksgiving Day, Christmas Day, Martin Luther King Day,
Presidents' Day, Patriots' Day, the day following Independence Day, and the day
following Thanksgiving Day.
The net asset value per share of each Portfolio is determined by adding the
value of all portfolio securities and other assets, deducting all portfolio
liabilities, and dividing by the number of outstanding shares. All Fund
expenses will be accrued daily for this purpose.
Equity securities and covered call and put options listed on a stock exchange
are valued at the closing sales price or, if there were no sales during the
day, at the last previous sale or bid price reported.
Debt securities (other than short-term investments) are valued on the basis
of valuations furnished by a pricing service which uses electronic data
processing techniques. Short-term investments with a remaining maturity of 60
days or less, and all investments of the Money Market Portfolio, are valued at
amortized cost.
Any other security for which market quotations are not readily available and
any other property for which valuation is not otherwise available is valued at
fair value as determined in good faith by, or under the direction of, the Board
of Trustees.
Financial futures contracts, options thereon and options on stock indexes are
valued at the last trade price of the day. In the absence of a trade on a given
day, the value is used which is established by the exchange on which the
instrument is traded.
Trading in the Portfolios that may purchase securities on European and Far
Eastern securities exchanges and over-the-counter markets is normally completed
at various times before the close of business on each day on which the New York
Stock Exchange is open. The values of such securities used in computing net
asset value per share are determined as of such times. Trading of these
securities may not take place on every New York Stock Exchange business day and
may take place on days which are not business days in New York. With the
exception of certain holidays, the Fund calculates net asset value per share as
of the close of regular trading on the New York Stock Exchange on each day on
which that Exchange is open. Therefore, such calculation does not take place
contemporaneously with the determination of the prices of many of the
International and Special Opportunities Portfolios' securities used in such
calculation. If events materially affecting the value of such securities occur
between the time when their price is determined and the time when net asset
value is calculated, such securities will be valued at fair value as determined
by or under the direction of the Board of Trustees in good faith.
INVESTMENT PERFORMANCE
From time to time, the Portfolios may advertise certain investment
performance figures. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE.
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The Money Market Portfolio may advertise its current yield and its effective
yield. The current yield of the Money Market Portfolio refers to the income
earned by the Portfolio during a seven-day period which is specified in the
advertisement. The income earned during that week is then assumed to be earned
each week for 52 weeks. The effective yield is calculated similarly, but the
income earned by an investment in the Portfolio is assumed to be reinvested
daily.
The other Portfolios may also advertise yield. The yield for each of these
Portfolios refers to the net investment income earned by the Portfolio during a
30-day period which is specified in the advertisement. The income earned during
this period is then assumed to be earned for a full year and to be reinvested
each month for six months. The resulting semi-annual yield is doubled.
Each of the Portfolios may advertise its average annual total return. In
general, total return is based upon the overall dollar or percentage change in
the value of a hypothetical investment in a Portfolio over a period of time
(which is specified in the advertisement), assuming all distributions are
reinvested. Average annual total return reflects the hypothetical annually
compounded return that would have produced the same cumulative rate of return
if the Portfolio's performance had been constant over the entire period.
Average annual returns tend to smooth out variations in a Portfolio's return;
they are not the same as actual year-by-year results.
Yields and total returns advertised for the Portfolios include the effect of
deducting each Portfolio's expenses, but may not include charges and expenses
attributable to any particular insurance product. Because shares of the
Portfolios can only be purchased through a variable annuity contract or
variable life insurance policy, a prospective contractholder should carefully
review the separate account prospectus attached at the front of this prospectus
for information on relevant charges and expenses. For more information about
performance advertising, see "Calculation of Performance Data" in the Statement
of Additional Information to this prospectus.
Additional performance information is also included in the Fund's annual
report to shareholders which will be made available upon request and without
charge.
CHANGES IN INTERNATIONAL EQUITIES PORTFOLIO'S
INVESTMENT OBJECTIVE AND POLICIES
The current investment objective and policies of the International Portfolio
(formerly, International Equities Portfolio) were approved by vote of that
Portfolio's shareholders, effective May 1, 1994, and that Portfolio's name was
changed from "Global Portfolio" to "International Portfolio." The principal
changes were to eliminate investments in debt securities (other than for
defensive purposes) as one of the Portfolio's principal investment strategies;
to add a policy that at least 80% of the Portfolio's total assets be invested
in equity securities; to increase from two to three the minimum number of
countries other than the United States in which the Portfolio generally will
invest; and to add a new policy that the Portfolio will invest primarily in
foreign (non-United States) securities.
46
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JOHN HANCOCK
VARIABLE SERIES TRUST I
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus. It is intended
that this Statement of Additional Information be read in conjunction with the
Prospectus of John Hancock Variable Series Trust I, dated May 1, 1996. A copy
of the Prospectus may be obtained from John Hancock Variable Series Trust I,
John Hancock Place, P.O. Box 111, Boston, Massachusetts, 02117, telephone
number 1-800-REAL LIFE.
This Statement of Additional Information is dated May 1, 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
BUSINESS HISTORY.......................................................... 1
INVESTMENT TECHNIQUES..................................................... 1
Hedging Strategies...................................................... 1
Further Considerations as Options and Futures Contracts................. 2
Short-Term Trading...................................................... 3
Foreign Currency Exchange Transactions.................................. 3
Forward Commitments..................................................... 4
Repurchase Agreements................................................... 4
Lending of Portfolio Securities......................................... 4
TYPES OF INVESTMENT INSTRUMENTS AND RATINGS............................... 5
Foreign Securities...................................................... 5
Debt Securities Generally............................................... 5
Debt Securities of the International Equities Portfolio................. 6
Sovereign Bond Portfolio Securities..................................... 6
U.S. Government Obligations............................................. 7
Other Money Market Portfolio Securities................................. 7
Commercial Paper Ratings................................................ 7
Corporate Bond Ratings.................................................. 8
Standard and Poor's Depository Receipts
Financial Futures Contracts............................................. 8
Options on Financial Futures Contracts.................................. 9
Interest Rate Options................................................... 9
Margin Requirements for Futures and Options............................. 9
Stock Index Options..................................................... 9
INVESTMENT RESTRICTIONS................................................... 10
BOARD OF TRUSTEES AND OFFICERS OF THE FUND................................ 12
CONTROL PERSON AND PRINCIPAL HOLDERS OF SECURITIES........................ 14
INVESTMENT ADVISORY AND OTHER SERVICES.................................... 14
Investment Management and Operating Expenses............................ 14
Underwriting and Administrative Services Agreement...................... 15
Custodian Agreement..................................................... 15
Independent Auditors.................................................... 16
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION........................... 16
THE TRUST'S ORGANIZATION AND SHARES....................................... 17
VOTING RIGHTS............................................................. 18
REDEMPTION AND PRICING OF SHARES.......................................... 18
TAXES..................................................................... 19
CALCULATION OF PERFORMANCE DATA........................................... 20
Yield and Total Return Information for All Portfolios Other than the
Money Market Portfolio................................................. 20
Calculation of Yield Quotations of the Money Market Portfolio........... 22
Charges Under Variable Life Insurance and Variable Annuity Policies..... 22
ADDITIONAL INFORMATION.................................................... 22
Legal Matters........................................................... 22
Reports................................................................. 22
FINANCIAL STATEMENTS...................................................... 22
</TABLE>
<PAGE>
BUSINESS HISTORY
John Hancock Variable Series Trust I, (the "Fund") is an open-end management
investment company which was incorporated on September 23, 1985, under the laws
of the State of Maryland and was reorganized as a Massachusetts business trust,
effective April 29, 1988. See the heading "The Trust's Organization and Shares"
below. The Fund has eighteen separate Portfolios, each with a separate series of
shares. Shares of the Fund are currently sold to John Hancock Variable Life
Accounts U, V, and S to fund variable life insurance policies issued by John
Hancock Variable Life Insurance Company ("JHVLICO"); John Hancock Variable
Annuity Accounts U and V, to fund variable annuity contracts issued by John
Hancock Mutual Life Insurance Company ("John Hancock"); John Hancock Variable
Annuity Account I, to fund variable annuity contracts issued by JHVLICO and John
Hancock Mutual Variable Life Insurance Account UV to fund variable life
insurance policies issued by John Hancock. It is anticipated that, in the
future, Fund shares may be sold to other separate investment accounts of JHVLICO
and John Hancock. Each of these separate accounts is hereinafter referred to as
a "Separate Account."
The Fund is, in part, a successor to three separate investment accounts of
JHVLICO as well as the six separate accounts of John Hancock described below.
On March 28, 1986, all of the investment assets and related liabilities of the
Variable Life Stock, Bond, and Money Market Accounts were transferred to the
Stock, Bond, and Money Market Portfolios of the Fund, respectively, in exchange
for shares of these Portfolios. These transactions were effected simultaneously
pursuant to an Agreement and Plan of Reorganization dated November 5, 1985,
entered into by JHVLICO, the Variable Life Stock, Bond, and Money Market
Accounts, and the Fund.
On February 20, 1987, all of the investment assets and related liabilities of
six Variable Annuity Stock, Bond and Money Market Accounts were transferred to
the Stock, Bond and Money Market Portfolios of the Fund, respectively, in
exchange for shares of these Portfolios. These transactions were effected
simultaneously pursuant to an Agreement and Plan of Reorganization dated June
10, 1986, entered into by John Hancock, the six Variable Annuity Stock, Bond
and Money Market Accounts, and the Fund.
In 1996, the Stock Portfolio was renamed the Growth & Income Portfolio, and
the Bond Portfolio was renamed the Sovereign Bond Portfolio.
INVESTMENT TECHNIQUES
HEDGING STRATEGIES
Certain hedging strategies are discussed in the Fund's prospectus, under the
heading "Hedging Strategies." These strategies are discussed further below. The
Large Cap Growth, Managed, Short-Term U.S. Government, Special Opportunities,
Equity Index, Large Cap Value, Mid Cap Growth, Mid Cap Value, Small Cap Growth,
Small Cap Value, Strategic Bond, International Opportunities, and International
Balanced Portfolios may engage in transactions in futures contracts, options on
futures contracts, and options on indexes for hedging purposes. Similarly, the
Sovereign Bond Portfolio may engage in transactions in futures contracts and
options thereon for hedging purposes.
For example, during a market decline, the selling of the appropriate futures
contract or the purchase of the appropriate put option could enable a Portfolio
to retain securities held in its portfolio, while avoiding part or all of any
loss resulting from a decline in their value. Outright sales of such securities
may not be advantageous at that time, for example, because (in the case of debt
instruments) the proceeds would have to be invested in lower-yielding, shorter-
term instruments. Also, with respect to both debt and equity securities held by
a Portfolio, it may be difficult to liquidate positions quickly when a market
decline is anticipated. Similarly, it may be difficult to re-establish such
positions quickly when the decline is over or if the decline fails to
materialize. These difficulties can be reduced by, for example, selling the
appropriate futures contracts when a decline is anticipated and closing out the
futures position when such anticipations changes.
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Similarly, purchasing futures contracts and call options would enable a
Portfolio to take the approximate economic equivalent of a substantial position
in bonds or equity securities more quickly or economically than may be possible
through direct purchases of debt or equity instruments.
FURTHER CONSIDERATIONS AS TO OPTIONS AND FUTURES CONTRACTS
Restrictions. A Portfolio will maintain at all times in a segregated account
with its custodian cash or cash equivalents at least equal to the sum of the
purchase prices of all of the Portfolio's open futures purchase positions, plus
the current value of the securities underlying all of the Portfolio's open
futures sales positions that are maintained for non-hedging (speculative)
purposes, plus the exercise price of all outstanding put options on futures
contracts written by the Portfolio, minus the amount of margin deposits with
respect thereto as marked to market each day. Regarding such margin deposits,
see "Margin Requirements for Futures and Options."
Certain Risks. Financial futures, options thereon, and stock index options, if
used by the Fund, will in most cases be based on securities or stock indexes the
components of which are not identical to the portfolio securities owned or
intended to be acquired by a Portfolio and in connection with which such
instruments are used. Furthermore, due to supply and demand imbalances and other
market factors, the price movements of financial futures, options thereon, and
stock index options do not necessarily correspond exactly to the price movements
of the securities, currencies, or stock index on which such instruments are
based. These factors increase the difficulty of implementing a successful
strategy using futures and options contracts.
The Portfolios generally will not take delivery of debt instruments pursuant
to purchasing an interest rate futures contract, nor make a delivery of debt
instruments pursuant to selling an interest rate futures contract. Nor will the
Portfolios necessarily take delivery of or deliver currencies in connection with
currency futures contracts. Instead, a Portfolio may close out such futures
positions by entering into closing futures contract transactions. Trading in
futures or options could be interrupted, for example, because of supply and
demand imbalances arising from a lack of either buyers or sellers. The futures
and options exchanges also may suspend trading after the price has risen or
fallen more than the maximum amount specified by the exchange. Exercise of
options could also be restricted or delayed because of regulatory restrictions
or other factors. Although the sub-investment managers will seek to avoid
situations where these factors would be likely to cause a problem for the Fund,
in some cases they could adversely affect the particular Portfolio's
transactions in these instruments.
Custodial Aspects. In certain circumstances, brokers may have access to
Portfolio assets posted as margin in connection with futures and options
transactions.
