<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1998
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. 19 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
AMENDMENT NO. 19 [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, 1998 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
[_]this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
----------------
<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 twenty-three Portfolios. The following
Portfolios are offered by this Prospectus:
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 Index 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.
Diversified Mid Cap Growth Portfolio (formerly the Special Opportunities
Portfolio): to provide long-term growth of capital through a diversified
portfolio investing primarily in common stocks of medium capitalization growth
companies.
Real Estate Equity Portfolio: to provide above-average income and long-term
growth of capital by investment principally in equity securities of companies
in the real estate and related industries.
Small/Mid Cap CORE Portfolio: to achieve long-term growth of capital through
a broadly diversified portfolio of equity securities of U.S. issuers which are
included in the Russell 2500 Index at the time of investment.
Small Cap Value Portfolio: 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.
Global Equity Portfolio: to achieve long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity securities,
of both U.S. and foreign issuers.
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, 1998
The Date of The Statement of Additional Information is May 1, 1998
<PAGE>
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 Equity Index Portfolio (fomerly the International Equities
Portfolio): to provide investment results that correspond to the total return
of the major developed international (non-U.S.) equity markets, as represented
by the MSCI EAFE GDP Index.
International Opportunities Portfolio: to provide capital appreciation
through investment in common stocks of primarily well-established, non-United
States companies.
Emerging Markets Equity Portfolio: to achieve capital appreciation by
investing primarily in equity securities of companies in countries having
economies and markets generally considered by the World Bank or the United
Nations to be emerging or developing.
Short-Term Bond Portfolio (formerly the Short-Term U.S. Government
Portfolio): to provide a high level of current income consistent with a low
degree of share price fluctuation through investment primarily in a
diversified portfolio of short- and intermediate-term investment-grade debt
obligations.
Bond Index Portfolio: to provide investment results that correspond to the
total return and risk characteristics of the U.S. investment grade fixed
income market, as represented by a Lehman Brothers bond index that tracks the
performance of investment grade debt securities.
Sovereign Bond Portfolio: 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.
High Yield Bond Portfolio: to provide high current income and capital
appreciation through investing primarily in high yield (below investment
grade) debt securities.
Money Market Portfolio: to provide maximum current income consistent with
capital preservation and liquidity, through investment in high quality money
market instruments. An investment in this Portfolio is neither insured nor
guaranteed by the U.S. Government and there can be no assurance that the
Portfolio will be able to maintain a stable net asset value of $10.00 per
share.
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...................................................... 4
INVESTMENT OBJECTIVES AND POLICIES........................................ 24
Managed Portfolio....................................................... 24
Growth & Income Portfolio............................................... 24
Equity Index Portfolio.................................................. 25
Large Cap Value Portfolio............................................... 25
Large Cap Growth Portfolio.............................................. 26
Mid Cap Value Portfolio................................................. 26
Mid Cap Growth Portfolio................................................ 27
Diversified Mid Cap Growth Portfolio.................................... 27
Real Estate Equity Portfolio............................................ 27
Small/Mid Cap CORE Portfolio............................................ 28
Small Cap Value Portfolio............................................... 29
Small Cap Growth Portfolio.............................................. 29
Global Equity Portfolio................................................. 30
International Balanced Portfolio........................................ 30
International Equity Index Portfolio.................................... 31
International Opportunities Portfolio................................... 32
Emerging Markets Equity Portfolio....................................... 32
Short-Term Bond Portfolio............................................... 33
Bond Index Portfolio.................................................... 34
Sovereign Bond Portfolio................................................ 35
Strategic Bond Portfolio................................................ 35
High Yield Bond Portfolio............................................... 36
Money Market Portfolio.................................................. 37
BROKERAGE COMMISSIONS AND PORTFOLIO TURNOVER.............................. 38
RISK FACTORS.............................................................. 38
INVESTMENT RESTRICTIONS................................................... 43
INVESTMENT PRACTICES...................................................... 44
Repurchase Agreements................................................... 44
Use of Options on Securities by the Equity Index, Large Cap Value, Large
Cap Growth, Mid Cap Value, Small Cap Value, and International
Opportunities Portfolios . . .......................................... 45
Other Hedging Strategies by the Equity Index, Large Cap Value, Large Cap
Growth, Mid Cap Value, Small Cap Value, and International Opportunities
Portfolios . . ........................................................ 45
Risks of Options and Futures Transactions............................... 47
Use of Options and Futures by the Managed, Mid Cap Growth, Diversified
Mid Cap Growth, Small/Mid Cap CORE, Small Cap Growth, Global Equity,
International Balanced, International Equity Index, Emerging Markets
Equity, Short-Term Bond, Sovereign Bond, Strategic Bond, and High Yield
Bond Portfolios........................................................ 48
Other Derivative Transactions........................................... 49
Foreign Currency Management Strategies.................................. 50
Rule 144A Securities.................................................... 52
</TABLE>
<PAGE>
<TABLE>
<S> <C>
When Issued Securities and Forward Commitments........................... 53
Portfolio Lending........................................................ 53
Mortgage Dollar Rolls and Reverse Repurchase Agreements.................. 53
The S&P 500.............................................................. 54
The Lehman Brothers Government/Corporate and Aggregate Bond Indexes...... 55
The MSCI EAFE GDP Index.................................................. 55
Investment Companies..................................................... 56
MANAGEMENT OF THE FUND..................................................... 57
Year 2000 Progress....................................................... 65
SHARES, TAXES, AND DIVIDENDS............................................... 65
PURCHASE AND REDEMPTION OF SHARES.......................................... 66
NET ASSET VALUE............................................................ 66
INVESTMENT PERFORMANCE..................................................... 67
CHANGES IN DIVERSIFIED MID CAP GROWTH PORTFOLIO'S INVESTMENT OBJECTIVE AND
POLICIES.................................................................. 68
CHANGES IN INTERNATIONAL EQUITY INDEX PORTFOLIO'S INVESTMENT OBJECTIVE AND
POLICIES.................................................................. 68
CHANGES IN SHORT-TERM BOND PORTFOLIO'S INVESTMENT OBJECTIVE AND POLICIES... 68
APPENDIX A: PERFORMANCE FIGURES............................................ 69
</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. The Fund has twenty-four Portfolios, each with a
separate series of shares. The twenty-three Portfolios available under this
Prospectus are listed on the cover pages of this Prospectus and in the tables
below. With the exception of the Mid Cap Growth and International Balanced
Portfolios, each of the Portfolios is a "diversified" Portfolio within the
meaning of the Investment Company Act of 1940. The Fund's 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.
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 the ultimate purchasers of policies or contracts whose benefits are
funded by the Portfolios (collectively, "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>
DIVERSIFIED REAL
GROWTH EQUITY LARGE CAP LARGE CAP MID CAP MID CAP MID CAP ESTATE SMALL/MID
MANAGED & INCOME INDEX VALUE GROWTH VALUE GROWTH GROWTH EQUITY CAP CORE
FEE TABLE PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO(8) PORTFOLIO PORTFOLIO
- --------- --------- --------- --------- --------- --------- --------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND
OPERATING
EXPENSES AFTER
EXPENSE
REIMBURSEMENT
(AS A PERCENTAGE
OF AVERAGE NET
ASSETS)
Management Fees. 0.33% 0.25% 0.15%(1) 0.75% 0.39% 0.80% 0.85% 0.75% 0.60% 0.80%
Other
Expenses(2).... 0.04% 0.03% 0.25%(3) 0.25%(3) 0.05% 0.25%(3) 0.25%(3) 0.10% 0.09% 0.25%(5)
Total Fund
Operating
Expenses....... 0.37% 0.28% 0.40% 1.00% 0.44% 1.05% 1.10% 0.85% 0.69% 1.05%
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP SMALL CAP GLOBAL INTERNATIONAL INTERNATIONAL INTERNATIONAL EMERGING SHORT-TERM
VALUE GROWTH EQUITY BALANCED EQUITY INDEX OPPORTUNITIES MARKETS BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO(7) PORTFOLIO EQUITY PORTFOLIO(6)
--------- --------- --------- ------------- ------------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES AFTER EXPENSE
REIMBURSEMENT (AS A
PERCENTAGE OF AVERAGE
NET ASSETS)
Management Fees........ 0.80% 0.75% 0.90% 0.85% 0.18% 0.97% 1.30% 0.30%(4)
Other Expenses(2)...... 0.25%(3) 0.25%(3) 0.25%(5) 0.25%(3) 0.19%(5) 0.25%(3) 0.25%(5) 0.21%(3)
Total Fund Operating
Expenses.............. 1.05% 1.00% 1.15% 1.10% 0.37% 1.22% 1.55% 0.51%
</TABLE>
<TABLE>
<CAPTION>
HIGH
SOVEREIGN STRATEGIC YIELD MONEY
BOND BOND BOND BOND MARKET
INDEX PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES AFTER EXPENSE
REIMBURSEMENT
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Management Fees........ 0.15% 0.25% 0.75% 0.65% 0.25%
Other Expenses(2)...... 0.25%(5) 0.06% 0.25%(3) 0.25%(5) 0.08%
Total Fund Operating
Expenses.............. 0.40% 0.31% 1.00% 0.90% 0.33%
</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 would be 0.15%, which
reflects a 0.05% reduction effective May 1, 1998.
(2) Restated to reflect the estimated effect of expense reallocation that
became 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, 1997 with
respect to nine 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, 0.90%; Large Cap Value, 0.31%; Mid Cap Value,
0.34%; Mid Cap Growth, 0.57%; Small Cap Value, 0.50%; Small Cap Growth,
0.37%; International Balanced, 0.71%; International Opportunities, 0.60%;
and Strategic Bond, 0.67%. Also, John Hancock voluntarily reimbursed the
Equity Index Portfolio for its first 0.25% of Other Expenses for 1997.
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.
(5) "Other Expenses" are based upon estimates for the current fiscal year.
(6) The name of this Portfolio prior to May 1, 1998 was the Short-Term
U.S. Government Portfolio.
