<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1997
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. 16 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
AMENDMENT NO. 16 [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)
SANDRA M. DaDALT, 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
[X] on May 1, 1997 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
[_] 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
[X]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, 1996 WAS FILED ON FEBRUARY 26, 1997.
<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 eighteen Portfolios:
Managed Portfolio: to achieve maximum long-term total return consistent with
prudent investment risk, through investment in common stocks, convertible
debentures, convertible preferred stocks, bonds, and money market instruments.
Growth & Income Portfolio: to achieve intermediate and long-term growth of
capital with income as a secondary consideration, through investment
principally in common stocks (and securities convertible into or with rights
to purchase common stocks) of companies believed to offer growth potential
over both the intermediate and the long-term.
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.
Large Cap Growth 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.
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.
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.
Special Opportunities Portfolio: to achieve long-term capital appreciation
by emphasizing investments in equity securities of issuers in various economic
sectors.
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.
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.
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.
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.
International Equities Portfolio: to achieve long-term growth of capital by
investing primarily in foreign equity securities.
International Opportunities Portfolio: to provide capital appreciation
through investment in common stocks of primarily well-established, non-United
States companies.
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, 1997
The Date of The Statement of Additional Information is May 1, 1997
<PAGE>
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.
Sovereign 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.
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.
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.
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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
GENERAL INFORMATION....................................................... 1
SYNOPSIS OF EXPENSE INFORMATION........................................... 2
FINANCIAL HIGHLIGHTS...................................................... 3
INVESTMENT OBJECTIVES AND POLICIES........................................ 23
Managed Portfolio....................................................... 23
Growth & Income Portfolio............................................... 23
Equity Index Portfolio.................................................. 23
Large Cap Value Portfolio............................................... 24
Large Cap Growth Portfolio.............................................. 25
Mid Cap Value Portfolio................................................. 25
Mid Cap Growth Portfolio................................................ 25
Special Opportunities Portfolio......................................... 26
Real Estate Equity Portfolio............................................ 27
Small Cap Value Portfolio............................................... 27
Small Cap Growth Portfolio.............................................. 28
International Balanced Portfolio........................................ 28
International Equities Portfolio........................................ 29
International Opportunities Portfolio................................... 29
Short-Term U.S. Government Portfolio.................................... 30
Sovereign Bond Portfolio................................................ 30
Strategic Bond Portfolio................................................ 31
Money Market Portfolio.................................................. 31
BROKERAGE COMMISSIONS AND PORTFOLIO TURNOVER.............................. 32
RISK FACTORS.............................................................. 32
INVESTMENT RESTRICTIONS................................................... 37
INVESTMENT PRACTICES...................................................... 38
Repurchase Agreements................................................... 38
Covered Call and Protective Put Options................................. 39
Hedging Strategies...................................................... 39
Risks of Options and Futures Transactions............................... 42
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.......... 43
Foreign Currency Management Strategies.................................. 44
Rule 144A Securities.................................................... 46
When Issued Securities and Forward Commitments.......................... 46
Portfolio Lending....................................................... 47
The S&P 500............................................................. 47
MANAGEMENT OF THE FUND.................................................... 48
SHARES, TAXES, AND DIVIDENDS.............................................. 54
PURCHASE AND REDEMPTION OF SHARES......................................... 55
NET ASSET VALUE........................................................... 55
INVESTMENT PERFORMANCE.................................................... 56
CHANGES IN INTERNATIONAL EQUITIES PORTFOLIO'S INVESTMENT OBJECTIVE AND
POLICIES................................................................. 57
APPENDIX A: PERFORMANCE FIGURES........................................... 58
</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 (Managed, Growth & Income, Equity
Index, Large Cap Value, Large Cap Growth, Mid Cap Value, Mid Cap Growth,
Special Opportunities, Real Estate Equity, Small Cap Value, Small Cap Growth,
International Balanced, International Equities, International Opportunities,
Short-Term U.S. Government, Sovereign Bond, Strategic Bond, and Money Market),
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>
GROWTH EQUITY LARGE CAP LARGE CAP MID CAP MID CAP SPECIAL
MANAGED & INCOME INDEX VALUE GROWTH VALUE GROWTH OPPORTUNITIES
FEE TABLE PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- --------- --------- --------- ------------- ------------- ------------- ---------- --------- -------------
<S> <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%
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%
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%
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%
Exchange Fee.... 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. 0.34% 0.25% 0.20%(1) 0.75% 0.40% 0.80% 0.85% 0.75%
Other
Expenses(2).... 0.03% 0.03% 0.25%(3) 0.25%(3) 0.05% 0.25%(3) 0.25%(3) 0.12%
Total Fund
Operating
Expenses....... 0.37% 0.28% 0.45% 1.00% 0.45% 1.05% 1.10% 0.87%
<CAPTION>
SHORT-
TERM
SMALL CAP SMALL CAP INTERNATIONAL INTERNATIONAL INTERNATIONAL U.S. SOVEREIGN STRATEGIC
VALUE GROWTH BALANCED EQUITIES OPPORTUNITIES GOVERNMENT BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ------------- ------------- ------------- ---------- --------- -------------
<S> <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%
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%
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%
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%
Exchange Fee.... 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. 0.80% 0.75% 0.85% 0.60% 1.00% 0.30%(4) 0.25% 0.75%
Other
Expenses(2).... 0.25%(3) 0.25%(3) 0.25%(3) 0.18% 0.25%(3) 0.25%(3) 0.06% 0.25%(3)
Total Fund
Operating
Expenses....... 1.05% 1.00% 1.10% 0.78% 1.25% 0.55% 0.31% 1.00%
<CAPTION>
REAL
ESTATE
EQUITY
FEE TABLE PORTFOLIO
- --------- ---------
<S> <C>
CONTRACTHOLDER
TRANSACTION
EXPENSES
Maximum Sales
Load Imposed on
Purchases (as a
percentage of
offering price). 0.00%
Maximum Sales
Load Imposed on
Reinvested
Dividends (as a
percentage of
offering
price)......... 0.00%
Deferred Sales
Load (as a
percentage of
original
purchase price
or redemption
proceeds, as
applicable).... 0.00%
Redemption Fees
(as a
percentage of
amount
redeemed, if
applicable).... 0.00%
Exchange Fee.... 0.00%
ANNUAL FUND
OPERATING
EXPENSES AFTER
EXPENSE
REIMBURSEMENT
(AS A PERCENTAGE
OF AVERAGE NET
ASSETS)
Management Fees. 0.60%
Other
Expenses(2).... 0.11%
Total Fund
Operating
Expenses....... 0.71%
<CAPTION>
MONEY
MARKET
PORTFOLIO
---------
<S> <C>
CONTRACTHOLDER
TRANSACTION
EXPENSES
Maximum Sales
Load Imposed on
Purchases (as a
percentage of
offering price). 0.00%
Maximum Sales
Load Imposed on
Reinvested
Dividends (as a
percentage of
offering
price)......... 0.00%
Deferred Sales
Load (as a
percentage of
original
purchase price
or redemption
proceeds, as
applicable).... 0.00%
Redemption Fees
(as a
percentage of
amount
redeemed, if
applicable).... 0.00%
Exchange Fee.... 0.00%
ANNUAL FUND
OPERATING
EXPENSES AFTER
EXPENSE
REIMBURSEMENT
(AS A PERCENTAGE
OF AVERAGE NET
ASSETS)
Management Fees. 0.25%
Other
Expenses(2).... 0.07%
Total Fund
Operating
Expenses....... 0.32%
</TABLE>
(1) At the date of this prospectus, John Hancock is voluntarily waiving the
management fees for this Portfolio, although it expects to discontinue the
waiver in the near future. Absent such voluntary waiver by John Hancock,
the management fees will be 0.20%, which reflects a 0.05% reduction
effective May 1, 1997.
(2) Restated to reflect the estimated effect of expense reallocation expected
to become effective July 1, 1997.
(3) 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, 1996 with
respect to ten of the Fund's Portfolios. Absent the reimbursement, the
Other Expenses as a percentage of average daily net assets would have been
as follows: Equity Index, 1.61%; Large Cap Value, 1.89%; Mid Cap Value,
2.15%; Mid Cap Growth, 2.34%; Small Cap Value, 2.06%; Small Cap Growth,
1.55%; International Balanced, 1.44%; International Opportunities, 2.76%;
Short-Term U.S. Government, 0.79%; Strategic Bond, 1.57%. Also, John
Hancock voluntarily reimbursed the Equity Index Portfolio for its first
0.25% of Other Expenses for 1996. This additional reimbursement is not
shown in the table because it is voluntary and is expected to be
discontinued at some point in the foreseeable future.
(4) Restated to reflect a 0.20% reduction in advisory fee effective May 1,
1997.
2
<PAGE>
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) continuation of the
investment to the end of each time period 1 YEAR 3 YEARS 5 YEARS 10 YEARS
(whether or not redeemed at that time): ------ ------- ------- --------
<S> <C> <C> <C> <C>
Managed....................................... $ 4 $12 $21 $ 47
Growth & Income............................... $ 3 $ 9 $16 $ 36
Equity Index.................................. $ 5 $14 $25 $ 57
Large Cap Value............................... $10 $32 $55 $123
Large Cap Growth.............................. $ 5 $14 $25 $ 57
Mid Cap Value................................. $11 $34 $58 $129
Mid Cap Growth................................ $11 $35 $61 $135
Special Opportunities......................... $ 9 $28 $48 $108
Real Estate Equity............................ $ 7 $23 $40 $ 88
Small Cap Value............................... $11 $34 $58 $129
Small Cap Growth.............................. $10 $32 $55 $123
International Balanced........................ $11 $35 $61 $135
International Equities........................ $ 8 $25 $43 $ 97
International Opportunities................... $13 $40 $69 $152
Short-Term U.S. Government.................... $ 6 $18 $31 $ 69
Sovereign Bond................................ $ 3 $10 $17 $ 39
Strategic Bond................................ $10 $32 $55 $123
Money Market.................................. $ 3 $10 $18 $ 41
</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,
1996, 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 also contained in
the Annual Report.
3
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
+1996 +1995 +1994 +1993 +1992 +1991 +1990 1989 1988 1987
----- ----- ----- ----- ----- ----- ----- ---- ---- ----
<S> <C> <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.......... $ 13.73 $ 11.96 $ 12.81 $ 12.41 $ 12.36 $ 10.93 $ 11.19 $ 10.66 $ 10.18 $ 10.23
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- -------
Net Investment
Income.......... .61 .62 .55 .52 .56 .64 .68 .71 .60 .52
Net Realized and
Unrealized Gain
(Loss) on
Investments**... .81 2.56 ( .83) .90 .37 1.70 ( .26) 1.31 .59 .29
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- -------
Total From
Investment
Operations..... 1.42 3.18 ( .28) 1.42 .93 2.34 .42 2.02 1.19 .81
Less Distribu-
tions:
From Net Invest-
ment Income.... ( .61) ( .62) ( .55) ( .52) ( .56) ( .64) ( .68) ( .71) ( .60) ( .52)
From Net
Realized Gains
on Investments. ( 1.19) ( .79) ( .02) ( .50) ( .32) ( .27) -- ( .78) ( .11) ( .34)
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- -------
Total Distribu-
tions........... ($ 1.80) ($ 1.41) ($ .57) ($ 1.02) ($ .88) ($ .91) ($ .68) ($ 1.49) ($ .71) ($ .86)
========== ========== ========== ========== ========== ======== ======== ======== ======== =======
Net Asset Value,
End of Period... $ 13.35 $ 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). 178,145 152,544 134,588 116,985 82,805 54,687 40,625 29,078 17,477 8,954
Total Investment
Return*......... 10.72% 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)....... $2,386,660 $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......... .36% .38% .37% .38% .43% .45% .46% .48% .45% .40%
Net investment
income to
average net
assets......... 4.41% 4.66% 4.50% 4.07% 4.56% 5.49% 6.34% 6.28% 5.84% 5.28%
Portfolio turn-
over rate...... 113.61% 187.67% 90.41% 63.74% 84.27% 105.80% 136.39% 327.66% 245.20% 98.13%
Average commis-
sion rate...... $ .06 -- -- -- -- -- -- -- -- --
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------------------------
+1996 +1995 +1994 +1993 +1992 +1991 +1990 1989 1988 1987
----- ----- ----- ----- ----- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GROWTH & INCOME
PORTFOLIO--
SELECTED DATA
FOR EACH SHARE
OF BENEFICIAL
INTEREST
OUTSTANDING
THROUGHOUT THE
YEAR INDICATED:
Net Asset Value,
Beginning of
Year............ $ 13.94 $ 11.50 $ 12.39 $ 11.99 $ 12.10 $ 10.58 $ 10.70 $ 10.15 $ 8.95 $ 10.03
---------- ---------- ---------- ---------- -------- -------- -------- -------- -------- --------
Net Investment
Income.......... .34 .36 .34 .32 .34 .41 .44 .51 .38 .39
Net Realized and
Unrealized Gain
(Loss) on
Investments**... 2.43 3.53 ( .41) 1.27 .71 2.29 -- 2.13 1.20 .06
---------- ---------- ---------- ---------- -------- -------- -------- -------- -------- --------
Total From
Investment
Operations..... 2.77 3.89 ( .07) 1.59 1.05 2.70 .44 2.64 1.58 .45
Less
Distributions:
From Net
Investment
Income......... ( .34) ( .36) ( .34) ( .32) ( .34) ( .41) ( .44) ( .51) ( .38) ( .39)
From Net
Realized Gains
on Investments. ( 1.72) ( 1.09) ( .48) ( .87) ( .82) ( .77) ( .12) ( 1.58) -- ( 1.14)
---------- ---------- ---------- ---------- -------- -------- -------- -------- -------- --------
Total
Distributions.. ($ 2.06) ($ 1.45) ($ .82) ($ 1.19) ($ 1.16) ($ 1.18) ($ .56) ($ 2.09) ($ .38) ($ 1.53)
========== ========== ========== ========== ======== ======== ======== ======== ======== ========
Net Asset Value,
End of Year..... $ 14.65 $ 13.94 $ 11.50 $ 12.39 $ 11.99 $ 12.10 $ 10.58 $ 10.70 $ 10.15 $ 8.95
========== ========== ========== ========== ======== ======== ======== ======== ======== ========
Number of shares
outstanding
(000's omitted). 139,748 114,666 97,361 84,788 71,833 61,958 55,009 50,815 41,547 39,650
Total Investment
Return*......... 20.10% 34.21% ( .56%) 13.33% 8.90% 26.00% 4.10% 26.00% 17.65% 4.49%
SIGNIFICANT
RATIOS AND
SUPPLEMENTAL
DATA
Net Assets, End
of year (000's
Omitted)....... $2,047,927 $1,598,585 $1,119,864 $1,050,349 $861,516 $749,836 $581,789 $543,846 $421,549 $354,785
Operating
expenses to
average net
assets......... .27% .28% .27% .28% .30% .30% .30% .36% .31% .25%
Net investment
income to
average net
assets......... 2.24% 2.70% 2.80% 2.56% 2.85% 3.49% 4.21% 4.49% 3.87% 3.64%
Portfolio
turnover rate.. 81.02% 73.54% 64.12% 70.27% 84.28% 77.57% 85.34% 168.12% 164.96% 131.91%
Average
commission
rate........... $ .04 -- -- -- -- -- -- -- -- --
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Period From
May 1, 1996(a)
to December 31,
1996
---------------
<S> <C>
EQUITY INDEX 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.......................................... .15
Net Realized and Unrealized Gain on Investments**.............. 1.26
-------
Total From Investment Operations.............................. 1.41
Less Distributions:
From Net Investment Income.................................... ( .15)
From Net Realized Gains on Investments........................ j( .10)
-------
Total Distributions........................................... ($ .31)
=======
Net Asset Value, End of Period................................. $ 11.10
=======
Number of shares outstanding (000's omitted).................. 1,320
Total Investment Return(u)*................................... 14.23%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)..................... $14,650
Operating expenses to average net assets(r)................... 0.00%(e)
Net investment income to average net assets................... 2.74%(e)
Portfolio turnover rate....................................... 15.72%(l)
Average commission rate....................................... $ .02
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
+Period From
May 1, 1996(a)
to December 31,
1996
---------------
<S> <C>
LARGE CAP VALUE 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.......................................... .16
Net Realized and Unrealized Gain on Investments**.............. 1.22
-------
Total From Investment Operations.............................. 1.38
Less Distributions:
From Net Investment Income.................................... ( .16)
From Net Realized Gains on Investments........................ ( .13)
-------
Total Distributions........................................... ($ .29)
=======
Net Asset Value, End of Period................................. $ 11.09
=======
Number of shares outstanding (000's omitted).................. 1,784
Total Investment Return*...................................... 13.90%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)..................... $19,781
Operating expenses to average net assets(n)................... 1.00%(e)
Net investment income to average net assets................... 2.74%(e)
Portfolio turnover rate....................................... 19.95%(l)
Average commission rate....................................... $ .03
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------
+1996 +1995 +1994 +1993 +1992 +1991 +1990 1989 1988 1987
----- ----- ----- ----- ----- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LARGE CAP GROWTH
PORTFOLIO--SELECTED
DATA FOR EACH SHARE OF
BENEFICIAL INTEREST
OUTSTANDING THROUGHOUT
THE PERIOD INDICATED:
Net Asset Value,
Beginning of Period... $ 17.37 $ 14.41 $ 15.38 $ 14.43 $ 13.86 $ 12.07 $ 11.75 $ 10.92 $ 9.91 $ 9.88
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
Net Investment Income.. .25 .44 .39 .33 .37 .42 .46 .50 .36 .34
Net Realized and
Unrealized Gain (Loss)
on investments**...... 2.89 4.06 ( .54) 1.64 .99 2.62 .32 2.69 1.12 .36
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
Total from Investment
Operations........... 3.14 4.50 ( .15) 1.97 1.36 3.04 .78 3.19 1.48 .70
Less Distributions:
From Net Investment
Income............... ( .25) ( .44) ( .39) ( .33) ( .37) ( .42) ( .46) ( .50) ( .36) ( .34)
From Net Realized
Gains on Investments. ( 2.77) ( 1.10) ( .43) ( .69) ( .42) ( .83) -- ( 1.86) ( .11) ( .33)
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
Total Distributions... ($ 3.02) ($ 1.54) ($ .82) ($ 1.02) ($ .79) ($ 1.25) ($ .46) ($ 2.36) ($ .47) ($ .67)
======== ======== ======== ======== ======= ======= ======= ======= ======= =======
Net Asset Value, End of
Period................ $ 17.49 $ 17.37 $ 14.41 $ 15.38 $ 14.43 $ 13.86 $ 12.07 $ 11.75 $ 10.92 $ 9.91
======== ======== ======== ======== ======= ======= ======= ======= ======= =======
Number of shares out-
standing
(000's omitted)....... 29,265 21,895 15,546 9,833 6,097 3,973 2,384 1,728 1,102 787
Total Investment Re-
turn*................. 18.27% 31.64% ( .98%) 13.80% 9.90% 25.50% 6.60% 29.20% 14.93% 7.09%
SIGNIFICANT RATIOS AND
SUPPLEMENTAL DATA
Net Assets, End of Pe-
riod
(000's Omitted)...... $524,145 $380,276 $223,957 $151,207 $87,952 $55,065 $28,777 $20,303 $12,040 $7,800
Operating expenses to
average net
assets(b)............ .44% .47% .47% .50% .52% .55% .63% .73% .64% .40%
CTCNet investment in-
come to average net
assets............... 1.35% 2.70% 2.69% 2.21% 2.70% 3.15% 4.01% 4.00% 3.44% 3.21%
Portfolio turnover
rate................. 135.98% 90.18% 80.51% 61.53% 65.88% 88.38% 88.50% 222.38% 192.20% 182.79%
Average commission
rate................. $ .04 -- -- -- -- -- -- -- -- --
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
+Period From
May 1, 1996(a)
to December 31,
1996
---------------
<S> <C>
MID CAP VALUE 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.......................................... .04
Net Realized and Unrealized Gain on Investments**.............. 1.57
-------
Total From Investment Operations.............................. 1.61
Less Distributions:
From Net Investment Income.................................... ( .04)
From Net Realized Gains on Investments........................ ( .22)
-------
Total Distributions........................................... ($ .26)
=======
Net Asset Value, End of Period................................. $ 11.35
=======
Number of shares outstanding (000's omitted).................. $ 963
Total Investment Return*...................................... 16.18%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)..................... $10,926
Operating expenses to average net assets(o)................... 1.05%(e)
Net investment income to average net assets................... .69%(e)
Portfolio turnover rate....................................... 62.99%(l)
Average commission rate....................................... $ .06
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
+Period From
May 1, 1996(a)
to December 31,
1996
---------------
<S> <C>
MID CAP GROWTH 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.......................................... .05
Net Realized and Unrealized Gain on Investments**.............. .22
-------
Total From Investment Operations.............................. .27
Less Distributions:
From Net Investment Income.................................... ( .05)
From Net Realized Gains on Investments........................ --
-------
Total Distributions........................................... ($ .05)
=======
Net Asset Value, End of Period................................. $ 10.22
=======
Number of shares outstanding (000's omitted).................. $1,613
Total Investment Return*...................................... 2.69%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)..................... $16,492
Operating expenses to average net assets(m)................... 1.10%(e)
Net investment income to average net assets................... .92%(e)
Portfolio turnover rate....................................... 71.25%(l)
Average commission rate....................................... $ .03
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Year Ended +Period From
December 31, May 6, 1994(a)
----------------- to December 30,
+1996 +1995 1994
-------- ------- ---------------
<S> <C> <C> <C>
SPECIAL OPPORTUNITIES PORTFOLIO--SELECTED
DATA FOR EACH SHARE OF BENEFICIAL INTEREST
OUTSTANDING THROUGHOUT THE PERIOD
INDICATED:
Net Asset Value, Beginning of Period........ $ 13.18 $ 9.94 $10.00
-------- ------- ------
Net Investment Income (Loss)................ .02 ( .01) .11
Net Realized and Unrealized Gain (Loss) on
Investments**.............................. 3.99 3.58 ( .06)
-------- ------- ------
Total From Investment Operations........... 4.01 3.57 .05
Less Distributions:
From Net Investment Income................. ( .02) -- --
-------- ------- ------
From Net Gains on Investments.............. ( .65) ( .33) ( .11)
-------- ------- ------
Total Distributions........................ ($ .67) ($ .33) ($ .11)
======== ======= ======
Net Asset Value, End of Period.............. $ 16.52 $ 13.18 $ 9.94
======== ======= ======
Number of shares outstanding
(000's omitted)........................... 11,749 4,133 722
Total Investment Return*................... 30.33% 35.96% .56%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted).. $194,108 $54,486 $7,181
Operating expenses to average net
assets(k)................................. .84% 1.00% 1.00%(e)
Net investment income to average net
assets.................................... .18% ( .11)% 1.51%(e)
Portfolio turnover rate.................... 217.84% 139.13% 26.54%(l)
Average commission rate.................... $ .06 -- --
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended December 31, May 16, 1988(a)
----------------------------------------------------------------------- to December 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <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......... $ 11.70 $ 11.16 $ 11.52 $ 10.27 $ 9.36 $ 7.42 $ 10.11 $10.15 $10.00
-------- -------- -------- ------- ------- ------ ------- ------ ------
Net Investment Income... .76 .77 .66 .52 .49 .52 .57 .59 .35
Net Realized and
Unrealized Gain (Loss)
on Investments**....... 2.97 .54 ( .34) 1.26 .96 1.94 ( 2.69) .14 .15
-------- -------- -------- ------- ------- ------ ------- ------ ------
Total From Investment
Operations............ 3.73 1.31 .32 1.78 1.45 2.46 ( 2.12) .73 .50
Less Distributions:
From Net Investment In-
come.................. ( .76) ( .77) ( .66) ( .52) ( .49) ( .52) ( .57) ( .59) ( .35)
From Net Realized Gains
on Investments........ ( .03) ( .00) ( .02) ( .01) ( .05) -- -- ( .18) --
-------- -------- -------- ------- ------- ------ ------- ------ ------
Total Distributions.... ($ .79) ($ .77) ($ .68) ($ .53) ($ .54) ($ .52) ($ .57) ($ .77) ($ .35)
======== ======== ======== ======= ======= ====== ======= ====== ======
Net Asset Value, End of
Period................. $ 14.64 $ 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)................... 10,325 9,301 10,178 7,061 1,672 875 587 467 153
Total Investment Re-
turn*.................. 33.07% 12.31% 2.86% 17.29% 16.00% 33.50% (21.00%) 7.20% 5.00%(l)
SIGNIFICANT RATIOS AND
SUPPLEMENTAL DATA
Net Assets, End of Pe-
riod (000's Omitted).. $151,105 $108,782 $113,545 $81,306 $17,176 $8,184 $4,360 $4,726 $1,553
Operating expenses to
average net assets(h). .69% .73% .71% .83% .85% .84% .86% .86% .75%(e)
Net investment income
to average net assets. 6.14% 6.85% 5.94% 4.80% 5.31% 5.88% 6.67% 5.93% 5.14%(e)
Portfolio turnover
rate.................. 18.37% 19.81% 22.36% 9.79% 16.24% 11.84% 17.17% 19.10% 3.89%(l)
Average commission
rate.................. $ .04 -- -- -- -- -- -- -- --
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
+Period From
May 1, 1996(a)
to December 31,
1996
---------------
<S> <C>
SMALL CAP VALUE 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.......................................... .07
Net Realized and Unrealized Gain on Investments**.............. .96
-------
Total From Investment Operations.............................. 1.03
Less Distributions:
From Net Investment Income.................................... ( .07)
From Net Realized Gains on Investments........................ ( .23)
-------
Total Distributions........................................... ($ .30)
=======
Net Asset Value, End of Period................................. $ 10.73
=======
Number of shares outstanding (000's omitted).................. 982
Total Investment Return*...................................... 10.33%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)..................... $10,541
Operating expenses to average net assets(p)................... 1.05%(e)
Net investment income to average net assets................... 1.15%(e)
Portfolio turnover rate....................................... 66.31%(l)
Average commission rate....................................... $ .06
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
+Period From
May 1, 1996(a)
to December 31,
1996
---------------
<S> <C>
SMALL CAP GROWTH PORTFOLIO--SELECTED DATA FOR EACH SHARE OF
BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE PERIOD
INDICATED:
Net Asset Value, Beginning of Period........................... $ 10.11
-------
Net Investment Income.......................................... .01
Net Realized and Unrealized Loss on Investments**.............. ( .06)
-------
Total From Investment Operations.............................. ( .05)
Less Distributions:
From Net Investment Income.................................... ( .02)
From Net Realized Gains on Investments........................