In such circumstances, the Fund will use only brokers in whose reliability
and financial soundness it has full confidence, and the Fund will adopt certain
other procedures and limitations to reduce the risk of loss to any Fund assets
which brokers hold or to which they may have access. Nevertheless, in the event
of a broker's insolvency or bankruptcy, it is possible that a Portfolio may
experience a delay or incur costs in recovering such assets or might recover
less than the full amount due. Also the value of such assets could decline by
the time the Fund could effect such recovery.
If on any day a Portfolio experiences net realized or unrealized gains with
respect to financial futures contracts held through a given broker, it will be
entitled immediately to receive from the broker the net amount of such gains.
The Fund will request payment of such amounts promptly after notification by
the broker that such amounts are due. Thereupon, these assets will be deposited
in the Fund's general or segregated account with the custodian, as appropriate.
2
<PAGE>
SHORT-TERM TRADING
The Sovereign Bond, Special Opportunities, International Equities, Large Cap
Value, Mid Cap Growth, Mid Cap Value, Small Cap Growth, Small Cap Value,
Strategic Bond, International Opportunities, and International Balanced
Portfolios intend to use short-term trading of securities as a means of managing
their portfolios to achieve their investment objectives. As used herein, "short-
term trading" means the purchase and subsequent sale of a security after it has
been held for a relatively brief period of time, in some instances for less than
three months. A Portfolio may engage in short-term trading in such instances as
the following if the investment manager, or sub-investment manager, believes the
transactions, net of costs (including commissions, if any), will benefit the
Portfolio:
(a) To avoid potential depreciation in the value of a security held in
the Portfolio where the Portfolio anticipates that it may decline in market
value as a result of unfavorable earnings trends and/or an unfavorable
investment environment.
(b) To increase the return by taking advantage of yield disparities
between various fixed-income securities in order to realize capital gains
or improved income on the Portfolio.
(c) To take advantage of movements in the price of a security that the
sub-investment manager expects to be of relatively short duration.
The investment manager, or sub-investment manager, in reaching a decision to
sell one security and purchase another security at approximately the same time,
will take into account a number of factors, including the quality ratings,
interest rates, yields, maturity dates, call prices, and refunding and sinking
fund provisions of the securities under consideration, as well as historical
yield spreads and current economic information. The success of short-term
trading will depend upon the ability of the investment manager, or sub-
investment manager, to evaluate particular securities, to anticipate relevant
market factors, including trends of interest rates and earnings and variations
from such trends, to obtain relevant information, to evaluate it promptly, and
to take advantage of its evaluations by completing transactions on a favorable
basis. It is expected that the expenses involved in short-term trading, which
would not be incurred by an investment company which does not use this
portfolio technique, will be taken into account.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
The foreign currency exchange transactions of those Portfolios that can invest
in foreign securities may be conducted on a spot, i.e., cash, basis at the spot
rate for purchasing or selling currency prevailing in the foreign exchange
market. Certain of such Portfolios also have authority to deal in forward
foreign currency exchange contracts involving currencies of the different
countries in which they invest as a hedge against possible variations in the
foreign exchange rate between these currencies. The Portfolios' hedging
transactions in forward foreign currency exchange contracts may involve either
specific transactions or portfolio positions. Transaction hedging is the forward
purchase or sale of foreign currency with respect to specific receivables or
payables of the Portfolio accruing in connection with the purchase and sale of
its securities denominated in foreign currencies. Portfolio hedging is the use
of forward foreign currency exchange contracts with respect to the Portfolio's
security positions denominated or quoted in such foreign currencies. Except as
described in the Fund's Prospectus as to the Mid Cap Growth, Strategic Bond,
International Opportunities and International Balanced Portfolios, the
Portfolios may not engage in portfolio hedging with respect to the currency of a
particular country to an extent greater than the aggregate market value (at the
time of making such sale) of the securities which the Portfolio holds
denominated or quoted in that particular foreign country. The Portfolios may or
may not attempt to hedge all of their foreign portfolio positions and will enter
into such transactions only to the extent, if any, deemed appropriate by the
sub-investment managers. The Portfolios will not use forward foreign currency
exchange contracts for the purpose of leveraging the Portfolio's currency
exposure.
In implementing the above-described currency techniques, the Mid Cap Growth
and International Balanced Portfolios may use forward contracts in a "proxy"
currency instead of the foreign currency being hedged. A "proxy" currency is one
that the sub-investment manager believes will bear a close relationship to the
currency being hedged and believes will at least equal the performance of such
currency relative to the U.S. dollar. A proxy currency might be used, for
example, where the market for such currency was more liquid or involved lower
transaction costs than the market being hedged. The Portfolios do not intend to
speculate in foreign currencies. Nevertheless, changes in the value of the
currency being hedged may not correspond to changes in the value of the proxy
currency as expected, which could result in the currency hedge being more
favorable or less favorable to the Portfolio.
If a Portfolio enters into a portfolio hedging transaction, the Portfolio may
cover outstanding forward currency sale contracts by maintaining portfolio
securities denominated in the currency of such contracts or of appropriate proxy
currency. To the extent a Portfolio does not thus cover all of its forward
currency sales positions with its portfolio securities, or if it has outstanding
any forward currency purchase contracts, its custodian bank will segregate cash
or liquid assets in a separate account of the Portfolio in an amount at all
times equal to the value of the Portfolio's net obligation with respect to
forward contracts in a particular currency or, in the case of the International
Balanced Portfolio only, the Portfolio's net "out of the money" obligation (if
any) with respect to all of the Portfolio's outstanding forward currency
contracts. If the value of the portfolio securities used to cover a position or
the value of the assets in the separate account declines, the Portfolio will
find additional cover or additional cash or liquid assets will be placed in the
account so that the value of the account will equal the amount of the
Portfolio's net obligation with respect to such contracts as described in the
preceding sentence.
At the maturity of a forward currency sale contract, a Portfolio may either
sell a portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract with the same currency
trader obligating it to purchase, on the same maturity date, the same amount of
the foreign currency. Similarly, at the maturity of a foreign currency purchase
contract, a Portfolio may take delivery of the currency, if needed to purchase a
portfolio security, or may enter into an offsetting transaction to close out its
position. The Portfolio may realize a gain or loss from currency transactions.
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Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Portfolios to hedge against a devaluation that
is so generally anticipated that the Portfolios are not able to contract to
sell the currency at a price above the devaluation level it anticipates. The
cost to the Portfolios of engaging in foreign currency exchange transactions
varies with such factors as the currency involved, the length of the contract
period and the market conditions then prevailing. Since transactions in foreign
currency exchange are usually conducted on a principal basis, no fees or
commissions are involved.
FORWARD COMMITMENTS
As described in the Fund's Prospectus, the International Equities, Short-
Term U.S. Government, Special Opportunities, Equity Index, Large Cap Value, Mid
Cap Growth, Mid Cap Value, Small Cap Growth, Small Cap Value, Strategic Bond,
International Opportunities, and International Balanced Portfolios may enter
into contracts to purchase securities for a fixed price at a future date beyond
customary settlement time ("forward commitments") because new issues of
securities are typically offered on such a basis. On the date when the Portfolio
enters into a forward commitment, it will segregate in a separate account cash
or liquid assets denominated in the currency of the security contracted to be
purchased having a value at least equal to the amount required to assure the
availability of funds for the purchase price. These assets will be valued at
market daily and additional cash or liquid assets will be added to the separate
account to the extent the total value of the assets in the account declines
below the amount of the commitment.
REPURCHASE AGREEMENTS
As described in the Fund's Prospectus, a Portfolio (other than the Short-Term
U.S. Government Portfolio) may enter into repurchase agreements with respect to
its portfolio securities. Each such Portfolio has established a procedure
providing that the securities serving as collateral for each repurchase
agreement must be delivered to the Portfolio's custodian or sub-custodian either
physically or in book-entry form and that the collateral must be marked-to-
market daily to ensure that each repurchase agreement is fully collateralized at
all times. In the event of a bankruptcy or other default by a seller of a
repurchase agreement, the Portfolio could experience delays in liquidating the
underlying securities and could experience losses, including the possible
decline in the value of the underlying securities during the period while the
Portfolio seeks to enforce its rights thereto, possible subnormal levels of
income and lack of access to income during this period, and expenses of
enforcing its rights.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Short-Term U.S. Government,
Special Opportunities, Equity Index, Large Cap Value, Mid Cap Growth, Mid Cap
Value, Small Cap Growth, Small Cap Value, Strategic Bond, International
Opportunities, and International Balanced Portfolios may from time to time lend
securities from its portfolio to brokers, dealers and financial institutions
such as banks and trust companies. Such loans will be secured by collateral
consisting of cash or U.S. Government securities, which will be maintained in an
amount equal to at least 100% of the current market value of the loaned
securities. During the period of the loan, the Portfolio receives the income on
the loaned securities and the compensation for making the loan and thereby
increases its return. Cash collateral may be invested in short-term securities,
which will increase the current income of the Portfolio. Such loans will not be
for more than 60 days and will be terminable by the Portfolio at any time. The
Portfolio will have the right to regain record ownership of loaned securities in
order to exercise rights of a holder thereof including receiving interest or
other distributions or exercising voting rights. The Portfolio may pay
reasonable fees to persons unaffiliated with the Portfolio for services in
arranging such loans. Lending of portfolio securities involves a risk of failure
by the borrower to return the loaned securities, in which event the Portfolio
may incur a loss.
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TYPES OF INVESTMENT INSTRUMENTS AND RATINGS
FOREIGN SECURITIES
As discussed in the prospectus under "Risks Factors -- Risks of Foreign
Securities," all of the Portfolios may invest at least some of their assets in
foreign securities, except for the Real Estate Equity and Short-Term U.S.
Government Portfolios. The purchase of foreign securities could involve risks
not associated with domestic securities. Among others, there may be risks of
political and economic instability, foreign taxes, liquidity, predictability of
international trade patterns, and fluctuations in rates of currency exchange.
Less information with respect to a foreign issuer may be publicly available, the
accounting, auditing, and financial standards may be lower, the issuer may be
subjected to less regulation or to a greater risk of expropriation or
confiscatory taxation and, in the event of default, a judgment against the
issuer may be difficult to obtain or enforce.
The securities markets of many countries have in the past moved relatively
independent of one another, due to differing economic, financial, political and
social factors. When markets move in different directions, there may be a
corresponding reduction in risk for those Portfolios that can invest in foreign
securities as a whole. This lack of correlation among the movements in the
world's securities markets may also affect unrealized gains these Portfolios may
derive from movements in any one market. If the securities of markets moving in
different directions are combined in any of these Portfolios, total volatility
of the Portfolio is reduced.
Because these Portfolios may invest in securities denominated or quoted in
currencies other than United States dollars, changes in foreign currency
exchange rates will affect the value of the securities. Exchange rates may not
move in the same direction as the securities markets in a particular country. As
a result, the gain realized on a foreign investment may be offset by an
unfavorable exchange rate.
The International Equities, Special Opportunities, Strategic Bond,
International Opportunities, and International Balanced Portfolios may invest in
companies located in emerging countries which, compared to the U.S. and other
developed countries, may have relatively unstable governments, economies and
currencies, based on only a few industries, and securities markets which trade
only a small number of securities. Prices on exchanges located in developing
countries tend to be volatile and, in the past, securities traded on those
exchanges have offered a greater potential for gain (and loss) than securities
traded on exchanges in the U.S. and more developed countries.
The Portfolios that are authorized to purchase foreign securities may also do
so in the form of American Depositary Receipts (ADRs), European Depositary
Receipts (EDRs) or other securities representing underlying shares of foreign
issuers. These securities may not necesssarily be denominated in the same
currency as the securities into which they may be converted but rather in the
currency of the market in which they are traded. ADRs are receipts typically
issued by an American bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs are receipts issued
in Europe by banks or depositories which evidence a similar ownership
arrangement. Generally, ADRs, in registered form, are designed for use in U.S.
securities markets and EDRs, in bearer form, are designed for use in European
securities markets.
The Portfolios that are authorized to purchase foreign securities may invest
in U.S. dollar denominated debt securities issued by foreign corporations and
publicly traded in the United States (Yankees) or Europe (Euros). Because
Yankees and Euros are U.S. dollar denominated, the risks associated with foreign
currency conversions are not present.
DEBT SECURITIES GENERALLY
The value of the debt securities in any Portfolio can be expected to vary
inversely to changes in prevailing interest rates, with the amount of such
variation depending primarily on the remaining duration of the security. Long-
term obligations usually fluctuate more in value than short-
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term obligations. If interest rates increase after a security is purchased, the
security, if sold, could be sold for a loss. On the other hand, if interest
rates decline after a purchase, the security, if sold, could be sold at a
profit. If, however, the security is held to maturity, no gain or loss will be
realized as a result of interest rate fluctuations, although the day-to-day
valuation of the Portfolio could fluctuate. As in the case of any other
security, substantial redemptions could require a Portfolio to sell debt
securities at a time when a sale might not be favorable. The value of a
portfolio security may also be affected by other factors, including factors
bearing on the creditworthiness of its issuer. Generally, lower-rated
securities are subject to greater price fluctuations.
Securities having one of the four highest rating categories for debt
securities as defined by Moody's Investors Services, Inc. (Aaa, Aa, A, or Baa)
or Standard and Poor's Corporation (AAA, AA, A, or BBB) or, if unrated,
determined to be of comparable quality by the sub-investment manager, are
referred to as investment grade. The meanings of such ratings are discussed
further under "Corporate Bond Ratings," below.