(7) The name of this Portfolio prior to May 1, 1998 was the International
Equities Portfolio. The fee and expense information has been restated to
reflect a new advisory fee and reduced operating expenses that became
effective May 1, 1998.
(8) The name of this Portfolio prior to May 1, 1998 was The Special
Opportunities Portfolio.
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
Diversified Mid Cap Growth.................... $ 9 $28 $48 $108
Real Estate Equity............................ $ 7 $23 $40 $ 88
Small/Mid Cap CORE............................ $11 $34 N/A N/A
Small Cap Value............................... $11 $34 $58 $129
Small Cap Growth.............................. $10 $32 $55 $123
Global Equity................................. $12 $37 N/A N/A
International Balanced........................ $11 $35 $61 $135
International Equity Index.................... $ 4 $14 N/A N/A
International Opportunities................... $13 $40 $69 $152
Emerging Markets Equity....................... $16 $49 N/A N/A
Short-Term Bond............................... $ 6 $18 $31 $ 69
Bond Index.................................... $ 4 $13 N/A N/A
Sovereign Bond................................ $ 3 $10 $17 $ 39
Strategic Bond................................ $10 $32 $55 $123
High Yield Bond............................... $ 9 $29 N/A N/A
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 more detail, 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.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables give information regarding income, expenses, and
capital changes in the Portfolios that are available under this Prospectus 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, 1997, 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. No Management's Discussion and Analysis, financial
statements or financial highlights are provided for the Small/Mid Cap CORE,
Global Equity, Emerging Markets Equity, Bond Index, or High Yield Bond
Portfolios because they did not have any assets, and had not commenced
operations at December 31, 1997.
4
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------------------
+1997 +1996 +1995 +1994 +1993 +1992 +1991 +1990 1989 1988
----- ----- ----- ----- ----- ----- ----- ----- ---- ----
<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.......... $ 13.35 $ 13.73 $ 11.96 $ 12.81 $ 12.41 $ 12.36 $ 10.93 $ 11.19 $ 10.66 $ 10.18
---------- ---------- ---------- ---------- ---------- ---------- -------- -------- -------- --------
Net Investment
Income.......... .59 .61 .62 .55 .52 .56 .64 .68 .71 .60
Net Realized and
Unrealized Gain
(Loss) on
Investments**... 1.86 .81 2.56 ( .83) .90 .37 1.70 ( .26) 1.31 .59
---------- ---------- ---------- ---------- ---------- ---------- -------- -------- -------- --------
Total From
Investment
Operations..... 2.45 1.42 3.18 ( .28) 1.42 .93 2.34 .42 2.02 1.19
Less Distribu-
tions:
From Net Invest-
ment Income.... ( .59) ( .61) ( .62) ( .55) ( .52) ( .56) ( .64) ( .68) ( .71) ( .60)
From Net
Realized Gains
on Investments. ( .86) ( 1.19) ( .79) ( .02) ( .50) ( .32) ( .27) -- ( .78) ( .11)
---------- ---------- ---------- ---------- ---------- ---------- -------- -------- -------- --------
Total Distribu-
tions........... ($ 1.45) ($ 1.80) ($ 1.41) ($ .57) ($ 1.02) ($ .88) ($ .91) ($ .68) ($ 1.49) ($ .71)
========== ========== ========== ========== ========== ========== ======== ======== ======== ========
Net Asset Value,
End of Period... $ 14.35 $ 13.35 $ 13.73 $ 11.96 $ 12.81 $ 12.41 $ 12.36 $ 10.93 $ 11.19 $ 10.66
========== ========== ========== ========== ========== ========== ======== ======== ======== ========
Number of shares
outstanding
(000's omitted). 195,139 178,145 152,544 134,588 116,985 82,805 54,687 40,625 29,078 17,477
Total Investment
Return*......... 18.72% 10.72% 27.09% ( 2.23%) 11.60% 7.70% 22.00% 3.80% 18.90% 11.68%
SIGNIFICANT
RATIOS AND
SUPPLEMENTAL
DATA
Net Assets, End
of Period
(000's
Omitted)....... $2,800,127 $2,386,660 $2,093,964 $1,609,939 $1,498,876 $1,027,746 $676,186 $443,969 $325,356 $186,339
Operating
expenses to
average net
assets......... .37% .36% .38% .37% .38% .43% .45% .46% .48% .45%
Net investment
income to
average net
assets......... 4.18% 4.41% 4.66% 4.50% 4.07% 4.56% 5.49% 6.34% 6.28% 5.84%
Portfolio turn-
over rate...... 200.41% 113.61% 187.67% 90.41% 63.74% 84.27% 105.80% 136.39% 327.66% 245.20%
Average commis-
sion rate...... $ .05 $ .06 -- -- -- -- -- -- -- --
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------------------------
+1997 +1996 +1995 +1994 +1993 +1992 +1991 +1990 1989 1988
----- ----- ----- ----- ----- ----- ----- ----- ---- ----
<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............ $ 14.65 $ 13.94 $ 11.50 $ 12.39 $ 11.99 $ 12.10 $ 10.58 $ 10.70 $ 10.15 $ 8.95
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
Net Investment
Income.......... .27 .34 .36 .34 .32 .34 .41 .44 .51 .38
Net Realized and
Unrealized Gain
(Loss) on
Investments**... 4.07 2.43 3.53 ( .41) 1.27 .71 2.29 -- 2.13 1.20
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
Total From
Investment
Operations..... 4.34 2.77 3.89 ( .07) 1.59 1.05 2.70 .44 2.64 1.58
Less
Distributions:
From Net
Investment
Income......... ( .27) ( .34) ( .36) ( .34) ( .32) ( .34) ( .41) ( .44) ( .51) ( .38)
From Net
Realized Gains
on Investments. ( 2.11) ( 1.72) ( 1.09) ( .48) ( .87) ( .82) ( .77) ( .12) ( 1.58) --
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
Total
Distributions.. ($ 2.38) ($ 2.06) ($ 1.45) ($ .82) ($ 1.19) ($ 1.16) ($ 1.18) ($ .56) ($ 2.09) ($ .38)
========== ========== ========== ========== ========== ======== ======== ======== ======== ========
Net Asset Value,
End of Year..... $ 16.61 $ 14.65 $ 13.94 $ 11.50 $ 12.39 $ 11.99 $ 12.10 $ 10.58 $ 10.70 $ 10.15
========== ========== ========== ========== ========== ======== ======== ======== ======== ========
Number of shares
outstanding
(000's omitted). 167,773 139,748 114,666 97,361 84,788 71,833 61,958 55,009 50,815 41,547
Total Investment
Return*......... 29.79% 20.10% 34.21% ( .56%) 13.33% 8.90% 26.00% 4.10% 26.00% 17.65%
SIGNIFICANT
RATIOS AND
SUPPLEMENTAL
DATA
Net Assets, End
of year (000's
Omitted)....... $2,785,964 $2,047,927 $1,598,585 $1,119,864 $1,050,349 $861,516 $749,836 $581,789 $543,846 $421,549
Operating
expenses to
average net
assets......... .28% .27% .28% .27% .28% .30% .30% .30% .36% .31%
Net investment
income to
average net
assets......... 1.61% 2.24% 2.70% 2.80% 2.56% 2.85% 3.49% 4.21% 4.49% 3.87%
Portfolio
turnover rate.. 74.56% 81.02% 73.54% 64.12% 70.27% 84.28% 77.57% 85.34% 168.12% 164.96%
Average
commission
rate........... $ .05 $ .04 -- -- -- -- -- -- -- --
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended May 1, 1996(a)
December 31, to December 31,
1997 1996
------------ ---------------
<S> <C> <C>
EQUITY INDEX PORTFOLIO--SELECTED DATA FOR EACH
SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT THE PERIOD INDICATED:
Net Asset Value, Beginning of Period.............. $ 11.10 $ 10.00
-------- -------
Net Investment Income............................. .24 .15
Net Realized and Unrealized Gain on Investments**. 3.41 1.26
-------- -------
Total From Investment Operations................. 3.65 1.41
Less Distributions:
From Net Investment Income....................... (.24) ( .15)
From Net Realized Gains on Investments........... (.25) ( .10)
-------- -------
Total Distributions.............................. ($.54) ($ .31)
======== =======
Net Asset Value, End of Period.................... $ 14.21 $ 11.10
======== =======
Number of shares outstanding (000's omitted)..... 7,134 1,320
Total Investment Return(u)*...................... 32.79% 14.23%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)........ $101,390 $14,650
Operating expenses to average net assets(r)...... 0.00% 0.00%(e)
Net investment income to average net assets...... 1.97% 2.74%(e)
Portfolio turnover rate.......................... 64.56% 15.72%(l)
Average commission rate.......................... $ .02 $ .02
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended May 1, 1996(a)
December 31, to December 31,
1997 1996
------------ ---------------
<S> <C> <C>
LARGE CAP VALUE PORTFOLIO--SELECTED DATA FOR EACH
SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT THE PERIOD INDICATED:
Net Asset Value, Beginning of Period.............. $ 11.09 $ 10.00
------- -------
Net Investment Income............................. .29 .16
Net Realized and Unrealized Gain on Investments**. 2.84 1.22
------- -------
Total From Investment Operations................. 3.13 1.38
Less Distributions:
From Net Investment Income....................... (.29) ( .16)
From Net Realized Gains on Investments........... (.36) ( .13)
------- -------
Total Distributions.............................. ($.65) ($ .29)
======= =======
Net Asset Value, End of Period.................... $ 13.57 $ 11.09
======= =======
Number of shares outstanding (000's omitted)..... 5,399 1,784
Total Investment Return*......................... 28.56% 13.90%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)........ $73,269 $19,781
Operating expenses to average net assets(n)...... 1.00% 1.00%(e)
Net investment income to average net assets...... 2.42% 2.74%(e)
Portfolio turnover rate.......................... 19.21% 19.95%(l)
Average commission rate.......................... $ .03 $ .03
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------
+1997 +1996 +1995 +1994 +1993 +1992 +1991 +1990 1989 1988
----- ----- ----- ----- ----- ----- ----- ----- ---- ----
<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... $ 17.49 $ 17.37 $ 14.41 $ 15.38 $ 14.43 $ 13.86 $ 12.07 $ 11.75 $ 10.92 $ 9.91
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Net Investment Income.. .17 .25 .44 .39 .33 .37 .42 .46 .50 .36
Net Realized and
Unrealized Gain (Loss)
on investments**...... 5.21 2.89 4.06 ( .54) 1.64 .99 2.62 .32 2.69 1.12
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Total from Investment
Operations........... 5.38 3.14 4.50 ( .15) 1.97 1.36 3.04 .78 3.19 1.48
Less Distributions:
From Net Investment
Income............... ( .17) ( .25) ( .44) ( .39) ( .33) ( .37) ( .42) ( .46) ( .50) ( .36)