-------
Total Distributions........................................... ($ .02)
=======
Net Asset Value, End of Period................................. $ 9.93
=======
Number of shares outstanding (000's omitted).................. 2,077
Total Investment Return*...................................... ( 0.50%)(I)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)..................... $20,633
Operating expenses to average net assets(f)................... 1.00%(e)
Net investment income to average net assets................... .12%(e)
Portfolio turnover rate....................................... 50.93%(I)
Average commission rate....................................... $ .07
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
+Period From
May 1, 1996(a)
to December 31,
1996
---------------
<S> <C>
INTERNATIONAL BALANCED 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.......................................... .24
Net Realized and Unrealized Gain on Investments**.............. .41
-------
Total From Investment Operations.............................. .65
Less Distributions:
From Net Investment Income.................................... ( .24)
From Net Realized Gains on Investments........................ ( .02)
-------
Total Distributions........................................... ($ .26)
=======
Net Asset Value, End of Period................................. $ 10.39
=======
Number of shares outstanding (000's omitted).................. 2,319
Total Investment Return*...................................... 6.73%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)..................... $24,098
Operating expenses to average net assets(v)................... 1.10%(e)
Net investment income to average net assets................... 3.59%(e)
Portfolio turnover rate....................................... 22.21%(l)
Average commission rate....................................... $ .02
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended December 31, May 2, 1988(a)
----------------------------------------------------------------------- to December 31,
+1996 +1995(c) +1994(c) +1993 +1992 +1991 +1990 1989 1988
----- -------- -------- ----- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTERNATIONAL EQUITIES
PORTFOLIO--SELECTED DATA
FOR EACH SHARE OF
BENEFICIAL INTEREST
OUTSTANDING THROUGHOUT
THE PERIOD INDICATED:
Net Asset Value,
Beginning of Period..... $ 15.61 $ 14.62 $ 15.85 $ 12.25 $ 12.57 $10.37 $11.63 $ 10.43 $10.00
-------- -------- -------- ------- ------- ------ ------ ------- ------
Net Investment Income... .21 .17 .12 .03 .11 .20 .35 .13 .09
Net Realized and
Unrealized Gain(Loss) on
Investments**........... 1.22 .99 ( 1.10) 3.91 ( .32) 2.20 ( 1.26) 1.35 .43
-------- -------- -------- ------- ------- ------ ------ ------- ------
Total From Investment
Operations............. 1.43 1.16 ( .98) 3.94 ( .21) 2.40 ( .91) 1.48 .52
Less Distributions:
From Net Investment
Income................. ( .21) ( .17) ( .12) ( .03) ( .11) ( .20) ( .35) ( .13) ( .09)
From Net Realized Gains
on Investments......... -- -- ( .13) ( .31) -- -- -- ( .15) --
-------- -------- -------- ------- ------- ------ ------ ------- ------
Total Distributions.... ($ .21) ($ .17) ($ .25) ($ .34) ($ .11) ($ .20) ($ .35) ($ .28) ($ .09)
======== ======== ======== ======= ======= ====== ====== ======= ======
Net Asset Value, End of
Period.................. $ 16.83 $ 15.61 $ 14.62 $ 15.85 $ 12.25 $12.57 $10.37 $ 11.63 $10.43
======== ======== ======== ======= ======= ====== ====== ======= ======
Number of shares
outstanding
(000's omitted)........ 9,254 8,123 8,162 3,574 1,202 792 588 209 79
Total Investment
Return*................ 9.19% 8.01% (6.26%) 32.08% (1.60%) 23.40% (7.80%) 6.70% 5.20%(l)
SIGNIFICANT RATIOS AND
SUPPLEMENTAL DATA:
Net Assets, End of
Period (000's omitted). $155,753 $126,803 $119,331 $56,652 $14,722 $9,954 $6,095 $2,431 $828
Operating expenses to
average net assets(g).. .76% .84% .85% .85% .85% .84% .79% .94% .78%(e)
Net investment income
to average net assets.. 1.30% 1.34% .85% .26% .90% 1.75% 3.29% 1.30% 1.17%(e)
Portfolio turnover
rate................... 92.03% 65.82% 78.21% 65.57% 110.79% 86.70% 80.19% 140.00% 63.30%(l)
Average commission
rate................... $ .02 -- -- -- -- -- -- -- --
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
+Period From
May 1, 1996(a)
to December 31,
1996
---------------
<S> <C>
INTERNATIONAL OPPORTUNITIES 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.......................................... .07
Net Realized and Unrealized Gain on Investments**.............. .60
-------
Total From Investment Operations.............................. .67
Less Distributions:
From Net Investment Income.................................... ( .70)
From Net Realized Gains on Investments........................ --
-------
Total Distributions........................................... ($ .70)
=======
Net Asset Value, End of Period................................. $ 10.60
=======
Number of shares outstanding (000's omitted).................. 1,689
Total Investment Return*...................................... 6.72%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)..................... $17,898
Operating expenses to average net assets(q)................... 1.25%(e)
Net investment income to average net assets................... 0.87%(e)
Portfolio turnover rate....................................... 5.46%(l)
Average commission rate....................................... $ .03
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Year Ended Period From
December 31, May 1, 1994(a)
---------------- to December 31,
1996 1995 1994
------- ------- ---------------
<S> <C> <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......... $ 10.23 $ 9 .66 $10.00
------- ------- ------
Net Investment Income........................ .54 .50 .37
Net Realized and Unrealized Gain (Loss) on
Investments**................................ ( .18) .59 ( .34)
------- ------- ------
Total From Investment Operations............ .36 1.09 .03
Less Distributions:
From Net Investment Income.................. ( .54) ( .50) ( .37)
From Net Realized Gains on Investments...... ( .00) ( .02) --
------- ------- ------
Total Distributions......................... ($ .54) ($ .52) ($ .37)
======= ======= ======
Net Asset Value, End of Period............... $ 10.05 $ 10.23 $ 9.66
======= ======= ======
Number of shares outstanding
(000's omitted)............................. 5,840 1,750 178
Total Investment Return*.................... 3.61% 11.49% .33%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)... $58,676 $17,911 $1,718
Operating expenses to average net assets(j). .75% .75% .75%(e)
Net investment income to average net assets. 5.66% 5.52% 5.82%(e)
Portfolio turnover rate..................... 20.68% 109.77% 11.22%(l)
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------
+1996 +1995 1994 1993 1992 1991 1990 1989 1988 1987
----- ----- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SOVEREIGN BOND
PORTFOLIO--
SELECTED DATA FOR
EACH SHARE OF
BENEFICIAL
INTEREST
OUTSTANDING
THROUGHOUT THE
YEAR INDICATED:
Net Asset Value,
Beginning of
Year............. $ 10.13 $ 9.19 $ 10.14 $ 9.84 $ 9.89 $ 9.23 $ 9.40 $ 9.16 $ 9.26 $ 9.95
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net Investment
Income........... .69 .71 .70 .73 .77 .81 .82 .85 .85 .85
Net Realized and
Unrealized Gain
(Loss) on
Investments**.... ( .31) 1.03 ( .95) .30 ( .05) .66 ( .17) .24 ( .10) ( .62)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total From
Investment
Operations...... .38 1.74 ( .25) 1.03 .72 1.47 .65 1.09 .75 .23
Less
Distributions:
From Net
Investment
Income.......... ( .69) ( .71) ( .70) ( .73) ( .77) ( .81) ( .82) ( .85) ( .85) ( .85)
From Net Realized
Gains on
Investments..... ( .05) ( .09) -- -- -- -- -- -- -- ( .07)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total
Distributions... ($ .74) ($ .80) ($ .70) ($ .73) ($ .77) ($ .81) ($ .82) ($ .85) ($ .85) ($ .92)
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Net Asset Value,
End of Year...... $ 9.77 $ 10.13 $ 9.19 $ 10.14 $ 9.84 $ 9.89 $ 9.23 $ 9.40 $ 9.16 $ 9.26
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Number of shares
outstanding
(000's
omitted)(d)...... 74,315 69,148 63,907 61,046 52,671 44,192 37,331 32,677 28,787 24,327
Total Investment
Return*.......... 4.10% 19.55% ( 2.57%) 10.77% 7.70% 16.70% 6.90% 11.90% 8.10% 2.31%
SIGNIFICANT RATIOS
AND
SUPPLEMENTAL DATA
Net Assets, End
of year
(000's Omitted). $726,111 $700,309 $587,077 $619,200 $518,341 $437,110 $344,629 $307,235 $263,544 $225,151
Operating
expenses to
average net
assets.......... .29% .30% .29% .28% .30% .30% .30% .31% .28% .25%
Net investment
income to
average net
assets.......... 7.07% 7.20% 7.27% 7.22% 7.85% 8.54% 9.06% 9.06% 9.19% 8.59%
Portfolio
turnover
rate(c)......... 119.12% 63.31% 21.80% 21.05% 19.66% 20.18% 34.46% 36.47% 25.13% 42.15%
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
+Period From
May 1, 1996(a)
to December 31,
1996
---------------
<S> <C>
STRATEGIC BOND 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.......................................... .38
Net Realized and Unrealized Gain on Investments**.............. .28
-------
Total From Investment Operations.............................. .66
Less Distributions:
From Net Investment Income.................................... ( .38)
From Net Realized Gains on Investments........................ ( .12)
-------
Total Distributions........................................... ($ .50)
=======
Net Asset Value, End of Period................................. $ 10.16
=======
Number of shares outstanding (000's omitted).................. 1,271
Total Investment Return*...................................... 6.71%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)..................... $12,907
Operating expenses to average net assets(s)................... 1.00%(e)
Net investment income to average net assets................... 6.05%(e)
Portfolio turnover rate....................................... 171.39%(l)
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<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 $ 10.00
Net Investment In-
come.............. .52 .57 .40 .30 .36 .58 .80 .89 .73 .64
Total From
Investment
Operations....... .52 .57 .40 .30 .36 .58 .80 .89 .73 .64
Less Distribu-
tions:
From Net Invest-
ment Income...... ( .52) ( .57) ( .40) ( .30) ( .36) ( .58) ( .80) ( .89) ( .73) ( .64)
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).......... 21,324 18,591 14,867 11,618 12,521 13,780 14,032 12,022 10,984 8,878
Total Investment
Return*........... 5.32% 5.78% 4.03% 3.06% 3.60% 6.00% 8.00% 8.90% 7.30% 6.40%
SIGNIFICANT RATIOS
AND
SUPPLEMENTAL DATA
Net Assets, End
of year (000's
omitted)......... $213,235 $ 185,909 $148,668 $116,190 $125,212 $137,795 $140,319 $120,220 $109,843 $88,783
Operating
expenses to
average net
assets........... .30% .35% .32% .35% .34% .33% .33% .34% .30% .25%
Net investment
income to average
net assets....... 5.20% 5.62% 4.05% 3.01% 3.58% 5.81% 7.96% 9.09% 7.55% 6.14%
</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."
(e) Annualized.
(f) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made, the expense ratio would have been 1.55% for the period ended
December 31, 1996.
(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.
(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, 1.83% for the year ended December 31, 1995, and .79%
for the year ended December 31, 1996.
(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.
(m) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.34% for the year ended
December 31, 1996.
(n) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.89% for the year ended
December 31, 1996.
(o) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.15% for the year ended
December 31, 1996.
21
<PAGE>
(p) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.06% for the year ended
December 31, 1996.
(q) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.76% for the year ended
December 31, 1996.
(r) Expense ratio is net of expense reimbursement. See notes 1 and 3 under
"Synopsis of Expense Information," above. Had such reimbursement not been
made the expense ratio would have been 1.61% for the year ended December
31, 1996.
(s) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.57% for the year ended
December 31, 1996.
(u) The Total Return includes the effect of a voluntary capital contribution
from John Hancock of $0.06 per share. The Total Investment Return without
the capital contribution would have been 13.59%.
(v) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.44% for the year ended
December 31, 1996.
+ 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.
22
<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.
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.
Growth & Income 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.
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
23
<PAGE>
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 to replicate the
characteristics of the S&P 500. For additional information about the S&P 500,
see "Investment Practices--The S&P 500" below.
The Portfolio seeks to replicate the investment results of the S&P 500,
through passive investment management. The Portfolio will purchase the common
stock of those companies included in the S&P 500 in their capitalization
weighted proportions to attempt to replicate the aggregate risk
characteristics and industry diversification of the S&P 500. In this way, the
sub-investment manager attempts to minimize the degree to which the investment
results of the Portfolio differ from the results of 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 approximately 500 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.
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 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 current 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.
24
<PAGE>
Large Cap Growth Portfolio: The investment objective of the Large Cap Growth
Portfolio is 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. 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 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.
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
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.
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 below under "Market Capitalization Risk." The Portfolio may also invest
in smaller or larger issuers, although, under
25
<PAGE>
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.
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.
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 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
26
<PAGE>
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").
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.
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.
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 its total assets in the equity
securities of U.S. small cap companies. The Fund's current definition of
"small cap" companies is set forth 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.
27
<PAGE>
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.
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 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.
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.
28
<PAGE>
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.
International Equities 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.
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.
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 countries, newly-industrialized
countries 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.
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
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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 the 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.
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.
Sovereign 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 debt securities only as follows: (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.
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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 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.)
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").
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
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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 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. As a fundamental investment policy, 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.
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 Portfolios are set forth under "Financial
Highlights," above. 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 of 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.
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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.
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
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(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.
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.
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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 $500
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 are generally expected to
represent primarily 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.
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
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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.
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.
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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, with the exception of Money Market
and Short-Term U.S. Government Portfolio, generally allow the sub-investment
manager some latitude to allocate across asset classes. 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 its assets
in equity securities within its 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 than any of such other Portfolios.
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,
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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, 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 policies or 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 (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. All of the Portfolios may enter into
repurchase agreements.
The 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 sub-investment manager of the
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. Advisers is responsible for ensuring that the agreement is fully
collateralized at all times.
In addition, the Growth & Income, Sovereign Bond, Money Market, Large Cap
Growth, Managed, Small Cap Value, 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
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the agreement is fully collateralized at all times. The other Portfolios also
may participate in this joint trading account advised by John Hancock or any
similar joint trading account established pursuant to an SEC exemptive order
for investment companies advised by their respective sub-investment managers.
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 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.
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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
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 when (a) 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
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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 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.
Other Derivative Transactions. The International Balanced and Strategic Bond
Portfolios may engage in swap transactions, specifically interest rate,
currency and index swaps and in the purchase or sale of related caps, floors
and collars. In a typical interest rate swap agreement, one party agrees to
make payments equal to a floating interest rate on a specified amount (the
"notional amount") in return for payments equal to a fixed interest rate on
the same amount for a specified period. If a swap agreement provides for
payments in different currencies, the parties might agree to exchange the
notional amount as well. The purchaser of an interest rate cap or floor, upon
payment of a fee, has the right to receive payments (and the seller of the cap
is obligated to make payments) to the extent a specified interest rate exceeds
(in the case of a cap) or is less than (in the case of a floor) a specified
level over a specified period of time or at specified dates. The purchaser of
an interest rate collar, upon payment of a fee, has the right to receive
payments (and the seller of the collar is obligated to make payments) to the
extent that a specified interest rate falls outside an agreed upon range over
a specified period of time or at specified dates.
Index and currency swaps, caps, floors, and collars are similar to those
described in the preceding paragraph, except that, rather than being
determined by variations in specified interest rates, the obligations of the
parties are determined by variations in specified interest rate or currency
indexes.
The amount of a Portfolio's potential gain or loss on any swap transaction
is not subject to any fixed limit. Nor is there any fixed limit on the
Portfolio's potential loss if it sells a cap, floor or collar. If a Portfolio
buys a cap, floor or collar, however, the Portfolio's potential loss is
limited to the amount of the fee that it has paid. Swaps, caps, floors and
collars tend to be more volatile than many other types of investments.
Nevertheless, a Portfolio will use these techniques only as a risk management
tool and not for purposes of leveraging the Portfolio's market exposure or its
exposure to changing interest rates, security values or currency values.
Rather, a portfolio will use these transactions only to preserve a return or
spread on a particular investment or portion of its investments, to protect
against currency fluctuations, as a duration management technique, to protect
against any increase in the price of securities the Portfolio anticipates
purchasing at a later date, or to gain exposure to
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certain markets in the most economical way possible. Nor will a Portfolio sell
interest rate caps, floors or collars if it does not own securities providing
the interest that the Portfolio may be required to pay.
The use of swaps, caps, floors and collars involves investment techniques
and risks different from those associated with other portfolio security
transactions. If the sub-investment manager is incorrect in its forecasts of
market values, interest rates, currency rates and other applicable factors,
the investment performance of a Portfolio will be less favorable than if these
techniques had not been used. These instruments are typically not traded on
exchanges. Accordingly, there is a risk that the other party to certain of
these instruments will not perform its obligations to the Fund or that a
Portfolio may be unable to enter into offsetting positions to terminate its
exposure or liquidate its investment under certain of these instruments when
it wishes to do so. Such occurrences could result in losses to the Portfolio.
The sub-investment manager, however, will consider such risks and will enter
into swap, cap, floor, and collar transactions only when it believes that the
risks are not unreasonable.
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.
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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 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 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 covered 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,
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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" hedging purposes (as defined by the U.S. Commodity
Futures Trading Commission) if immediately thereafter the Portfolio's initial
margin deposits 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 or currency
swaps, caps, floors or collars 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 may 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
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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 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 and
International Balanced Portfolios 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
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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 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, Managed, 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 Sovereign Bond, 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.
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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 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.
The Fund and the insurance products supported by the Fund are not sponsored,
endorsed, sold or promoted by Standard & Poor's. Standard & Poor's makes no
representation or warranty, express or implied, to the owners of the insurance
products supported by the Fund or any member of the public regarding the
advisability of investing in the Fund or such insurance products. Standard &
Poor's only relationship to the Fund 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 or the Fund. "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 the Fund. In
determining, composing, or calculating the S&P 500 Index, S&P has no
obligation to take into consideration the needs of the Fund or those of the
owners of the insurance products supported by the Fund. S&P is not responsible
for and has not participated in the determination of the prices and amount of
the insurance products supported by the Fund or the timing of the issuance or
sale of such products or in the determination or calculation of the equation
by which such products are to be converted into cash. S&P has no obligation or
liability in connection with the administration, marketing, or trading of such
products.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE FUND, OWNERS OF THE PRODUCTS
SUPPORTED BY THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P
500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR
ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT
SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
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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), as amended,
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, 1996, amounted to over $106 billion, of which
over $59 billion was owned by John Hancock.