DEBT SECURITIES OF THE INTERNATIONAL EQUITIES PORTFOLIO
It is the intention of the International Equities Portfolio generally to
invest in debt securities only for temporary defensive purposes. Accordingly,
when the sub-investment managers believe unfavorable investment conditions exist
requiring the Portfolio to assume a temporary defensive investment posture, the
Portfolio may hold cash or invest all or a portion of its assets in short-term
domestic as well as foreign instruments, including: short-term U.S. Government
securities and repurchase agreements in connection with such instruments; bank
certificates of deposit, bankers' acceptances, time deposits and letters of
credit; and commercial paper (including so called Section 4(2) paper) rated at
least A-1 or A-2 by Standard & Poor's Corporation ("S&P") or P-1 or P-2 by
Moody's Investors Service, Inc. ("Moody's") or if unrated considered by the sub-
investment managers to be of comparable quality. The Portfolio's temporary
defensive investments may also include: investment grade debt obligations of U.S
companies; commercial paper and corporate debt obligations not satisfying the
above credit standards if they are (a) subject to demand features or puts or (b)
guaranteed as to principal and interest by a domestic or foreign bank having
total assets in excess of $1 billion, by a corporation whose commercial paper
may be purchased by the Portfolio or by a foreign government having an existing
debt security rated investment grade by S&P or Moody's; and other short-term
investments which the Fund's Trustees determine present minimal credit risks and
which are of "high quality" as determined by any major rating service, or in the
case of an instrument that is not rated, of comparable quality as determined by
the sub-investment managers. If the rating of a debt security is reduced below
the minimums discussed above, the sub-investment managers will consider whatever
action is appropriate consistent with the Portfolio's investment objectives and
policies.
SOVEREIGN BOND PORTFOLIO SECURITIES
It is contemplated that at least 75% of the value of the Sovereign Bond
Portfolio's total investment in debt securities (other than commercial paper)
will be represented by debt securities which have, at the time of purchase, an
investment grade rating and debt securities of banks and other issuers which,
although not rated as a matter of policy by either Moody's or S&P, are
considered by the sub-investment manager to have comparable investment quality.
The Portfolio will, as a rule, seek to purchase debt securities which have
protection against immediate refunding. In recent years, corporate debt
securities have frequently been issued which have refunding protection for a
period of five to ten years and, in some cases, longer, although there can be no
assurance that securities containing similar provisions will continue to be
issued.
The Portfolio may purchase corporate debt securities bearing fixed interest
as well as those 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 Portfolio's total assets taken at market value.
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The Portfolio may also purchase U.S. dollar-denominated securities issued by
foreign corporations and publicly traded in either the United States (Yankees)
or Europe (Euros).
The Portfolio may include debt securities which sell at substantial
discounts from par. These securities are low coupon bonds which, during
periods of high interest rates, because of their lower acquisition cost, tend
to sell on a yield basis approximating current interest rates.
U.S. GOVERNMENT OBLIGATIONS
U.S. Government obligations are bills, certificates of indebtedness, notes and
bonds issued or guaranteed as to principal or interest by the United States or
by agencies or authorities controlled or supervised by and acting as
instrumentalities of the U.S. Government established under the authority granted
by Congress, including, but not limited to, the Tennessee Valley Authority,
Federal Home Loan Banks, Federal Land Banks, Farm Credit System, the Federal
National Mortgage Association, World Bank, Inter-American Development Bank,
Student Loan Marketing Association, Financing Corporation, Asian Development
Bank, Federal Housing Administration, Agency for International Development,
Federal Home Loan Mortgage Corporation, Government Trust Certificates, Private
Export Funding Corporation, and Small Business Administration. Some obligations
of U.S. Government agencies, authorities, and other instrumentalities are
supported by the full faith and credit of the U.S. Treasury; others by the right
of the issuer to borrow from the Treasury; and others only by the credit of the
issuing agency, authority, or other instrumentality. U.S. Government obligations
are primarily used in the Money Market and the Short-Term U.S. Government
Portfolios. All of the other Portfolios may also invest in U.S. Government
obligations to some extent.
OTHER MONEY MARKET PORTFOLIO SECURITIES
Certificates of Deposit--are certificates issued against funds deposited in
a bank, are for a definite period of time, earn a specified rate of return,
and are normally negotiable.
Bankers' Acceptances--are short-term credit instruments issued by
corporations to finance the import, export, transfer or storage of goods. They
are termed "accepted" when a bank guarantees their payment at maturity. These
instruments reflect the obligation of both the bank and the drawer to pay the
face amount of the instrument at maturity.
Commercial Paper--refers to promissory notes issued by corporations to
finance their short-term credit needs. See "Commercial Paper Ratings,"
below.
Corporate Obligations--include bonds, debentures, and notes issued by
corporations in order to finance longer term credit needs. See "Corporate Bond
Ratings," below. These instruments may be considered money market securities
when they have a relatively short remaining maturity.
The foregoing types of money market instruments are used primarily by the
Money Market Portfolio, but may also be used by each of the other Portfolios to
some extent.
COMMERCIAL PAPER RATINGS
The rating A-1 is the highest rating assigned by Standard & Poor's
Corporation ("S&P") to commercial paper which is considered by S&P to have the
following characteristics: liquidity ratios of the issuer are adequate to meet
cash requirements; long-term senior debt is rated "A" or better; the issuer
has access to at least two additional channels of borrowing; basic earnings
and cash flow have an upward trend with allowance made for unusual
circumstances; typically, the issuer's industry is well established and the
issuer has a strong position within the industry.
The rating P-1 is the highest commercial paper rating assigned by Moody's
Investors Services, Inc. (Moody's). Among the factors considered by Moody's in
assigning ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas;
(3) evaluation of the issuer's products in relation to competition and
customer acceptance; (4) liquidity; (5) amount and quality of long-term debt;
(6) trend of earnings over a period of ten years; (7) financial strength of a
parent company and the relationships which exist with the issuer; and (8)
recognition by the management of obligations which may be present or may arise
as a result of public interest questions and preparations to meet such
obligations.
The rating F-1 is the highest rating assigned by Fitch's Investors Service.
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CORPORATE BOND RATINGS
Moody's Investors Service, Inc., describes its four highest ratings for
corporate bonds as follows:
Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or 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.
Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Standard & Poor's Corporation describes its four highest ratings for
corporate bonds as follows:
AAA This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA Bonds rated AA also qualify as high-quality obligations. Capacity to
pay principal and interest is very strong, and in the majority of
instances, they differ from AAA issues only in small degree.
A Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for
bonds in this category than for bonds in the A category.
STANDARD AND POOR'S DEPOSITORY RECEIPTS
The Equity Index Portfolio may, consistent with its objectives, purchase
Standard & Poor's Depository Receipts ("SPDRs"). SPDRs are American Stock
Exchange-traded securities that represent ownership in the SPDR Trust, a trust
which has been established to accumulate and hold a portfolio of common stocks
that is intended to track the price performance and dividend yield of the S&P
500. This trust is sponsored by a subsidiary of the American Stock Exchange.
SPDRs may be used for several reasons, including but not limited to:
facilitating the handling of cash flows or trading, or reducing transaction
costs. The use of SPDRs would introduce additional risk to the Portfolio as the
price movement of the instrument does not perfectly correlate with the price
action of the underlying index.
FINANCIAL FUTURES CONTRACTS
A public market currently exists for interest rate futures contracts on United
States Treasury Bills, United States Treasury Notes and bank certificates of
deposit. A public market currently exists for stock index futures contracts
based on the Standard & Poor's 500 Stock Index, the Standard & Poor's Midcap
Index, the New York Stock Exchange Composite Index and the Value Line Stock
Index. Stock index
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futures contracts bind purchaser and seller to delivery at a future date
specified in the contract of a cash amount equal to a multiple of the
difference between the value of a specified stock index on that date and
settlement price specified by the contract. That is, the seller of the futures
contract must pay and the purchaser would receive a multiple of any excess of
the value of the index over the settlement price, and the purchaser must pay
and the seller would receive a multiple of any excess of the settlement price
over the value of the index. Multiples reflect the denominations in which the
contracts are traded.
The Sovereign Bond, Large Cap Growth, Managed, Short-Term U.S. Government,
Special Opportunities, Equity Index, Large Cap Value, Mid Cap Growth, Mid Cap
Value, Small Cap Growth, Small Cap Value, Strategic Bond, International
Opportunities, and International Balanced Portfolios may use the above-described
and other available exchange traded financial futures contracts, and options
thereon, subject to the limitations set forth herein and in the Fund's
prospectus.
OPTIONS ON FINANCIAL FUTURES CONTRACTS
The writer of an option on a financial futures contract agrees to assume a
position in such financial futures contract if the purchaser exercises the
option and thereby assumes the opposite position in the financial futures
contract. A party that writes an option receives a premium for doing so, and
the party that purchases an option pays a premium therefor. The option writer
incurs the risk that the option will be exercised and the writer will suffer a
loss on the futures contract position it is thus required to assume that
exceeds the premium the writer received.
If the price of the debt instrument or stock index on which the futures
contract is based increases (in the case of a put option written by the
Portfolio) or decreases (in the case of a call option written by the
Portfolio), the Portfolio may incur losses that exceed the amount of the
premium received by the Portfolio for writing the option. Such losses may arise
because an option written by the Portfolio on a futures contract requires the
Portfolio to pay any amount by which the fluctuating price of the underlying
debt instrument or index exceeds (in the case of a put option) or is less than
(in the case of a call option) the price specified in the futures contract to
which the option relates.
INTEREST RATE OPTIONS
After payment of a specified premium at the time an interest rate option is
entered into, the purchaser of a call interest rate option obtains the right to
receive specified debt securities upon exercise of the option in exchange for
payment of a specified exercise price. The purchaser of a put option obtains
the right to sell the specified debt securities upon exercise of the option and
to receive the exercise price therefor. The writer of the interest rate option
receives a premium but has the obligation, upon exercise of the option, to
deliver the subject securities in exchange for the exercise price (in the case
of a call option) or to purchase the subject securities at the exercise price
(in the case of a put option).
Securities for which interest rate options are currently traded include United
States Treasury Bonds and United States Treasury Notes. Subject to the
limitations and conditions elsewhere set forth in this Statement of Additional
Information and in the Fund Prospectus, the Special Opportunities, Mid Cap
Growth, Small Cap Growth, Strategic Bond, and International Balanced Portfolios
may use these and such other interest rate options as may be available.
MARGIN REQUIREMENTS FOR FUTURES AND OPTIONS
When futures contracts are traded, both buyer and seller are required to post
an initial margin of cash or United States Treasury Bills equaling as much as 5
to 10 percent or more of the contract settlement price. The nature of the
margin requirements in futures transactions differs from traditional margin
payments made in securities transactions in that margins for futures contracts
do not involve the borrowing of funds by the customer to finance the
transaction. Instead, a customer's margin on a futures contract represents a
good faith deposit securing the customer's contractual obligations under the
futures contract. If the market moves against the Fund, so that a Portfolio has
a net loss on its outstanding futures contracts for a given day, the Portfolio
generally will be required to post additional margin to that extent. The margin
deposit is returned, assuming the Fund's obligations have been met, when the
futures contract is terminated.
Similar margin requirements will apply in connection with any transactions in
which a Portfolio writes options on futures contracts, options on securities
indexes, or interest rate options.
STOCK INDEX OPTIONS
After payment of a specified premium at the time a stock index option is
entered into, the purchaser of a stock index call option obtains the right to
receive a sum of money upon exercise of the option equal to a multiple of the
excess of a specified stock index on the exercise date over the exercise or
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"strike" price specified by the option. The purchaser of a put option obtains
the right to receive a sum of money upon exercise of the option equal to a
multiple of any excess of the strike price over the stock index. The writer of
a call or put stock index option receives a premium, but has the obligation,
upon exercise of the option, to pay a multiple of the difference between the
index and the strike price.
Stock indexes for which options are currently traded include the Standard &
Poor's 100 and Standard & Poor's 500 Indexes. Subject to the limitations set
forth herein and in the Fund's prospectus, the Large Cap Growth, Managed,
Special Opportunities, Equity Index, Large Cap Value, Mid Cap Growth, Mid Cap
Value, Small Cap Growth, Small Cap Value, International Opportunities, and
International Balanced Portfolios may use these options and options on such
other indexes as may be available.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions relating to the investment of
each Portfolio's assets. These restrictions are fundamental policies and may
not be changed for any Portfolio without the approval of a majority of the
outstanding voting shares of each affected Portfolio. (As used in the
Prospectus and this Statement of Additional Information, the term "majority of
the outstanding voting shares" means the lesser of (1) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (2) more than 50% of the outstanding shares.) A change in policy
affecting only one Portfolio may be effected with the approval of the majority
of the outstanding voting shares of that Portfolio, without the approval of a
majority of the outstanding voting shares of any other Portfolio or of the
entire Fund.
No Portfolio will:
(1) Purchase real estate or any interest therein, except through the
purchase of corporate or certain government securities (including
securities secured by a mortgage or a leasehold interest or other interest
in real estate). A security issued by a real estate or mortgage investment
trust or an interest in a pool of real estate mortgage loans is not treated
as an interest in real estate.