From Net Realized
Gains on Investments. ( 1.88) ( 2.77) ( 1.10) ( .43) ( .69) ( .42) ( .83) -- ( 1.86) ( .11)
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Total Distributions... ($ 2.05) ($ 3.02) ($ 1.54) ($ .82) ($ 1.02) ($ .79) ($ 1.25) ($ .46) ($ 2.36) ($ .47)
======== ======== ======== ======== ======== ======= ======= ======= ======= =======
Net Asset Value, End of
Period................ $ 20.82 $ 17.49 $ 17.37 $ 14.41 $ 15.38 $ 14.43 $ 13.86 $ 12.07 $ 11.75 $ 10.92
======== ======== ======== ======== ======== ======= ======= ======= ======= =======
Number of shares out-
standing
(000's omitted)....... 36,236 29,265 21,895 15,546 9,833 6,097 3,973 2,384 1,728 1,102
Total Investment Re-
turn*................. 30.89% 18.27% 31.64% ( .98%) 13.80% 9.90% 25.50% 6.60% 29.20% 14.93%
SIGNIFICANT RATIOS AND
SUPPLEMENTAL DATA
Net Assets, End of Pe-
riod
(000's Omitted)...... $754,398 $524,145 $380,276 $223,957 $151,207 $87,952 $55,065 $28,777 $20,303 $12,040
Operating expenses to
average net
assets(b)............ .44% .44% .47% .47% .50% .52% .55% .63% .73% .64%
CTCNet investment in-
come to average net
assets............... .86% 1.35% 2.70% 2.69% 2.21% 2.70% 3.15% 4.01% 4.00% 3.44%
Portfolio turnover
rate................. 83.82% 135.98% 90.18% 80.51% 61.53% 65.88% 88.38% 88.50% 222.38% 192.20%
Average commission
rate................. $ .05 $ .04 -- -- -- -- -- -- -- --
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended May 1, 1996(a)
December 31, to December 31,
1997 1996
------------ ---------------
<S> <C> <C>
MID CAP VALUE PORTFOLIO--SELECTED DATA FOR EACH
SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT THE PERIOD INDICATED:
Net Asset Value, Beginning of Period.............. $ 11.35 $ 10.00
------- -------
Net Investment Income............................. .05 .04
Net Realized and Unrealized Gain on Investments**. 3.59 1.57
------- -------
Total From Investment Operations................. 3.64 1.61
Less Distributions:
From Net Investment Income....................... ( .05) ( .04)
From Net Realized Gains on Investments........... ( 1.07) ( .22)
------- -------
Total Distributions.............................. ($ 1.12) ($ .26)
======= =======
Net Asset Value, End of Period.................... $ 13.87 $ 11.35
======= =======
Number of shares outstanding (000's omitted)..... 4,686 963
Total Investment Return*......................... 32.17% 16.18%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)........ $64,973 $10,926
Operating expenses to average net assets(o)...... 1.05% 1.05%(e)
Net investment income to average net assets...... .53% .69%(e)
Portfolio turnover rate.......................... 93.78% 62.99%(l)
Average commission rate.......................... $ .06 $ .06
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended May 1, 1996(a)
December 31, to December 31,
1997 1996
------------ ---------------
<S> <C> <C>
MID CAP GROWTH PORTFOLIO--SELECTED DATA FOR EACH
SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT THE PERIOD INDICATED:
Net Asset Value, Beginning of Period.............. $ 10.22 $ 10.00
------- -------
Net Investment Income............................. ( .02) .05
Net Realized and Unrealized Gain on Investments**. 1.73 .22
------- -------
Total From Investment Operations................. 1.71 .27
Less Distributions:
From Net Investment Income....................... -- ( .05)
From Net Realized Gains on Investments........... -- --
------- -------
Total Distributions.............................. -- ($ .05)
======= =======
Net Asset Value, End of Period.................... $ 11.93 $ 10.22
======= =======
Number of shares outstanding (000's omitted)..... $ 3,374 $1,613
Total Investment Return*......................... 16.66% 2.69%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)........ $40,235 $16,492
Operating expenses to average net assets(m)...... 1.10% 1.10%(e)
Net investment income to average net assets...... ( .26)% .92%(e)
Portfolio turnover rate.......................... 124.04% 71.25%(l)
Average commission rate.......................... $ .03 $ .03
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended December 31, May 6, 1994(a)
--------------------------- to December 31,
1997(w) 1996(w) 1995(w) 1994(w)
-------- -------- ------- ---------------
<S> <C> <C> <C> <C>
SPECIAL OPPORTUNITIES PORTFOLIO
(RENAMED THE "DIVERSIFIED MID-CAP
GROWTH PORTFOLIO" EFFECTIVE MAY
1, 1998)--SELECTED DATA FOR EACH
SHARE OF BENEFICIAL INTEREST
OUTSTANDING THROUGHOUT THE PERIOD
INDICATED:
Net Asset Value, Beginning of
Period........................... $ 16.52 $ 13.18 $ 9.94 $10.00
-------- -------- ------- ------
Net Investment Income (Loss)...... .01 .02 ( .01) .11
Net Realized and Unrealized Gain
(Loss) on Investments**.......... .56 3.99 3.58 ( .06)
-------- -------- ------- ------
Total From Investment Operations. .57 4.01 3.57 .05
Less Distributions:
From Net Investment Income....... ( .01) ( .02) -- --
-------- -------- ------- ------
From Net Gains on Investments.... ( 1.69) ( .65) ( .33) ( .11)
-------- -------- ------- ------
Total Distributions.............. ($ 1.70) ($ .67) ($ .33) ($ .11)
======== ======== ======= ======
Net Asset Value, End of Period.... $ 15.39 $ 16.52 $ 13.18 $ 9.94
======== ======== ======= ======
Number of shares outstanding
(000's omitted)................. 13,884 11,749 4,133 722
Total Investment Return*......... 3.44% 30.33% 35.96% .56%(l)
SIGNIFICANT RATIOS AND
SUPPLEMENTAL DATA:
Net Assets, End of Period
(000's omitted)................. $213,612 $194,108 $54,486 $7,181
Operating expenses to average net
assets(k)....................... 0.85% .84% 1.00% 1.00%(e)
Net investment income to average
net assets...................... 0.09% .18% ( .11)% 1.51%(e)
Portfolio turnover rate.......... 331.19% 217.84% 139.13% 26.54%(l)
Average commission rate.......... $ .07 $ .06 -- --
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended December 31, May 16, 1988(a)
--------------------------------------------------------------------------------- to December 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <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,
Beginning of Peri-
od................ $ 14.64 $ 11.70 $ 11.16 $ 11.52 $ 10.27 $ 9.36 $ 7.42 $ 10.11 $10.15 $10.00
-------- -------- -------- -------- ------- ------- ------ ------- ------ ------
Net Investment In-
come.............. .77 .76 .77 .66 .52 .49 .52 .57 .59 .35
Net Realized and
Unrealized Gain
(Loss) on
Investments**..... 1.68 2.97 .54 ( .34) 1.26 .96 1.94 ( 2.69) .14 .15
-------- -------- -------- -------- ------- ------- ------ ------- ------ ------
Total From Invest-
ment Operations.. 2.45 3.73 1.31 .32 1.78 1.45 2.46 ( 2.12) .73 .50
Less Distributions:
From Net Invest-
ment Income...... ( .77) ( .76) ( .77) ( .66) ( .52) ( .49) ( .52) ( .57) ( .59) ( .35)
From Net Realized
Gains on Invest-
ments............ ( .41) ( .03) ( .00) ( .02) ( .01) ( .05) -- -- ( .18) --
-------- -------- -------- -------- ------- ------- ------ ------- ------ ------
Total Distribu-
tions............ ($ 1.18 ($ .79) ($ .77) ($ .68) ($ .53) ($ .54) ($ .52) ($ .57) ($ .77) ($ .35)
======== ======== ======== ======== ======= ======= ====== ======= ====== ======
Net Asset Value,
End of Period..... $ 15.91 $ 14.64 $ 11.70 $ 11.16 $ 11.52 $ 10.27 $ 9.36 $ 7.42 $10.11 $10.15
======== ======== ======== ======== ======= ======= ====== ======= ====== ======
Number of shares
outstanding (000's
omitted).......... 12,830 10,325 9,301 10,178 7,061 1,672 875 587 467 153
Total Investment
Return*........... 17.22% 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
Period (000's
Omitted)......... $204,131 $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% .69% .73% .71% .83% .85% .84% .86% .86% .75%(e)
Net investment in-
come to average
net assets....... 5.12% 6.14% 6.85% 5.94% 4.80% 5.31% 5.88% 6.67% 5.93% 5.14%(e)
Portfolio turnover
rate............. 20.04% 18.37% 19.81% 22.36% 9.79% 16.24% 11.84% 17.17% 19.10% 3.89%(l)
Average commission
rate............. $ .05 $ .04 -- -- -- -- -- -- -- --
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended May 1, 1996(a)
December 31, to December 31,
1997 1996
------------ ---------------
<S> <C> <C>
SMALL CAP VALUE PORTFOLIO--SELECTED DATA FOR EACH
SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT THE PERIOD INDICATED:
Net Asset Value, Beginning of Period.............. $ 10.73 $ 10.00
------- -------
Net Investment Income............................. .08 .07
Net Realized and Unrealized Gain on Investments**. 2.66 .96
------- -------
Total From Investment Operations................. 2.74 1.03
Less Distributions:
From Net Investment Income....................... ( .08) ( .07)
From Net Realized Gains on Investments........... ( .99) ( .23)
------- -------
Total Distributions.............................. ($ 1.07) ($ .30)
======= =======
Net Asset Value, End of Period.................... $ 12.40 $ 10.73
======= =======
Number of shares outstanding (000's omitted)..... 3,488 982
Total Investment Return*......................... 25.57% 10.33%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)........ $43,261 $10,541
Operating expenses to average net assets(p)...... 1.05% 1.05%(e)
Net investment income to average net assets...... .68% 1.15%(e)
Portfolio turnover rate.......................... 126.10% 66.31%(l)
Average commission rate.......................... $ .06 $ .06
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended May 1, 1996(a)
December 31, to December 31,
1997 1996
------------ ---------------
<S> <C> <C>
SMALL CAP GROWTH PORTFOLIO--SELECTED DATA FOR EACH
SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT THE PERIOD INDICATED:
Net Asset Value, Beginning of Period.............. $ 9.93 $ 10.00
------- -------
Net Investment Income............................. ( .02) .01
Net Realized and Unrealized Loss on Investments**. 1.44 ( .06)
------- -------
Total From Investment Operations................. 1.42 ( .05)
Less Distributions:
From Net Investment Income....................... ( .01) ( .02)
From Net Realized Gains on Investments...........