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, 0.30% on an annual
basis of the average daily net assets;
(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 Equities 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.
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(g) for the Equity Index Portfolio, 0.20% on an annual basis of the first
$75,000,000 of the average daily net assets of such Portfolio; 0.19% for
that portion between $75,000,000 and $125,000,000; and 0.18% for that
portion in excess of $125,000,000;
(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.
GROWTH & INCOME, LARGE CAP GROWTH, MANAGED, SHORT-TERM U.S. GOVERNMENT, AND
REAL ESTATE EQUITY 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 $25 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. Paul F.
McManus, Senior Vice President of IIA, is the portfolio manager of the Growth
& Income Portfolio. He has been with IIA since its inception in 1982. Michael
G. Trotsky, Senior Vice President of IIA, is the portfolio manager of the
Large Cap Growth Portfolio. He has been with IIA since 1990. John C. Forelli,
Senior Vice President of IIA, manages the equity portion of the Managed
Portfolio. He has been with IIA since 1990. Thomas D. Spicer, Vice President
with IIA, manages the fixed income portion of the Managed Portfolio. He has
been with IIA since 1991. Mr. Spicer also manages the Short-Term U.S.
Government Portfolio.
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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.
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 $22 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. Miren Etcheverry, John L.F. Wills and Gerardo J. Espinoza lead the
portfolio management team. Ms. Etcheverry and Mr. Espinoza, senior vice
presidents, joined John Hancock Advisers in December 1996; they have analyzed
and managed international investments since 1978 and 1979, respectively. Mr.
Wills is a senior vice president of the Adviser and managing director of the
subadviser, John Hancock Advisers International, Ltd. He joined John Hancock
Advisers in 1987 and has been in the investment business since 1969.
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 May 1, 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. The Special Opportunities Portfolio will be
managed on a day-to-day basis by an investment team overseen by Kevin R.
Baker. This team represents the analytical expertise of sector and global
specialists from Advisers' equity group. Mr. Baker is a Second Vice President
at Advisers who also manages John Hancock Special Opportunities Fund and
supports the management of John Hancock Special Equities Fund. Mr. Baker
joined Advisers in 1994. Prior to joining Advisers, Mr. Baker was president of
Baker Capital Management. He also worked as a registered representative for
Kidder Peabody.
With respect to the Small Cap Growth Portfolio, John Hancock, has by a Sub-
Investment Management Agreement, dated March 29, 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 Bernice S.
Behar. Ms. Behar also manages John Hancock Discovery Fund and is a member of
the portfolio management team for John Hancock Pacific Basin Equities Fund,
John Hancock Global Fund, and John Hancock International Fund. Ms. Behar is a
Senior Vice President of Advisers and has been associated with Advisers since
1991.
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EQUITY INDEX PORTFOLIO
With respect to the Equity Index Portfolio, John Hancock has, by a Sub-
Investment Management Agreement, dated March 18, 1997, contracted with State
Street Bank and Trust Company ("State Street"), through its investment
management division, State Street Global Advisors ("State Street Global"), to
make investment decisions, place investment orders, and perform certain
recordkeeping functions. State Street Bank and Trust Company, a Massachusetts
trust company located at Two International Place, Boston, Massachusetts 02110,
is a bank as defined in the Investment Advisers Act of 1940. As of December
31, 1996, it had over $254.6 billion of assets under management, $92.6 billion
of which were in equities, fixed income, and real estate, and $161.9 billion
of which were in short-term assets. The Portfolio will be co-managed by John
A. Tucker and James B. May, Assistant Vice Presidents and Portfolio Managers
for State Street Global. Mr. May joined State Street in November 1989. He
currently manages State Street's Commingled S&P Midcap Index Fund, Commingled
S&P 500 Common Trust Fund, several separately managed funds, and the MULDEX
funds. Mr. Tucker joined State Street in 1988. He currently manages State
Street's Russell 1000 Value Common Trust Fund, Russell 2000 Value Common Trust
Fund and several separately managed funds.
LARGE CAP VALUE PORTFOLIO
With respect to this Portfolio, John Hancock, has by a Sub-Investment
Management Agreement, March 29, 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 $95 billion for over 4.5 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, March 29, 1996, 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 $25 billion of international stocks and bonds for various
clients. Rowe Price-Fleming's address 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, March 29, 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
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adviser, managed over $50 billion of assets as of January 31, 1997, 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, contracted with Neuberger & Berman, LLC ("Neuberger &
Berman") a Delaware limited liability company, to make investment decisions,
place investment orders and to perform certain recordkeeping functions.
Neuberger & Berman, a registered investment adviser, manages over $44 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, March 22, 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 $94.5 billion as of December 31, 1996. 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.
STRATEGIC BOND PORTFOLIO
With respect to this Portfolio, John Hancock, has by a Sub-Investment
Management Agreement, March 29, 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 $208
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.
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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 1987 and began her investment career in 1987.
INTERNATIONAL BALANCED PORTFOLIO
With respect to this Portfolio, John Hancock, has by a Sub-Investment
Management Agreement, March 29, 1996, contracted with Brinson Partners, Inc.
("Brinson") a Delaware corporation, to make investment decisions, place
investment orders and to perform certain recordkeeping functions. Brinson is
an indirect wholly owned subsidiary of Swiss Bank Corporation ("SBC"). Brinson
Partners, Inc. together with its predecessor organizations, has been managing
international investments since 1974. Brinson has over $71.6 billion in
institutional assets under management. It also serves as the advisor to the
SBC Private Banking mutual funds with assets totaling $47.3 billion. 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, CFA, Managing Partner, Equities/Fixed Income, who began his investment
career in 1964; Jeffrey J. Diermeier, CFA, Managing Partner, Equities, who
began his investment career in 1975; M. Dale Fritz, CFA, Managing Partner,
Portfolio Coordination, who began his investment career in 1971; Dennis L.
Hesse, Managing Partner, Fixed Income, who began his investment career in
1970; Denis S. Karnosky, Ph.D., Managing Partner, Asset Allocation/Currency,
began his investment career in 1967; Norman D. Cumming, Partner, Fixed Income,
who began his investment career in 1977; Susan M. Haroun, Partner, Equities,
who began her investment career in 1982; Anthony W. Robinson, Partner,
Equities/Fixed Income, who began his investment career in 1973.
----------------
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, State Street, 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 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, State Street, 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, as amended, 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, compensation of unaffiliated trustees, the Fund's fidelity bond
coverage, printing and distributing to
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contractholders of annual and semi-annual reports and voting materials,
tabulating votes,compensation for certain accounting, valuation, and
compliance services, legal expenses and independent agent fees, registration
fees and costs, proxy costs, organizational costs, association dues, 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.")
Registered broker/dealers affiliated with any one of the sub-investment
managers 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. During 1996, the International Opportunities
Portfolio paid commissions of $2,421 and $789 to Robert Fleming Securities
Limited ("Robert Fleming") and Jardine Fleming & Co. ("JFC"), respectively,
which represented approximately 5% and 1.6%, respectively, of total
commissions paid during 1996 by the International Opportunities Portfolio. For
that Portfolio, transactions effected through Robert Fleming and JFC
represented 7.3% and 1.1% of the aggregate dollar amount of transactions
involving payment of commissions. Robert Fleming and JFC are affiliates of
Rowe Price-Fleming, sub-investment manager of the International Opportunities
Portfolio. Also during 1996, Neuberger & Berman, a registered broker-dealer
that also serves as sub-investment manager of the Mid Cap Value Portfolio,
executed transactions representing approximately 54% of the aggregate dollar
amount of transactions for that Portfolio involving the payment of
commissions. Commissions for the transactions executed by Neuberger & Berman
totaled approximately $13,971, which represented just under 50% of all
commissions paid by that Portfolio during 1996. Finally, also during 1996, the
Small Cap Growth and Special Opportunities Portfolios paid commissions of
$1,960 and $245, respectively, to J.P. Morgan Securities, Inc. ("J.P. Morgan
Securities"), which represented approximately 10% and .03%, respectively, of
total commissions paid during 1996 by each Portfolio. For each of these
Portfolios, transactions effected through J.P. Morgan Securities represented
8.8% and .04%, respectively, of the aggregate dollar amount of transactions
involving payment of commissions. J.P. Morgan Securities is an affiliate of
J.P. Morgan, sub-investment manager of the Strategic Bond Portfolio. 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 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.
54
<PAGE>
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.")
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.
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.
55
<PAGE>
Securities and covered call and put options that are listed on a stock
exchange are normally valued at the closing sales price. If there were no
sales during the day, they are normally valued at the last previous sale or
bid price reported, as are equity securities that are traded in the over-the-
counter market.
Non-exchange traded debt securities (other than certain short-term
investments) are valued on the basis of valuations furnished by a pricing
service which uses electronic data processing techniques, without exclusive
reliance upon quoted prices. 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 which approximates market value. The amortized cost
method involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of the difference
between the principal amount due at maturity and the cost of the security to
the Portfolio.
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.
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.
56
<PAGE>
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 contractholders 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 Equities
Portfolio (formerly, International 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.
57
<PAGE>
APPENDIX A--PERFORMANCE FIGURES
This Appendix includes historical total return information for each of the
Portfolios, other than the Money Market Portfolio. This information represents
past performance and assumes reinvestment of all distributions. For
information as to how this information was computed for the Portfolios, see
"Investment Performance" and "Changes in International Equities Portfolio's
Investment Objectives and Policies" in this Prospectus and "Calculation of
Performance Data" in the Fund's Statement of Additional Information.
Certain Portfolios have been offered only commencing in May, 1996; Equity
Index, Large Cap Value, Mid Cap Growth, Mid Cap Value, Small Cap Growth, Small
Cap Value, Strategic Bond, International Opportunities, and International
Balanced. Since these Portfolios have only limited performance history, this
Appendix also includes total return information for certain similar accounts
that are managed by the Portfolios' respective sub-investment managers. In
each case the Portfolio's estimated expenses as set forth in this Prospectus
under "Synopsis of Expense Information" has been substituted for the actual
fees and expenses (other than brokerage, interest, and other such portfolio
transaction expenses) of the accounts for which performance figures are shown.
Also, except as otherwise noted, the accounts for which performance figures
are shown include all of the investment company and other accounts of the
appropriate sub-investment manager or management team that (a) have been
managed with investment objectives, policies, and strategies substantially
similar to those used in managing the Portfolio and (b) are of sufficient size
that their performance would be considered relevant to the owner of a policy
or contract investing in that Portfolio.
THE PERFORMANCE FIGURES SET FORTH ON THE FOLLOWING PAGES DO NOT REFLECT THE
DEDUCTION OF SALES, TAX, RISK, ADMINISTRATIVE, MORTALITY, OR OTHER CHARGES
UNDER THE TERMS OF THE VARIABLE ANNUITY CONTRACTS AND VARIABLE LIFE INSURANCE
POLICIES THAT MAY INVEST IN THE FUND. THESE CHARGES MAY BE SUBSTANTIAL AND
WILL CAUSE THE INVESTMENT RETURN UNDER SUCH A CONTRACT OR POLICY TO BE LESS
THAN THAT OF THE PORTFOLIOS SELECTED BY THE CONTRACTOWNER. YOU SHOULD REVIEW
THE SEPARATE ACCOUNT PROSPECTUS ATTACHED AT THE FRONT OF THIS PROSPECTUS FOR
DETAILED INFORMATION ABOUT SUCH CHARGES.
The information set forth in this Appendix should not be interpreted as
indicative of future performance of any Portfolio.
58
<PAGE>
Managed Portfolio
Independence Investment Associates, Inc.
<TABLE>
<CAPTION>
Annualized Total Return*
- -------------------------------------------------------
Periods Ending Managed S&P 500 (50%)/
On 12/31/96 Portfolio (1) LB G/C (50%)(2)
- --------------- -------------- ---------------
<S> <C> <C>
5 Years 10.57% 11.20%
3 Years 11.21% 12.61%
1 Years 10.72% 12.69%
</TABLE>
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Managed Portfolio (1) and Benchmark (2)*
- -----------------------------------------------------------------
S & P 500/LB G/C Index Manage Portfolio
---------------------- ----------------
<S> <C> <C>
12/31/91 10,000 10,000
3/31/92 9,798 9,914.26
6/30/92 10,094 10,136.32
9/30/92 10,498 10,369.88
12/31/92 10,768 10,609.15
3/31/93 11,251 11,075.06
6/30/93 11,451 11,273.34
9/30/93 11,788 11,816.03
12/31/93 11,907 11,884.6
3/31/94 11,493 11,976.13
6/30/94 11,447 11,686.16
9/30/94 11,758 12,014.65
12/31/94 11,781 11,629.88
3/31/95 12,646 12,332.2
6/30/95 13,655 13,260.29
9/30/95 14,327 13,832.23
12/31/95 15,089 14,728.52
3/29/96 15,315 15,104.11
6/30/96 15,697 15,333.24
9/30/96 16,084 15,270.04
12/31/96 17,004 16,751.96
</TABLE>
* Past performance is not predictive of future performance.
1. The performance results are net of Fund asset management expenses and are
total returns, which include the reinvestment of dividends and interest. The
total return figures reflect the expenses reimbursements and capital
contribution described in the footnotes to the "Financial Highlights" in this
Prospectus.
2. This index represents an equal weighted index of 50% of the S&P 500 Index and
50% of the Lehman Brothers Government/Corporate Bond Index.
a) The Standard & Poor's 500 Index covers 500 industrial, utility,
transportation, and financial companies of the U.S. markets (mostly NYSE
issues). The Index represents about 75% of NYSE market capitalization and
30% of NYSE issues. It is a capitalization-weighted index calculated on a
total return basis with dividends reinvested.
b) The Lehman Brothers Government/Corporate Bond Index is capitalization
weighted index calculated on a total return basis with dividends
reinvested. It is composed of all bonds that are invested grade (rated Baa
or higher by Moody's or BBB or higher by S&P, if unrated by Moody's).
Issues must have at least one year to maturity. Total return comprises
price appreciation/depreciation and income as a percentage of the original
investment. Indexes are rebalanced monthly by market capitalization.
A-1
<PAGE>
GROWTH & INCOME PORTFOLIO
Independence Investment Associates, Inc.
<TABLE>
<CAPTION>
Annualized Total Return*
- ----------------------------------------------
Periods Ending Growth & Income S&P 500
On 12/31/96 Portfolio(1) Index (2)
- --------------- ----------------- ----------
<S> <C> <C>
5 Years 14.60% 15.20%
3 Years 17.01% 19.66%
1 Year 20.10% 23.07%
</TABLE>
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
S&P 500 Index Growth & Income Portfolio
<S> <C> <C>
12/31/91 10,000 10,000.00
3/31/92 9,745 9,941.24
6/30/92 9,936 10,183.36
9/30/92 10,244 10,249.99
12/31/92 10,767 10,750.08
3/31/93 11,228 11,155.95
6/30/93 11,286 11,485.07
9/30/93 11,575 12,000.07
12/31/93 11,843 12,117.16
3/31/94 11,391 12,338.12
6/30/94 11,437 12,112.30
9/30/94 12,001 12,668.39
12/31/94 11,997 12,076.00
3/31/95 13,166 13,019.98
6/30/95 14,415 14,151.91
9/29/95 15,561 15,033.62
12/31/95 16,488 16,239.62
3/29/96 17,384 17,128.99
6/30/96 18,169 17,949.58
9/30/96 18,725 17,604.87
12/31/96 20,293 20,128.50
</TABLE>
* Past performance is not predictive of future performance.
1. The performance results are net of Fund asset management expenses and are
total returns, which include the reinvestment of dividends and interest. The
total return figures reflect the expense reimbursements and capital
contribution described in the footnotes to the "Financial Highlights" in
this Prospectus.
2. The Standard & Poor's 500 Index covers 500 industrial, utility,
transportation, and financial companies of the U.S. markets (mostly NYSE
issues). The index represents about 75% of NYSE market capitalization and 30%
of NYSE issues. It is a capitalization-weighted index calculated on a total
return basis with dividends reinvested.
<PAGE>
Equity Index Portfolio
and
State Street Global Advisors
S&P 500 Flagship Fund
<TABLE>
<CAPTION>
Annualized Total Return*
- --------------------------------------------------------------------------------
Periods Ending SSGA S&P 500 S&P 500 Equity Index
On 12/31/96 Flagship Fund (1) Index (2) Portfolio (3)
- ---------------- -------------------- ----------------- -----------------
<S> <C> <C> <C>
5 Years 14.77% 15.20% N/A
3 Years 19.20% 19.66% N/A
1 year 22.49% 23.07% N/A
Since Inception N/A 15.04% 14.23% (4)
</TABLE>
<TABLE>
<CAPTION>
SSGA S&P 500 Flagship Fund (1) and Benchmark (2)*
- --------------------------------------------------------------------------------
S&P 500 SSGA S&P 500
Index Flagship Fund
------------ -----------------
<S> <C> <C>
12/91 10,000.00 10,000.00
3/92 9,745.00 9,752.00
6/92 9,936.00 9,925.00
9/92 10,244.00 10,227.00
12/92 10,767.00 10,732.00
3/93 11,228.00 11,185.00
6/93 11,286.00 11,224.00
9/93 11,575.00 11,501.00
12/93 11,843.00 11,758.00
3/94 11,391.00 11,302.00
6/94 11,437.00 11,337.00
9/94 12,000.00 11,879.00
12/94 11,997.00 11,868.00
3/95 13,165.00 13,010.00
6/95 14,415.00 14,236.00
9/95 15,561.00 15,353.00
12/95 16,488.00 16,257.00
3/96 17,384.00 17,117.00
6/96 18,169.00 17,866.00
9/96 18,725.00 18,395.00
12/96 20,293.00 19,914.00
</TABLE>
Value on 12/31/96:
- ------------------
$19,914 SSGA S&P 500
Flagship Fund
$20,293 S&P 500 Index
<TABLE>
<CAPTION>
Equity Index Portfolio (3) and Benchmark (2)*
- --------------------------------------------------------------------------------
S&P Equity Equity Index
Index Portfolio
-------------- -------------
<S> <C> <C>
5/1/96 10,000.00 10,000.00
May 1996 10,258.00 10,000.00
Jun 1996 10,300.00 10,210.21
Jul 1996 9,842.00 10,231.27
Aug 1996 10,050.00 9,825.37
Sep 1996 10,615.00 9,970.93
Oct 1996 10,906.00 10,509.35
Nov 1996 11,734.00 10,787.24
Dec 1996 11,504.00 11,561.33
</TABLE>
Value on 12/31/96:
- ------------------
$11,561 Equity Index Portfolio
$11,504 S&P 500 Index
* Past performance is not predictive of future performance.
1. The State Street Global Advisors S&P 500 Flagship Fund is the largest and
oldest commingled vehicle managed by SSGA using a substantially similar
investment strategy to that of the Equity Index Portfolio. As of December
31, 1996, the Fund had $20.9 billion in total assets and 150 participants.
2. The Standard & Poor's 500 Index covers 500 industrial, utility,
transportation, and financial companies of the U.S. markets (mostly NYSE
issues). The Index represents about 75% of NYSE market capitalization and 30%
of NYSE issues. It is a capitalization-weighted index calculated on a total
return basis with dividends reinvested.
3. The performance results are net of Fund asset management expenses and are
total returns, which assume the reinvestment of dividends and interest. The
total return figure reflects the expense reimbursements and capital
contribution described in the footnotes to the "Financial Highlights" in
this Prospectus.
4. But for a special capital contribution, the total return would have been
13.59%.
<PAGE>
Large Cap Value Portfolio
and
Equity Income Composite (1)
T. Rowe Price Associates, Inc.
<TABLE>
<CAPTION>
Annualized Total Return*
- ----------------------------------------------------------------
T. Rowe Price
Periods Ending Equity Income Russell 1000 Large Cap Value
On 12/31/96 Composite (1) Value Index (2) Portfolio (3)
- -------------- ------------- --------------- ---------------
<S> <C> <C> <C>
5 Years 16.86% 17.27% N/A
3 Years 19.18% 18.15% N/A
1 Year 20.77% 21.64% N/A
Since Inception N/A 14.68% 13.90%
</TABLE>
<TABLE>
<CAPTION>
Equity Income Composite (1) and Benchmark (2)*
TR Price Equity Income
Composite Russell 1000 Value Index
<S> <C> <C>
12/91 10,000.00 10,000.00
03/92 10,300.00 10,112.00
06/92 10,665.00 10,534.00
09/92 10,864.00 10,753.00
12/92 11,243.00 11,381.00
03/93 11,889.00 12,481.00
06/93 12,110.00 12,846.00
09/93 12,460.00 13,480.00
12/93 12,872.00 13,444.00
03/94 12,508.00 12,974.00
06/94 12,704.00 13,055.00
09/94 13,405.00 13,388.00
12/94 13,346.00 13,176.00
03/95 14,520.00 14,429.00
06/95 15,519.00 15,721.00
09/95 16,703.00 17,095.00
12/95 18,046.00 18,229.00
03/96 18,948.00 19,262.00
06/96 19,492.00 19,593.00
09/96 20,197.00 20,163.00
12/96 21,793.00 22,174.00
</TABLE>
Value on 12/31/96:
- ------------------
$21,793 TR Price Equity Income
Composite
$22,174 Russell 1000 Value Index
<TABLE>
<CAPTION>
Large Cap Value Portfolio (3) and Benchmark (2)*
Russell 1000 Value
Index Large Cap Value Portfolio
<S> <C> <C>
April 1996 10,000.00 10,000.00
May 1996 10,125.00 10,000.00
Jun 1996 10,133.00 10,190.10
Jul 1996 9,750.00 10,255.44
Aug 1996 10,029.00 9,976.73
Sep 1996 10,428.00 10,186.40
Oct 1996 10,831.00 10,618.31
Nov 1996 11,616.00 10,859.97
Dec 1996 11,468.00 11,451.49
</TABLE>
Value on 12/31/96:
- ------------------
$11,451 Large Cap Value Portfolio
$11,468 Russell 1000 Value
Index
* Past Performance is not predictive of future performance.