(2) Make loans, other than through the acquisition of obligations in which
the Portfolio may invest consistent with its objective and investment
policies, except that the Short-Term U.S. Government, Special Opportunities,
Equity Index, Large Cap Value, Mid Cap Growth, Mid Cap Value, Small Cap
Growth, Small Cap Value, Strategic Bond, International Opportunities, and
International Balanced Portfolios may lend portfolio securities not having a
value in excess of 33 1/3% of the Portfolio's total assets.
(3) Invest in commodities or in commodity contracts or in puts, calls or
a combination of both, except that
(A) the Large Cap Growth, Managed, Short-Term U.S. Government,
Special Opportunities, Equity Index, Large Cap Value, Mid Cap Growth, Mid
Cap Value, Small Cap Growth, Small Cap Value, Strategic Bond, International
Opportunities, and International Balanced Portfolios may,
(i) write call options on, and purchase put options covered by,
securities held by them and purchase and sell options to close out
positions thus established, provided that no such covered call or
put option position will be established in the Large Cap Growth and
Managed Portfolios if more than one-third of the Portfolio's total
assets would immediately thereafter be subject to such call and put
options,
(ii) purchase options on stock indexes and write such options to
close out positions previously established, and
(iii) enter into financial futures contracts or purchase options on such
contracts, and effect offsetting transactions to close out such positions
previously established; provided that, (a) as to the Large Cap Growth,
Managed, Large Cap Value, Mid Cap Value, and Small Cap Value Portfolios,
no position in financial futures, options thereon or options on securities
indexes will be established if, immediately thereafter, the then-current
aggregate value of all securities owned or to be acquired by the Portfolio
which are hedged by such instruments exceeds one-third of the value of its
total assets and (b) as to such Portfolios and as to the Equity Index and
International Opportunities Portfolios, no futures position or position in
options on futures will be established
10
<PAGE>
if, immediately thereafter, the total of the initial margin
deposits required by commodities exchanges with respect to all open
futures positions at the time such positions were established, plus
the sum of the premiums paid for all unexpired options on futures
contracts would exceed 5% of the Portfolio's total assets;
(B) with respect to International Equities, Short-Term U.S. Government,
Special Opportunities, Equity Index, Large Cap Value, Mid Cap Growth, Mid
Cap Value, Small Cap Value, Small Cap Growth, Strategic Bond, International
Opportunities, and International Balanced Portfolios, forward foreign
exchange contracts,forward commitments, and when-issued securities are not
deemed to be commodities or commodity contracts or puts or calls for the
purposes of this restriction;
(C) the Short-Term U.S. Government, Special Opportunities, Mid Cap Growth,
Small Cap Growth, Strategic Bond, and International Balanced Portfolios may,
in addition to the activities permitted in (A) and (B) above,
(i) write put and call options on securities and market indexes,
if such positions are covered by other securities or outstanding
put and call positions of the Fund and purchase put and call
options to close out any positions thus established, and
(ii) enter into futures contracts on securities or market
indexes, or purchase or write put or call options on such futures
contracts, for hedging or speculative (non-hedging) purposes, and enter
into offsetting transactions to close out any positions thus established;
provided that neither Portfolio may purchase, sell or write such futures
or options for speculative purposes if immediately thereafter the margin
deposits on the Portfolio's speculative positions, plus the amount of
premiums paid for outstanding speculative options on futures contracts,
less any amount by which the option is "in the money" at the time of
purchase, exceeds 5% of the market value of the Portfolio's net assets;
(D) the Sovereign Bond Portfolio may enter into futures contracts and
purchase or write options thereon to the same extent as is permitted in (C),
above, with respect to the Portfolios listed therein; and
(E) the Equity Index, Large Cap Value, Mid Cap Growth, Mid Cap Value,
Small Cap Growth, Small Cap Value, Strategic Bond, International
Opportunities and International Balanced Portfolios may purchase or write
put or call options on foreign currencies, may purchase put or call options
on securities, and may enter into closing transactions with respect to any
of such options.
(4) Engage in the underwriting of securities of other issuers, except to
the extent the Portfolio may be deemed an underwriter in selling as part of
an offering registered under the Securities Act of 1933 securities which it
has acquired.
(5) Borrow money, except from banks as a temporary measure where such
borrowings would not exceed 5% of the market value of total assets of the
Portfolio as of the time each such borrowing is made.
(6) Except as set forth herein as to the Sovereign Bond, International
Equities, Short-Term U.S. Government, and Special Opportunities Portfolios,
neither such portfolios, nor the Growth & Income, Money Market, Large Cap
Growth, Managed, or Real Estate Equities Portfolios may purchase securities
which are subject to legal or contractual delays in or restrictions on resale.
The Sovereign Bond Portfolio may, however, purchase restricted securities,
including those eligible for resale to "qualified institutional buyers"
pursuant to Rule 144A under the securities Act of 1933, subject to a
nonfundamental restriction limiting all illiquid securities held by the
Portfolio to not more than 15% of the Portfolio's net assets.
(7) Purchase securities on margin, except for short-term credits as may
be necessary for the clearance of purchases or sales of securities, or
effect a short sale of any security. Neither the use of futures contracts
as permitted by restriction (3), above nor the use of option contracts as
permitted by restriction (3) above, shall be deemed to be the purchase of a
security on margin.
(8) Invest for the purpose of exercising control over or management of
any company.
(9) Unless received as a dividend or as a result of an offer of exchange
approved by the Securities and Exchange Commission or of a plan of
reorganization, purchase or otherwise acquire any security issued by an
investment company if the Portfolio would immediately thereafter own (a)
more than 3% of the outstanding voting stock of the investment company, (b)
securities of the investment company having an aggregate value in excess of
5% of the Portfolio's total assets, (c) securities of investment companies
having an aggregate value in excess of 10% of the Portfolio's total assets,
or (d) together with investment companies having the same investment
adviser as the Portfolio (and companies controlled by such investment
companies), more than 10% of the outstanding voting stock of any registered
closed-end investment company. A real estate or mortgage investment trust
is not considered an investment company. This restriction does not apply to
the Equity Index, Large Cap Value, Mid Cap Growth, Mid Cap Value, Small Cap
Growth, Small Cap Value, Strategic Bond, International Opportunities or
International Balanced Portfolios.
11
<PAGE>
(10) Purchase securities of any issuer, if (a) with respect to 75% of the
market value of its total assets, more than 5% of the Portfolio's total
assets taken at market value would at the time be invested in the
securities of such issuer, unless such issuer is the United States
Government or its agency or instrumentality, or (b) such purchase would at
the time result in more than 10% of the outstanding voting securities of
such issuer being held by the Portfolio. This restriction shall not apply
to the Special Opportunities, Mid Cap Growth, and International Balanced
Portfolios.
(11) Issue senior securities. For the purposes of this restriction, the
following shall not be deemed to be the issuance of a senior security: the
use of futures contracts as permitted by restriction 3, above; the use of
option contracts as permitted by restriction 3, above; and the use of
foreign currency contracts.
The Sovereign Bond, International Equities, Special Opportunities, Equity
Index, Large Cap Value, Mid Cap Value, Mid Cap Growth, Small Cap Value, Small
Cap Growth, Strategic Bond, International Opportunities, and the International
Balanced Portfolios will not purchase the securities of issuers conducting their
principal business activity in the same industry if, immediately after such
purchase, the value of the Portfolio's investments in such industry would exceed
25% of its total assets taken at market value. For the purpose of this
restriction, telephone, water, gas and electric public utilities are each
regarded as separate industries, and wholly-owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of their parent.
The International Equities, Short-Term U.S. Government, and Special
Opportunities Portfolios will not purchase any security, including any
repurchase agreement maturing in more than seven days, which is subject to legal
or contractual delays in or restrictions on resale, or which is not directly
marketable, if more than 10% of the assets of the Portfolio, taken at market
value, would be invested in such securities.
For purposes of any restrictions or limitation to which the Fund is subject,
no Portfolio, by entering into any futures contract or acquiring or writing any
option thereon or on any security or market index, shall be deemed
(1) to have acquired or invested in any securities of any exchange or
clearing corporation for any such instrument or
(2) to have acquired or invested in any debt obligations or in any stocks
comprising indexes on which such instrument is based, but which the
Portfolio does not hold directly in its portfolio.
BOARD OF TRUSTEES AND OFFICERS OF THE FUND
The following is a list of the current members of the Board of Trustees and
officers of the Fund, together with their principal occupations during the past
five years:
<TABLE>
<CAPTION>
POSITION HELD
NAME, ADDRESS WITH REGISTRANT PRINCIPAL OCCUPATION
------------- --------------- --------------------
<S> <C> <C>
Henry D. Shaw............. Chairman Senior Vice President, Individual
John Hancock Place and Trustee Retail Products, John Hancock
Boston, Massachusetts Mutual Life Insurance Company;
02117 Director, Hancock Leasing
Corporation
Thomas J. Lee............. Vice Chairman, Vice President, Life and Annuity
John Hancock Place President Services, John Hancock Mutual
Boston, Massachusetts and Trustee Life Insurance Company; Director,
02117 John Hancock Variable Life
Insurance Company
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS OFFICE HELD PRINCIPAL OCCUPATION
------------- ----------- --------------------
<S> <C> <C>
William H. Dykstra............ Trustee Director, Reed & Barton
Reed & Barton Corporation Corporation (silversmiths);
Taunton, Massachusetts 02780 Certified Public Accountant;
Trust Fund Commissioner, Town of
Braintree; Chairman of the Board
of Trustees and member of the
Investment Committee, East Boston
Savings Bank.
Joseph Kiebala, Jr. .......... Trustee Former Assistant Director, Woods
26 Pasture Road Hole Oceanographic Institution.
Box 407
Cataumet, Massachusetts 02534
Frank J. Zeo.................. Trustee Public affairs and management
90 Naugus Avenue consultant; Member of Board of
Marblehead, Massachusetts Directors, Careers For Later
01945 Years, Inc.; Honorary Trustee,
East Boston Savings Bank;
Honorary Trustee, Massachusetts
Taxpayers Foundation.
Elizabeth G. Cook............. Trustee Executive Director, The
85 East India Row Advertising Club of Greater
Boston, Massachusetts 02110 Boston.
Laura L. Mangan............... Secretary Assistant Regulatory and
John Hancock Place Compliance Officer, John Hancock
Boston, Massachusetts 02117 Mutual Life Insurance Company.
Raymond F. Skiba.............. Treasurer Director, Fund Operations, John
John Hancock Place Hancock Mutual Life Insurance
Boston, Massachusetts 02117 Company.
</TABLE>
Mr. Lee and Mr. Shaw are the only Trustees who are "interested persons" as
defined in the 1940 Act, as amended, and are members of the Fund's Executive
Committee. Although Ms. Mangan and Mr. Skiba are officers of the Fund, they are
not Trustees of the Fund.
13
<PAGE>
Certain members of the Fund's Board of Trustees own either variable annuity
contracts or variable life insurance policies funded by one of the Accounts
and, in that sense, have an interest in shares of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT MANAGEMENT AND OPERATING EXPENSES
John Hancock, the Fund's investment manager, is a Massachusetts corporation.
John Hancock's indirect wholly-owned subsidiary, Independence Investment
Associates, Inc. ("IIA"), serves as a sub-investment manager to the Growth &
Income, Large Cap Growth and Managed Portfolios. For this, John Hancock pays IIA
a fee at an annual rate of .1875% of the value of the average daily net assets
of the Growth & Income Portfolio. The advisory fee payable to IIA by John
Hancock for the Large Cap Growth and Managed Portfolios is at an annual rate of
.30% of the first $500,000,000 of the Portfolio's average daily net assets,
.2625% of the next $500,000,000 and .225% of all additional amounts.
IIA also serves as sub-investment manager to the Real Estate Equity
Portfolio. For this John Hancock pays IIA a fee at an annual rate of .30% of
the first $300,000,000 of the Portfolio's average daily net assets, .25% of the
next $800,000,000 and .20% of all additional amounts. Prior to May 1, 1993,
John Hancock's indirect subsidiary Hancock Realty Investors Incorporated
("HRII") also served as a sub-investment manager to the Portfolio and was paid
a fee by John Hancock which fee is now shared by John Hancock and IIA. As of
that date, however, the personnel of HRII primarily responsible for its
services to the Portfolio became employees of John Hancock and will continue in
that capacity to provide the services formerly furnished by HRII.
IIA also serves as sub-investment manager to the Short-Term U.S. Government
Portfolio. For this, John Hancock pays IIA a fee at an annual rate of .19% of
the first $250,000,000 of the Portfolio's average daily net assets, .17% of the
next $500,000,000, and .15% of all additional amounts.
John Hancock's indirect wholly-owned subsidiary, John Hancock Advisers, Inc.
("Advisers"), serves as a sub-investment manager to the International Equities
Portfolio. For this John Hancock pays Advisers a fee at an annual rate of .40%
of the first $250,000,000 of the Portfolio's average daily net assets, .37% of
the next $250,000,000 and .33% of all additional amounts. Advisers' wholly-owned
subsidiary, John Hancock International Advisers Limited ("International
Advisers"), also serves as a sub-investment manager to the International
Equities Portfolio. For this Advisers pays International Advisers a fee at an
annual rate of .25% of the first $250,000,000 of the Portfolio's average daily
net assets, .22% of the next $250,000,000 and .18% of all additional
amounts.