------- -------
Total Distributions.............................. ($ .01) ($ .02)
======= =======
Net Asset Value, End of Period.................... $ 11.34 $ 9.93
======= =======
Number of shares outstanding (000's omitted)..... 4,298 2,077
Total Investment Return*......................... 14.26% ( 0.50%)(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)........ $48,761 $20,633
Operating expenses to average net assets(f)...... 1.00% 1.00%(e)
Net investment income to average net assets...... ( .28%) .12%(e)
Portfolio turnover rate.......................... 86.23% 50.93%(l)
Average commission rate.......................... $ .07 $ .07
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended May 1, 1996(a)
December 31, to December 31,
1997 1996
------------ ---------------
<S> <C> <C>
INTERNATIONAL BALANCED PORTFOLIO--SELECTED DATA
FOR EACH SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT THE PERIOD INDICATED:
Net Asset Value, Beginning of Period.............. $ 10.39 $ 10.00
------- -------
Net Investment Income............................. .33 .24
Net Realized and Unrealized Gain on Investments**. ( .05) .41
------- -------
Total From Investment Operations................. .28 .65
Less Distributions:
From Net Investment Income....................... ( .33) ( .24)
From Net Realized Gains on Investments........... ( .23) ( .02)
------- -------
Total Distributions.............................. ($ .56) ($ .26)
======= =======
Net Asset Value, End of Period.................... $ 10.11 $ 10.39
======= =======
Number of shares outstanding (000's omitted)..... 2,514 2,319
Total Investment Return*......................... 2.65% 6.73%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)........ $25,420 $24,098
Operating expenses to average net assets(v)...... 1.10% 1.10%(e)
Net investment income to average net assets...... 3.18% 3.59%(e)
Portfolio turnover rate.......................... 81.04% 22.21%(l)
Average commission rate.......................... $ .03 $ .02
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended December 31, May 2, 1988(a)
------------------------------------------------------------------------------------- to December 31,
+1997(c) +1996(c) +1995(c) +1994(c) +1993(c) +1992(c) +1991(c) +1990(c) 1989(c) 1988(c)
-------- -------- -------- -------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTERNATIONAL
EQUITIES
PORTFOLIO
(RENAMED THE
"INTERNATIONAL
EQUITY INDEX
PORTFOLIO"
EFFECTIVE MAY 1,
1998)--SELECTED
DATA FOR EACH
SHARE OF
BENEFICIAL
INTEREST
OUTSTANDING
THROUGHOUT THE
PERIOD INDICATED:
Net Asset Value,
Beginning of
Period........... $ 16.83 $ 15.61 $ 14.62 $ 15.85 $ 12.25 $ 12.57 $10.37 $11.63 $ 10.43 $10.00
-------- -------- -------- -------- ------- ------- ------ ------ ------- ------
Net Investment
Income........... .13 .21 .17 .12 .03 .11 .20 .35 .13 .09
Net Realized and
Unrealized
Gain(Loss) on
Investments**.... ( .97) 1.22 .99 ( 1.10) 3.91 ( .32) 2.20 ( 1.26) 1.35 .43
-------- -------- -------- -------- ------- ------- ------ ------ ------- ------
Total From
Investment
Operations...... ( .84) 1.43 1.16 ( .98) 3.94 ( .21) 2.40 ( .91) 1.48 .52
Less
Distributions:
From Net
Investment
Income.......... ( .13) ( .21) ( .17) ( .12) ( .03) ( .11) ( .20) ( .35) ( .13) ( .09)
From Net
Realized Gains
on Investments.. ( .66) -- -- ( .13) ( .31) -- -- -- ( .15) --
-------- -------- -------- -------- ------- ------- ------ ------ ------- ------
Total
Distributions... ($ .79) ($ .21) ($ .17) ($ .25) ($ .34) ($ .11) ($ .20) ($ .35) ($ .28) ($ .09)
======== ======== ======== ======== ======= ======= ====== ====== ======= ======
Net Asset Value,
End of Period.... $ 15.20 $ 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). 10,024 9,254 8,123 8,162 3,574 1,202 792 588 209 79
Total Investment
Return*......... ( 5.03) 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). $152,359 $155,753 $126,803 $119,331 $56,652 $14,722 $9,954 $6,095 $2,431 $828
Operating
expenses to
average net
assets(g)....... .79% .76% .84% .85% .85% .85% .84% .79% .94% .78%(e)
Net investment
income to
average net
assets.......... .78% 1.30% 1.34% .85% .26% .90% 1.75% 3.29% 1.30% 1.17%(e)
Portfolio
turnover rate... 83.13% 92.03% 65.82% 78.21% 65.57% 110.79% 86.70% 80.19% 140.00% 63.30%(l)
Average commis-
sion rate....... $ .02 $ .02 -- -- -- -- -- -- -- --
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended May 1, 1996(a)
December 31, to December 31,
1997 1996
------------- ---------------
<S> <C> <C>
INTERNATIONAL OPPORTUNITIES PORTFOLIO--SELECTED
DATA FOR EACH SHARE OF BENEFICIAL INTEREST
OUTSTANDING THROUGHOUT THE PERIOD INDICATED:
Net Asset Value, Beginning of Period............. $ 10.60 $ 10.00
------- -------
Net Investment Income............................ .10 .07
Net Realized and Unrealized Gain on
Investments**.................................... .11 .60
------- -------
Total From Investment Operations................ .21 .67
Less Distributions:
From Net Investment Income...................... (.10) ( .07)
From Net Realized Gains on Investments.......... (.08) --
------- -------
Total Distributions............................. $ (.18) ($ .07)
======= =======
Net Asset Value, End of Period................... $ 10.63 $ 10.60
======= =======
Number of shares outstanding (000's omitted).... 2,882 1,689
Total Investment Return*........................ 1.95% 6.72%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)....... $30,631 $17,898
Operating expenses to average net assets(q)..... 1.22% 1.25%(e)
Net investment income to average net assets..... .65% 0.87%(e)
Portfolio turnover rate......................... 21.09% 5.46%(l)
Average commission rate......................... $ .03 $ .03
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended December 31, May 1, 1994(a)
------------------------- to December 31,
1997(x) 1996(x) 1995(x) 1994(x)
------- ------- ------- ---------------
<S> <C> <C> <C> <C>
SHORT-TERM U.S. GOVERNMENT PORTFOLIO
(RENAMED THE SHORT-TERM BOND
PORTFOLIO EFFECTIVE MAY 1, 1998)--
SELECTED DATA FOR EACH SHARE OF
BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT THE PERIOD INDICATED:
Net Asset Value, Beginning of
Period.............................. $ 10.05 $ 10.23 $ 9 .66 $10.00
------- ------- ------- ------
Net Investment Income............... .59 .54 .50 .37
Net Realized and Unrealized Gain
(Loss) on Investments**............. .03 ( .18) .59 ( .34)
------- ------- ------- ------
Total From Investment Operations... .62 .36 1.09 .03
Less Distributions:
From Net Investment Income......... ( .59) ( .54) ( .50) ( .37)
From Net Realized Gains on
Investments........................ -- ( .00) ( .02) --
------- ------- ------- ------
Total Distributions................ ($ .59) ($ .54) ($ .52) ($ .37)
======= ======= ======= ======
Net Asset Value, End of Period...... $ 10.08 $ 10.05 $ 10.23 $ 9.66
======= ======= ======= ======
Number of shares outstanding
(000's omitted).................... 5,070 5,840 1,750 178
Total Investment Return*........... 6.41% 3.61% 11.49% .33%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL
DATA:
Net Assets, End of Period
(000's omitted).................... $51,120 $58,676 $17,911 $1,718
Operating expenses to average net
assets(j).......................... .57% .75% .75% .75%(e)
Net investment income to average
net assets......................... 5.67% 5.66% 5.52% 5.82%(e)
Portfolio turnover rate............ 108.29% 20.68% 109.77% 11.22%(l)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------
1997 +1996 +1995 1994 1993 1992 1991 1990 1989 1988
---- ----- ----- ---- ---- ---- ---- ---- ---- ----
<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............. $ 9.77 $ 10.13 $ 9.19 $ 10.14 $ 9.84 $ 9.89 $ 9.23 $ 9.40 $ 9.16 $ 9.26
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net Investment
Income........... .71 .69 .71 .70 .73 .77 .81 .82 .85 .85
Net Realized and
Unrealized Gain
(Loss) on
Investments**.... .24 ( .31) 1.03 ( .95) .30 ( .05) .66 ( .17) .24 ( .10)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total From
Investment
Operations...... .95 .38 1.74 ( .25) 1.03 .72 1.47 .65 1.09 .75
Less
Distributions:
From Net
Investment
Income.......... ( .71) ( .69) ( .71) ( .70) ( .73) ( .77) ( .81) ( .82) ( .85) ( .85)
From Net Realized
Gains on
Investments..... ( .06) ( .05) ( .09) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total
Distributions... ($ .77) ($ .74) ($ .80) ($ .70) ($ .73) ($ .77) ($ .81) ($ .82) ($ .85) ($ .85)
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Net Asset Value,
End of Year...... $ 9.95 $ 9.77 $ 10.13 $ 9.19 $ 10.14 $ 9.84 $ 9.89 $ 9.23 $ 9.40 $ 9.16
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Number of shares
outstanding
(000's omitted).. 80,789 74,315 69,148 63,907 61,046 52,671 44,192 37,331 32,677 28,787
Total Investment
Return*.......... 10.11% 4.10% 19.55% ( 2.57%) 10.77% 7.70% 16.70% 6.90% 11.90% 8.10%
SIGNIFICANT RATIOS
AND
SUPPLEMENTAL DATA
Net Assets, End
of year
(000's Omitted). $803,770 $726,111 $700,309 $587,077 $619,200 $518,341 $437,110 $344,629 $307,235 $263,544
Operating
expenses to
average net
assets.......... .31% .29% .30% .29% .28% .30% .30% .30% .31% .28%
Net investment
income to
average net
assets.......... 7.18% 7.07% 7.20% 7.27% 7.22% 7.85% 8.54% 9.06% 9.06% 9.19%
Portfolio
turnover rate... 138.29% 119.12% 63.31% 21.80% 21.05% 19.66% 20.18% 34.46% 36.47% 25.13%
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Period From
Year Ended May 1, 1996(a)
December 31, to December 31,
1997 1996
------------ ---------------
<S> <C> <C>
STRATEGIC BOND PORTFOLIO--SELECTED DATA FOR EACH
SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT THE PERIOD INDICATED:
Net Asset Value, Beginning of Period.............. $ 10.16 $ 10.00
------- -------
Net Investment Income............................. .59 .38
Net Realized and Unrealized Gain on Investments**. .30 .28
------- -------
Total From Investment Operations................. .89 .66