1. The Equity Income Composite is an asset-weighted composite of 11 accounts
managed using a substantially similar investment strategy, with $752
million in total assets as of December 31, 1996. It includes all private
accounts with assets of at least $1 million (but not mutual funds) using a
substantially similar investment strategy.
2. Russell 1000 Value Index contains those Russell 1000 securities with a less-
than-average growth orientation. It represents the universe of stocks from
which large cap value managers typically select. Securities in this Index
tend to exhibit low price-to-book and price-earnings ratios, higher
dividend yields and lower forecasted growth values than the Russell 1000
Growth Index. It is a capitalization-weighted index calculated on a total
return basis with dividends reinvested.
3. The performance results are net of Fund asset management expenses and are
total returns, which assume the reinvestment of dividends and interest. The
total return figure reflects the expense reimbursements and capital
contribution described in the footnotes to the "Financial Highlights" in
this Prospectus.
A-4
<PAGE>
Large Cap Growth Portfolio
Independence Investment Associates, Inc.
<TABLE>
<CAPTION>
Annualized Total Return*
- -----------------------------------------------------------------
Periods Ending Large Cap Large Cap Growth
On 12/31/96 Growth Portfolio (1) Benchmark (2)(3)
- -------------- -------------------- ----------------
<S> <C> <C>
5 Years 14.02% 14.99%
3 Years 15.51% 19.27%
1 Year 18.27% 21.73%
</TABLE>
Large Cap Growth Portfolio (1) and Benchmark (2)(3)*
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Large Cap Benchmark Large Cap Portfolio
<S> <C> <C>
12/31/91 10,000.00 10,000.00
3/92 9,747.00 9,958.41
6/92 9,933.00 10,205.56
9/92 10,246.00 10,290.18
12/92 10,762.00 10,790.19
3/93 11,232.00 11,299.86
6/93 11,286.00 11,559.06
9/93 11,578.00 12,141.97
12/93 11,847.00 12,341.59
3/94 11,397.00 12,492.26
6/94 11,445.00 12,285.72
9/94 12,005.00 12,838.49
12/94 12,003.00 12,205.33
3/95 13,172.00 13,098.65
6/95 14,429.00 14,193.49
9/95 15,576.00 15,013.68
12/95 16,513.00 16,084.60
3/96 17,400.00 16,887.90
6/96 18,298.00 17,773.86
9/96 18,957.00 17,102.59
12/96 20,102.00 19,610.54
</TABLE>
* Past performance is not predictive of future performance.
1. The performance results are net of Fund asset management expenses and are
total returns, which include the reinvestment of dividends and interest. The
total return figures reflect the expense reimbursements and capital
contribution described in the footnotes to the "Financial Highlights" in this
Prospectus.
2. Russell 1000 Growth Index contains those Russell 1000 securities with a
greater-than-average growth orientation. It represents the universe of
stocks from which large cap growth managers typically select. Securities in
this Index tend to exhibit higher price-to-book and price-earnings ratios,
lower dividend yields and higher forecasted growth values than the Russell
1000 Value Index. It is a capitalization-weighted index calculated on a
total return basis with dividends reinvested.
3. This Benchmark is represented by:
a) the S&P 500 for the period April 1986 to April 1996. The Standard & Poor's
500 Index covers 500 industrial, utility, transportation, and financial
companies of the U.S. markets (mostly NYSE issues). The Index represents
about 75% of NYSE market capitalization and 30% of NYSE issues. It is a
capitalization-weighted index calculated on a total return basis with
dividends reinvested.
b) the Russell 1000 Growth Index for the period May 1996 to December
1996, (described above #2).
A-5
<PAGE>
Mid Cap Value Portfolio
and
Mid Cap Value Composite (1)
Neuberger & Berman Management, LLC
<TABLE>
<CAPTION>
Annualized Total Return*
- --------------------------------------------------------------------------
Periods Ending N&B Mid Cap Russell Mid Cap Mid Cap Value
On 12/31/96 Value Composite (1) Value Index (2) Portfolio (3)
- -------------- ------------------- --------------- -------------
<S> <C> <C> <C>
5 Years 18.61% 17.44% N/A
3 Years 19.85% 16.67% N/A
1 Year 28.30% 20.26% N/A
Since Inception N/A 12.93% 16.18%
</TABLE>
Mid Cap Value Composite (1) and Benchmark (2)*
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
N&B MidCap Russell MidCap
<S> <C> <C>
12/91 10,000.00 10,000.00
3/92 10,419.00 10,478.59
6/92 10,273.13 10,761.78
9/92 10,631.67 11,083.48
12/92 11,732.04 12,167.86
3/93 12,310.43 13,187.83
6/93 12,490.17 13,523.56
9/93 13,430.68 14,101.37
12/93 13,638.85 14,068.84
3/94 13,057.84 13,670.30
6/94 12,992.55 13,634.28
9/94 13,842.26 14,245.73
12/94 13,429.76 13,769.15
3/95 14,868.09 15,152.30
6/95 16,293.94 16,465.60
9/95 17,661.00 17,772.11
12/95 18,300.33 18,579.43
3/96 20,022.39 19,617.84
6/96 20,406.82 19,994.50
9/96 21,227.17 20,569.60
12/96 23,479.37 22,342.80
</TABLE>
Mid Cap Value Portfolio (3) and Benchmark (2)
<TABLE>
<CAPTION>
Russell MidCap Mid Cap Value
<S> <C> <C>
April 1996 10,000.00 10,000.00
May 1996 10,096.00 10,000.00
Jun 1996 10,106.00 10,248.80
Jul 1996 9,625.00 10,094.61
Aug 1996 10,029.00 9,571.52
Sep 1996 10,397.00 10,034.57
Oct 1996 10,671.00 10,516.00
Nov 1996 11,340.00 10,707.74
Dec 1996 11,293.00 11,615.98
</TABLE>
* Past performance is not predictive of future performance.
1. The Mid Cap Value Composite is an asset-weighted composite of all accounts
with assets of at least $1 million managed by the same management team using
a substantially similar investment strategy.
2. Russell Mid Cap Value Index consists of the smallest 800 securities in the
Russell 1000 Index, as ranked by total market capitalization. This index
accurately captures the medium-sized universe of securities and represents
approximately 34% of the Russell 1000 total market capitalization. The
Russell Mid Cap Value Index contains securities with a less-than-average
growth orientation. It is a capitalization-weighted index calculated on a
total return basis with dividends reinvested.
3. The performance results are net of Fund asset management expenses and are
total returns, which assume the reinvestment of dividends and interest. The
total return figure reflects the expense reimbursements and capital
contribution described in the footnotes to the "Financial Highlights" in this
Prospectus.
A-6
<PAGE>
Mid Cap Growth Portfolio
and
Mid Cap Growth Composite (1)
Janus Capital Corporation
<TABLE>
<CAPTION>
Annualized Total Return*
- --------------------------------------------------------------------------------
Periods Ending Janus Mid Cap Russell Mid Cap Mid Cap Growth
On 12/31/96 Growth Composite (1) Growth Index (2) Portfolio (3)
- -------------- -------------------- ---------------- --------------
<S> <C> <C> <C>
5 Years 15.09% 13.23% N/A
3 Years 14.30% 15.48% N/A
1 Year 8.71% 17.48% N/A
Since Inception N/A 5.28% 2.69%
</TABLE>
<TABLE>
<CAPTION>
[LINE GRAPH APPEARS HERE]
Mid Cap Growth Composite (1) and Benchmark (2)*
- --------------------------------------------------------------------------------
Janus Mid-Cap Russell Mid-Cap
- --------------------------------------------------------------------------------
<S> <C> <C>
12/91 10,000 10,000
3/92 9,590 9,695
6/92 9,436 9,245
9/92 10,091 9,739
12/92 11,608 10,871
3/93 12,032 10,969
6/93 11,921 10,970
9/93 12,856 11,710
12/93 13,520 12,088
3/94 13,000 11,713
6/94 12,545 11,198
9/94 13,952 11,994
12/94 14,395 11,826
3/95 14,569 13,105
6/95 15,485 14,157
9/95 17,763 15,552
12/95 18,573 15,845
3/96 20,373 16,866
6/96 21,120 17,497
9/96 20,964 18,092
12/96 20,190 18,615
</TABLE>
<TABLE>
<CAPTION>
[LINE GRAPH APPEARS HERE]
Mid Cap Growth Portfolio (3) and Benchmark (2)*
- --------------------------------------------------------------------------------
Russell Mid Cap Mid Cap Growth
- --------------------------------------------------------------------------------
<S> <C> <C>
April 1996 10,000 10,000
May 1996 10,204 10,000
June 1996 9,896 10,251.79
July 1996 9,128 10,020.18
August 1996 9,621 9,186.41
September 1996 10,233 9,881.14
October 1996 10,112 10,473.40
November 1996 10,708 10,325.04
December 1996 10,528 10,408.08
- --------------------------------------------------------------------------------
</TABLE>
* Past performance is not predictive of future performance.
1. The Mid Cap Growth Composite is an asset-weighted composite of all accounts
with asset of at least $1 million managed using a substantially similar
investment strategy.
2. Russell Mid Cap Growth Index consists of the smallest 800 securities in the
Russell 1000 Index, as ranked by total market capitalization. This index
accurately captures the medium-sized universe of securities and represents
approximately 34% of the Russell 1000 total market capitalization. The
Russell Mid Cap Growth Index contains securities with a greater-than-average
growth orientation. It is a capitalization-weighted index calculated on a
total return basis with dividends reinvested.
3. The performance results are net of Fund asset management expenses and are
total returns, which assume the reinvestment of dividends and interest. The
total return figure reflects the expense reimbursements and capital
contribution described in the footnotes to the "Financial Highlights" in
this Prosptectus.
A-7
<PAGE>
Special Opportunities Portfolio
John Hancock Advisers, Inc.
<TABLE>
<CAPTION>
Annualized Total Return*
- ----------------------------------------------------------------
Periods Ending Special Opportunities Russell Mid Cap
On 12/31/96 Portfolio (1) Growth Index (2)
- -------------- --------------------- -----------------
<S> <C> <C>
5 Years N/A N/A
3 Years N/A N/A
1 Year 30.33% 17.48%
</TABLE>
Special Opportunities Portfolio (1) and Benchmark (2)*
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Russell MidCap
Growth Index Special Opportunities Portfolio
- -------------------------------------------------------------------
<S> <C> <C>
5/1/94 10,000.00 10,000.00
6/94 9,583.80 10,019.50
9/94 10,264.60 10,359.03
12/94 10,121.50 9,992.18
3/95 11,216.00 10,282.83
6/95 12,116.30 11,087.25
9/95 13,309.70 12,807.23
12/95 13,560.40 13,159.52
3/96 14,434.80 14,611.97
6/96 14,974.50 16,455.41
9/96 15,484.00 15,484.22
12/96 15,931.00 17,438.18
</TABLE>
* Past performance is not predictive of future performance.
1. The performance results are net of Fund asset management expenses and are
total returns, which include the reinvestment of dividends and interest. The
total return figure reflects the expense reimbursements and capital
contribution described in the footnotes to the "Financial Highlights" in
this Prospectus.
2. Russell Mid Cap Growth Index consists of the smallest 800 securities in the
Russell 1000 Index, as ranked by total market capitalization. This index
accurately captures the medium-sized universe of securities and represents
approximately 34% of the Russell 1000 total market capitalization. The
Russell Mid Cap Growth Index contains securities with a greater-than-
average growth orientation. It is a capitalization-weighted index
calculated on a total return basis with dividends reinvested.
A-8
<PAGE>
Real Estate Equity Portfolio
Independence Investment Associates, Inc.
<TABLE>
<CAPTION>
Annualized Total Return*
- -------------------------------------------------------------
Periods Ending Real Estate Wilshire Real
On 12/31/96 Equity Portfolio (1) Estate Index (2)
- ---------------- ---------------------- ------------------
<S> <C> <C>
5 Years 15.89% 14.36%
3 Years 15.40% 16.50%
1 Year 33.07% 36.87%
</TABLE>
Real Estate Equity Portfolio (1) and Benchmark (2)*
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Wilshire Real Estate Real Estate Equity
Index Portfolio
<S> <C> <C>
1/31/91 10,000.00 10,000.00
3/92 10,217.00 10,285.46
6/92 9,784.00 10,412.47
9/92 10,040.00 10,479.67
12/92 10,736.00 11,059.53
3/93 12,845.00 13,048.58
6/93 12,239.00 12,983.16
9/93 13,327.00 13,515.32
12/93 12,372.00 13,434.55
3/94 12,650.00 14,506.56
6/94 12,801.00 14,451.12
9/94 12,607.00 14,008.48
12/94 12,575.00 12,882.75
3/95 12,623.00 13,797.33
6/95 13,172.00 14,238.49
9/95 13,797.00 14,839.69
12/95 14,291.00 14,742.30
3/96 14,895.00 16,069.76
6/96 15,602.00 16,460.14
9/96 16,523.00 17,456.35
12/96 19,561.00 19,042.53
</TABLE>
* Past performance is not predictive of future performance.
1. The performance results are net of Fund asset management expenses and are
total returns, which include the reinvestment of dividends and interest. The
total return figures reflect the expense reimbursements and capital
contribution described in the footnotes to the "Financial Highlights" in
this Prospectus.
2. The Wilshire Real Estate Securities Index is a market-capitalization weighted
index which measures the performance of more than 85 real estate securities.
The index contains performance data on five major categories of property:
office, retail, industrial, apartment and miscellaneous. It is a total
return index with dividends reinvested.
A-9
<PAGE>
Small Cap Value Portfolio
and
Small Cap Equity Account Composite (1)
INVESCO Management & Research, Inc.
<TABLE>
<CAPTION>
Annualized Total Return*
- -----------------------------------------------------------------------
Periods Ending INVESCO Small Cap Russell 2000 Small Cap Value
On 12/31/96 Equity Composite (1) Index (2) Portfolio (3)
- ------------- -------------------- ------------ ----------------
<S> <C> <C> <C>
5 Years 16.90% 15.64% N/A
3 Years 14.32% 13.68% N/A
1 Year 17.70% 16.49% N/A
Since Inception N/A 5.21% 10.33%
</TABLE>
[GRAPH APPEARS HERE]
Small Cap Composite (1) and Benchmark (2)*
<TABLE>
<CAPTION>
INVESCO Small Cap Equity Composite Russell 2000 Index
- --------------------------------------------------------------------------------
<S> <C> <C>
12/31/91 10,000 10,000
3/92 10,929 10,750
6/92 10,044 10,017
9/92 10,588 10,304
12/92 12,443 11,841
3/93 13,568 12,347
6/93 13,467 12,617
9/93 14,974 13,720
12/93 14,614 14,080
3/94 14,254 13,706
6/94 13,689 13,172
9/94 14,435 14,087
12/94 14,391 13,823
3/95 14,924 14,461
6/95 16,310 15,816
9/95 18,090 17,378
12/95 18,549 17,755
3/96 19,480 18,661
6/96 20,232 19,594
9/96 20,601 19,660
12/96 21,832 20,683
</TABLE>
<TABLE>
<CAPTION>
Small Cap Value Portfolio (3) and Benchmark (2)
Small Cap Value Portfolio Russell 2000 Index
- ------------------------------------------------------------------------------
<S> <C> <C>
May 15, 96 10,000.00 10,000
5/96 10,000.00 10,394
6/96 10,231.73 9,967
7/96 10,126.04 9,097
8/96 9,630.09 9,625
9/96 10,161.38 10,001
10/96 10,449.97 9,847
11/96 10,340.15 10,253
12/96 10,678.01 10,521
</TABLE>
* Past performance is not predictive of future performance.
1. The Small Cap Equity Account Composite represents an asset weighted
composite of all accounts with assets of at least $1 million managed using
substantially similar investment strategy.
2. Russell 2000 Index consists of the smallest 2,000 securities in the Russell
3000 Index, representing approximately 11% of the Russell 3000 total market
capitalization. This small capitalization index is widely regarded in the
industry as the premier measure of small capitalization stocks. It is a
capitalization-weighted index calculated on a total return basis with
dividends reinvested.
3. The performance results are net of Fund asset management expenses and are
total returns, which assume the reinvestment of dividends and
interest. The total return figure reflects the expense reimbursements and
capital contribution described in the footnotes to the "Financial
Highlights" in this Prospectus.
A-10
<PAGE>
Small Cap Growth Portfolio
and
Emerging Growth Composite (1)
John Hancock Advisers, Inc.
<TABLE>
<CAPTION>
Annualized Total Return*
- ------------------------------------------------------------------------------
Periods Ending J.H. Advisers Emerging Russell 2000 Small Cap Growth
On 12/31/96 Growth Composite (1) Growth Index (2) Portfolio (3)
- -------------- ---------------------- ---------------- ----------------
<S> <C> <C> <C>
5 Years 16.12% 11.69% N/A
3 Years 17.79% 12.47% N/A
1 Year 14.03% 11.26% N/A
Since Inception N/A -2.28% -0.50%
</TABLE>
Emerging Growth composite (1) and Benchmark (2)*
Small Cap Growth portfolio (3) and Benchmark (2)*
<TABLE>
<CAPTION>
Russell 2000 Small Cap Growth
<S> <C> <C>
Apr 10,000.00 10,000.00
May 10,513.00 10,000.00
Jun 9,830.00 10,599.17
Jul 8,630.00 10,294.35
Aug 9,269.00 9,480.13
Sep 9,746.00 10,298.31
Oct 9,325.00 11,150.77
Nov 9,585.00 10,169.74
Dec 9,772.00 9,976.02
</TABLE>
* Past performance is not predictive of future performance.
1. The Emerging Growth Composite represents the performance of all accounts with
assets of at least $1 million managed using a substantially similar
investment strategy, consisting of a single mutual fund.
2. The Russell 2000 Growth Index contains those Russell 2000 securities with a
greater-than-average growth orientation. It represents the universe of stocks
from which small cap growth managers typically select. Securities in this
index tend to exhibit higher price-to-book and price-earnings ratios, lower
dividend yields and higher forecasted growth values than the Russell 2000
Value Index. It is a capitalization-weighted index calculated on a total
return basis with dividends reinvested.
3. The performance results are net of Fund asset management expenses and are
total returns, which assume the reinvestment of dividends and interest. The
total return figure reflects the expense reimbursements and capital
contribution described in the footnotes to the "Financial Highlights" in this
Prospectus.
A-11
<PAGE>
International Balanced Portfolio
and
International Balanced Strategy(1)
Brinson Partners, Inc.
<TABLE>
<CAPTION>
Annualized Total Return*
- -------------------------------------------------------------------------------------------
Periods Ending Brinson International International Balanced International Balanced
On 12/31/96 Balanced Strategy(1) Benchmark (2) Portfolio (3)
- -------------- --------------------- ---------------------- ----------------------
<S> <C> <C> <C>
5 Years 9.69% 9.01% N/A
3 Years 9.44% 9.19% N/A
1 Year 10.16% 6.20% N/A
Since Inception N/A 2.78% 6.73%
</TABLE>
International Balanced Strategy(1) and Benchmark(2)*
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Brinson Intl International
Balanced Strategy Balanced Benchmark
- ----------------------------------------------------------
<S> <C> <C>
12/91 10,000 10,000
3/92 9,480 9,054
6/92 10,160 9,463
9/92 10,548 9,780
12/92 10,567 9,337
3/93 11,198 10,261
6/93 11,467 11,039
9/93 11,834 11,705
12/93 12,116 11,823
3/94 11,873 12,159
6/94 11,775 12,619
9/94 11,972 12,742
12/94 11,863 12,669
3/95 12,267 13,429
6/95 12,852 13,742
9/95 13,649 14,009
12/95 14,415 14,493
3/96 14,545 14,712
6/96 15,000 14,897
9/96 15,282 15,076
12/96 15,880 15,391
</TABLE>
<TABLE>
<CAPTION>
[LINE GRAPH APPEARS HERE]
International Balanced Portfolio(3) and Benchmark(2)*
- --------------------------------------------------------------------------------
Index Portfolio
<S> <C> <C> <C>
April 1996 10,000 10,000
May 1996 9,890 10,000
June 1996 9,940 9,992.36
July 1996 9,847 10,054.88
August 1996 9,698 9,955.81
September 1996 10,066 10,007.29
October 1996 10,082 10,256.56
November 1996 10,396 10,314.89
December 1996 10,278 10,677.97
</TABLE>
* Past performance is not predictive of future performance.
1. The International Balanced Strategy represents the performance of all
accounts with assets of at least $1 million managed using a substantially
similar investment strategy, consisting of a private account.
2. The International Balanced Benchmark represents the following weighting of
two indices:
a) A 67% weighting of the Morgan Stanley Capital International World
Excluding the United States (MSCI World EX US) (Net of Withholding Taxes
From a U.S. Tax Perspective) Index is an arithmetic, market value-
weighted average of the performance of more than 1000 securities listed
on the stock exchanges of the following: Australia, Austria, Belgium,
Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy,
Japan, Malaysia, Netherlands, New Zealand, Norway, Singapore, Spain,
Sweden, Switzerland, United Kingdom. The index is calculated net of
withholding taxes for a U.S.-based investor. It is a capitalization-
weighted index calculated on a total return basis with dividends
reinvested.
b) a 33% weighting of the Salomon Brothers Non-US Government Bond index,
which is a market capitalization weighted index consisting of the
government bond markets of the following countries: Australia, Austria,
Belgium, Canada, Denmark, France, Germany, Italy, Japan, Netherlands,
Spain, Sweden, United Kingdom. Country eligibility is determined based
on market capitalization and investability criteria. All issues have
remaining maturity of at least one year. The index is rebalanced
monthly. It is a capitalization-weighted index calculated on a total
return basis with income reinvested.
3. The performance results are net of Fund asset management expenses and are
total returns, which assume the reinvestment of dividends and interest. The
total return figure reflects the expense reimbursements and capital
contribution described in the footnotes to the "Financial Highlights" in this
Prospectus.
A-12
<PAGE>
International Opportunities Portfolio
and
Mainstream International Equities Composite Accounts (MIEC)(1)
Rowe Price-Fleming International, Inc.