Advisers also serves as sub-investment manager to the Special Opportunities
Portfolio. For this, John Hancock pays Advisers a fee at an annual rate of .50%
of the first $250,000,000 of the Portfolio's average daily net assets, .47% of
the next $250,000,000, and .44% of all additional amounts.
IIA also serves as sub-investment manager to the Equity Index Portfolio.
For this John Hancock pays IIA a fee at an annual rate of .15% of the
Portfolio's average daily net assets.
Advisers also serves as sub-investment manager to the Sovereign Bond
Portfolio. For this, John Hancock pays Advisers a fee at an annual rate of
.1875% or the Portfolio's average daily net assets.
14
<PAGE>
Advisers also serves as sub-investment manager to the Small Cap Growth
Portfolio. For this, John Hancock pays Advisers a fee at an annual rate of .50%
of the Portfolio's average daily net assets.
T. Rowe Price Associates, Inc. ("T. Rowe Price") serves as sub-investment
manager to the Large Cap Value Portfolio. For this John Hancock pays T. Rowe
Price a fee at an annual rate of .50% of the Portfolio's average daily net
assets.
Rowe Price-Fleming International, Inc., ("Rowe Price-Fleming") serves as
sub-investment manager to the International Opportunities Portfolio. For this
John Hancock pays Rowe Price-Fleming a fee at an annual rate of .75% of the
first $20,000,000 of the Portfolio's average daily net assets, .60% of the next
$30,000,000, .50% of the next $150,000,000, and .50% of all the Portfolio's
assets once the Portfolio's average daily net assets reaches $200,000,000.
Janus Capital Corporation ("Janus") serves as sub-investment manger to the
Mid Cap Growth Portfolio. For this John Hancock pays Janus a fee at an annual
rate of .60% of the first $100,000,000 of the Portfolio's average daily net
assets and .55% on all additional amounts.
Neuberger & Berman Management, L.P. ("Neuberger & Berman") serves as sub-
investment manager to the Mid Cap Value Portfolio. For this John Hancock pays
Neuberger & Berman a fee at an annual rate of .55% of the first $250,000,000 of
the Portfolio's average daily net assets; .525% of the next $250,000,000; .50%
of the next $250,000,000; and .475% of all additional amounts.
INVESCO Management & Research, Inc. ("INVESCO") serves as sub-investment
manger to the Small Cap Value Portfolio. For this John Hancock pays INVESCO a
fee at an annual rate of .55% of the average daily net assets of the first
$100,000,000; .50% of the next $100,000,000; and .40% of all additional amounts.
Brinson Partners, Inc., ("Brinson") serves as sub-investment manager to the
International Balanced Portfolio. For this John Hancock pays Brinson a fee at
an annual rate of .50% of the first $100,000,000s of the Portfolio's average
daily net assets and .35% on all additional amounts.
J.P. Morgan Investment Management Inc. ("J.P. Morgan") serves as sub-
investment manager to the Strategic Bond Portfolio. For this John Hancock pays
J.P. Morgan a fee at an annual rate of .50% of the first $25,000,000 of the
Portfolio's average daily net assets, .40% of the next $50,000,000, .30% of the
next $75,000,000, and .25% on all additional amounts.
The fees of the sub-investment managers are solely the responsibility of
John Hancock and not the Fund.
Pursuant to its Investment Management Agreements with the Fund, John Hancock
has reserved the right to its name and "logo," which the Fund must cease using
upon termination of the Agreement.
Under the Investment Management Agreements, John Hancock provides the Fund
with office space, supplies and other facilities required for the business of
the Fund. It pays the compensation of Fund officers and employees and the
expenses of clerical services relating to the administration of the Fund.
Expenses not expressly assumed by John Hancock under the Investment Management
Agreement are paid by the Fund. These include, but are not limited to, taxes,
custodian and auditing fees, brokerage commissions, advisory fees, the
compensation of unaffiliated trustees, the cost of the Fund's fidelity bond,
the costs of printing and distributing periodic reports and proxy materials to
contract holders and other expenses related to the Fund's operations.
In 1993, and 1994, and 1995, the Fund paid a total of approximately
$9,520,000, $11,971,000, and ________ respectively, in investment advisory fees
for all the Portfolios.
Under the Investment Management Agreements, for any fiscal year in which the
normal operating costs and expenses of any Portfolio of the Series, exclusive
of the investment advisory fee, interest, brokerage commissions, taxes and
extraordinary expenses outside the control of John Hancock exceed 0.25% of that
Portfolio's average daily net assets, John Hancock will reimburse that Portfolio
promptly after the end of the fiscal year in an amount equal to such excess. In
1993, it reimbursed the International Equities Portfolio $69,537; and in 1994,
it reimbursed the International Equities Portfolio $17,500, the Special
Opportunities Portfolio $72,109, and the Short-Term U.S. Government Portfolio
$67,281. In 1994, it reimbursed __________________________________________.
UNDERWRITING AND ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to an Underwriting and Administrative Services Agreement, as amended
April 29, 1988, John Hancock serves as the Fund's principal underwriter and
provides, at its expense, all necessary administrative, clerical, legal,
accounting, and recordkeeping services which are not furnished to the Fund
pursuant to the Fund's Investment Management Agreements with John Hancock. John
Hancock receives no additional compensation from the Fund for the services it
performs pursuant to the Underwriting and Administrative Services Agreement.
The offering of the Fund's shares is continuous.
CUSTODIAN AGREEMENT
Chemical Banking Corporation is the Fund's custodian with respect to the
Growth & Income, Money Market, Large Cap Growth, Managed, Real Estate Equity,
and Short-Term U.S. Government Portfolios. Under a Custodian Agreement, amended
April 29, 1988, Manufacturers Hanover Trust Company of New York served as the
Fund's custodian until it merged with Chemical Bank in 1992 and assumed the name
Chemical Banking Corporation.
State Street Bank and Trust Company of Boston, Massachusetts, is the
custodian of the assets of the International Equities, Special Opportunities,
Equity Index, Large Cap Value, Mid Cap Value, Mid Cap Growth, Small Cap Value,
Small Cap Growth, Strategic Bond, International Opportunities, and International
Balanced Portfolios pursuant to a revised Custodian Agreement dated as of
January 30, 1995, and amended as of February, 1996. Investors Bank and Trust
Company ("IBT") of Boston, Massachusetts, is the custodian of the assets of the
Sovereign Bond Portfolio, pursuant to a custodian agreement dated as of April,
1995. The custodians' duties include safeguarding and controlling the Fund's
cash and investments, handling the receipt and delivery of securities, and
collecting interest and dividends on the Fund's investments. Portfolio
securities purchased in the United States are maintained in the custody of
Chemical Bank, State Street Bank or IBT, as appropriate although such securities
may be deposited in the Book-entry system of the Federal Reserve System or with
Depository Trust Company. The Trustees of the Fund have determined that, except
as otherwise permitted under applicable Securities and Exchange Commission "no-
action" letters or exemptive orders, it is in the Fund's best interest to hold
foreign assets in qualified foreign banks and depositories meeting the
requirements of Rule 17f-5 under the Investment Company Act of 1940, as
amended.
15
<PAGE>
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts, are the
independent auditors of the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Portfolios are charged with securities brokers' commissions, transfer
taxes, and other fees relating to their portfolio transactions. Expenses
identifiable to a particular Portfolio are charged to that Portfolio;
otherwise, expenses are prorated according to the size of the Portfolio.
Investments in debt securities are, however, generally traded on a net basis
through issuers or dealers acting for their own account as principals and not
as brokers; therefore, no brokerage commissions are payable on such
transactions, although the price to the Fund usually reflects a dealer "spread"
or "mark-up."
Brokerage commissions were paid by the Portfolios during 1993, 1994, and 1995,
respectively, as follows: $1,709,501, $1,356,742, and $1,612,272 by the Growth
and Income Portfolio; $197,181, $306,112, and $448,290 by the Large Cap Growth
Portfolio; $1,097,436, $865,560, and $1,158,098 by the Managed Portfolio;
$158,738, $187,145, and $105,581 by the Real Estate Equity Portfolio; and
$222,443, $725,100, and $639,586 by the International Equities Portfolio. In
1994 and 1995, brokerage commissions of $6,489 and $120,439, respectively were
paid for the Special Opportunities Portfolio. In fiscal 1996, orders for the
purchase and sale of Portfolio investments will be placed by John Hancock with
respect to the Money Market Portfolio; by IIA with respect to the Growth &
Income, Large Cap Growth, Managed, Real Estate Equity, Short-Term U.S.
Government, and Equity Index Portfolios; by Advisers and International Advisers
with respect to the International Equities Portfolio; and by Advisers with
respect to the Sovereign Bond, Special Opportunities, and Small Cap Growth
Portfolios; by T. Rowe Price with respect to the Large Cap Value Portfolio; by
Rowe-Price Fleming with respect to the International Opportunities Portfolio; by
Janus with respect to the Mid Cap Growth Portfolio; by Neuberger & Berman with
respect to the Mid Cap Value Portfolio; by INVESCO with respect to the Small Cap
Value Portfolio; by J.P. Morgan with respect to the Strategic Bond Portfolio; by
Brinson with respect to the International Balanced Portfolio. These Investment
Managers place orders in such manner as, in their opinion, will offer the best
price and market for the execution of each transaction. In seeking the best
price and execution for equity securities traded only in the over-the-counter
market, they normally deal directly with the principal market-makers.
The Investment Managers are governed in the selection of brokers and dealers
and the negotiation of brokerage commission rates (or the payment of net prices
in the case of debt securities) by the reliability and quality of the broker or
dealer's services. Some weight is given the availability and value of research
and statistical assistance furnished by the broker or dealer to the Investment
Manager but it is not possible to place a dollar value on such information and
services. Because it is only supplementary to the Investment Managers' own
research efforts, the receipt of research information and statistical
assistance is not expected to reduce their expenses measurably. Research and
statistical assistance typically furnished by brokers includes analysts'
reports on companies and industries, market forecasts, and economic analyses.
Research and statistical services furnished by brokers handling the Portfolios'
transactions may be used by the Investment Managers for the benefit of all of
the accounts managed by them and not all of such research and statistical
services may be used by the Investment Managers in connection with the
Portfolios.
The Investment Managers or the Portfolios will not at any time make a
commitment pursuant to an agreement or understanding with a broker because of
research services provided. Nor, except as set forth in the following sentence,
will the Investment Managers otherwise, through an internal allocation
procedure, direct brokerage upon any prescribed basis to a broker because of
research services provided. The sub-investment manager for each of the Mid Cap
Growth, and Mid Cap Value Portfolios may have an internal procedure for
allocating transactions in a manner consistent with its execution policy to
brokers that it has identified as providing superior executions, research, or
research related products or services which benefit its advisory clients,
including the Portfolio.
Evaluations of the overall reasonableness of any broker's commissions are made
by the Investment Managers' traders for the Portfolios on the basis of their
experience and judgment. To the extent permitted by Section 28(e) of the
Securities Exchange Act of 1934, such traders are authorized to pay a brokerage
commission on a particular transaction in excess of what another broker might
have charged in recognition of the value of the broker's brokerage or research
services, although such authority is generally expected to be used very
infrequently. The Mid Cap Growth, Mid Cap Value, and International Balanced
Portfolios, however, may be more likely to use such authority.
Although the Investment Managers will be responsible for the allocation of the
Portfolios' brokerage, their policies and practices in this regard must be
consistent with the foregoing and will at all times be subject to review by the
Board of Trustees of the Fund.
16
<PAGE>
The brokerage transactions for those Portfolios that can invest in securities
of companies domiciled in countries other than the United States are anticipated
to be normally conducted on the stock exchanges or other markets of those
countries in which the particular security is traded. Fixed commissions on
foreign stock exchange transactions are generally higher than negotiated
commissions available in the United States. Moreover, there is generally less
government supervision and regulation of foreign stock exchanges and broker-
dealers than in the United States. Settlement periods in non-U.S. markets may
differ from the normal settlement period in the United States.
THE TRUST'S ORGANIZATION AND SHARES
On April 12, 1988, pursuant to an Agreement and Plan or Reorganization dated
February 2, 1988, a majority of the outstanding shares of each Portfolio of
John Hancock Variable Series Fund I, Inc., a Maryland corporation, voted its
reorganization as a Massachusetts business trust effective April 29, 1988. On
that date, all of the existing assets of John Hancock Variable Series Fund I,
Inc., and all of its obligations were transferred to John Hancock Variable
Series Trust I, a trust organized on February 25, 1988, for a number of full
and fractional shares of beneficial interest of the Trust equal to the number
of full and fractional shares of John Hancock Variable Series Fund I, Inc.,
then outstanding.
The shares of beneficial interest of the Fund as reorganized are divided into
eighteen series: Growth & Income Portfolio, Sovereign Bond Portfolio, Money
Market Portfolio, Large Cap Growth Portfolio, Managed Portfolio, Real Estate
Equity Portfolio, International Equities Portfolio, Short-Term U.S. Government
Portfolio, Special Opportunities, Equity Index Portfolio, Large Cap Value
Portfolio, Mid Cap Value Portfolio, Mid Cap Growth Portfolio, Small Cap Value
Portfolio, Small Cap Growth Portfolio, Strategic Bond Portfolio, International
Opportunities Portfolio, and International Balanced Portfolio. Portfolio. The
Fund has the right to establish additional series and issue additional shares
without the consent of the shareholders.