Less Distributions:
From Net Investment Income....................... ( .66) ( .38)
From Net Realized Gains on Investments........... ( .15) ( .12)
------- -------
Total Distributions.............................. ($ .81) ($ .50)
======= =======
Net Asset Value, End of Period.................... $ 10.24 $ 10.16
======= =======
Number of shares outstanding (000's omitted)..... 2,797 1,271
Total Investment Return*......................... 9.05% 6.71%(l)
SIGNIFICANT RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)........ $28,647 $12,907
Operating expenses to average net assets(s)...... 1.00% 1.00%(e)
Net investment income to average net assets...... 5.80% 6.05%(e)
Portfolio turnover rate.......................... 69.38% 171.39%(l)
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<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
Income........... .53 .52 .57 .40 .30 .36 .58 .80 .89 .73
Total From
Investment
Operations...... .53 .52 .57 .40 .30 .36 .58 .80 .89 .73
Less Distribu-
tions:
From Net Invest-
ment Income..... ( .53) ( .52) ( .57) ( .40) ( .30) ( .36) ( .58) ( .80) ( .89) ( .73)
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).. 22,944 21,324 18,591 14,867 11,618 12,521 13,780 14,032 12,022 10,984
Total Investment
Return*.......... 5.38% 5.32% 5.78% 4.03% 3.06% 3.60% 6.00% 8.00% 8.90% 7.30%
SIGNIFICANT
RATIOS AND
SUPPLEMENTAL DATA
Net Assets, End
of year (000's
omitted)........ $229,443 $213,235 $ 185,909 $148,668 $116,190 $125,212 $137,795 $140,319 $120,220 $109,843
Operating
expenses to
average net
assets.......... .33% .30% .35% .32% .35% .34% .33% .33% .34% .30%
Net investment
income to
average net
assets.......... 5.23% 5.20% 5.62% 4.05% 3.01% 3.58% 5.81% 7.96% 9.09% 7.55%
</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 Index 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 1.12% and 1.55% for the years
ended December 31, 1997, and 1996, respectively.
(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 .79%, 1.83%, and 13.60%, for
the years ended December 31, 1996, 1995, and 1994, respectively.
(k) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made, the expense ratio would have been 1.19% and 6.05% for the years
ended December 31, 1995, and 1994, respectively.
(l) Not Annualized.
(m) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.42% and 2.34% for the years
ended December 31, 1997, and 1996, respectively.
(n) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.06% and 1.89% for the years
ended December 31, 1997, and 1996, respectively.
(o) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.14% and 2.15% for the years
ended December 31, 1997, and 1996, respectively.
22
<PAGE>
(p) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.30% and 2.06% for the years
ended December 31, 1997, and 1996, respectively.
(q) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.57% and 2.76% for the years
ended December 31, 1997, and 1996, respectively.
(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 .65% and 1.61% for the years ended
December 31, 1997, and 1996, respectively.
(s) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.32% and 1.57% for the years
ended December 31, 1997, and 1996, respectively.
(u) The Total Return includes the effect of a voluntary capital contribution
from John Hancock of $0.06 per share for the year ended 1996 and $0.04 per
share for year ended 1997. The Total Investment Return without the capital
contribution would have been 13.59% for the year ended 1996 and 32.47% for
the year ended 1997.
(v) Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.56% and 1.44% for the years
ended December 31, 1997, and 1996, respectively.
(w) See "Changes in Diversified Mid-Cap Growth Portfolio's Investment
Objective and Policies."
(x) See "Changes in Short-Term Bond Portfolio's Investment Objective and
Policies."
+ 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.
23
<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.
In addition, up to 30% of the Portfolio's total fixed income investments (at
time of purchase) may be invested in securities denominated in currencies of
developed countries other than the United States. (For this purpose, debt
securities include convertible securities and preferred stock.)
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.
24
<PAGE>
Equity Index Portfolio: The investment objective of the Equity Index
Portfolio is to provide investment results that correspond to the total return
of the U.S. market as represented by the Standard & Poor's 500 Composite Price
Index (S&P 500) utilizing common stocks that are publicly traded in the United
States. The Portfolio attempts to achieve this objective by investing in U.S.
traded and denominated stocks 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.
25
<PAGE>
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.
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 Portfolio. 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.
26
<PAGE>
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 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.
Diversified Mid Cap Portfolio: The investment objective of the Diversified
Mid Cap Growth Portfolio is to provide long-term growth of capital through a
diversified portfolio investing primarily in common stocks of medium
capitalization ("mid cap") growth companies. The potential for growth of
capital is generally the sole basis for selection of securities, with any
current income being only incidental to the Portfolio's objective. The
Portfolio expects to be broadly diversified over many economic sectors.
The sub-investment manager expects that common stocks of faster growing mid
cap companies generally offer the most attractive growth prospects. However,
the Portfolio may also invest in equity securities of larger, more established
companies or smaller, less established companies that the sub-investment
manager 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 mid cap companies. The Fund's current
definition of "mid cap" companies is set forth below under "Market
Capitalization Risk." The Portfolio will be invested in securities that the
sub-investment manager believes will offer growth potential higher than the
average for all mid cap 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.
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.
27
<PAGE>
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/Mid Cap CORE Portfolio: The investment objective of the Small/Mid Cap
CORE Portfolio is to achieve long-term growth of capital through a broadly
diversified portfolio of securities of U.S. issuers. Such securities will
generally be included in the Russell 2500 Index at the time of investment. The
sub-investment manager utilizes optimization techniques (described below) to
seek to maximize the Portfolio's expected return, while maintaining a risk
profile, style, capitalization and industry characteristics similar to the
Russell 2500 Index. At least 90% of total assets will be invested in equity
securities of U.S. issuers or foreign issues traded in the U.S. and that
comply with U.S. accounting standards. Under normal circumstances at least 65%
of this Portfolio's total assets will consist of equity investments in small
capitalization ("small cap") or medium capitalization ("mid cap") companies.
The Fund's current definitions of "small cap" and "mid cap" companies are set
forth below under "Market Capitalization Risk."
Within these general parameters, the Portfolio's investments are selected
using a "Computer-Optimized, Research-Enhanced ("CORE") investment process. An
important component of the CORE process is a rigorous computerized system for
forecasting returns in the U.S. equity market, and returns on individual
equity securities, according to fundamental investment characteristics. This
proprietary computerized system incorporates measures of value, growth,
momentum and risk (e.g., book/price ratio, earnings/price ratio, price
momentum, price volatility, consensus growth forecasts, earnings estimate
revisions, and earnings stability). All of these factors have been shown to
significantly impact the performance of the securities and markets they were
designed to forecast. The weightings that the computerized system assigns to
these factors are derived using a statistical formulation that considers each
factor's historical performance in different market environments. Moreover,
the computerized system is designed to evaluate each security using only the
factors that are statistically related to returns in the anticipated market
environment. Because it includes many disparate factors, the sub-investment
manager believes that this computerized system is broader in scope and
provides more thorough evaluation than most conventional quantitative models.
Securities and markets ranked highest by this computerized system do not have
one dominant investment characteristic; rather, they possess an attractive
combination of investment characteristics.
28
<PAGE>
The sub-investment manager seeks to "enhance" the above described
computerized analysis of a security with more traditional types of research
provided by the Goldman Sachs Global Investment Research Department or other
appropriate sources. The resulting evaluations reflect analysts' judgments as
to the investment merits of each specific security and incorporate economic
outlook, valuation, risk and a variety of other factors.
Securities owned by this Portfolio will generally be sold when the sub-
investment manager believes that the market price fully reflects or exceeds
the securities fundamental valuation or when more attractive investments are
identified. By employing both a quantitative (i.e., "Computer-Optimized") and
a qualitative (i.e., "Research-Enhanced") method of selecting securities,
Small/Mid Cap CORE Portfolio seeks to capitalize on the strengths of each
discipline.