<TABLE>
<CAPTION>
Annualized Total Return*
- ------------------------------------------------------------
International
Periods Ending Rowe Price- MSCI EAFE Opportunities
On 12/31/96 Fleming MIEC (1) Index (2) Portfolio (3)
- -------------- ------------------ --------- -------------
<S> <C> <C> <C>
5 Years 11.45% 8.48% N/A
3 Years 8.13% 8.64% N/A
1 Year 14.49% 6.36% N/A
Since Inception N/A 0.36% 6.72%
</TABLE>
[GRAPH APPEARS HERE]
International Composite (1) and Benchmark (2)*
<TABLE>
<CAPTION>
RP-Fleming MSCI EAFE
MIEC INDEX
---------- ---------
<S> <C> <C>
12/91 10,000 10,000
3/92 9,746 8,821
6/92 10,240 9,016
9/92 9,774 9,160
12/92 9,615 8,815
3/93 10,373 9,880
6/93 10,884 10,882
9/93 12,084 11,611
12/93 13,601 11,719
3/94 13,270 12,136
6/94 13,363 12,765
9/94 14,121 12,785
12/94 13,481 12,664
3/95 13,395 12,910
6/95 13,985 13,014
9/95 14,662 13,566
12/95 15,018 14,127
3/96 15,806 14,545
6/96 16,384 14,786
9/96 16,468 14,799
12/96 17,194 15,025
</TABLE>
[GRAPH APPEARS HERE]
International Opportunities Portfolio (3) and Benchmark (2)*
<TABLE>
<CAPTION>
International
Opportunities
Portfolio MSCI/EAFE
------------- ---------
<S> <C> <C>
5/1/96 10,000.00 10,000
5/96 10,000.00 9,890
6/96 10,024.34 9,940
7/96 10,129.22 9,847
8/96 9,819.73 9,898
9/96 9,971.07 10,066
10/96 10,190.88 10,082
11/96 10,150.25 10,396
12/96 10,608.68 10,036
</TABLE>
* Past performance is not predictive of future performance.
1. The Mainstream International Equities Composite is an asset-weighed
composite of 19 accounts managed using a substantially similar investment
strategy, with $4.4 billion in total assets as of December 31, 1996. It
includes all private accounts with assests of at least $1 million (but not
mutual funds) using a substantially similar investment strategy.
2. Morgan Stanley Capital International Europe, Australia, Far East Index (the
MSCI EAFE Index) is an arithmetic, market value-weighted average of the
performance of over 900 securities listed on the stock exchanges of the
following countries in Europe, Australia, and the Far East: Australia,
Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland,
Italy, Japan, Malaysia, Netherlands, New Zealand, Norway, Singapore, Spain,
Sweden, Switzerland, United Kingdom. The Index is calculated on a total
return basis, which includes reinvestment of gross dividends before
deduction of withholdiing taxes.
3. The performance results are net of Fund asset management expenses and are
total returns, which assume the reinvestment of dividends and interest. The
total return figure reflects the expense reimbursements and capital
contribution described in the footnotes to the "Financial Highlights" in this
Prospectus.
A-13
<PAGE>
International Equities Portfolio
John Hancock Advisers, Inc.
<TABLE>
<CAPTION>
Annualized Total Return*
- --------------------------------------------------------------------------------
Periods Ending International MSCI EAFE
On 12/31/96 Equities Portfolio(1) Index (2)
- ----------------- --------------------- ----------------
<S> <C> <C>
5 Years 7.54% 8.48%
3 Years 3.40% 8.64%
1 Year 9.19% 6.36%
</TABLE>
International Equities Portfolio (1) and Benchmark (2)*
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
MSCI EAFE INTERNATIONAL EQUITIES PORTFOLIO
- -------------------------------------------------------------------------------
<S> <C> <C>
12/31/91 $10,000 $10,000.00
3/92 8,821 9,957.05
6/92 9,016 9,742.69
9/92 9,160 9,398.20
12/92 8,815 9,704.39
3/93 9,880 9,844.91
6/93 10,882 10,754.26
9/93 11,611 11,454.44
12/93 11,719 11,890.54
3/94 12,136 12,948.55
6/94 12,765 12,650.67
9/94 12,785 13,191.63
12/94 12,664 12,313.93
3/95 12,910 11,712.19
6/95 13,014 12,759.13
9/95 13,566 12,958.94
12/95 14,127 12,974.66
3/96 14,545 13,534.39
6/96 14,786 14,025.88
9/96 14,779 13,566.43
12/96 15,025 14,349.08
</TABLE>
* Past performance is not predictive of future performance.
1. The performance results are net of Fund asset management expenses and are
total returns, which include the reinvestment of dividends and interest.
The total return figures reflect the expense reimbursements and capital
contribution described in the footnotes to the "Financial Highlights" in
this Prospectus.
2. Morgan Stanely Capital International Europe, Australia, Far East Index (the
MSCI EAFE Index) is an arithmetic, market value-weighted average of the
performance of over 900 securities listed on the stock exchanges of the
following countries in Europe, Australia, and the Far East: Australia,
Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland,
Italy, Japan, Malaysia, Netherlands, New Zealand, Norway, Singapore, Spain,
Sweden, Switzerland, United Kingdom. The index is calculated on a total
return basis, which includes reinvestment of gross dividends before
deduction of withholding taxes.
A-14
<PAGE>
Sovereign Bond Portfolio
John Hancock Advisers, Inc.
<TABLE>
<CAPTION>
Annualized Total Return*
- ----------------------------------------------------------
Periods Ending Sovereign Bond LB Govt./Corp Bond
On 12/31/96 Portfolio (1) Index (2)
- -------------- ------------------ ------------------
<S> <C> <C>
5 Years 7.65% 7.18%
3 Years 6.63% 5.79%
1 Year 4.10% 2.91%
</TABLE>
Sovereign Bond Portfolio (1) and Benchmark (2)*
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
LB Govt./Corp Bond Index Sovereign Bond Portfolio
------------------------ ------------------------
<S> <C> <C>
1/31/96 10,000 10,000
3/92 9,850 9,929.01
6/92 10,250 10,134.37
9/92 10,750 10,628.16
12/92 10,758 10,606.89
3/93 11,259 11,186.14
6/93 11,597 11,312.25
9/93 11,982 11,887.83
12/93 11,947 11,869.45
3/94 11,572 11,876.99
6/94 11,429 11,501.29
9/94 11,486 11,704.33
12/94 11,528 11,527.76
3/95 12,102 12,123.64
6/95 12,887 12,927.39
9/95 13,134 13,132.84
12/95 13,746 13,681.64
3/96 13,424 13,703.35
6/96 13,487 13,547.47
9/96 13,726 13,783.65
12/96 14,145 14,508.71
</TABLE>
* Past performance is not predictive of future performance.
1. The performance results are net of Fund asset management expenses and are
total returns, which include the reinvestment of dividends and interest. The
total return figures reflect the expense reimbursements and capital
contribution described in the footnotes to the "Financial Highlights" in this
Prospectus.
2. The Lehman Brothers Government/Corporate Bond Index is composed of all bonds
that are investment grade (rated Baa or higher by Moody's or BBB or higher
by S&P, if unrated by Moody's). Issues must have at least one year to
maturity. Total return comprises price appreciation/depreciation and income
as a percentage of the original investment. Indexes are rebalanced monthly
by market capitalization.
A-15
<PAGE>
Strategic Bond Portfolio
and
Strategic Bond Composite (1)
J.P. Morgan Investment Management Inc.
<TABLE>
<CAPTION>
Annualized Total Return*
- -----------------------------------------------------------------------------
Periods Ending J.P. Morgan Strategic Strategic Bond Strategic Bond
On 12/31/96 Bond Composite (1) Benchmark (2) Portfolio (3)
- -------------- --------------------- -------------- --------------
<S> <C> <C> <C>
5 Years 6.68% 7.47% N/A
3 Years 5.61% 6.51% N/A
1 Year 4.76% 5.69% N/A
Since Inception N/A 7.03% 6.71%
</TABLE>
Strategic Bond Composite (1) and Benchmark (2)*
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
JP Morgan Strategic Bond
<S> <C> <C>
12/91 10,000.00 10,000.00
3/92 9,822.00 9,918.00
6/92 10,158.00 10,248.00
9/92 10,567.00 10,606.00
12/92 10,605.00 10,708.00
3/93 10,970.00 11,116.00
6/93 11,233.00 11,410.00
9/93 11,608.00 11,738.00
12/93 11,728.00 11,863.00
3/94 11,361.00 11,498.00
6/94 11,191.00 11,328.00
9/94 11,193.00 11,374.00
12/94 11,241.00 11,452.00
3/95 11,735.00 12,014.00
6/95 12,373.00 12,700.00
9/95 12,655.00 13,006.00
12/95 13,187.00 13,561.00
3/96 12,990.00 13,408.00
6/96 13,100.00 13,557.00
9/96 13,402.00 13,888.00
12/96 13,815.00 14,333.00
</TABLE>
Strategic Bond Portfolio (3) and Benchmark (2)*
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Strategic Bond Benchmark Strategic Bond Portfolio
<S> <C> <C>
May 1996 10,000.00 10,000.00
May 1996 10,002.00 9,983.20
Jun 1996 10,123.00 9,983.20
Jul 1996 10,162.00 10,068.31
Aug 1996 10,183.00 10,102.86
Sep 1996 10,370.00 10,111.98
Oct 1996 10,586.00 10,297.03
Nov 1996 10,775.00 10,489.94
Dec 1996 10,703.00 10,674.48
</TABLE>
* Past Performance is not predictive of future performance.
1. The Strategic Bond Composite represents the performance of all accounts
included in two composites, as follows:
a) a 75% allocation to the Public Only Active Fixed Income Composite.
b) a 25% allocation to the Non-US Hedged Fixed Income Composite.
c) Each of these is an asset-weighted composite representing all accounts
with assets of at least $1 million managed using a substantially similar
investment strategy.
2. The Strategic Bond Benchmark represents the following weighting of two
indices:
a) a 75% allocation to the Lehman Brothers Aggregate Bond Index, composed of
securities from the Lehman Brothers Government/Corporate Bond Index, the
Mortgage-Backed Securities Index and the Asset-Backed Securities Index.
Total return comprises price appreciation/depreciation and income as a
percentage of the original investment. Indexes are rebalanced monthly by
market capitalization. It is a capitalization-weighted index calculated on
a total return basis with income reinvested.
b) a 25% allocation to the JP Morgan Non-US Government Bond Index, Hedged,
which is a total return, market capitalization weighted index, rebalanced
monthly consisting of the following countries: Australia, Belgium, Canada,
Denmark, France, Germany, Italy, Japan, Netherlands, Spain, Sweden, and
United Kingdom. This index is hedged into US dollars using a rolling 1-
month forward exchange contract as the hedging instrument. It is a
capitalization-weighted index calculated on a total return basis with
income reinvested.
3. The performance results are net of Fund asset management expenses and are
total returns, which assume the reinvestment of dividends and interest. The
total return figure reflects the expense reimbursements and capital
contribution described in the footnotes to the "Financial Highlights" in
this Prospectus.
<PAGE>
Short-Term U.S. Government Portfolio
Independence Investment Associates, Inc.
<TABLE>
<CAPTION>
Annualized Total Return*
- --------------------------------------------------------------------------------
Periods Ending Merrill Lynch 1-5 Short-Term U.S.
On 12/31/96 Yr. Gov. Bond Index (2) Gov. Portfolio (1)
- ---------------- ----------------------- ------------------------
<S> <C> <C>
5 Years N/A N/A
3 Years N/A N/A
1 Year 3.61% 4.47%
</TABLE>
<TABLE>
<CAPTION>
Short-Term U.S. Govt. Portfolio (1) and Benchmark (2)*
- --------------------------------------------------------------------------------
Short-Term U.S. Merrill Lynch 1-5
Gov. Portfolio (1) U.S. Govt. Bond Index
------------------- -----------------------
<S> <C> <C>
5/1/94 10,000.00 10,000.00
6/94 10,032.70 9,999.10
9/94 10,117.50 10,129.77
12/94 10,102.00 10,032.42
3/95 10,489.50 10,323.89
6/95 10,907.60 10,693.65
9/95 11,071.40 10,844.29
12/95 11,397.70 11,097.85
3/96 11,382.90 11,183.40
6/96 11,473.50 11,123.35
9/96 11,665.90 11,259.93
12/96 11,907.50 11,607.29
- --------------------------------------------------------------------------------
</TABLE>
* Past performance is not predictive of future performance.
1. The performance results are net of Fund asset management expenses and are
total returns, which include the reinvestment of dividends and interest. The
total return figure reflects the expense reimbursements and capital
contribution described in the footnotes to the "Financial Highlights" in
this Prospectus.
2. The index represents the Merrill Lynch 1-5 Year U.S. Government Bond Index.
It is a capitalization-weighted index calculated on a total return basis with
dividends reinvested.
A-17
<PAGE>
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, 1997. 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, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BUSINESS HISTORY.......................................................... 1
INVESTMENT TECHNIQUES..................................................... 1
Hedging Strategies...................................................... 1
Further Considerations as to Options and Futures Contracts.............. 2
Short-Term Trading...................................................... 3
Foreign Currency Exchange Transactions.................................. 3
Forward Commitments..................................................... 5
Repurchase Agreements................................................... 5
Lending of Portfolio Securities......................................... 5
TYPES OF INVESTMENT INSTRUMENTS AND RATINGS............................... 6
Foreign Securities...................................................... 6
Debt Securities Generally............................................... 7
Debt Securities of the International Equities Portfolio................. 7
Sovereign Bond Portfolio Securities..................................... 7
U.S. Government Obligations............................................. 8
Other Money Market Portfolio Securities................................. 8
Commercial Paper Ratings................................................ 9
Corporate Bond Ratings.................................................. 9
Standard and Poor's Depository Receipts................................. 10
Financial Futures Contracts............................................. 10
Options on Financial Futures Contracts.................................. 10
Interest Rate Options................................................... 11
Margin Requirements for Futures and Options............................. 11
Stock Index Options..................................................... 11
Other Derivative Transactions........................................... 12
INVESTMENT RESTRICTIONS................................................... 13
BOARD OF TRUSTEES AND OFFICERS OF THE FUND................................ 16
INVESTMENT ADVISORY AND OTHER SERVICES.................................... 17
Investment Management and Operating Expenses............................ 17
Underwriting and Indemnity Agreement.................................... 19
Custodian Agreement..................................................... 19
Independent Auditors.................................................... 20
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION........................... 20
THE TRUST'S ORGANIZATION AND SHARES....................................... 22
VOTING RIGHTS............................................................. 23
REDEMPTION AND PRICING OF SHARES.......................................... 24
TAXES..................................................................... 24
CALCULATION OF PERFORMANCE DATA........................................... 26
Yield and Total Return Information for all Portfolios Other Than the
Money Market Portfolio................................................. 26
Calculation of Yield Quotations of the Money Market Portfolio........... 27
Charges Under Variable Life Insurance and Variable Annuity Policies..... 27
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADDITIONAL INFORMATION..................................................... 28
Legal Matters............................................................ 28
Reports.................................................................. 28
FINANCIAL STATEMENTS....................................................... 28
</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,
in 1995, 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-
1
<PAGE>
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.
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.
2
<PAGE>
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.
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
3
<PAGE>
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 an 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 at least 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.
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
4
<PAGE>
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 Sovereign Bond, 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 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.
5
<PAGE>
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.
6
<PAGE>
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-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
7
<PAGE>
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.
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.
8
<PAGE>
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 Investors Service.
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.
9
<PAGE>
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 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
10
<PAGE>
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 Short-Term U.S. Government,
Special Opportunities, Mid Cap Growth, Small Cap Growth, Small Cap Value,
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
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<PAGE>
of the excess of a specified stock index on the exercise date over the
exercise or "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.
OTHER DERIVATIVE TRANSACTIONS
Subject to the conditions set forth in the Fund's Prospectus, the
International Balanced and Strategic Bond Portfolios may use swaps, caps,
floors and collars. Provided the contract so permits, a Portfolio will usually
enter into swaps on a net basis; that is, the two payment streams are netted
out in a cash settlement on the payment date or dates specified in the
instrument, with the Portfolio receiving or paying, as the case may be, only
the net amount of the two payments.
Each Portfolio will maintain cash or liquid high grade debt securities in a
segregated account with its custodian in an amount sufficient at all times to
cover its current obligations under swaps, caps, floors and collars. If a
Portfolio enters into a swap agreement on a net basis, it will segregate
assets with a daily value at least equal to the excess, if any, of the
Portfolio's accrued obligations under the swap agreement over the accrued
amount the Portfolio is entitled to receive under the agreement. If a
Portfolio enters into a swap agreement on other than a net basis, or sells a
cap, floor or collar, it will segregate assets with a daily value at least
equal to the full amount of the Portfolio's accrued obligations under the
agreement.
Neither Portfolio will enter into any swap, cap, floor, or collar, unless
the other party to the transaction (the "Counterparty") is deemed creditworthy
by the sub-investment manager. If a Counterparty defaults, the Portfolio may
have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years, with a
large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, for that reason, they are less liquid than swaps.
The liquidity of swaps, caps, floors and collars will be determined by the
sub-investment manager based on various factors, including (1) the frequency
of trades and quotations, (2) the number of dealers and prospective purchasers
in the marketplace, (3) dealer undertakings to make a market, (4) the nature
of the instrument (including any demand or tender features) and (5) the nature
of the marketplace for trades (including the ability to assign or offset a
Portfolio's rights and obligations relating to the investment). Such
determination will govern whether the instrument will be deemed within the 15%
restriction on investments in securities that are not readily marketable.
The federal income tax treatment with respect to swaps, caps, floors, and
collars may impose limitations on the extent to which a Portfolio may engage
in such transactions.
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<PAGE>
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 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;
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<PAGE>
(B) with respect to Sovereign Bond, 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, Managed,
International Equities, Short-Term U.S. Government, and Special
Opportunities Portfolios, neither such portfolios, nor the Growth & Income,
Money Market, Large Cap Growth, or Real Estate Equities Portfolios may
purchase securities which are subject to legal or contractual delays in or
restrictions on resale. The Sovereign Bond and Managed Portfolios 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 each 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
14
<PAGE>
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.
(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.
15
<PAGE>
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 02117 Mutual Life Insurance Company;
Director, Hancock Leasing
Corporation
Thomas J. Lee................ Vice Chairman, Vice President, Life and Annuity
John Hancock Place President Services, John Hancock Mutual
Boston, Massachusetts 02117 and Trustee Life Insurance Company; Director,
John Hancock Variable Life
Insurance Company
William H. Dykstra........... Trustee Director, Reed & Barton
Reed & Barton Corporation Corporation (silversmiths);
Taunton, Massachusetts 02780 Certified Public Accountant;
Trust Fund Commissioner, Town of
Braintree.
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
Tax
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.
16
<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 $500,000,000 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 $250,000,000, 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.
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.
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.
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State Street Global Bank & Trust, N.A. ("State Street") serves as sub-
investment manager to the Equity Index Portfolio. For this John Hancock pays
State Street a fee at an annual rate of .07% of the first $75,000,000 of the
Portfolio's average daily net assets; .06% of the next $50,000,000; and .05%
on all additional amounts.
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 manager 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, LLC ("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
manager 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, as amended, 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 Fund's fidelity bond coverage, the
costs of printing and distributing to contract holders annual and semi-annual
reports and voting materials, tabulating votes, compensation for certain
accounting, valuation, and compliance services, legal expenses and independent
agent fees, registration fees and costs, proxy costs, organizational costs,
association dues, and other expenses related to the Fund's operations.
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<PAGE>
In 1994, 1995, and 1996, the Fund paid a total of approximately $11,971,000,
$14,458,000, and $19,148,000 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 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 1995, it reimbursed the International
Portfolio $38,026, the Special Opportunities Portfolio $58,280, and the Short-
Term U.S. Government Portfolio $81,642; and in 1996, it reimbursed the Short-
Term U.S. Government Portfolio $11,154, the Equity Index Portfolio $102,406,
the Large Cap Value Portfolio $64,905, the Mid Cap Growth Portfolio $63,755,
the Mid Cap Value Portfolio $54,886, the Small Cap Growth Portfolio $51,269,
the Small Cap Value Portfolio $55,765, the Strategic Bond Portfolio $49,882,
the International Opportunities Portfolio $145,385, and the International
Balanced Portfolio $50,657.
UNDERWRITING AND INDEMNITY AGREEMENT
The offering of the Fund's shares is continuous. Pursuant to an Underwriting
and Indemnity Agreement, as amended May 1, 1997, John Hancock Distributors,
Inc. ("Distributors") serves as the Fund's principal underwriter. Neither
Distributors nor John Hancock receives any additional compensation from the
Fund for the services it performs pursuant to the Underwriting Agreement.
Distributors is a wholly-owned subsidiary of John Hancock located at 197
Clarendon Street, Boston, MA 02117.
CUSTODIAN AGREEMENT
Chase Banking Corporation is the Fund's custodian with respect to the Growth
& Income, Money Market, Large Cap Growth, 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 Managed, 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 March 18,
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 May 2, 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 Chase 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
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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.
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."
In 1994, 1995, and 1996, respectively, brokerage commissions were paid by six
of the Portfolios, as follows: $1,356,742, $1,612,272, and $2,669,585 by the
Growth & Income Portfolio; $306,112, $448,290, and $1,008,291 by the Large Cap
Growth Portfolio; $865,560, $1,158,098, and $411,250 by the Managed Portfolio;
$187,145, $105,581, and $118,195 by the Real Estate Equity Portfolio; $725,100,
$639,586, and $913,461 by the International Equities Portfolio; $6,489,
$120,439, and $849,200 by the Special Opportunities Portfolio. In 1996,
brokerage commissions were paid by nine of the Portfolios, as follows: $6,843
by the Equity Index Portfolio, $14,960 by the Large Cap Value Portfolio,
$24,888 by the Mid Cap Growth Portfolio, $22,485 by the Mid Cap Value
Portfolio, $40,337 by the Small Cap Value Portfolio, $19,090 by the Small Cap
Growth Portfolio, $41,380 by the International Balanced Portfolio, $46,838 by
the International Opportunities Portfolio.
In fiscal 1997, 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, and Short-Term U.S. Government Portfolios; by State Street Global with
respect to the Equity Index Portfolio; 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 always possible to
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<PAGE>
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 or dealers includes analysts' reports on companies and
industries, market forecasts, and economic analyses. Brokers or dealers may
also provide reports on pertinent federal and state legislative developments
and changes in accounting practices; direct access by telephone or meetings
with leading research analysts throughout the financial community, corporate
management personnel, industry experts, leading economists and government
officials; comparative performance and evaluation and technical performance
measurement services; availability of economic advice; quotation services; and
services from recognized experts on investment matters of particular interest
to the sub-investment manager. In addition, the foregoing services may
comprise the use of or be delivered by computer systems whose software and
hardware components may be provided to the sub-investment manager as part of
the services. In any case in which the foregoing systems can be used for both
research and non-research purposes, the Investment Manager makes an
appropriate allocation of those uses and will permit brokers to provide only
the portion of the systems to be used for research services. 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.