The assets received by the Fund for the issuance or sale of shares of each
Portfolio and all income, earnings, profits, and proceeds thereof are
specifically allocated to that Portfolio. They constitute the underlying assets
of each Portfolio, are segregated on the books of the Fund, and are to be
charged with the expenses of such Portfolio. Any assets which are not clearly
allocable to a particular Portfolio or Portfolios are allocated in a manner
determined by the Board of Trustees. Accrued liabilities which are not clearly
allocable to one or more Portfolios would generally be allocated among the
Portfolios in proportion to their relative net assets before adjustment for
such unallocated liabilities. Each issued and outstanding share in a Portfolio
is entitled to participate equally in dividends and distributions declared with
respect to such Portfolio and in the net assets of such Portfolio upon
liquidation or dissolution remaining after satisfaction of outstanding
liabilities.
The shares of each Portfolio, when issued, will be fully paid and non-
assessable, and will have no preference, preemptive, exchange or similar
rights. Shares do not have cumulative voting rights.
Under the Declaration of Trust of the Fund, the Fund is not required to hold
an Annual Meeting. Normally there will be no shareholder meetings for the
purpose of electing Trustees unless and until fewer than a majority of the
Trustees then in office have been elected by the shareholders. Trustees elected
at the Annual Meeting of shareholders on April 26, 1995, will continue in office
until the next Annual Meeting unless they die, resign or are removed, either
for cause or without cause, at any meeting of shareholders by an affirmative
vote of a majority of the outstanding shares entitled to vote for the election
of Trustees. The Trustees may elect their own successors and appoint Trustees
to fill any vacancy only if, after filling the vacancy, at least two-thirds of
the Trustees then in office have been elected by the shareholders. If at any
time less than a majority of Trustees in office have been elected by the
shareholders, the Trustees must call a special shareholders' meeting promptly
for the purpose of electing the Board of Trustees.
The Trustees shall promptly call a meeting of shareholders for the purpose of
voting upon the question of removal of any Trustee or all of the Trustees when
requested in writing to do so by holders
17
<PAGE>
of 10% or more of the outstanding shares. Whenever ten or more shareholders
who have been such for at least six months and who hold in the aggregate either
shares having a net asset value of at least $25,000 or at least 1% of the
outstanding shares, whichever is less, apply to the Trustees in writing stating
that they wish to communicate with other shareholders with a view to obtaining
signatures to a request for a shareholders' meeting, for consideration of the
removal of any or all of the Trustees and accompanied by the material which
they wish to transmit, the Trustees will within five business days after
receipt either afford to such applicants access to the Fund's shareholder list
or inform such applicants as to the approximate number of shareholders of
record, and the approximate cost of mailing the material. If the Trustees elect
the latter, the Trustees, upon written request of such applicants, accompanied
by the material to be mailed and the reasonable expenses of mailing, shall
promptly mail such material to all shareholders of record, unless within five
business days the Trustees shall mail to such applicants and file with the
Securities and Exchange Commission, together with a copy of the material to be
mailed, a written statement signed by at least a majority of the Trustees to
the effect that in their opinion either such material is misleading or in
violation of applicable law and specifying the basis of such opinion.
In addition to transferring assets to the Fund through Variable Life
Account U and Variable Annuity Account U, JHVLICO also provided additional
capital for the Fund by purchasing through Variable Life Account U $350,000
worth of shares each of the Large Cap Growth and Managed Portfolios and through
Variable Life Account V $500,000 worth of shares each of the Real Estate Equity,
International Equities, Short-Term U.S. Government, and Special Opportunities
Portfolios. JHVLICO may withdraw such additional investment at some time.
However, before withdrawing any part of their interests in any Portfolio, John
Hancock or JHVLICO will consider any possible adverse impact the withdrawal
might have on that Portfolio.
If the contractholders show minimal interest in any Portfolio, the Fund's
Board of Trustees, by majority vote, may eliminate the Portfolio or substitute
shares of another investment company. Any such action by the Board would be
subject to compliance with any requirements for governmental approvals or
exemptions or for shareholder approval. The contractholders of such Portfolios
will be notified in writing of the Fund's intention to eliminate the Portfolio
and given 30 days to transfer amounts from such Portfolio to other Portfolios
without incurring a transaction fee. Amounts not transferred or withdrawn will
automatically be transferred, at the discretion of the Fund's management.
VOTING RIGHTS
All shares of the Fund of whatever class are entitled to one vote, and the
votes of all classes are cast on an aggregate basis, except on matters where
the interests of the Portfolios differ. Where the interests of the Portfolios
differ, the voting is on a Portfolio-by-Portfolio basis. Approval or
disapproval by the shareholders in one Portfolio on such a matter would not
generally be a prerequisite of approval or disapproval by shareholders in
another Portfolio; and shareholders in a Portfolio not affected by a matter
generally would not be entitled to vote on that matter. Examples of matters
which would require a Portfolio-by-Portfolio vote are changes in the
fundamental investment policy of a particular Portfolio and approval of
investment management or sub-investment management agreements.
REDEMPTION AND PRICING OF SHARES
Redemptions are normally made in cash, but the Fund reserves the right, at
its discretion, to make full or partial payment by assignment to the
appropriate Separate Account of portfolio securities at their value used in
determining the redemption price. In such cases, the Separate Account would
incur brokerage costs should it wish to liquidate these portfolio securities.
The right to redeem shares or to receive payment with respect to any redemption
of shares of any Portfolio may only be suspended (a) for
18
<PAGE>
any period during which trading on the New York Stock Exchange is restricted or
such Exchange is closed (other than customary weekend and holiday closings),
(b) for any period during which an emergency exists as a result of which
disposal of portfolio securities or determination of the net asset value of
that Portfolio is not reasonably practicable, or (c) for such other periods as
the Securities and Exchange Commission may by order permit for the protection
of shareholders of the Portfolio.
The value of the Money Market Portfolio's securities is stated at amortized
cost, which generally approximates market value. This involves valuing a
security at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates. While this method provides certainty in valuation, it may
result in periods during which the value of an instrument, as determined by
amortized cost, is higher or lower than the price the Portfolio would receive
upon the sale of the instrument.
The valuation of the Money Market Portfolio's securities based upon their
amortized cost is subject to the Portfolio's adherence to certain procedures
and conditions. The portfolio manager will purchase U.S. dollar-denominated
securities with remaining maturities of 397 days or less and will maintain a
dollar-weighted average portfolio maturity of no more than 90 days. The
portfolio manager will invest only in securities that are judged to present
minimal credit risk and that satisfy the quality and diversification
requirements of applicable rules and regulations of the SEC.
The Board of Trustees has established procedures designed to stabilize the
Money Market Portfolio's price per share, as computed for the purpose of sales
and redemptions, at $10.00. There can be no assurance, however, that the
Portfolio will at all times be able to maintain a constant $10.00 net asset
value per share. Such procedures include review of the Portfolio's holdings at
such intervals as is deemed appropriate to determine whether the Portfolio's
net asset value, calculated by using available market quotations, deviates from
$10.00 per share and, if so, whether such deviation may result in material
dilution, or is otherwise unfair to existing shareholders. In the event that it
is determined that such a deviation exists, the Board of Trustees will take
such corrective action as it regards as necessary and appropriate. Such action
may include selling portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity, withholding
dividends, or establishing a net asset value per share by using available
market quotations.
TAXES
In order for the Fund to qualify for Federal income tax treatment as a
regulated investment company, at least 90 percent of each Portfolio's gross
income for each taxable year must be derived from qualifying income, i.e.,
dividends, interest, income derived from loans of securities, and gains from
the sale of securities. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30 percent of the annual gross income of each Portfolio (without
deduction for losses).
To avoid taxation of capital gains, the Fund will distribute to the Separate
Accounts each Portfolio's net capital gains at least annually and net
investment income at least monthly. A Portfolio's
19
<PAGE>
net investment income from the time of the immediately preceding dividend
declaration consists of interest accrued or discount earned during such period
(including both original issue and market discount) on that Portfolio's
securities, less amortization of premium and the actual or estimated expenses
of the Portfolio applicable to that dividend period.
Each Portfolio must also be adequately diversified in its investments and
maintain its status as a regulated investment company ("RIC") in order that the
variable life insurance policies and annuity contracts funded through the
Separate Accounts retain their character as life insurance or an annuity and the
related tax benefits for annuity and insurance contract holders. John Hancock
will monitor continued compliance with the adequate diversification requirements
set forth in regulations issued by the Treasury Department. The diversification
requirements are briefly summarized below.
For a Portfolio to qualify as a regulated investment company ("RIC"), at the
end of each fiscal quarter of the Portfolio's taxable year, (i) at least 50% of
the market value of the Portfolio's assets must be represented by cash and cash
items, U.S. Government securities, securities of other RICs, and other
securities, with such other securities limited, in respect of any one issuer,
to an amount that does not exceed 10% of the voting securities of such issuer
of 5% of the value of the Portfolio's total assets; and (ii) not more than 25%
of the value of its assets may be invested in the securities (other than U.S.
Government securities and securities of other RICs) of any one issuer or two or
more issuers which the Portfolio controls and which are engaged in the same,
similar or related trades or businesses. Should a Portfolio, for any reason,
fail to qualify for tax treatment as a RIC, investment company, or otherwise
incur any tax liability, the investment performance of the Separate Accounts
could be adversely affected, to the detriment of the contractholders.
In addition, Treasury Department regulations require that no more than 55% of
the total value of the assets of each Portfolio be represented by any one
investment, no more than 70% by any two investments, no more than 80% by three
investments and no more than 90% by four investments. Generally, for purposes
of the regulations, all securities of the same issuer are treated as one
investment. In the context of U.S. Government securities (including any
security that is issued, guaranteed or insured by the United States or an
instrumentality of the United States), each U.S. Government agency or
instrumentality is treated as a separate issuer.
CALCULATION OF PERFORMANCE DATA
The Money Market Portfolio may advertise investment performance figures,
including its current yield and its effective yield. (See the following section
on "Calculation of Yield Quotation of the Money Market Portfolio" for a
complete description.)
YIELD AND TOTAL RETURN INFORMATION FOR ALL PORTFOLIOS OTHER THAN THE MONEY
MARKET PORTFOLIO
The non-money market Portfolios of the Fund may also advertise investment
performance figures, including yield. Each such Portfolio's yield is based upon
a stated 30-day period and is computed by dividing the
20
<PAGE>
net investment income per share earned during the period by the maximum
offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[([(a-b)/(cd)] + 1)/6/] -1]
Where: a= dividends and interest earned during the period
b= expenses accrued for the period (net of reimbursements, if
c= any)
the average daily number of shares outstanding during the
period that were entitled to receive dividends
d=
the maximum offering price (which is the net asset value)
per share on the last day of the period.
The following table shows the current yield for each of the Portfolios for
the 30-day period ended December 31, 1995:
<TABLE>
<CAPTION>
PORTFOLIO CURRENT YIELD
--------- -------------
<S> <C>
Large Cap Growth............................................
Sovereign Bond..............................................
International Equities......................................
Real Estate Equity..........................................
Growth & Income.............................................
Managed.....................................................
Short-Term U.S. Government..................................
Special Opportunities.......................................
</TABLE>
Each of the Portfolios may advertise its total return. Total return
quotations will be based upon a stated period and will be computed by finding
the average annual compounded rate of return over the stated period that would
equate an initial amount invested to the ending redeemable value of the
investment (assuming reinvestment of all distributions), according to the
following formula:
P(1 + T)/n/= ERV
Where: P= a hypothetical initial payment of $1,000
T= average annual total return
n= number of years
ERV= ending redeemable value at the end of the stated period
of a hypothetical $1,000 payment made at the beginning
of the stated period
The following table shows the average annual total return for each of the
Portfolios for the periods ending December 31, 1995:
<TABLE>
<CAPTION>
AVERAGE
ANNUALIZED RETURNS
---------------------- DATE
1 5 10 OF
PORTFOLIO YEAR* YEAR YEAR* INCEPTION
--------- ------ ------ ------ ---------
<S> <C> <C> <C> <C>
Large Cap Growth.............................
Sovereign Bond...............................
International Equities**.....................
Money Market.................................
Real Estate Equity...........................
Growth & Income..............................
Managed......................................
Short-Term U.S. Government...................
Special Opportunities........................
</TABLE>
- --------
*or since inception
**See "Changes in International Equities Portfolio's Investment Objectives and
Policies" in the Fund's prospectus.
21
<PAGE>
CALCULATION OF YIELD QUOTATIONS OF THE MONEY MARKET PORTFOLIO
The Money Market Portfolio's yield is its current investment income expressed
in annualized terms. The current yield is based on a specified seven-calendar-
day period. It is computed by (1) determining the net change (exclusive of
capital changes) in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, (2) dividing the net
change in account value by the value of the account at the beginning of the
base period to get the base period return, then (3) multiplying the base period
return by 52.15 (365 divided by 7). The resulting yield figure is carried to
the nearest hundredth of one percent.
The calculations include the value of additional shares purchased with any
dividends paid on the original share and the value of dividends declared on
both the original share and any such additional shares. The capital changes
excluded from the calculation are realized capital gains and losses from the
sale of securities and unrealized appreciation and depreciation.
Compound (effective) yield for the Portfolio will be computed by dividing the
seven-day annualized yield as defined above by 365, adding 1 to the quotient,
raising the sum to the 365th power, and subtracting 1 from the result.