Although most of the assets normally will be invested in U.S. common stocks,
the Portfolio may also purchase other types of securities: for example,
foreign securities, convertible securities, preferred stocks, and warrants,
when considered consistent with the Portfolio's investment objective and
program. The Portfolio will invest in equity securities of foreign issuers
only if traded in the U.S. and if the issuer complies with U.S. accounting
standards. The Portfolio will invest only in those fixed income securities
that are considered cash equivalents.
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.
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
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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.
Global Equity Portfolio: The investment objective of the Global Equity
Portfolio is to achieve long-term growth of capital through a diversified
portfolio of marketable securities, primarily equity securities. The Portfolio
invests on a worldwide basis in equity securities of companies which are
incorporated in the U.S. or in foreign countries. Income is an incidental
consideration.
The Portfolio invests in companies that the Portfolio's sub-investment
manager believes will benefit from global economic trends, promising
technologies or products and specific country opportunities resulting from
changing geopolitical, currency or economic relationships. It is expected that
investments will be spread broadly around the world. The Portfolio will be
invested usually in securities of issuers located in at least three countries,
one of which may be the U.S. The Portfolio may be invested 100% in non-U.S.
issues, and for temporary defensive purposes may be invested 100% in U.S.
issues, although under normal circumstances it is expected that both foreign
and U.S. investments will be represented in this Portfolio.
It is expected that investments will include companies of varying size as
measured by assets, sales or capitalization. It is expected that these
companies will be primarily "large cap" companies as defined below under
"Market Capitalization." The Portfolio generally invests in equity securities
of established companies listed on U.S. or foreign securities exchanges, but
also may invest in securities traded over-the-counter. It also may invest in
debt securities convertible into common stock, convertible and non-convertible
preferred stock, and fixed-income securities of governments, government
agencies, supranational agencies and companies when the sub-investment manager
believes the potential for appreciation will equal or exceed that available
from investments in equity securities. These debt and fixed-income securities
will be predominantly of investment grade quality (as defined below under
"Sovereign Bond Portfolio"). The Portfolio may not invest more than 5% of its
total assets in debt securities of the type commonly referred to as "high
yield" or "junk" bonds. See "Risks of Other Debt Securities" below.
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-
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U.S. markets. The sub-investment manager believes that, over the long term,
investing across non-U.S. equity and fixed income markets based upon
discrepancies between market prices and fundamental values may achieve
enhanced return.
It is expected that the Portfolio will invest its assets primarily in
developed equity markets other than the U.S. and in developed fixed income
markets other than the U.S. and to a lesser extent invest in equity and debt
securities of issuers in emerging markets. Under normal circumstances, fixed
income senior securities will constitute at least 25% of the value of the
Portfolio's total assets and the Portfolio will invest in issuers of at least
three different countries other than the United States.
International Equity Index Portfolio: The investment objective of the
International Equity Index Portfolio is to provide investment results that
correspond to the total return of the major developed international (non-U.S.)
equity markets as represented by the MSCI EAFE GDP Index. This is the Gross
Domestic Product Weighted Morgan Stanley Capital International Europe,
Australasia and Far East (Free) Index, which is a broad-based benchmark made
up of more than 1,000 companies in Europe and the Pacific Rim. The MSCI EAFE
GDP Index is constructed by Morgan Stanley Capital International (MSCI), which
chooses countries commonly known as developed markets and weights them in the
index based on their Gross Domestic Product (GDP). Within each country, stocks
are weighted by their market capitalization. Most of the largest companies
listed on each country's stock exchange, by market value, are included in the
MSCI EAFE GDP Index for diversification purposes. For additional information
about this index, see "Investment Practices--The MSCI EAFE GDP Index" below.
The Portfolio attempts to track the capital appreciation and dividend income
of the Index by investing in a representative portion of the stocks which
matches as closely as possible the characteristics of the stocks which
comprise the Index. The Portfolio will also invest in stock index futures. The
Portfolio will attempt to achieve a correlation between the performance of its
Portfolio and that of MSCI EAFE GDP Index of at least 0.90, without taking
into account fees and expenses. A perfect correlation would be 1.00.
The Portfolio's ability to track the performance of the Index will depend to
some extent on the size and timing of cash flows into and out of the
Portfolio, as well as on the level of the Portfolio's expenses, and the
capability of the sub-investment manager to select a representative sample of
the securities included in the Index. To the extent that the size of the
Portfolio's assets limits the number of issues that the Portfolio can
purchase, or is relatively small in relation to cash flows, there is more
potential for deviation from the MSCI EAFE GDP Index's performance than at
higher asset levels.
The Portfolio normally invests at least 65% of its total assets in foreign
equity securities, consisting of common stocks (including American Depository
Receipts) and preferred stocks, securities convertible to common stock
(provided they are traded on an exchange or over-the-counter), warrants and
receipts. No more than 10% of the Portfolio's assets will be held in cash or
cash equivalents. The Portfolio may invest up to 20% of its net assets at time
of purchase in securities of emerging international markets, such as Mexico,
Chile and Brazil, either directly through local exchanges, through publicly-
traded closed-end country funds or through "passive foreign investment
companies." A substantial portion of the Portfolio's assets will be
denominated in foreign currencies. See "Risks of Foreign Securities" below.
MSCI EAFE GDP Index is the exclusive property of Morgan Stanley & Co.,
Incorporated and is a registered service mark of Morgan Stanley Capital
International. Those organizations do not sponsor and are not in any
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way affiliated with the Fund. Inclusion of a security in the Index in no way
implies an opinion as to its attractiveness or appropriateness as an
investment.
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 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.
Emerging Markets Equity Portfolio: The investment objective of the Emerging
Markets Equity Portfolio is capital appreciation which, under normal
conditions, it seeks by investing at least 65% of its total assets in equity
securities of emerging markets companies. Under normal conditions, the
Portfolio maintains investments in at least six emerging markets countries at
all times and invests no more than 35% of its total assets in any one emerging
markets country.
The sub-investment manager currently regards the following to be emerging
markets countries: Latin America (Argentina, Brazil, Chile, Colombia, Costa
Rica, Jamaica, Mexico, Peru, Trinidad and Tobago, Uruguay and Venezuela); Asia
(Bangladesh, China, India, Indonesia, Korea, Malaysia, Pakistan, the
Philippines, Singapore, Sri Lanka, Taiwan, Thailand and Vietnam); southern and
eastern Europe (Czech Republic, Greece, Hungary, Kazakistan, Poland, Portugal,
Romania, Russia, Slovakia, Slovenia, Turkey, and the Ukraine); the Middle East
(Israel and Jordan); and Africa (Egypt, Ghana, Ivory Coast, Kenya, Morocco,
Nigeria, South Africa, Tunisia and Zimbabwe). In the future the Portfolio may
invest in other emerging markets countries. The Portfolio considers a company
to be an emerging market company if its securities are principally traded in
the capital
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market of an emerging market country; it derives at least 50% of its total
revenue from either goods produced or services rendered in emerging market
countries or from sales made in such emerging market countries, regardless of
where the securities of such companies are principally traded; or it is
organized under the laws or and has a principal office in an emerging market
country.
This Portfolio uses a proprietary, quantitative asset allocation model
created by the sub-investment manager. This model employs mean-variance
optimization, a process used in developed markets based on modern portfolio
theory and statistics. Mean-variance optimization helps determine the
percentage of assets to invest in each country to maximize expected returns
for a given risk level. The Portfolio's aims are to invest in those countries
that are expected to have the highest risk/reward trade-off when incorporated
into a total portfolio context. This "top-down" country selection is combined
with "bottom-up" fundamental industry analysis and stock selection based on
original research and publicly available information and company visits.
This Portfolio invests primarily in common stock, but also may invest in
other types of equity and equity derivative securities (such as convertible
debt). This includes certain debt securities issued by the governments of
emerging markets countries that are, or may be eligible for, conversion into
investments in emerging markets companies under debt conversion programs
sponsored by such governments. It may invest up to 35% of its total assets at
the time of purchase in debt securities, including up to 5% in debt securities
rated below investment grade (as defined under "Sovereign Bond Portfolio"
below).
Investors in this Portfolio should expect greater fluctuations in share
price and total return compared with less aggressive funds. These
fluctuations, whether positive or negative, may be sharp and unanticipated.
See "Risks of Foreign Securities," below.
Short-Term Bond Portfolio: The investment objective of the Short-Term Bond
Portfolio is to provide a high level of current income consistent with a low
degree of share price fluctuation, through investment primarily in a
diversified portfolio of short- and intermediate-term investment-grade debt
obligations.
Under normal circumstances, (a) at least 65% of the Portfolio's total assets
will be invested in debt obligations, (b) the Portfolio's average maturity
will be between one and three and one half years, and (c) securities that are
below "investment grade" will not equal more than 20% of the Portfolio's net
assets. Investments in such lower rated ("high yield") securities are subject
to greater risks of loss. The Portfolio, however, will not purchase any
security unless it is rated within the five highest categories for bonds by a
nationally recognized securities rating organization ("NRSRO") or, for any
security that does not have a bond rating, considered by the sub-investment
manager to be of comparable quality. Foreign securities will be purchased only
if they are payable in United States dollars. Under normal conditions, the
Portfolio will not invest more than 25% of its net assets in foreign
securities at the time of purchase.
Within these parameters, the Portfolio is expected to invest most heavily in
corporate debt obligations. Nevertheless, the Portfolio has complete
discretion also to invest in U.S. Government securities, commercial paper,
bank obligations, or any other investment grade obligations that do not
violate the Portfolio's investment policies or objective. See "Types of
Investment Securities and Ratings--U.S. Government Obligations" in the
Statement of Additional Information.
For purposes of satisfying its investment objective and policies, the
Portfolio considers the following to be "investment grade": (a) all U.S.