Except as described below with respect to the International Balanced
Portfolio, 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 below, 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 Small Cap Value,
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. In certain cases, the sub-investment manager of the
International Balanced Portfolio directs securities transactions for that
Portfolio to particular brokers, in recognition of research services the
broker has provided, pursuant to an understanding or agreement with the broker
or pursuant to the sub-investment manager's own internal allocation
procedures. During 1996, such transactions totaled $1,539,369, with related
commissions of $4,503.
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.
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
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in the United States. Settlement periods in non-U.S. markets may differ from
the normal settlement period in the United States.
During 1996, certain Portfolios purchased the securities of their "regular
brokers or dealers," as that term is defined under Rule 10b-1 of the
Investment Company Act of 1940. The following table sets forth the name of
each such Portfolio, the identity of each broker or dealer, and the aggregate
value of the securities each such broker or dealer as of December 31, 1996.
<TABLE>
<CAPTION>
VALUE OF HOLDING
PORTFOLIO BROKER-DEALER AS OF 12/31/96
--------- ------------- ----------------
<S> <C> <C>
Mid Cap Value Equitable Company, Inc. $103,425
Large Cap Value J. P. Morgan Securities, Inc. $234,300
International Opportunities Norman Securities $ 91,280
International Opportunities Westpac Bank $ 23,267
International Opportunities Nat West $236,254
International Opportunities Deutsche Bank $ 16,108
International Opportunities Banco Santander $ 51,904
</TABLE>
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.
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<PAGE>
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 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
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<PAGE>
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 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).
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<PAGE>
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 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.
25
<PAGE>
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 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 any)
c= 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, 1996:
<TABLE>
<CAPTION>
PORTFOLIO CURRENT YIELD
--------- -------------
<S> <C>
Large Cap Growth............................................... 1.4 %
Sovereign Bond................................................. 6.9 %
International Equities......................................... (0.3)%
Real Estate Equity............................................. 9.6 %
Growth & Income................................................ 2.5 %
Managed........................................................ 4.8 %
Short-Term U.S. Government..................................... 5.7 %
Special Opportunities.......................................... 1.2 %
Equity Index................................................... 4.4 %
Large Cap Value................................................ 2.2 %
Mid Cap Growth................................................. (0.4)%
Mid Cap Value.................................................. 0.7 %
Small Cap Growth............................................... 0.1 %
Small Cap Value................................................ 1.9 %
Strategic Bond................................................. 5.8 %
International Opportunities.................................... (0.1)%
International Balanced......................................... 2.7 %
</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
26
<PAGE>
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 average annual total return for each of the Portfolios for the periods
ending December 31, 1996 is set forth in the Appendix to the prospectus.
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, 1996, the Money Market
Portfolio's current yield was 5.38%; its effective yield was 5.52%.
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.
27
<PAGE>
ADDITIONAL INFORMATION
LEGAL MATTERS
Freedman, Levy, Kroll & Simonds of Washington, D.C., serves as legal counsel
to the Trust 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 Fund's Annual Report to
contractholders 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. No other part of such Annual Report is
incorporated by reference. A free copy of the Annual Report to contract
holders may be obtained by writing to the address which appears on the cover
page of this Statement of Additional Information.
28
<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 eighteen
Portfolios that were being offered on December 31, 1996 are incorporated by
reference into Part B of the Fund's Registration Statement from the Fund's
Annual Report to contractholders, dated December 31, 1996.
a. Statement of Assets and Liabilities, at December 31, 1996.
b. Statement of Operations, for the year ended December 31, 1996.
c. Statements of Changes in Net Assets, for each of the two years in
the period ended December 31, 1996 for all Portfolios except for the Equity
Index, Large Cap Value, Mid Cap Growth, Mid Cap Value, Small Cap Growth,
Small Cap Value, Strategic Bond, International Balanced, and International
Opportunities Portfolios, for the period from May 1, 1996 (commencement of
operations) to December 31, 1996.
d. Schedule of Investments, at December 31, 1996.
e. Notes to Financial Statements.
f. Report of Ernst & Young LLP, Independent Auditors.
(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, Independence 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, included in Post-Effective Amendment No. 13
to this File No. 33-2081, filed April 30, 1996.
l. Amendment, dated May 1, 1997, to the Investment Management Agreements
dated April 12, 1988, April 15, 1994, and March 14, 1996, to reallocate Fund
expenses and to reduce the advisory fee of the Short-Term U.S. Government
Portfolio and the Equtiy Index Portfolio.
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, included in
Post-Effective Amendment No. 13 to this File No. 33-2081, filed
April 30, 1996.
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, included in
Post-Effective Amendment No. 13 to this File No. 33-2081, filed
April 30, 1996.
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, included in
Post-Effective Amendment No. 13 to this File No. 33-2081, filed
April 30, 1996.
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, included in
Post-Effective Amendment No. 13 to this File No. 33-2081, filed
April 30, 1996.
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, included in
Post-Effective Amendment No. 13 to this File No. 33-2081, filed
April 30, 1996.
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, included in
Post-Effective Amendment No. 13 to this File No. 33-2081, filed
April 30, 1996.
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, included in Post-Effective Amendment No. 13 to this
File No. 33-2081, filed April 30, 1996.
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, included in
Post-Effective Amendment No. 13 to this File No. 33-2081, filed
April 30, 1996.
u. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, State Street Bank & Trust Company, and John Hancock Mutual Life
Insurance Company, relating to the Equity Index Portfolio.
6. a. 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.
b. Underwriting and Indemnity Agreement among John Hancock Variable Series
Trust I, John Hancock Distributors, Inc., and John Hancock Mutual Life
Insurance Company, previously filed electronically on February 28, 1997.
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 29, 1995.
d. Amendment to Custodian Agreement dated January 30, 1995, between John
Hancock Variable Series Trust I and State Street Bank and Trust Company,
expanding the Agreement to cover additional Portfolios, included in
Post-Effective Amendment No. 13 to this File No. 33-2081,
filed April 30, 1996.
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.
11. (a) Consent of Ernst & Young LLP, independent auditors.
11. (b) Representation of Counsel pursuant to Rule 485(b).
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.
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.
27. Financial Data Schedule.
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. 13
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), and Section 6 of the Underwriting and Indemnity Agreement By and Among
John Hancock Series Trust, John Hancock Distributors, Inc., and John Hancock
Mutual LIfe Insurance Company (Exhibit 6.b to Post-Effective Amendment No. 14
to this Registration Statement dated February 28, 1997).
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,
II-5
<PAGE>
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. 801-856), Janus
(File No. 801-13991), Neuberger & Berman (File No. 801-3908), INVESCO (File
No. 801-1596), J.P. Morgan (File No. 801-21011), Rowe Price-Fleming (File No.
801-14713), Brinson (File No. 801-34910) filed separately with the Commission.
The other businesses, professions, vocations, and employment of a
substantial nature, during the past two years, of the directors and officers
of John Hancock, IIA, Advisers, Advisers International, T. Rowe Price, Janus,
Neuberger & Berman, INVESCO, J.P. Morgan, Rowe Price-Fleming, and Brinson 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 the sub-
investment advisers.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) John Hancock Distributors, Inc. ("Distributors") 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. Distributors does not act as a principal underwriter, distributor, or
investment advisor for any other investment company.
(b) The name and principal business address of each officer, director, or
partner of Distributors as well as their positions and offices with Distributors
are hereby incorporated by reference from Schedules A and D of Distributors Form
BD [filed separately with the Commission (Firm CRD No. 468)]. None of the
directors or partners of Distributors hold positions with the Registrant.
(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:
Chase 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
II-6
<PAGE>
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, and Short-Term U.S. Government
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.
State Street, Two International Place, 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 Equity Index
Portfolio.
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.
II-7
<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.
II-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, AS AMENDED, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF
THE REQUIREMENTS OF THIS POST-EFFECTIVE AMENDMENT TO ITS REGISTRATION STATEMENT
PURSUANT TO RULE 485(b) UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED
THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED IN THE CITY OF BOSTON, AND THE COMMONWEALTH OF MASSACHUSETTS, ON THE
30TH DAY OF APRIL, 1997.
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: ____________________________________ April 30, 1997
Raymond F. Skiba
Treasurer (Principal Financial and
Accounting Officer)
/s/ Henry D. Shaw
By: ____________________________________ April 30, 1997
Henry D. Shaw
Chairman (Principal Executive Officer)
For himself and as attorney-in-fact for:
William H. Dykstra
Trustee
Joseph Kiebala, Jr.
Trustee
Frank J. Zeo
Trustee
Elizabeth G. Cook
Trustee
II-9
<PAGE>
EXHIBIT 5.L
AMENDMENT NO. 1
TO
INVESTMENT MANAGEMENT AGREEMENTS
The four Investment Management Agreements by and between John Hancock Variable
Series Trust I and John Hancock Mutual Life Insurance Company (dated April 12,
1988, April 12, 1988, April 15, 1994 and March 14, 1996, respectively) are
hereby amended as follows:
A. Each said Agreement is amended, effective July 1, 1997, by deleting
Sections 2 and 3 thereof in their entirety and substituting the following :
2. PROVISION OF INVESTMENT MANAGEMENT SERVICES.
JHMLICO will provide to the Portfolios a continuing and suitable
investment program consistent with the investment policies, objectives and
restrictions of the Series. JHMLICO will manage the investment and
reinvestment of the assets in the Portfolios, and perform the other
functions set forth below, subject to the overall supervision, direction,
control and review of the Board of Trustees of the Series and, as in effect
from time to time, the provisions of the Series' Declaration of Trust,
Bylaws, prospectus, statement of additional information, the 1940 Act and
all other applicable laws and regulations (including any applicable
investment restrictions imposed by state insurance laws and regulations) or
any directions or instructions delivered to JHMLICO in writing by the
Series from time to time.
Except to the extent that the Board of Trustees approves performance of any
of the following functions by any custodian, transfer agent, independent
counsel, or other independent agent, JHMLICO will, with respect to the
Portfolios:
<PAGE>
(a) advise the Series in connection with policy decisions to be made by
its Board of Trustees or any committee thereof and, upon request, furnish the
Series with research, economic and statistical data in connection with the
Series' investments and investment policies;
(b) provide administration of the day to day operations of the Series;
(c) submit such reports relating to the valuation of the Series'
securities as its Board of Trustees may reasonably request;
(d) assist the Series in any negotiations relating to its investments
with issuers, investment banking firms, securities brokers or dealers and
other institutions or investors and place orders for purchases and sales of
portfolio investments;
(e) provide office space and office equipment and supplies (including
telephone and other utility services), accounting and data processing
equipment and necessary executive, legal, accounting, clerical and
secretarial personnel for the administration of the affairs of the Series;
(f) maintain and preserve the records required by the 1940 Act to be
maintained and preserved by the Series, to the extent not maintained by the
Series' custodian, distributor, transfer agent or any Sub-Investment Manager;
(g) oversee, and use its best efforts to assure the performance of all
the activities and services of any custodian, distributor, transfer agent or
other similar agent retained by the Series;
(h) value the assets and liabilities of the Series, compute the daily
income, net asset value and yield of each Portfolio; and
(i) supervise the activities of each Sub-Investment Manager.
<PAGE>
The Series will provide timely information to JHMLICO regarding such
matters as purchases and redemptions of shares in each Portfolio and the cash
requirements of, and cash available for investment in, each Portfolio, and
all other information as may be reasonably necessary or appropriate in order
for JHMLICO to perform its responsibilities hereunder.
3. ALLOCATION OF EXPENSES.
Except as set forth below, each party to this Agreement shall bear the
costs and expenses of performing its obligations hereunder.
(a) The Series agrees to assume the Portfolios' share of the expense of:
(i) brokerage commissions for transactions in the portfolio
investments of the Series and similar fees and charges for the
acquisition, disposition, lending or borrowing of such portfolio
investments;
(ii) the advisory fees called for in this Agreement;
(iii) all taxes, including issuance and transfer taxes, and reserves
for taxes payable by the Series to federal, state or other governmental
agencies, and the expenses and costs associated with the preparation and
filing of all tax returns;
(iv) interest payable on the Series' borrowings;
(v) extraordinary or non-recurring expenses, such as legal claims and
liabilities and litigation costs and indemnification payments by the
Series in connection therewith;
(vi) the charges and expenses of any custodian or depository appointed
by the Series for the safekeeping of its cash, portfolio securities and
other property, for providing accounting and valuation services, and for
monitoring compliance with federal laws and regulations, subject to the
<PAGE>
Board of Trustees' approval as to the scope of such accounting, valuation, and
monitoring functions;
(vii) the charges and expenses of its independent auditors;
(viii) the cost of the fidelity bond required by 1940 Act Rule 17g-l;
(ix) the compensation and travel expenses of trustees who are not
"interested persons" within the meaning of the 1940 Act;
(x) the expenses in preparing, printing and distributing voting
instruction information statements to persons entitled to give voting
instructions in tabulating proxy votes and in printing and distributing to
policyowners and contractowners annual and semi-annual reports;
(xi) fees and costs for legal services provided to or on behalf of
the Series (including fees and costs of independent counsel and an
allocable portion of the cost of JHMLICO's Law Department rendering such
services) (For this purpose, "legal services" includes (but is not limited
to) the services of such independent counsel or Law Department employees
in the course of administering the business and affairs of the Series.);
(xii) charges of any independent agents (other than independent
counsel) approved by the Board of Trustees;
(xiii) the fees and expenses involved in registering and maintaining
registrations of the Series and its shares with the Securities and
Exchange Commission and various states and other jurisdictions; and
(xiv) membership or association dues for the Investment Company
Institute, the National Association of Variable Annuities, or similar
trade association or for any self-regularly organization.
(b) To the extent not assumed by the Series pursuant to (a) above,
JHMLICO agrees to assume the Portfolios' share of the expense of:
<PAGE>
(i) the charges and expenses of any registrar, stock transfer or
dividend disbursing agent ;
(ii) the cost of any stock certificates representing shares of the
Series;
(iii) the expenses of shareholders' meetings; trustees' meetings;
printing and distributing Prospectuses and statements of additional
information to prospective and existing policyowners and contractowners;
preparing, printing, and distributing any advertising or sales literature
to prospective and existing policyowners and contractowners; and any
other activity and related legal services primarily intended to result in
the sale of the Series' shares;
(vi) the expense of furnishing each shareholder statements of
account; and
(v) the cost of and any errors and omissions insurance or other
liability insurance covering the Series and/or its officers, directors and
employees.
(vi) fees and costs of independent counsel to Series not incurred in
the actual conduct of the Series' affairs.
B. The Investment Management Agreement dated April 15, 1994 is amended,
effective May 1, 1997, so as to reduce the investment advisory fee payable
for the Short-Term U.S. Government Portfolio (as expressed in item (a) of
Section 5 of said Agreement) from that currently in effect to an effective
annual rate of 0.30% of Current Net Assets.
C. The Investment Management Agreement dated March 14, 1996 is amended,
effective May 1, 1997, so as to reduce the investment advisory fee payable
for the Equity Index Portfolio (as expressed in item (i) of Section 5 of
said Agreement) from that currently in effect to an effective rate of (i)
0.20% on an annual basis of the first $75,000,000 of the Current Net Assets
of such Portfolio; (ii) 0.19% on an annual basis of that portion of the
Current Net Assets of such Portfolio in excess of $75,000,000 and not over
$125,000,000; and (iii) 0.18% on an annual basis of that portion of the
Current Net Assets of such Portfolio in excess of $125,000,000.
All other terms and provisions of the Investment Management Agreements shall
remain unchanged and in full force and effect
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
and to take effect on the date hereinabove specified.
JOHN HANCOCK VARIABLE SERIES TRUST I
ATTEST:
_____________________________ By:______________________________
_____________________________ Title:___________________________
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
ATTEST:
_____________________________ By:______________________________
_____________________________ Title:___________________________
<PAGE>
Exhibit 5.u.
SUB-INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made as of the 18th day of March, 1997 by and among John
Hancock Variable Series Trust I, a Massachusetts business trust (the "Series"),
State Street Bank and Trust Company, a Massachusetts corporation
("Advisers"), and John Hancock Mutual Life Insurance Company, a Massachusetts
corporation ("JHMLICO").
WHEREAS, the Series is organized and is engaged in business as an open-end
management investment company and is so registered under the Investment Company
Act of 1940 (the "1940 Act"); and
WHEREAS, JHMLICO and Advisers are each engaged in the business of rendering
investment advice; and
WHEREAS, the Series is authorized to issue shares of capital stock in
separate classes with each such class representing interests in a separate
portfolio of securities and other assets; and
WHEREAS, the Series offers shares in several classes, one of which is
designated as the Equity Index Portfolio (together with all other classes
established by the Series, collectively referred to as the "Portfolios"), each
of which pursues its investment objectives through separate investment policies;
and
WHEREAS, the Series has retained JHMLICO to render investment management
services to the Series pursuant to an Investment Management Agreement dated as
of March 14, 1996 (the "Investment Management Agreement"), pursuant to which it
may contract with Advisers as a sub-manager as provided for herein;
NOW, THEREFORE, WITNESSETH: That it is hereby agreed between the parties
hereto as follows:
1. APPOINTMENT OF SUB-MANAGER
(a) Subject Portfolio. Advisers is hereby appointed and Advisers hereby
-----------------
accepts the appointment, on the terms herein set forth and for the
compensation herein provided, to act as investment adviser and manager to
the Equity Index Portfolio (the "Subject Portfolio") for the period
commencing May 1, 1997, subject to the approval of the relevant shareholders
of the Series.
(b) Additional Subject Portfolios. In the event that the Series and JHMLICO
-----------------------------
desire to retain Advisers to render investment advisory services hereunder for
any other Portfolio, they shall so notify Advisers in writing. If it is willing
to render such services, Advisers shall notify the Series in writing, whereupon
such Portfolio shall become a Subject Portfolio hereunder.
<PAGE>
(c) Incumbency Certificates. Advisers shall furnish to JHMLICO, immediately
-----------------------
upon execution of this Agreement, a certificate of a senior officer of Advisers
setting forth (by name and title, and including specimen signatures) those
officers of Advisers who are authorized to make investment decisions for the
Subject Portfolio pursuant to the provisions of this Agreement. Advisers shall
promptly provide supplemental certificates in connection with each additional
Subject Portfolio (if any) and further supplemental certificates, as needed, to
reflect all changes with respect to such authorized officers for any Subject
Portfolio. On behalf of the Series, JHMLICO shall instruct the custodian for
the Subject Portfolio to accept instructions with respect to the Subject
Portfolio from the officers of Advisers so named.
(d) Independent Contractor. Advisers shall for all purposes herein be
----------------------
deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or be deemed an agent of
the Series.
(e) Advisers' Representations. Advisers represents, warrants and agrees (i)
-------------------------
that it is a "bank" as defined in the Investment Advisers Act of 1940, (ii) that
it will promptly notify JHMLICO if the foregoing representation and agreement
shall cease to be true (in any material respect) at any time during the term of
this Agreement, (iii) that it will promptly notify JHMLICO of any material
change in the senior management or ownership of Advisers, or of any change in
the identity of the personnel who manage the Subject Portfolio, and (iv) that it
has adopted a code of ethics complying with the requirements of Rule 17j-1 of
the Securities and Exchange Commission (the "SEC") under the 1940 Act and has
provided true and complete copies of such code to the Series and to JHMLICO, and
has adopted procedures designed to prevent violations of such code.
(f) JHMLICO's Representations. JHMLICO represents, warrants and
-------------------------
agrees that it has all requisite power and authority to enter into and perform
its obligations under this Agreement, and has taken all necessary corporate
action to authorize its execution, delivery and performance of this Agreement.
(g) The Series' Representations. The Series represents, warrants and
---------------------------
agrees that it has all requisite power and authority to enter into and perform
its obligations under this Agreement, and has taken all necessary corporate
action to authorize its execution, delivery and performance of this
Agreement.
2. PROVISION OF INVESTMENT MANAGEMENT SERVICES.
Advisers will provide for the Subject Portfolio a continuing and suitable
investment program consistent with the investment policies, objectives and
restrictions of said Portfolio, as established by the Series and JHMLICO, and
as contained in the Prospectus and Statement of Additional Information of the
Subject Portfolio, as in effect from time to time. From time
-2-
<PAGE>
to time, JHMLICO or the Series may provide Advisers with additional or amended
investment policies, guidelines and restrictions. Advisers, as sub-manager,
will manage the investment and reinvestment of the assets in the Subject
Portfolio, and perform the functions set forth below, subject to the overall
supervision, direction, control and review of JHMLICO and the Board of Trustees
of the Series, consistent with the applicable investment policies, guidelines
and restrictions, the provisions of the Series' Declaration of Trust, Bylaws,
prospectus, statement of additional information (each as in effect from time to
time), the 1940 Act and all other applicable laws and regulations (including any
applicable investment restrictions imposed by state insurance laws and
regulations or any directions or instructions delivered to Advisers in writing
by JHMLICO or the Series from time to time). By its signature below, Advisers
acknowledges receipt of a copy of the Series' Declaration of Trust, Bylaws,
prospectus, and statement of additional information, each as in effect on the
date of this Agreement.
Advisers will, at its own expense:
(a) advise the Series in connection with investment policy decisions to be
made by its Board of Trustees or any committee thereof regarding the Subject
Portfolio and, upon request, furnish the Series with research, economic and
statistical data in connection with said Portfolio's investments and investment
policies;
(b) submit such reports and information as JHMLICO or the Series' Board of
Trustees may reasonably request, to assist the custodian in its determination of
the market value of securities held in the Subject Portfolio;
(c) place orders for purchases and sales of portfolio investments for the
Subject Portfolio;
(d) give instructions to the Subject Portfolio's custodian concerning the
delivery of securities and transfer of cash for the Subject Portfolio;
(e) maintain and preserve the records relating to its activities hereunder
required by the 1940 Act to be maintained and preserved by the Series, to the
extent not maintained by the custodian, transfer agent or JHMLICO;
(f) at the close of business each day, provide JHMLICO and the custodian
with copies of trade tickets for each transaction effected for the Subject
Portfolio, and promptly forward to the custodian copies of all brokerage or
dealer confirmations;
(g) as soon as practicable following the end of each calendar month, provide
JHMLICO with written statements showing all transactions effected for the
Subject Portfolio during the month, a summary listing all investments held in
such Portfolio as of the last day of the month, and such other information as
JHMLICO may reasonably request in connection with the accounting services that
JHMLICO provides for the Subject Portfolio; and
-3-
<PAGE>
(h) absent specific instructions to the contrary provided to it by JHMLICO
and subject to its receipt of all necessary voting materials, vote all proxies
with respect to investments of the Subject Portfolio in accordance with
Advisers' proxy voting policy as most recently provided to JHMLICO.