For the seven-day period ending December 31, 1995, the Money Market
Portfolio's current yield was ____%; its effective yield was ____%.
The Portfolio's yield will fluctuate depending upon market conditions, the
type, quality, and maturity of the instruments in the Portfolio, and its
expenses. Current yield information should not be deemed comparable to bank
deposits or other investments which pay a fixed return or which calculate
yields on a different basis.
CHARGES UNDER VARIABLE LIFE INSURANCE AND VARIABLE ANNUITY POLICIES
Yield and total return quotations do not reflect any charges imposed on any
Separate Account or otherwise imposed pursuant to JHVLICO's and John Hancock's
variable life insurance and variable annuity policies. Therefore, the yield or
total return of any Portfolio is not comparable to that of a publicly available
fund. Yield or total return quotations should not be considered representative
of the Portfolio's yield or total return in any future period.
ADDITIONAL INFORMATION
LEGAL MATTERS
Freedman, Levy, Kroll & Simonds of Washington, D.C., have advised John
Hancock on certain legal matters relating to the Federal securities laws.
REPORTS
Annual and semi-annual reports containing financial statements of the Fund,
as well as voting instructions soliciting material for the Fund, will be sent
to variable life insurance and annuity contractholders having an interest in
the Fund.
FINANCIAL STATEMENTS
The Fund's financial statements appearing in its Annual Report to
shareholders and the report of Ernst & Young LLP, independent auditors of the
Fund, which appears therein, are incorporated by reference into the Statement
of Additional Information. A free copy of the Annual Report to contractholders
may be obtained by writing to the address which appears on the cover page of
this Statement of Additional Information.
22
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements.
1. Financial Highlights (Part A).
2. The following statements and schedules for each of the Fund's nine
Portfolios that were being offered on December 31, 1995 (Stock, Bond, Money
Market, Select Stock, Managed, Real Estate Equity, International, Short-
Term U.S. Government, and Special Opportunities) are incorporated by
reference into Part B of the Fund's Registration Statement from the Fund's
Annual Report to contractholders, dated December 31, 1995. (To be filed by
amendment.)
a. Statement of Assets and Liabilities, at December 31, 1995. (To be
filed by amendment.)
b. Statement of Operations, for the year ended December 31, 1995. (To
be filed by amendment.)
c. Statements of Changes in Net Assets, for each of the two years in
the period ended December 31, 1995 for all Portfolios except Special
Opportunities Portfolio for the period from May 6, 1994 (commencement
of operations) to December 31, 1995, and Short-Term U.S. Government
Portfolio for the period from May 1, 1994 (commencement of operations)
to December 31, 1995. (To be filed by amendment.)
d. Schedule of Investments, at December 31, 1995. (To be filed by
amendment.)
e. Notes to Financial Statements. (To be filed by amendment.)
f. Report of Ernst & Young LLP, Independent Auditors. (To be filed by
amendment.)
(b) Exhibits:
1. Declaration of Trust of John Hancock Variable Series Trust I, dated
February 21, 1988, included in Post-Effective Amendment No. 3 to this File
No. 33-2081, filed in April, 1988.
2. By-Laws of John Hancock Variable Series Trust I, adopted April 12,
1988, included in Post-Effective Amendment No. 3 to this File No. 33-2081,
filed in April, 1988.
3. Not Applicable.
4. Not Applicable.
5. a. Investment Management Agreement by and between John Hancock
Variable Series Trust I, and John Hancock Mutual Life Insurance Company
dated April 12, 1988 relating to the Initial Portfolios, included in Post-
Effective Amendment No. 4 to this File No. 33-2081, filed in April, 1989.
b. Sub-Investment Management Agreement among John Hancock Variable Series
Trust I, Independence Investment Associates, Inc., and John Hancock Mutual
Life Insurance Company dated April 29, 1988, relating to the Growth &
Income, Large Cap Growth, and Managed Portfolios, included in Post-
Effective Amendment No. 4 to this File No. 33-2081, filed in April, 1989.
c. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Independence Investment Associates, and John Hancock Mutual Life
Insurance Company, pertaining to the Real Estate Equity Portfolio, included
in Post-Effective Amendment No. 9 to this File No. 33-2081, filed March 1,
1994.
d. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, John Hancock Mutual Life Insurance Company and John Hancock
Advisers, Inc., relating to the International Equities Portfolio, included
in Post-Effective Amendment No. 3 to this File No. 33-208l, filed in April
15, 1988.
e. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, John Hancock Mutual Life Insurance Company, John Hancock Advisers,
Inc. and John Hancock
II-1
<PAGE>
International Advisers, Limited, relating to the International Equities
Portfolio, included in Post-Effective Amendment No. 3 to this File No. 33-
208l, filed in April, 1988.
f. Investment Management Agreement by and between John Hancock Variable
Series Trust I and John Hancock Mutual Life Insurance Company dated April
12, 1988, relating to the Real Estate Equity and International Portfolios,
included in Post-Effective Amendment No. 3 to this File No. 33-208l, filed
in April, 1988.
g. Investment Management Agreement By and Between John Hancock Variable
Series Trust I and John Hancock Mutual Life Insurance Company relating to
the Short-Term U.S. Government and Special Opportunities Portfolios,
included in Post-Effective Amendment No. 9 to this File No. 33-2081, filed
March 1, 1994.
h. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Independent Investment Associates, Inc. and John Hancock Mutual
Life Insurance Company relating to the Short-Term U.S. Government
Portfolio, included in Post-Effective Amendment No. 9 to this File No. 33-
2081, filed March 1, 1994.
i. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, John Hancock Advisers, Inc., and John Hancock Mutual Life
Insurance Company relating to the Special Opportunities Portfolio, included
in Post-Effective Amendment No. 9 to this File No. 33-2081, filed March 1,
1994.
j. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, John Hancock Advisers, Inc., and John Hancock Mutual Life
Insurance Company, relating to the Sovereign Bond Portfolio, included in
Post-Effective Amendment No. 11 to this File No. 33-2081, filed April 29,
1995.
k. Investment Management Agreement By and Between John Hancock Variable
Series Trust I and John Hancock Mutual Life Insurance Company relating to
the Equity Index, Large Cap Value, Mid Cap Growth, Mid Cap Value, Small Cap
Growth, Small Cap Value, Strategic Bond, International Opportunities, and
International Balanced Portfolios. (To be filed by amendment.)
l. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Independence Investment Associates, Inc., and John Hancock Mutual
Life Insurance Company relating to the Equity Index Portfolio. (To be filed
by amendment.)
m. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, T. Rowe Price Associates, Inc., and John Hancock Mutual Life
Insurance Company, relating to the Large Cap Value Portfolio. (To be filed
by amendment.)
n. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Janus Capital Corporation, and John Hancock Mutual Life Insurance
Company, relating to the Mid Cap Growth Portfolio. (To be filed by
amendment.)
o. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Neuberger & Berman Management, L.P., and John Hancock Mutual Life
Insurance Company, relating to the Mid Cap Value Portfolio. (To be filed by
amendment.)
p. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, John Hancock Advisers, Inc., and John Hancock Mutual Life
Insurance Company, relating to the Small Cap Growth Portfolio. (To be filed
by amendment.)
q. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, INVESCO Management & Research, and John Hancock Mutual Life
Insurance Company, relating to the Small Cap Value Portfolio. (To be filed
by amendment.)
r. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, J.P. Morgan Investment Management, Inc., and John Hancock Mutual
Life Insurance Company, relating to the Strategic Bond Portfolio. (To be
filed by amendment.)
II-2
<PAGE>
s. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Rowe Price-Fleming International, Inc., and John Hancock Mutual
Life Insurance Company, relating to the International Opportunities
Portfolio. (To be filed by amendment.)
t. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Brinson Partners, Inc., and John Hancock Mutual Life Insurance
Company, relating to the International Balanced Portfolio. (To be filed by
amendment.)
6. Underwriting and Administrative Services Agreement by and between John
Hancock Variable Series Trust I and John Hancock Mutual Life Insurance
Company, dated April 29, 1988, included in Post-Effective Amendment No. 4
to this File No. 33-2081, filed in April, 1989.
7. Not Applicable.
8. a. Custodian Agreement among John Hancock Variable Series Fund I,
Inc., John Hancock Mutual Life Insurance Company, and Manufacturers Hanover
Bank, dated January 16, 1986, included in Exhibit 8 to Pre-Effective
Amendment No. 1 to this File No. 33-2081, filed March 13, 1986.
b. Custodian Agreement Between John Hancock Variable Series Trust I and
State Street Bank and Trust Company, dated January 30, 1995, relating to
the International Equities and Special Opportunities Portfolios, included
in Post-Effective Amendment No. 10 to this File No. 33-2081, filed March 2,
1995.
c. Custodian Agreement among John Hancock Variable Series Trust I and
Investors Bank and Trust Company, relating to the Sovereign Bond Portfolio
included in Post-Effective Amendment No. 11 to this File No. 33-2081, filed
April, 1995.
9. Amendment dated April 29, 1988 to Transfer Agency Agreement by and
between John Hancock Variable Series Fund I, Inc., and John Hancock Mutual
Life Insurance Company, January 27, 1986, which was priorly included in
Exhibit 9 to Pre-Effective Amendment No. 1 to this File No. 33-2081, filed
March 13, 1986, included in Post-Effective Amendment No. 4 to this File No.
33-2081, filed in April, 1989.
10. Opinion and Consent of Counsel regarding the legality of the
securities being registered. (To be filed by amendment.)
11. Consent of Ernst & Young LLP, independent auditors. (To be filed by
amendment.)
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. Not Applicable.
16. Not Applicable. Registrant does not use performance information in
any advertising materials; therefore, Registrant is not required to provide
schedules for the computation of performance quotations provided in this
Registration Statement.
17. Diagram of Subsidiaries of John Hancock Mutual Life Insurance
Company. (To be filed by amendment.)
18. Powers of Attorney for Ms. Cook and Mr. Lee included in Post-
Effective Amendment No. 9 to this Form N-1A Registration Statement (File
No. 33-2081), filed March 1, 1994. Powers of Attorney of Messrs. Shaw, Zeo,
Dykstra and Kiebala, included in Post-Effective Amendment No. 3 to this
Form N-1A Registration Statement (File No. 33-208l), filed in April, 1988.
19. Annual Report of John Hancock Variable Series Trust I, dated December
31, 1994. (To be filed by amendment.)
II-3
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Currently, shares of the Registrant are sold only to (1) John Hancock
Variable Life Accounts U, V and S, separate investment accounts created
pursuant to Massachusetts law, to fund variable life insurance policies issued
by John Hancock Variable Life Insurance Company ("JHVLICO"), a stock life
insurance company organized under the laws of Massachusetts; (2) John Hancock
Variable Annuity Accounts U and V, separate investment accounts created
pursuant to Massachusetts law to fund variable annuity contracts issued by
John Hancock Mutual Life Insurance Company, ("John Hancock"), a life insurance
company organized under the laws of Massachusetts; (3) John Hancock Mutual
Variable Life Insurance Account UV, a separate investment account created
pursuant to Massachusetts law to fund variable life insurance policies issued
by John Hancock; and (4) John Hancock Variable Annuity Account I, a separate
investment account created pursuant to created pursuant to Massachusetts law
to fund variable annuity contracts issued by JHVLICO. (The seven variable
accounts are hereinafter referred to as "Separate Accounts.") The purchasers
of variable life insurance policies and variable annuity contracts issued in
connection with such Separate Accounts will have the opportunity to instruct
JHVLICO and John Hancock, respectively, with regard to the voting of the
Registrant's shares held by the Separate Account as to certain matters.
Subject to such voting instructions, John Hancock and JHVLICO directly control
the Registrant, and the Separate Accounts currently are its sole shareholders.
Subsequently, shares of the Registrant may be sold to other separate
investment accounts of John Hancock and JHVLICO. A diagram of the subsidiaries
of John Hancock is attached as Exhibit 17 to Post-Effective Amendment No.
to this Form N-1A Registration Statement.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
The number of Separate Account record holders of each class of securities of
Registrant are as follows:
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
<S> <C>
Growth & Income Portfolio Shares Seven
Sovereign Bond Portfolio Shares Seven
Money Market Portfolio Shares Seven
Large Cap Growth Portfolio Shares Seven
Managed Portfolio Shares Seven
Real Estate Equity Portfolio Shares Seven
International Equities Portfolio Shares Seven
Short-Term U.S. Government Portfolio Shares Seven
Special Opportunities Portfolio Shares Seven
Equity Index Portfolio Shares Seven
Large Cap Value Portfolio Shares Seven
Mid Cap Growth Portfolio Shares Seven
Mid Cap Value Portfolio Shares Seven
Small Cap Growth Portfolio Shares Seven
Small Cap Value Portfolio Shares Seven
Strategic Bond Portfolio Shares Seven
International Opportunities Portfolio Shares Seven
International Balanced Portfolio Shares Seven
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is made to Article VI of the Registrant's By-Laws (Exhibit 2 to
Post-Effective Amendment No. 3 to this Registration Statement dated April,
1988), which provides that the Trust shall indemnify or advance any expenses
to the trustees, shareholders, officers, or employees of the Trust to the
extent set forth in the Declaration of Trust.