Government securities; (b) other bonds or bank obligations rated within the
four highest categories for such obligations by an NRSRO or, if unrated,
considered to be of comparable quality
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by the sub-investment manager (see "Types of Investment Securities and
Ratings--Corporate Bond Ratings" in the Statement of Additional Information);
(c) commercial paper and short-term bank obligations rated in one of the three
highest grades for such instruments by an NRSRO or, if unrated, considered by
the sub-investment manager to be of comparable quality (see "Types of
Investment Securities and Ratings--Commercial Paper Ratings" in the "Statement
of Additional Information"); and (d) repurchase agreements involving
investment-grade debt securities.
The investments of the Short-Term Bond Portfolio may include convertible
debt, preferred and convertible preferred stock, and similar securities. This
Portfolio also may use, among others, the Portfolio management devices
discussed below under "Mortgage Dollar Rolls and Reverse Repurchase
Agreements."
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 bond portfolio offers greater
stability and defensive characteristics than a longer maturity bond account.
On the other hand, because this Portfolio's share price will not remain
constant, the Portfolio would not be appropriate for an investor whose primary
objective is absolute stability of principal.
Bond Index Portfolio: The initial investment objective of the Diversified
Bond Index Portfolio will be to provide investment results that correspond to
the total return and risk characteristics of the Lehman Brothers
Government/Corporate Index (the "Government/Corporate Index"). Over time, as
the portfolio reaches sufficient size, it is expected that the Portfolio will
seek to match the performance of the Lehman Brothers Aggregate Bond Index (the
"Aggregate Bond Index"), which is made up of the Government/Corporate Index,
the Lehman Brothers Mortgage-Backed Securities Index, and the Lehman Brothers
Asset-Backed Securities Index. The sub-investment manager estimates that,
under current conditions, this transition would occur when and if the
Portfolio's assets reach approximately $50 million.
Each of these indexes includes fixed rate debt issues rated investment grade
(as defined below under "Sovereign Bond Portfolio") by Moody's Investors
Service, Inc., or by Standard & Poor's Ratings Group if unrated by Moody's.
All issues have at least one year to maturity and an outstanding par value of
at least $100 million. For additional information about these indexes, see
"Investment Practices--the Lehman Brothers Government/Corporate and Aggregate
Bond Indexes."
The sub-investment manager will monitor to determine whether any of the
Portfolio's securities have ceased to meet any of these criteria, and, if so,
the Portfolio may dispose of such securities or retain them, regardless of
whether they have yet been removed from the relevant index. However, such
"ineligible" investments, together with cash and money market instruments may
not exceed 20% (and are not expected to exceed 10%) of the Portfolio's net
assets. Nor will more than 5% of the Portfolio's net assets comprise either
(a) cash or money-market instruments or (b) debt securities of the type
commonly referred to as "high yield" or "junk" bonds. See "Risks of Other Debt
Securities" below.
Within the foregoing parameters, the Portfolio will invest primarily in the
following obligations: (i) debt obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities; (ii) debt obligations
issued by U.S. corporations; (iii) debt obligations issued or guaranteed by
foreign companies, sovereign governments, municipalities, governmental
agencies or international agencies; (iv) mortgage-backed securities; (v)
asset-backed securities; and (vi) any other issues that are included in the
Government/Corporate or Aggregate Bond Index. Although the sub-investment
manager will manage the Portfolio in a passive manner,
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the Portfolio generally will not hold all of the individual issues which
comprise the Government/Corporate or Aggregate Bond Index, because of the
large number of securities involved. Instead, the Portfolio will hold a
representative sample of the securities in the index, selecting issues so that
certain critical statistics of the Portfolio match those of the index to the
greatest extent feasible. Those factors include, but are not limited to:
duration, cash flow structure, industry sector, credit quality, and
callability.
The Portfolio's ability to duplicate the performance of the relevant index
will depend to some extent on the size and timing of cash flows into and out
of the Portfolio, as well as on the level of the Portfolio's expenses, and the
capability of the sub-investment manager to select a representative sample of
the securities included in the index. To the extent that the size of the
Portfolio's assets limits the number of issues that the Portfolio can
purchase, or is relatively small in relation to cash flows, there is more
potential for deviation from the relevant index's performance than at greater
asset levels.
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.
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
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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").
High Yield Bond Portfolio: The investment objective of the High Yield Bond
Portfolio is to provide high current income and capital appreciation through
investing primarily in high yield (below investment grade) debt securities.
Under normal market and economic conditions, the Portfolio will invest at
least 65% of its assets in debt obligations considered to be below investment
grade, including high yield/high risk, preferred stock and convertible
securities. High yield/high risk debt securities, which are frequently
referred to as "junk bonds," are considered to be those debt securities rated
Bal or lower by Moody's Investors Service, or BB+ or lower by Standard &
Poor's Corporation, or unrated securities deemed to be of comparable credit
quality by the sub-investment manager. The meanings of these ratings are
further discussed under "Types of Investment Instruments and Ratings--
Corporate Bond Ratings" in the Statement of Additional Information. Generally,
the Portfolio's average maturity is expected to range between 3 and 15 years,
although there are no specific maturity restrictions.
The Portfolio may invest in debt obligations issued by foreign governments,
their agencies and instrumentalities, supranational entities, and companies
located outside of the United States. These will be primarily denominated in
U.S. dollars, and no more than 20% of the Portfolio's assets at the time of
purchase will be invested in issuers domiciled in countries whose credit
rating is below investment grade (e.g., emerging market countries). For
liquidity and flexibility or for defensive purposes in unusual market
conditions, the Portfolio may invest all or any portion of its assets in
investment-grade short term securities, cash or cash equivalents.
The Portfolio will be managed using a bottom-up decision-making process.
That is, decisions about which high yield/high risk bonds are to be bought,
held or sold will be based primarily on the investment merits of the
particular security. Top-down considerations (such as the macroeconomic
outlook or industry trends) will play an important role in new idea
generation, but the emphasis is on individual security selection based on
fundamental research. Such research will be performed largely at the sub-
investment manager by its staff of
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research analysts. Generally, the Portfolio will not trade in securities for
short-term profits but, when circumstances warrant, securities may be sold
without regard to the length of time held.
Investors in this Portfolio should expect greater fluctuations in share
price, yield and total return, compared with less aggressive debt-oriented
funds. These fluctuations, whether positive or negative, may be sharp and
unanticipated. See also "Risks of Lower-Quality Instruments" under "Risks of
Other Debt Securities" below.
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: obligations issued or guaranteed as to
principal or interest by the United States Government, or any agency or
authority thereof; municipal and foreign government obligations; obligations
of supranational organizations (e.g., the World Bank and the International
Monetary Fund); obligations of U.S. and foreign banks and other lending
institutions; repurchase agreements; reverse repurchase agreements; commercial
paper; and other corporate obligations. All investments will be denominated in
U.S. dollars and have a remaining maturity of 397 days or less.
At the time the Money Market Portfolio acquires its investments, they will
be rated (or issued by an issuer that is rated with respect to a comparable
class of short-term debt obligations) in one of the two highest rating
categories for short-term debt obligations assigned by at least two nationally
recognized rating organizations (or one rating organization if the obligation
was rated by only one such organization). These high quality securities are
divided into "first tier" and "second tier" securities. First tier securities
have received the highest rating from at least two rating organizations while
second tier securities have received ratings within the two highest categories
from at least two rating agencies, but do not qualify as first tier
securities. The Portfolio may also purchase obligations that are not rated,
but are determined by John Hancock, based on procedures adopted by the Trust's
Board of Trustees, to be of comparable quality to rated first or second tier
securities. The Portfolio may not purchase any second tier security if, as a
result of its purchase (a) more than 5% of its total assets would be invested
in second tier securities or (b) more than 1% of its total assets or $1
million (whichever is greater) would be invested in the second tier securities
of a single issuer.
(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.
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BROKERAGE COMMISSIONS AND PORTFOLIO TURNOVER
To the extent that brokerage commissions (or dealer "spreads" or "mark-ups")
are incurred in buying and selling portfolio securities, the rate of portfolio
turnover could affect each Portfolio's net asset value. The historical rates
of portfolio turnover for the Portfolios are set forth under "Financial
Highlights," above. The annual portfolio turnover rates for the Portfolios as
to which no historical information is yet available are expected to be
approximately the following percentages of those Portfolios' average daily net
assets: 45% for the Small/Mid Cap CORE Portfolio, 150% for the Global Equity
Portfolio, 75% for the Emerging Markets Equity Portfolio, at least 30% for the
Bond Index Portfolio, and not more than 100% for the High Yield Bond
Portfolio.
Certain option and futures contract strategies which may be employed, in
varying degrees, by all of the Portfolios except the Growth & Income, Real
Estate Equity, Bond Index, and Money Market Portfolios 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 financial and market risks to which each Portfolio is
subject. Financial risk refers to the ability of an issuer of a debt security
to pay principal and interest on such security; and it refers to the earnings
stability and overall financial soundness of an issuer of an equity security.
Market risk refers to the volatility of the conditions in the securities
markets in general and, with particular reference to debt securities, how
changes in the overall level of interest rates affect their prices.
In addition to the general risks discussed in the paragraphs that follow,
risks relating to certain specific investment practices in which a Portfolio
may engage are discussed below under "Investment Practices" and under "Types
of Investment Instruments and Ratings" in the Statement of Additional
Information.
RISKS OF MONEY MARKET INSTRUMENTS
The Money Market Portfolio invests exclusively in money market instruments;
all the other Portfolios may invest in these instruments to some extent. Money
market instruments generally do not have maturities that exceed thirteen
months. Such securities can include short-term paper such as certificates of
deposit and commercial paper, and U.S. government obligations and other debt
securities with maturities generally not in excess of thirteen months. Money
market instruments offer investors liquidity. Although money market
instruments are subject to decreases and increases in market value resulting
from changes in interest rates, for the most part these changes are small due
to the instruments' short term to maturity.
RISKS OF OTHER DEBT SECURITIES
The following Portfolios are primarily invested in non-money market debt
securities: the Short-Term Bond, Bond Index, Sovereign Bond, Strategic Bond,
and High Yield Bond. The Managed, Emerging Markets Equity, and International
Balanced Portfolios can vary their holdings of these securities within a broad
range. All the other Portfolios (except the Money Market Portfolio) may invest
in these securities to some extent.