On its own initiative, Advisers will apprise JHMLICO and the Series of
important political and economic developments materially affecting the
marketplace or the Subject Portfolio, and will furnish JHMLICO and the Series'
Board of Trustees from time to time such information as is appropriate for this
purpose. Advisers will also make its personnel available in Boston or other
reasonable locations as often as quarterly to discuss the Subject Portfolio and
Advisers' management thereof, to educate JHMLICO sales personnel with respect
thereto, and for such other purposes as the Series or JHMLICO may reasonably
request.
The Series and JHMLICO will provide timely information to Advisers regarding
such matters as purchases and redemptions of shares in the Subject Portfolio and
the cash requirements of, and cash available for investment in, the Portfolio.
JHMLICO will timely provide Advisers with copies of monthly accounting
statements for the Subject Portfolio, and such other information (including,
without limitation, reports concerning the classification of Portfolio
securities for purposes of Subchapter M of the Internal Revenue Code and
Treasury Regulations Section 1.817) as may be reasonably necessary or
appropriate in order for Advisers to perform its responsibilities hereunder.
3. ALLOCATION OF EXPENSES.
Each party to this Agreement shall bear the costs and expenses of performing
its obligations hereunder. In this regard, the Series specifically agrees to
assume the expense of:
(a) brokerage commissions for transactions in the portfolio investments of
the Series and similar fees and charges for the acquisition, disposition,
lending or borrowing of such portfolio investments;
(b) custodian fees and expenses;
(c) all taxes, including issuance and transfer taxes, and reserves for
taxes payable by the Series to federal, state or other governmental agencies;
and
(d) interest payable on the Series' borrowings.
Nothing in this Agreement shall alter the allocation of expenses and costs
agreed upon between the Series and JHMLICO in the Investment Management
Agreement or any other agreement to which they are parties.
4. SUB-ADVISORY FEES.
For all of the services rendered with respect to the Subject Portfolio as
herein provided, JHMLICO shall pay to Advisers a fee (for the payment of which
the Series shall have no
-4-
<PAGE>
obligation or liability), based on the Current Net Assets of the Subject
Portfolio, as set forth in Schedule I attached hereto and made a part hereof.
Such fee shall be accrued daily and payable monthly, as soon as practicable
after the last day of each calendar month. In the case of termination of this
Agreement with respect to the Subject Portfolio during any calendar month, the
fee with respect to such Portfolio accrued to but excluding the date of
termination shall be paid promptly following such termination. For purposes of
computing the amount of advisory fee accrued for any day, "Current Net Assets"
shall mean the Subject Portfolio's net assets as of the most recent preceding
day for which the Subject Portfolio's net assets were computed.
5. PORTFOLIO TRANSACTIONS.
In connection with the investment and reinvestment of the assets of the
Subject Portfolio, Advisers is authorized to select the brokers or dealers that
will execute purchase and sale transactions for the Portfolio and to use its
best efforts to obtain the best available price and most favorable execution
with respect to all such purchases and sales of portfolio securities for said
Portfolio. Advisers shall maintain records adequate to demonstrate compliance
with this requirement. Subject to this primary requirement, and maintaining as
its first consideration the benefits to the Subject Portfolio and its
shareholders, Advisers shall have the right subject to the control of the Board
of Trustees, and to the extent authorized by the Securities Exchange Act of
1934, to follow a policy of selecting brokers who furnish brokerage and research
services to the Subject Portfolio or to Advisers, and who charge a higher
commission rate to the Subject Portfolio than may result when allocating
brokerage solely on the basis of seeking the most favorable price and execution.
Advisers shall determine in good faith that such higher cost was reasonable in
relation to the value of the brokerage and research services provided.
Advisers will not receive any tender offer solicitation fees or similar
payments in connection with the tender of investments of any Portfolio.
6. OWNERSHIP OF INFORMATION, RECORDS, AND CONFIDENTIALITY.
The Series shall own and control all records maintained hereunder by Advisers
on the Series' behalf and, in the event of termination of this Agreement with
respect to any Portfolio for any reason, all records relating to that Portfolio
shall be promptly returned to the Series, free from any claim or retention of
rights by Advisers, provided that (subject to the last paragraph of this Section
6) Advisers may retain copies of such records. Advisers also agrees, upon
request of the Series, promptly to surrender such books and records or, at its
expense, copies thereof, to the Series or make such books and records available
for audit or inspection by representatives of regulatory authorities or other
persons reasonably designated by the Series. Advisers further agrees to
maintain, prepare and preserve such books and records in accordance with the
1940 Act and rules thereunder, including but not limited to Rules 31a-1 and 31a-
2, and to supply all information requested by any insurance regulatory
authorities to determine whether all insurance laws and regulations are being
complied with.
-5-
<PAGE>
Advisers shall supply the Board of Trustees and officers of the Series and
JHMLICO with all statistical information regarding investments which is
reasonably required by them and reasonably available to Advisers.
Advisers shall not disclose or use any records or information obtained
pursuant hereto in any manner whatsoever except as expressly authorized herein,
and will keep confidential any information obtained pursuant hereto, and
disclose such information only if the Series has authorized such disclosure, or
if such disclosure is expressly required by applicable federal or state
regulatory authorities.
7. LIABILITY; STANDARD OF CARE.
No provision of this Agreement shall be deemed to protect Advisers or JHMLICO
against any liability to the Series or its shareholders to which it might
otherwise be subject by reason of any willful misfeasance, bad faith or
negligence in the performance of its duties or the reckless disregard of its
obligations and duties under this Agreement or the Investment Management
Agreement. Nor shall any provision hereof be deemed to protect any trustee or
officer of the Series against any such liability to which he might otherwise be
subject by reason of any willful misfeasance, bad faith or negligence in the
performance his duties or the reckless disregard of his obligations and duties.
Adviser shall employ only qualified personnel to manage the Subject Portfolio;
shall comply with all applicable laws and regulations in the discharge of its
duties under this Agreement; shall (as provided in Section 2 above) comply with
the investment policies, guidelines and restrictions of the Subject Portfolio
and with the provisions of the Series' Declaration of Trust, Bylaws, prospectus
and statement of additional information; shall manage the Subject Portfolio
(subject to the receipt of, and based upon the information contained in,
periodic reports from JHMLICO or the custodian concerning the classification of
Portfolio securities for such purposes) as a regulated investment company in
accordance with subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), and Treasury Regulations Section 1.817-5(b); shall act at all
times in the best interests of the Series; and shall discharge its duties with
the care, skill, prudence and diligence under the circumstances then prevailing
that a prudent person acting in a like capacity and familiar with such matters
would use in the conduct of a similar enterprise. However, Advisers shall not
be obligated to perform any service not described in this Agreement, and shall
not be deemed by virtue of this Agreement to have made any representation or
warranty that any level of investment performance or level of investment results
will be achieved.
8. DURATION AND TERMINATION OF THIS AGREEMENT.
(a) Duration. This Agreement shall become effective with respect to the
--------
Subject Portfolio as provided in Section 1(a) hereof and, with respect to
any additional Subject Portfolio, on the date of receipt by the Series of notice
from Advisers in accordance with Paragraph 1(b) hereof that it is willing to
serve with respect to such Portfolio. Unless terminated as herein provided,
this Agreement shall remain in full force and effect for two years from the date
hereof with respect to the initial Subject Portfolio and, with respect to each
additional Subject Portfolio, until two years following the date on which such
Portfolio
-6-
<PAGE>
becomes a Subject Portfolio hereunder, and shall continue in full force and
effect thereafter with respect to each Subject Portfolio so long as such
continuance with respect to any such Portfolio is approved at least annually (a)
by either the Board of Trustees of the Series or by vote of a majority of the
outstanding voting shares of such Portfolio, and (b) in either event by the vote
of a majority of the trustees of the Series who are not parties to this
Agreement or "interested persons" of any such party, cast in person at a meeting
called for the purpose of voting on such approval.
Any approval of this Agreement by the holders of a majority of the
outstanding shares of any Subject Portfolio shall be effective to continue this
Agreement with respect to any such Portfolio notwithstanding (A) that this
Agreement has not been approved by the holders of a majority of the outstanding
shares of any other Portfolio affected hereby, and (B) that this Agreement has
not been approved by the vote of a majority of the outstanding shares of the
Series, unless such approval shall be required by any other applicable law or
otherwise. The terms "assignment," "vote of a majority of the outstanding
shares" and "interested person," when used in this Agreement, shall have the
respective meanings specified in the 1940 Act and rules thereunder.
(b) Termination. This Agreement may be terminated with respect to any
-----------
Subject Portfolio at any time, without payment of any penalty, by the Series
pursuant to a vote of the trustees of the Series or a vote of a majority of the
outstanding shares of such Portfolio, which termination shall be effective
immediately upon delivery of notice thereof to Advisers and JHMLICO. This
Agreement may be terminated by Advisers on at least ninety days' prior written
notice to the Series and JHMLICO, and may be terminated by JHMLICO on at least
ninety days' prior written notice to the Series and Advisers.
(c) Automatic Termination. This Agreement shall automatically and
---------------------
immediately terminate in the event of its assignment (other than as permitted
pursuant to Section 15 below) or if the Investment Management Agreement is
terminated.
9. SERVICES NOT EXCLUSIVE; USE OF ADVISERS' NAME AND LOGO.
The services of Advisers to the Series are not to be deemed exclusive and it
shall be free to render similar services to others so long as its services
hereunder are not impaired thereby. It is specifically understood that
directors, officers and employees of Advisers and of its subsidiaries and
affiliates may continue to engage in providing portfolio management services and
advice to other investment companies, whether or not registered, and other
investment advisory clients.
During the term of this Agreement, JHMLICO and the Series shall have the non-
exclusive and non-transferable right to use Advisers' name and logo in
all materials relating to the Subject Portfolio, including all prospectuses,
proxy statements, reports to shareholders, sales literature and other written
materials prepared for distribution to shareholders of the Series or the public.
However, prior to distribution of any materials which refer to Advisers, JHMLICO
shall consult with Advisers and shall furnish to Advisers a copy of such
materials. Advisers agrees to cooperate with JHMLICO and to review such
materials promptly.
-7-
<PAGE>
JHMLICO shall not distribute such materials if Advisers reasonably objects in
writing, within five (5) business days of its receipt of such copy (or such
other time as may be mutually agreed), to the manner in which its name and logo
are used.
10. AVOIDANCE OF INCONSISTENT POSITION.
In connection with the purchase and sale of portfolio securities of the
Subject Portfolio, Advisers and its directors, officers and employees will not
act as principal or agent or receive any commission; except that, in compliance
with procedures adopted by the Series pursuant to Rule 17e-1 under the 1940 Act,
an affiliate of Adviser, State Street Brokerage Services, Inc., may be so
employed and may receive a commission. Nothing in this Agreement, however, shall
preclude the combination of orders for the sale or purchase of portfolio
securities of the Subject Portfolio with those for other registered investment
companies managed by Advisers or its affiliates, if orders are allocated in a
manner deemed equitable by Advisers among the accounts and at a price
approximately averaged.
11. AMENDMENT.
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing. No amendment of this
Agreement shall be effective with respect to any Portfolio until approved
specifically by (a) the Board of Trustees of the Series, or by vote of a
majority of the outstanding shares of that Portfolio, and (b) by vote of a
majority of those trustees of the Series who are not interested persons of any
party to this Agreement cast in person at a meeting called for the purpose of
voting on such approval.
12. LIMITATION OF LIABILITY.
It is expressly agreed that the obligations of the Series hereunder shall
not be binding upon any of the trustees, shareholders, officers, agents or
employees of Series personally, but only bind the trust property of the Series,
as provided in the Series' Declaration of Trust.
13. NOTICES
Notices and other communications required or permitted under this Agreement
shall be in writing, shall be deemed to be effectively delivered when actually
received, and may be delivered by US mail (first class, postage prepaid), by
facsimile transmission, by hand or by commercial overnight delivery service,
addressed as follows:
ADVISERS: State Street Bank and Trust Company
Two International Place
34th Floor
Boston, MA 02110
Attn: Compliance Officer
Fax #: (617) 664-6174
-8-
<PAGE>
JHMLICO: John Hancock Mutual Life Insurance Company
200 Clarendon Street
P.O. Box 111
Boston, MA 02117
Attention: Raymond F. Skiba
Fax #: (617) 572-4953
SERIES: John Hancock Variable Series Trust I
200 Clarendon Street
P.O. Box 111
Boston, MA 02117
Attention: Raymond F. Skiba
Fax #: (617) 572-4953
14. GOVERNING LAW.
This agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts and the applicable provisions of the 1940 Act and
rules thereunder.
15. ASSIGNMENT.
This Agreement may not be assigned by any party, either in whole or in part,
without the prior written consent of each other party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the day first set forth above.
ATTEST: JOHN HANCOCK VARIABLE SERIES
TRUST I
By:
---------------------------
Name: Henry D. Shaw
Title: Chairman
ATTEST: JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
By:
---------------------------
Name: Robert R. Reitano
Title: Vice President
ATTEST: STATE STREET BANK AND TRUST
COMPANY
By:
---------------------------
Name:
-------------------------
Title:
------------------------
<PAGE>
SCHEDULE I
FEES
----
Current Net Assets Under Management Sub-Investment Management Fee
----------------------------------- -----------------------------
On the first $75,000,000 Seven (7) basis points (0.07%)
On the next $50,000,000` Six (6) basis points (0.06%)
On amounts over $125,000,000 Five (5) basis points (0.05%)
<PAGE>
EXHIBIT 10
[John Hancock Mutual Life
Insurance Company Letterhead]
April 16, 1997
John Hancock Variable Series Trust I
John Hancock Place
P.O. Box 111
Boston, MA 02117
Trustees:
This opinion is given in connection with the filing by John Hancock
Variable Series Trust I, a Massachusetts business trust, (the "Fund") of its
Post-Effective Amendment No. 15 to its Registration Statement on Form N-1A (File
No. 33-2081; the "Registration Statement") under the Securities Act of 1933 and
the Investment Company Act of 1940, relating to an indefinite amount of its
shares of beneficial interest, which includes eighteen separate series (i.e.,
the Growth & Income, Large Cap Growth, Managed, Sovereign Bond, Money Market,
Real Estate Equity, International Equities, Short-Term U.S. Government, Special
Opportunities, Small Cap Growth, Small Cap Value, Mid Cap Growth, Mid Cap Value,
International Balanced, International Opportunities, Large Cap Value, Strategic
Bond, and Equity Index Portfolios). The Fund's shares of beneficial interest,
including the eighteen series of shares, are hereinafter referred to as the
"shares".
I have examined the Fund's Declaration of Trust, its By-Laws, the
Registration Statement of its predecessor as originally filed on December 11,
1985, subsequent post-effective amendments and this Post-Effective Amendment No.
14, and such other records, certificates, documents and statutes that I have
deemed relevant in order to render the opinion expressed herein.
Based on such examination, I am of the opinion that:
1. The Fund is a business trust duly organized, validly existing and in
good standing under the laws of the Commonwealth of Massachusetts.
<PAGE>
-2-
2. The shares offered for sale by the Fund, when issued in the manner
contemplated by this Post-Effective Amendment to its Registration
Statement, will be legally issued, fully-paid and non-assessable.
I consent to the use of this opinion as Exhibit 10 to the Post-Effective
Amendment to the Registration Statement and to the use of my name under the
caption "Legal Matters" in the Statement of Additional Information incorporated
by reference into the Prospectus comprising a part of the Registration
Statement.
Very truly yours,
/s/ RONALD J. BOCAGE
Ronald J. Bocage
Vice President and Counsel
<PAGE>
EXHIBIT 11(a)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in the Prospectus and "Independent Auditors" and "Financial
Statements" in the Statement of Additional Information in Post-Effective
Amendment Number 16 to the Registration Statement (Form N-1A, No. 33-2081) of
John Hancock Variable Series Trust I.
We also consent to the incorporation by reference therein of our report dated
February 7, 1996 on the financial statements included in the Annual Report of
the John Hancock Variable Series Trust I for the year ended December 31, 1996.
/s/ ERNST & YOUNG, LLP
ERNST & YOUNG, LLP
Boston, Massachusetts
April 30, 1997
<PAGE>
EXHIBIT 11(b)
[John Hancock Mutual Life
Insurance Company Letterhead]
April 16, 1997
SECURITIES & EXCHANGE COMMISSION
450 Fifth Street, NW
Washington, DC 20549
RE: John Hancock Variable Series Trust 1
File Nos. 33-2081 and 811-4490
------------------------------
Dear Commissioners:
This opinion is being furnished with respect to the filing of Post-
Effective Amendment No. 15 under the Securities Act of 1933 and Post-Effective
Amendment No. 15 under the Investment Company Act of 1940 of the Form N-1A
Registration Statement of John Hancock Variable Series Trust I as required by
Rule 485 under the 1933 Act.
I have acted as counsel to Registrant for the purpose of preparing this
Post-Effective Amendment which is being filed pursuant to paragraph (b) of
Rule 485 and hereby represent to the Commission that in my opinion this
Post-Effective Amendment does not contain disclosures which would render it
ineligible to become effective pursuant to paragraph (b).
I hereby consent to the filing of this opinion with and as a part of this
Post-Effective Amendment to Registrant's Registration Statement with the
Commission.
Very truly yours,
/s/ SANDRA M. DADALT
Sandra M. DaDalt
Counsel
<PAGE>
Exhibit 17
ORGANIZATIONAL CHART FOR
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
LEVEL ONE
John Hancock Mutual Life Insurance Company directly owns the following entities:
Comox Timber Ltd. (Canada)
Woodley Road Associates, Inc. (Delaware)
WKTWE Corp. (Delaware) (23.8% of voting securities owned)
John Hancock Receivables, Inc. (Massachusetts)
Holmes Protection Group, Inc. (Delaware) (10.9% of voting securities owned)
John Hancock Variable Life Insurance Company (Massachusetts)
A.G. Ship Recovery Corp. (Delaware) (90% of voting securities owned)
Sulza Food Corp. (Delaware) (24.5% of voting securities owned)
John Hancock Subsidiaries, Inc. (Delaware)
John Hancock Servicos Internacionais S/C Limitada (Brazil) (99.0% of quotas
owned)
John Hancock International Services, S.A. (Belgium) (99.9% of securities
owned)
70 Park Ave. Corp. (Delaware)
John Hancock Canadian Holdings Limited (Canada)
P.T. Asuransi Jiwa Bumiputera John Hancock (Indonesia) (80.0% of voting
securities owned)
John Hancock International Holdings, Inc. (Massachusetts)
John Hancock International Services Pte. Ltd. (Singapore) (99.9% of voting
securities owned)
Concord Oil & Gas, Inc. (Delaware) (11.7% of voting securities owned)
The Beard Company (Oklahoma) (11.4% of voting securities owned)
IFP Holdings, Inc. (Illinois) (12.1% of voting securities owned)
International Human Resources Development Corp. (Delaware) (24.7% of voting
securities owned)
Hotel Property Holdings, Inc. (Delaware) (35.4% of voting securities owned)
Delta and Pine Land Company (Delaware) (13.2% of voting securities owned)
HPW Holdings, Inc. (13.5% of voting securities owned)
LEVEL TWO
John Hancock Variable Life Insurance Company (one of the wholly-owned
subsidiaries of John Hancock Mutual Life Insurance Company) directly owns the
following entities:
1
<PAGE>
Holmes Protection Group, Inc. (Delaware) (1.8% of voting securities owned)
John Hancock Mutual Life Insurance Company of America (Delaware)
A.G. Ship Recovery Corp. (Delaware) (10% of voting securities owned)
Sulza Food Corp. (Delaware) (0.4% of voting securities owned)
John Hancock Subsidiaries, Inc. (one of the wholly-owned subsidiaries of John
Hancock Mutual Life Insurance Company) directly owns the following entities:
Hancock Realty Investors Incorporated (Delaware)
John Hancock Leasing Corp. (Delaware)
John Hancock Property and Casualty Holding Co. (Delaware)
John Hancock Asset Management (Massachusetts)
John Hancock Realty Advisors, Inc. (Delaware)
John Hancock HealthPlans, Inc. (Massachusetts)
John Hancock Distributors, Inc. (Delaware)
Professional Economic Services, Inc. (New York)
First Signature Bank & Trust Co. (New Hampshire) (99.7% of voting
securities owned)
Profesco Corp. (New York)
John Hancock Real Estate Finance, Inc. (Delaware)
Hancock Association Services Group, Inc. (Washington)
Hancock Venture Partners, Inc. (Delaware)
JH Networking Insurance Agency, Inc. (Massachusetts)
Cost Care, Inc. (Massachusetts)
Tri-State Inc. (Delaware) (60% of voting securities owned)
John Hancock Capital Corp. (Delaware)
HealthPlan Management Services, Inc. (Massachusetts)
John Hancock Realty Services Corp. (Delaware)
John Hancock Canadian Holdings Limited (one of the wholly-owned subsidiaries of
John Hancock Mutual Life Insurance Company) directly owns the following
entities:
The Maritime Life Assurance Co. (Canada)
CIFAS Investment Corporation (Canada)
P.T. Asuransi Jiwa Bumiputera John Hancock (one of the wholly-owned subsidiaries
of John Hancock Mutual Life Insurance Company) directly owns P.T. Indras Insan
Jaya Utama (Indonesia)
2
<PAGE>
John Hancock International Holdings, Inc. (one of the wholly-owned subsidiaries
of John Hancock Mutual Life Insurance Company) directly owns the following
entities:
John Hancock Life Insurance (Malaysia) Berhad (Malaysia)
John Hancock Life Assurance Company Ltd. (Singapore) (32.3% of voting
securities directly owned)
The Interlife Assurance Public Co. Ltd. (Thailand) (24.9% of voting
securities owned)
LEVEL THREE
Hancock Realty Investors Incorporated (one of the wholly-owned subsidiaries of
John Hancock Subsidiaries, Inc.) directly owns John Hancock Property Investors
Corp. (Delaware)
John Hancock Leasing Corp. (one of the wholly-owned subsidiaries of John Hancock
Subsidiaries, Inc.) directly owns the following entities:
JHFS One Corp. (Massachusetts)
JHLC Two Corp. (New York)
John Hancock Property and Casualty Holding Co. (one of the wholly-owned
subsidiaries of John Hancock Subsidiaries, Inc.) directly owns the following
entities:
Clarendon Asset Management Corp. (Delaware)
John Hancock Management Co. (Delaware)
Unigard Security Insurance Co. (Washington)
John Hancock Insurance Co. of Bermuda, Ltd. (Bermuda)
John Hancock Property and Casualty Ins. Co. (Delaware)
John Hancock Asset Management (one of the wholly-owned subsidiaries of John
Hancock Subsidiaries, Inc.) directly owns the following entities:
Hancock Natural Resource Group, Inc. (Delaware)
John Hancock Energy Resource Management, Inc. (Delaware)
3
<PAGE>
The Berkeley Financial Group (Massachusetts)
Independence Investment Associates, Inc. (Delaware)
JHM Capital Management Inc. (Delaware)
John Hancock Realty Advisors, Inc. (one of the wholly-owned subsidiaries of John
Hancock Subsidiaries, Inc.) directly owns John Hancock Realty Management, Ind.