II-4
<PAGE>
Sections 6.3 through 6.17 of the Declaration of Trust (Exhibit I to Post-
Effective Amendment No. 3 to this Registration Statement dated April, 1988),
relate to the indemnification of trustees, shareholders, officers and
employees and are hereby incorporated by references. It is provided that the
Registrant shall indemnify any Trustee made a party to any proceeding by
reason of service in that capacity if the Trustee (a) acted in good faith and
(b) reasonably believed, (1) in the case of conduct in the Trustee's official
capacity with the Trust, that the conduct was in the best interest of the
Trust and (2) in all other cases, that the conduct was at least not opposed to
the best interests of the Trust, and (c) in the case of any criminal
proceeding, the Trust shall indemnify the Trustee if the Trustee acted in good
faith and had no reasonable cause to believe that the conduct was unlawful.
Indemnification may not be made by the Trust unless authorized in each case by
a determination by the Board of Trustees or by special legal counsel or by the
shareholders. Neither indemnification nor advancement of expenses may be made
if the Trustee or officer has incurred liability by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of duties
involved in the conduct of his office ("Disabling Conduct"). The means for
determining whether indemnification shall be made shall be (1) a final
decision on the merits by a court or other body before whom the proceeding was
brought that the person to be indemnified was not liable by reason of
Disabling Conduct or (2) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that such person was not
liable by reason of Disabling Conduct. Such latter determination may be made
either (a) by the vote of a majority of a quorum of Trustees who are neither
"interested persons" of the Trust (as defined in the 1940 Act, as amended) nor
parties to the proceeding or (b) by an independent legal counsel in a written
opinion. The advancement of legal expenses may not occur unless the Trustee or
officer agrees to repay the advance (unless it is ultimately determined that
he is entitled to indemnification) and at least one of three conditions is
satisfied: (1) he provides security for his agreement to repay, (2) the
Registrant is insured against loss by reason of lawful advances, or (3) a
majority of a quorum the Trustees who are not interested persons and are not
parties to the proceedings, or independent counsel in a written opinion,
determine that there is reason to believe that the Trustee or officer will be
found entitled to indemnification.
Similar types of provisions dealing with the indemnification of the
Registrant's officers and directors is included in several exhibits attached
to the original filing and subsequent amendments to this Registration
Statement: specifically, Section 14 of the Investment Management Agreement by
and between John Hancock Variable Series Trust I and John Hancock Mutual Life
Insurance Company (Exhibit 5(k) to Post-Effective Amendment No. 12 to this
Registration Statement dated February 13, 1996), Section 14 of the Investment
Management Agreement by and between John Hancock Variable Series Trust I and
John Hancock Mutual Life Insurance Company (Exhibit 5(g) to Post-Effective
Amendment No. 9 to this Registration Statement dated March, 1994), Section 14
of the Investment Management Agreement by and between John Hancock Variable
Series Fund I, Inc., and John Hancock Mutual Life Insurance Company (Exhibit
5(a) to Post-Effective Amendment No. 4 to this Registration Statement, dated
April, 1989), Section 7 of the Underwriting and Administrative Services
Agreement by and between John Hancock Variable Series Trust I, and John
Hancock Mutual Life Insurance Company (Exhibit 6 to Post-Effective Amendment
No. 3 to this Registration Statement dated April, 1988), and Section 15 of the
Transfer Agency Agreement by and between John Hancock Variable Series Fund I,
Inc., and John Hancock Mutual Life Insurance Company (Exhibit 9 to Pre-
Effective Amendment No. 1 to this Registration Statement dated March 13,
1986).
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers, and controlling persons of the
Registrant pursuant to the Registrant's By-Laws or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange
Commission (the "Commission"), such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit, or proceeding) is asserted by such trustee, officer, or controlling
person in connection with the securities being registered, then the Registrant
will,
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unless in the opinion of its counsel the matter has been settled by a
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information pertaining to any business and other connections of Registrant's
investment adviser, John Hancock, is hereby incorporated by reference from the
section of Part A of this Form N-1A (the "Prospectus") captioned "Management
of the Fund," Item 7 of Part II of John Hancock's Form ADV [filed separately
with the Commission (File No. 801-8352)], and Item 10 of John Hancock's Form
BD [filed separately with the Commission (File No. 8-15661)]. Information
pertaining to any business and other connections of Registrant's sub-
investment advisers, Independence Investment Associates, Inc. ("IIA"), John
Hancock Advisers Inc. ("Advisers"), John Hancock International Advisers,
Limited ("International Advisers"), T. Rowe Price Associates, Inc. ("T. Rowe
Price"), Janus Capital Corporation ("Janus"), Neuberger & Berman Management,
L.P. ("Neuberger & Berman"), INVESCO Management & Research ("INVESCO"), J.P.
Morgan Investment Management Inc. ("J.P. Morgan"), Rowe Price-Fleming
International, Inc. ("Rowe Price-Fleming"), and Brinson Partners, Inc.
("Brinson") is incorporated by reference from the section of the Prospectus
captioned "Management of the Fund" and Item 7 of Part II of the Forms ADV of
IIA, (File No. 801-18048), Advisers (File No. 801-8124), Advisers
International (File No. 801-29498), T. Rowe Price (File No. 801- ), Janus
(File No. 801- ), Neuberger & Berman (File No. 801-3908), INVESCO (File No.
801- ), J.P. Morgan (File No. 801- ), Rowe Price-Fleming (File No. 801-
), Brinson (File No. 801-34910) filed separately with the Commission.
The other businesses, professions, vocations, and employment of a
substantial nature of John Hancock's, IIA's, Advisers' and International
Advisers', directors and officers during the past two years are hereby
incorporated by reference, respectively, from Schedules A and D of John
Hancock's Form ADV and from Schedules A and D of the Forms ADV of IIA,
Advisers and International Advisers.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) John Hancock acts as principal underwriter and distributor of the
Registrant's shares on a best-efforts basis and receives no fee or commission
for its underwriting and distribution services. Although John Hancock performs
investment advisory services for other separate accounts and advisory clients,
none of these is a registered investment company.
(b) The name and principal business address of each officer, director, or
partner of John Hancock as well as their positions and officers with John
Hancock are hereby incorporated by reference from Schedules A and D of John
Hancock's Form BD [filed separately with the Commission (File No. 8-15661)].
None of the directors or partners of John Hancock hold positions with the
Registrant. Two officers of John Hancock hold positions with the Registrant:
Henry D. Shaw is Chairman of the Registrant and Thomas J. Lee is President and
Vice-Chairman.
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The following entities prepare, maintain, and preserve the records required
by Section 31(a) of the Act for the Registrant through written agreements
between the parties to the effect that such services will be provided to the
Registrant for such periods prescribed by the Rules and Regulations of the
Commission under the Act and such records will be surrendered promptly on
request:
Chemical Banking Corporation, 4 New York Plaza--2nd Floor, New York, New
York 10015, serves as custodian for the Registrant for all Portfolios other
than the Managed, Sovereign Bond, International
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Equities, Special Opportunities, Equity Index, Large Cap Value, Mid Cap
Growth, Mid Cap Value, Small Cap Growth, Small Cap Value, Strategic Bond,
International Opportunities, and International Balanced Portfolio and in such
capacity will keep records regarding securities in transfer, bank statements,
and cancelled checks.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110 will serve as custodian for the Registrant with respect to
Managed, International Equities, Special Opportunities, Equity Index, Large
Cap Value, Mid Cap Growth, Mid Cap Value, Small Cap Growth, Small Cap Value,
Strategic Bond, International Opportunities, and International Balanced
Portfolios and in such capacity will keep records regarding securities in
transfer, bank statements and cancelled checks.
Investors Bank & Trust Company, 24 Federal Street, Boston, Massachusetts
02110, serves as custodian for the Registrant with respect to the Sovereign
Bond Portfolio and in such capacity will keep records regarding securities in
transfer, bank statements and cancelled checks.
John Hancock, John Hancock Place, P.O. Box 111, Boston, Massachusetts 02117,
will serve as Registrant's transfer agent, investment adviser, principal
underwriter, and distributor and, in such capacities, will keep records
regarding shareholders' account records, cancelled stock certificates, and all
other records required by Section 31(a) of the Act. John Hancock, as
Investment Adviser will keep records related to transactions in the Bond and
Money Market Portfolios.
IIA, 53 State Street, Boston, Massachusetts 02109, will serve as
Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the Growth & Income, Large
Cap Growth, Managed, Real Estate Equity, Short-Term U.S. Government, and
Equity Index Portfolios.
Advisers, 101 Huntington Avenue, Boston, Massachusetts 02199, and
International Advisers, 37 Park Street, London W1Y3H6, England, will serve as
Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the International Equities
Portfolio.
Advisers, 101 Huntington Avenue, Boston, Massachusetts 02199, will serve as
Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the Special Opportunities,
Sovereign Bond, and Small Cap Growth Portfolios.
T. Rowe Price, 100 East Pratt Street, Baltimore, Maryland 21202, will serve
as Registrant's sub-investment manager and, in such capacity, will keep
records related to transactions in portfolio securities of the Large Cap Value
Portfolio.
Janus, 100 Fillmore Street, Denver, Colorado 80206, will serve as
Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the Mid Cap Growth
Portfolio.
Neuberger & Berman, 605 Third Avenue, New York, New York 10158, will serve
as Registrant's sub-investment manager and, in such capacity, will keep
records related to transactions in portfolio securities of the Mid Cap Value
Portfolio.
INVESCO, 101 Federal Street, Boston, Massachusetts 02110, will serve as
Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the Small Cap Value
Portfolio.
J.P. Morgan, 522 Fifth Avenue, New York, New York, 10036, will serve as
Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the Strategic Bond
Portfolio.
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<PAGE>
Rowe Price-Fleming, 100 East Pratt Street, Baltimore, Maryland 21202, will
serve as Registrant's sub-investment manager and, in such capacity, will keep
records related to transactions in portfolio securities of the International
Opportunities Portfolio.
Brinson, 209 South LaSalle Street, Chicago, Illinois 60604, will serve as
Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the International Balanced
Portfolio.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
Registrant undertakes to furnish to each person to whom a prospectus is
delivered with a copy of Registrant's latest annual report to shareholders,
upon request and without charge.
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<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, AS AMENDED, THE REGISTRANT HAS DULY CAUSED
THIS POST-EFFECTIVE AMENDMENT TO ITS REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF
BOSTON, AND THE COMMONWEALTH OF MASSACHUSETTS, ON THE 9TH DAY OF FEBRUARY,
1996.
John Hancock Variable Series
Trust I
/s/ Henry D. Shaw
By: ______________________________
Henry D. Shaw, Chairman
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST-
EFFECTIVE AMENDMENT TO ITS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE DATE
--------- ----
/s/ Raymond F. Skiba
By: ____________________________________
Raymond F. Skiba 2/9/96
Treasurer (Principal Financial and
Accounting Officer)
/s/ Henry D. Shaw
By: ____________________________________
Henry D. Shaw 2/9/96
Chairman (Principal Executive Officer)
For himself and as attorney for:
William H. Dykstra
Trustee
Joseph Kiebala, Jr.
Trustee
Frank J. Zeo
Trustee
Elizabeth G. Cook
Trustee
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<PAGE>
INDEX TO EXHIBITS
FORM N-1A
JOHN HANCOCK VARIABLE SERIES TRUST I
5. k. Investment Management Agreement By and Between John Hancock Variable
Series Trust I and John Hancock Mutual Life Insurance Company relating to the
Equity Index, Large Cap Value, Mid Cap Growth, Mid Cap Value, Small Cap
Growth, Small Cap Value, Strategic Bond, International Opportunities, and
International Balanced Portfolios. (To be filed by amendment.)
l. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Independence Investment Associates, Inc., and John Hancock Mutual
Life Insurance Company relating to the Equity Index Portfolio. (To be filed by
amendment.)
m. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, T. Rowe Price Associates, Inc., and John Hancock Mutual Life
Insurance Company, relating to the Large Cap Value Portfolio. (To be filed by
amendment.)
n. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Janus Capital Corporation, and John Hancock Mutual Life Insurance
Company, relating to the Mid Cap Growth Portfolio. (To be filed by amendment.)
o. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Neuberger & Berman Management, L.P., and John Hancock Mutual Life
Insurance Company, relating to the Mid Cap Value Portfolio. (To be filed by
amendment.)
p. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, John Hancock Advisers, Inc., and John Hancock Mutual Life Insurance
Company, relating to the Small Cap Growth Portfolio. (To be filed by
amendment.)
q. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, INVESCO Management & Research, and John Hancock Mutual Life Insurance
Company, relating to the Small Cap Value Portfolio. (To be filed by
amendment.)
r. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, J.P. Morgan Investment Management, Inc., and John Hancock Mutual Life
Insurance Company, relating to the Strategic Bond Portfolio. (To be filed by
amendment.)
s. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Rowe Price-Fleming International, Inc., and John Hancock Mutual Life
Insurance Company, relating to the International Opportunities Portfolio. (To
be filed by amendment.)
t. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Brinson Partners, Inc., and John Hancock Mutual Life Insurance
Company, relating to the International Balanced Portfolio. (To be filed by
amendment.)
10. Opinion and Consent of Counsel regarding the legality of the securities
being registered. (To be filed by amendment.)
11. Consent of Ernst & Young LLP, independent auditors. (To be filed by
amendment.)
17. Diagram of Subsidiaries of John Hancock Mutual Life Insurance Company.
(To be filed by amendment.)
19. Annual Report of John Hancock Variable Series Trust I, dated December
31, 1994. (To be filed by amendment.)
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