(Delaware)
John Hancock Realty Services Corp. (one of the wholly-owned subsidiaries of John
Hancock Subsidiaries, Inc.) directly owns the following entities:
JHRD 492 Corp. (Delaware)
John Hancock Realty Funding, Inc. (Delaware)
Marlborough Realty Development Corp. (Delaware)
John Hancock Realty Equities, Inc. (Delaware)
Exeter Realty Development Corp. (Delaware)
John Hancock HealthPlans, Inc. (one of the wholly-owned subsidiaries of John
Hancock Subsidiaries, Inc.) directly owns the following entities:
Dikewood Computer Corp. (New Mexico)
H. D. Management Corp. (Georgia)
John Hancock Distributors, Inc. (one of the wholly-owned subsidiaries of John
Hancock Subsidiaries, Inc.) directly owns John Hancock Distributors Insurance
Agency, Inc. (Massachusetts)
4
<PAGE>
John Hancock Venture Partners, Inc. (one of the wholly-owned subsidiaries of
John Hancock Subsidiaries, Inc.) directly owns the following entities:
Hancock International Private Equity Management, Ltd. (England) (99.9% of
voting securities owned)
John Hancock Capital Growth Management, Inc. (Delaware)
HVP-Russia, Inc. (Delaware)
Hancock International Private Equity Partners (Asia) Limited (99.98% of
voting securities owned)
John Hancock Networking Insurance Agency, Inc. (one of the wholly-owned
subsidiaries of John Hancock Subsidiaries, Inc.) directly owns Networking, Inc.
(Tennessee).
Cost Care, Inc. (one of the wholly-owned subsidiaries of John Hancock
Subsidiaries, Inc.) directly owns 40% of the voting securities of Tri-State Inc.
(Delaware)
LEVEL FOUR
John Hancock Natural Resources Group, Inc. (one of the wholly-owned subsidiaries
of John Hancock Asset Management) directly owns John Hancock Timber Resources
Corporation (Delaware)
John Hancock Energy Resources Management (one of the wholly-owned subsidiaries
of John Hancock Asset Management) directly owns 51% of the voting securities of
Energy Investors Management, Inc. (Delaware)
5
<PAGE>
The Berkeley Financial Group (one of the wholly-owned subsidiaries of John
Hancock Asset Management) directly owns the following entities:
Sovereign Asset Management Corporation (Delaware)
John Hancock Investors Services Corporation (Delaware)
NM Capital Management, Inc. (New Mexico)
John Hancock Advisers, Inc. (Delaware)
John Hancock Realty Equities, Inc. (one of the wholly-owned subsidiaries of John
Hancock Realty Services Corp.) directly owns the following entities:
John Hancock Income Fund II Assignor, Inc. (Delaware)
John Hancock Income Fund III Assignor, Inc. (Delaware)
H.D. Management Corp. (one of the wholly-owned subsidiaries of John Hancock
HealthPlans, Inc.) directly owns the following entities:
Ameriplan Health Systems, Inc. (Georgia)
Ameriplan Health Services, Ltd. (Georgia)
Ameriplan of Georgia, Inc. (Georgia)
6
<PAGE>
LEVEL FIVE
John Hancock Advisers, Inc. (one of the wholly-owned subsidiaries of The
Berkeley Financial Group) directly owns the following entities:
John Hancock Funds, Inc. (Delaware)
John Hancock Advisers International, Ltd. (England) (99.9% of voting
securities owned)
Transamerica Fund Management Company (Delaware)
Patriot Group, Inc. (Massachusetts)
LEVEL SIX
John Hancock Advisers International, Ltd. (one of the wholly-owned subsidiaries
of John Hancock Advisers, Inc.) directly owns John Hancock Advisers
International, (Ireland) Ltd. (Ireland)
7
<PAGE>
Patriot Group, Inc. (one of the wholly-owned subsidiaries of John Hancock
Advisers, Inc.) directly owns the following entities:
Patriot Advisers, Inc. (Massachusetts)
Patriot Distributors, Inc. (Massachusetts)
Transamerica Fund Management Company (one of the wholly-owned subsidiaries of
John Hancock Advisers, Inc.) directly owns Transamerica Fund Distributors, Inc.
(Maryland)
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> LARGE CAP GROWTH
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 461,348
<INVESTMENTS-AT-VALUE> 522,774
<RECEIVABLES> 627
<ASSETS-OTHER> 108
<OTHER-ITEMS-ASSETS> 1,888
<TOTAL-ASSETS> 525,397
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,252
<TOTAL-LIABILITIES> 1,252
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 474,681
<SHARES-COMMON-STOCK> 29,965
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,410)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 50,874
<NET-ASSETS> 524,145
<DIVIDEND-INCOME> 7,216
<INTEREST-INCOME> 757
<OTHER-INCOME> 0
<EXPENSES-NET> 1,940
<NET-INVESTMENT-INCOME> 6,033
<REALIZED-GAINS-CURRENT> 70,842
<APPREC-INCREASE-CURRENT> (979)
<NET-CHANGE-FROM-OPS> 75,896
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,033)
<DISTRIBUTIONS-OF-GAINS> (71,587)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,608
<NUMBER-OF-SHARES-REDEEMED> (1,960)
<SHARES-REINVESTED> 4,422
<NET-CHANGE-IN-ASSETS> 143,869
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,785
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,940
<AVERAGE-NET-ASSETS> 445,797
<PER-SHARE-NAV-BEGIN> 17.37
<PER-SHARE-NII> .25
<PER-SHARE-GAIN-APPREC> 2.89
<PER-SHARE-DIVIDEND> (.25)
<PER-SHARE-DISTRIBUTIONS> (2.77)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.49
<EXPENSE-RATIO> .44
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> SOBEREIGN BOND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 662,837
<INVESTMENTS-AT-VALUE> 714,447
<RECEIVABLES> 0
<ASSETS-OTHER> 12,082
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 726,529
<PAYABLE-FOR-SECURITIES> 137
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 281
<TOTAL-LIABILITIES> 418
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 715,475
<SHARES-COMMON-STOCK> 74,315
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 237
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,399
<NET-ASSETS> 726,110
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 51,353
<OTHER-INCOME> 0
<EXPENSES-NET> 2,049
<NET-INVESTMENT-INCOME> 49,304
<REALIZED-GAINS-CURRENT> 3,975
<APPREC-INCREASE-CURRENT> (24,593)
<NET-CHANGE-FROM-OPS> 28,686
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (49,304)
<DISTRIBUTIONS-OF-GAINS> (3,975)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,571
<NUMBER-OF-SHARES-REDEEMED> (6,870)
<SHARES-REINVESTED> 5,466
<NET-CHANGE-IN-ASSETS> 25,802
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,749
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,049
<AVERAGE-NET-ASSETS> 697,482
<PER-SHARE-NAV-BEGIN> 10.13
<PER-SHARE-NII> .69
<PER-SHARE-GAIN-APPREC> (.31)
<PER-SHARE-DIVIDEND> (.69)
<PER-SHARE-DISTRIBUTIONS> (.05)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.77
<EXPENSE-RATIO> .29
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> MONEY MARKET
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 212,394
<INVESTMENTS-AT-VALUE> 212,394
<RECEIVABLES> 926
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 213,317
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 82
<TOTAL-LIABILITIES> 82
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 213,235
<SHARES-COMMON-STOCK> 21,324
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 213,235
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10,971
<OTHER-INCOME> 0
<EXPENSES-NET> 606
<NET-INVESTMENT-INCOME> 10,365
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 10,365
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,635)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 16,617
<NUMBER-OF-SHARES-REDEEMED> (14,921)
<SHARES-REINVESTED> 1,037
<NET-CHANGE-IN-ASSETS> 27,326
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 499
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 606
<AVERAGE-NET-ASSETS> 199,155
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .52
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.52)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> .30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> GROWTH & INCOME
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 1,643,518
<INVESTMENTS-AT-VALUE> 2,043,447
<RECEIVABLES> 4,297
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<EXPENSES-NET> 4,891
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<NUMBER-OF-SHARES-REDEEMED> (6,988)
<SHARES-REINVESTED> 17,357
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<PER-SHARE-NAV-BEGIN> 13.94
<PER-SHARE-NII> .34
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<PER-SHARE-DIVIDEND> (.34)
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> MANAGED
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<S> <C>
<PERIOD-TYPE> 12-MOS
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<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 2,155,185
<INVESTMENTS-AT-VALUE> 2,416,492
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<TOTAL-LIABILITIES> 3,537
<SENIOR-EQUITY> 0
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<SHARES-COMMON-PRIOR> 0
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<ACCUMULATED-NET-GAINS> (15,433)
<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 2,386,660
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<APPREC-INCREASE-CURRENT> (58,766)
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<NUMBER-OF-SHARES-SOLD> 15,162
<NUMBER-OF-SHARES-REDEEMED> (10,826)
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<PER-SHARE-NAV-BEGIN> 13.73
<PER-SHARE-NII> .61
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<PER-SHARE-DIVIDEND> (.61)
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> INTERNATIONAL EQUITIES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
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<PAYABLE-FOR-SECURITIES> 0
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<TOTAL-LIABILITIES> 332
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 136,790
<SHARES-COMMON-STOCK> 9,254
<SHARES-COMMON-PRIOR> 0
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<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 18,970
<NET-ASSETS> 155,753
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<EXPENSES-NET> 1,085
<NET-INVESTMENT-INCOME> 1,854
<REALIZED-GAINS-CURRENT> 1,098
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<NUMBER-OF-SHARES-SOLD> 2,305
<NUMBER-OF-SHARES-REDEEMED> (1,286)
<SHARES-REINVESTED> 112
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<PER-SHARE-NAV-BEGIN> 15.61
<PER-SHARE-NII> .21
<PER-SHARE-GAIN-APPREC> 1.22
<PER-SHARE-DIVIDEND> (.21)
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<EXPENSE-RATIO> .75
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> REAL ESTATE EQUITY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
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<TOTAL-LIABILITIES> 111
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 119,747
<SHARES-COMMON-STOCK> 10,325
<SHARES-COMMON-PRIOR> 0
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<ACCUMULATED-NET-GAINS> (86)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 31,444
<NET-ASSETS> 151,105
<DIVIDEND-INCOME> 7,937
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<NUMBER-OF-SHARES-SOLD> 1,675
<NUMBER-OF-SHARES-REDEEMED> (1,245)
<SHARES-REINVESTED> 594
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<ACCUMULATED-NII-PRIOR> 0
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<OVERDIST-NET-GAINS-PRIOR> 0
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<PER-SHARE-NAV-BEGIN> 11.70
<PER-SHARE-NII> .76
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<PER-SHARE-DIVIDEND> (.76)
<PER-SHARE-DISTRIBUTIONS> (.03)
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<EXPENSE-RATIO> .69
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> SPECIAL OPPORTUNITIES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
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<PERIOD-END> DEC-31-1996
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<ACCUMULATED-NET-GAINS> (502)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 26,723
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<PER-SHARE-DIVIDEND> (.02)
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> SHORT-TERM US GOVERNMENT
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
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<PAID-IN-CAPITAL-COMMON> 59,042
<SHARES-COMMON-STOCK> 5,840
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<ACCUMULATED-NET-GAINS> (9)
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<NET-INVESTMENT-INCOME> 1,653
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<APPREC-INCREASE-CURRENT> (606)
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<PER-SHARE-NAV-BEGIN> 10.23
<PER-SHARE-NII> .54
<PER-SHARE-GAIN-APPREC> (.18)
<PER-SHARE-DIVIDEND> (.54)
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<EXPENSE-RATIO> .75
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> SMALL CAP GROWTH
<MULTIPLIER> 1,000
<S> <C>
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<PERIOD-END> DEC-31-1996
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<ACCUMULATED-NET-GAINS> (1,491)
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<NET-INVESTMENT-INCOME> 11
<REALIZED-GAINS-CURRENT> (1,491)
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<PER-SHARE-NAV-BEGIN> 10
<PER-SHARE-NII> .01
<PER-SHARE-GAIN-APPREC> (.08)
<PER-SHARE-DIVIDEND> (.02)
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> INTERNATIONAL BALANCED
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<S> <C>
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<PERIOD-END> DEC-31-1996
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 911
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<NET-CHANGE-IN-ASSETS> 24,098
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<PER-SHARE-NAV-BEGIN> 10
<PER-SHARE-NII> .24
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 12
<NAME> MID CAP GROWTH
<S> <C>
<PERIOD-TYPE> 12-MOS
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<PERIOD-END> DEC-31-1996
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<REALIZED-GAINS-CURRENT> (338)
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<NUMBER-OF-SHARES-SOLD> 1,763
<NUMBER-OF-SHARES-REDEEMED> (155)
<SHARES-REINVESTED> 5
<NET-CHANGE-IN-ASSETS> 16,492
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<PER-SHARE-NAV-BEGIN> 10
<PER-SHARE-NII> .05
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<PER-SHARE-DIVIDEND> (.05)
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 13
<NAME> LARGE CAP VALUE
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<S> <C>
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<PERIOD-END> DEC-31-1996
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<TOTAL-LIABILITIES> 728
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<PAID-IN-CAPITAL-COMMON> 18,587
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<ACCUMULATED-NET-GAINS> (167)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,211
<NET-ASSETS> 19,781
<DIVIDEND-INCOME> 204
<INTEREST-INCOME> 67
<OTHER-INCOME> 0
<EXPENSES-NET> 72
<NET-INVESTMENT-INCOME> 199
<REALIZED-GAINS-CURRENT> 209
<APPREC-INCREASE-CURRENT> 1,211
<NET-CHANGE-FROM-OPS> 1,619
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (199)
<DISTRIBUTIONS-OF-GAINS> (225)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,130
<NUMBER-OF-SHARES-REDEEMED> (385)
<SHARES-REINVESTED> 39
<NET-CHANGE-IN-ASSETS> 19,781
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 137
<AVERAGE-NET-ASSETS> 10,800
<PER-SHARE-NAV-BEGIN> 10
<PER-SHARE-NII> .16
<PER-SHARE-GAIN-APPREC> 1.22
<PER-SHARE-DIVIDEND> (.16)
<PER-SHARE-DISTRIBUTIONS> (.13)
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<PER-SHARE-NAV-END> 11.09
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 14
<NAME> MID CAP VALUE
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 8,053
<INVESTMENTS-AT-VALUE> 10,856
<RECEIVABLES> 82
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,938
<PAYABLE-FOR-SECURITIES> 8
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<OTHER-ITEMS-LIABILITIES> 4
<TOTAL-LIABILITIES> 12
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,903
<SHARES-COMMON-STOCK> 963
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (8)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,031
<NET-ASSETS> 10,925
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<INTEREST-INCOME> 31
<OTHER-INCOME> 0
<EXPENSES-NET> 52
<NET-INVESTMENT-INCOME> 34
<REALIZED-GAINS-CURRENT> 197
<APPREC-INCREASE-CURRENT> 1,031
<NET-CHANGE-FROM-OPS> 1,262
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (34)
<DISTRIBUTIONS-OF-GAINS> (205)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,215
<NUMBER-OF-SHARES-REDEEMED> (273)
<SHARES-REINVESTED> 21
<NET-CHANGE-IN-ASSETS> 10,926
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 40
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 107
<AVERAGE-NET-ASSETS> 7,387
<PER-SHARE-NAV-BEGIN> 10
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> 1.57
<PER-SHARE-DIVIDEND> (.04)
<PER-SHARE-DISTRIBUTIONS> (.22)
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<PER-SHARE-NAV-END> 11.35
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 15
<NAME> SMALL CAP VALUE
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 8,816
<INVESTMENTS-AT-VALUE> 10,476
<RECEIVABLES> 68
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,544
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
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<TOTAL-LIABILITIES> 3
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,841
<SHARES-COMMON-STOCK> 982
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 700
<NET-ASSETS> 10,541
<DIVIDEND-INCOME> 77
<INTEREST-INCOME> 44
<OTHER-INCOME> 0
<EXPENSES-NET> 58
<NET-INVESTMENT-INCOME> 63
<REALIZED-GAINS-CURRENT> 217
<APPREC-INCREASE-CURRENT> 700
<NET-CHANGE-FROM-OPS> 980
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (63)
<DISTRIBUTIONS-OF-GAINS> (217)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,357
<NUMBER-OF-SHARES-REDEEMED> (401)
<SHARES-REINVESTED> 26
<NET-CHANGE-IN-ASSETS> 10,541
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 44
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 114
<AVERAGE-NET-ASSETS> 8,211
<PER-SHARE-NAV-BEGIN> 10
<PER-SHARE-NII> .07
<PER-SHARE-GAIN-APPREC> .96
<PER-SHARE-DIVIDEND> (.07)
<PER-SHARE-DISTRIBUTIONS> (.23)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.73
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 16
<NAME> INTERNATIONAL OPPORTUNITIES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 15,195
<INVESTMENTS-AT-VALUE> 17,619
<RECEIVABLES> 105
<ASSETS-OTHER> 192
<OTHER-ITEMS-ASSETS> 12
<TOTAL-ASSETS> 17,926
<PAYABLE-FOR-SECURITIES> 15
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 15
<TOTAL-LIABILITIES> 30
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,919
<SHARES-COMMON-STOCK> 1,689
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (13)
<OVERDISTRIBUTION-GAINS> (43)
<ACCUM-APPREC-OR-DEPREC> 1,035
<NET-ASSETS> 17,898
<DIVIDEND-INCOME> 148
<INTEREST-INCOME> 56
<OTHER-INCOME> 0
<EXPENSES-NET> 120
<NET-INVESTMENT-INCOME> 84
<REALIZED-GAINS-CURRENT> (40)
<APPREC-INCREASE-CURRENT> 1,035
<NET-CHANGE-FROM-OPS> 995
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (103)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,253
<NUMBER-OF-SHARES-REDEEMED> (574)
<SHARES-REINVESTED> 10
<NET-CHANGE-IN-ASSETS> 17,898
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 96
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 265
<AVERAGE-NET-ASSETS> 14,422
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .07
<PER-SHARE-GAIN-APPREC> .60
<PER-SHARE-DIVIDEND> (.07)
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<PER-SHARE-NAV-END> 10.60
<EXPENSE-RATIO> .87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 17
<NAME> EQUITY INDEX
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 12,944
<INVESTMENTS-AT-VALUE> 14,969
<RECEIVABLES> 99
<ASSETS-OTHER> 27
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 15,095
<PAYABLE-FOR-SECURITIES> 445
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 045
<TOTAL-LIABILITIES> 445
<SENIOR-EQUITY> 03,465
<PAID-IN-CAPITAL-COMMON> 13,465
<SHARES-COMMON-STOCK> 14,650
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (38)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,223
<NET-ASSETS> 14,650
<DIVIDEND-INCOME> 131
<INTEREST-INCOME> 28
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 159
<REALIZED-GAINS-CURRENT> 89
<APPREC-INCREASE-CURRENT> 1,223
<NET-CHANGE-FROM-OPS> 1,312
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (159)
<DISTRIBUTIONS-OF-GAINS> (127)
<DISTRIBUTIONS-OTHER> (84)
<NUMBER-OF-SHARES-SOLD> 1,681
<NUMBER-OF-SHARES-REDEEMED> (395)
<SHARES-REINVESTED> 34
<NET-CHANGE-IN-ASSETS> 14,650
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 15
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 102
<AVERAGE-NET-ASSETS> 9,593
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .15
<PER-SHARE-GAIN-APPREC> 1.26
<PER-SHARE-DIVIDEND> (.15)
<PER-SHARE-DISTRIBUTIONS> (.10)
<RETURNS-OF-CAPITAL> (.06)
<PER-SHARE-NAV-END> 11.10
<EXPENSE-RATIO> 0.0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 18
<NAME> STRATEGIC BOND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 11,077
<INVESTMENTS-AT-VALUE> 12,625
<RECEIVABLES> 457
<ASSETS-OTHER> 320
<OTHER-ITEMS-ASSETS> 2
<TOTAL-ASSETS> 13,404
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10
<TOTAL-LIABILITIES> 497
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,845
<SHARES-COMMON-STOCK> 1,271
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 266
<NET-ASSETS> 12,907
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 617
<OTHER-INCOME> 0
<EXPENSES-NET> 88
<NET-INVESTMENT-INCOME> 429
<REALIZED-GAINS-CURRENT> 148
<APPREC-INCREASE-CURRENT> 266
<NET-CHANGE-FROM-OPS> 941
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (529)
<DISTRIBUTIONS-OF-GAINS> (150)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,963
<NUMBER-OF-SHARES-REDEEMED> (759)
<SHARES-REINVESTED> 67
<NET-CHANGE-IN-ASSETS> 12,097
<ACCUMULATED-NII-PRIOR> 0
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<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 138
<AVERAGE-NET-ASSETS> 13,065
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .38
<PER-SHARE-GAIN-APPREC> .28
<PER-SHARE-DIVIDEND> (.38)
<PER-SHARE-DISTRIBUTIONS> (.12)
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<PER-SHARE-NAV-END> 10.16
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