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Interest Rate Risk: In general, debt securities having longer maturities
than money market instruments have exposure to interest rate risk. Changes in
generally prevailing market interest rates alter a debt security's market
value and introduce volatility into the rate of return of a Portfolio that
invests in such securities. This sensitivity of the market value of a debt
security to changes in interest rates is generally related to the duration of
the instrument. The market value of a shorter-term fixed income security is
generally less sensitive to interest rate moves than that of a longer-term
security. The interest rate risk of the Short-Term Bond Portfolio, although
moderate, is 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 Portfolio has 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. Issuers of high yield/high
risk securities are typically in weak financial health and their ability to
pay back principal and interest on the bonds they issue is uncertain. Some of
these issuers may be in default or bankruptcy. Compared with issuers of
investment-grade bonds, they are more likely to encounter financial
difficulties and to be materially affected by these difficulties when they do
encounter them. Junk bond markets may react strongly to adverse news about an
issuer or the economy, or to the perception or expectations of adverse news.
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
High Yield Bond Portfolio intends to invest primarily in these securities. The
other Portfolios most likely to invest a significant portion of their assets
in high-yield securities are the Managed, Large Cap Value, International
Balanced, Short-Term Bond, Sovereign Bond, and Strategic Bond Portfolios. In
contrast, the Diversified Mid Cap Growth and Bond Index Portfolios will not
invest in debt securities that are not at least investment grade at the time
of purchase. However, all Portfolios (other than the Equity Index and Money
Market 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
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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 Managed, Real Estate Equity,
International Balanced, Emerging Markets Equity, Short-Term Bond, Bond Index,
Sovereign Bond, Strategic Bond, and High-Yield Bond 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 (or pay interest in the form of additional
securities), rather than paying interest in cash 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 Managed, Real Estate Equity, International Balanced, Emerging Markets
Equity, Short-Term Bond, Bond Index, Sovereign Bond, Strategic Bond, and High-
Yield Bond 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 Short-Term Bond, Bond Index, Sovereign
Bond, Strategic Bond, and Money Market Portfolios. All of the Portfolios that
invest in equity securities expect to make such securities their primary
investment (except for the Managed Portfolio, which may nevertheless do so in
the discretion of its sub-investment manager). The Managed Portfolio and
International Balanced Portfolio, though investing in equity securities,
expect under normal conditions also to have a substantial amount of their
assets invested in debt obligations.
Equity Risk: Investments in common stock or other equity securities may
offer a higher rate of return than those in money market instruments and
longer term debt securities. However, the risks associated with investments in
equity securities may also be higher, because the investment performance of
equity securities depends upon factors which are difficult to predict. Such
factors include overall market price trends for securities and operating
results of particular issuers. The fundamental risk associated with any equity
portfolio is the risk that the value of the investments it holds might
decrease in value. Equity security values may fluctuate in response to the
activities of an individual company or in response to general market and/or
economic conditions. Historically, equity securities have provided greater
long-term returns and have entailed greater short-term risks than other
investment choices.
Market Capitalization Risk: Another indication of the relative risk of a
common stock investment is defined by the size of the company, which is
typically referred to as its market capitalization. Market capitalization is
computed by multiplying current market price of a share of the company's stock
by the total number of its shares outstanding. Investing in larger
capitalization companies generally involves a lesser degree of risk than
investing in smaller capitalization companies.
Three capitalization levels will be used by the Fund: large, medium ("mid"),
and small. Each of these capitalization levels will be defined by reference to
the Russell 3000 Index. The Russell 3000 Index is a broad market index and is
representative of the U.S. stock markets with a total capitalization of $8.9
trillion at the end of 1997. The Russell 3000 Index is a service mark of Frank
Russell Company, which does not sponsor and is
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not in any way affiliated with the Fund. Inclusion in the index in no way
applies an opinion as to its attractiveness or appropriateness as an
investment.
. Companies having a capitalization within the range of the 300 largest
companies in the Russell 3000 Index will be considered to be large
capitalization ("large cap") companies. At the end of 1997, each of the
largest 300 companies in the Russell 3000 Index had a capitalization of
$6 billion or more.
. Companies having a capitalization within the range of the 700 next
largest companies in the Russell 3000 Index will be considered to be "mid
cap." At the end of 1997, such mid cap companies had capitalizations
ranging from $1.27 billion to $6 billion.
. Companies having a capitalization within the range of the remaining
companies in the Russell 3000 Index will be considered to be small
capitalization ("small cap") companies. At the end of 1997, none of these
smallest companies in the Russell 3000 Index had a market capitalization
of more than $1.27 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 Managed, Growth & Income, Equity Index, Large
Cap Value, Large Cap Growth, Global Equity, International Balanced,
International Equity Index, and International Opportunities 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 Value, Mid Cap Growth, Diversified Mid
Cap Growth, and Real Estate Equity 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 Small/Mid Cap CORE Portfolio are generally
expected to represent companies that are small cap and mid cap issuers. This
Portfolio also may invest in the equity securities of companies that qualify
as large 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 Value and Small Cap Growth 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.
The Emerging Markets Equity Portfolio has broad latitude to invest in
companies of any size.
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
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markets. The market value of shares in equity real estate investment trusts
and commercial property companies in particular is heavily dependent upon the
value of their underlying properties. Overbuilding, declines in local or
regional economic conditions, financial difficulties on the part of major
tenants and increases in real estate taxes and operating expenses all could
decrease the value of the real estate investments. In addition to the Real
Estate Portfolio, all of the other Portfolios (except for the Money Market
Portfolio) 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 Balanced, International Equity Index, International
Opportunities, and Emerging Markets Equity Portfolios. The Managed,
Diversified Mid Cap Growth, Global Equity, Short-Term Bond, Bond Index,
Strategic Bond, and High-Yield Bond 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 Portfolio.
The Emerging Markets Equity Portfolio invests primarily in developing
countries commonly known as "emerging markets." To a lesser extent, the Global
Equity, International Balanced, International Equity Index, International
Opportunities, Short-Term Bond, Bond Index, Strategic Bond, and High-Yield
Bond Portfolios may also 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.
Administrative problems and delays may result from international action such
as the planned creation of a unified "Euro" currency for several European
nations.
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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.
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 the Money
Market 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, International Equity Index, and Bond Index Portfolios
expect to invest substantially all of their assets in equity or debt
securities within their investment objectives and policies at all times.
Accordingly, these Portfolios may carry more risk in times of declining
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 Money Market Portfolio, 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,
International Equity Index, and Bond Index Portfolios are less likely to
assume such a defensive position than any of such other Portfolios.
RISKS OF NON-DIVERSIFIED PORTFOLIOS
The 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
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under "Investment Restrictions.") No Portfolio will: (1) purchase real estate
or any interest in real estate, but investments of the type permitted in the
Real Estate Equity Portfolio are not deemed interests in real estate for the
purposes of this restriction; (2) make loans, other than as described below
under "Investment Practices--Portfolio Lending"; (3) invest in commodities,
commodity contracts, puts, or calls, except within certain limits, the
Managed, Equity Index, Large Cap Value, Large Cap Growth, Mid Cap Value, Mid
Cap Growth, Diversified Mid Cap Growth, Small/Mid Cap CORE, Small Cap Value,
Small Cap Growth, Global Equity, International Balanced, International Equity
Index, International Opportunities, Emerging Markets Growth, Short-Term Bond,
Sovereign Bond, Strategic Bond, and High Yield 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 exceptions for some Portfolios; (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, Large Cap Growth, Real Estate Equity, and Sovereign
Bond 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 Managed, Growth & Income,
Large Cap Growth, Real Estate Equity, Sovereign Bond and Money Market
Portfolios may not invest in repurchase agreements maturing in more than 7
days. No more than 15% (10% as to the Diversified Mid Cap Growth, and Short-
Term Bond 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 Diversified Mid Cap Growth, Sovereign Bond, 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
Diversified Mid Cap Growth 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 Managed, Growth & Income, Large Cap Growth, Real Estate
Equity, Small Cap Value, International Equity Index, and Money Market
Portfolios have entered into a joint trading account pursuant to an
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SEC exemptive order. Under this arrangement, John Hancock is responsible for
investing the aggregate cash balances into one or more repurchase agreements,
as described above, or in other money market instruments. In the case of
repurchase agreements acquired pursuant to this arrangement, John Hancock is
responsible for ensuring that the agreement is fully collateralized at all
times. 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.
Furthermore, Goldman Sachs Asset Management ("GSAM") has also received a
similar SEC exemptive order which permits GSAM to invest the aggregate cash
balances of the Small/Mid Cap CORE Portfolio in one or more repurchase
agreements with other GSAM-advised mutual funds. Janus Capital Corporation
("Janus") has also received a similar SEC exemptive order which permits Janus
to invest the aggregate cash balances of the Mid Cap Growth Portfolio in one
or more repurchase agreements with other Janus-advised mutual funds.
USE OF OPTIONS ON SECURITIES BY THE EQUITY INDEX, LARGE CAP VALUE, LARGE CAP
GROWTH, MID CAP VALUE, SMALL CAP VALUE, AND INTERNATIONAL OPPORTUNITIES
PORTFOLIOS
Writing Exchange-Traded Covered Call Options. These 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.
Purchasing Exchange-Traded Protective Put Options. These 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.
Liquidity Risk. These 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.
OTHER HEDGING STRATEGIES BY THE EQUITY INDEX, LARGE CAP VALUE, LARGE CAP
GROWTH, MID CAP VALUE, SMALL CAP VALUE, AND INTERNATIONAL OPPORTUNITIES
PORTFOLIOS
These Portfolios (other than the Equity Index Portfolio) may use exchange-
traded financial futures contracts and options thereon. These Portfolios will
use those instruments 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; but
again, solely for hedging purposes.
Similarly, the Equity Index Portfolio may purchase and sell stock index
futures and may purchase options on such futures contracts or on stock indexes
to maintain market exposure and manage cash flows.
Financial Futures Contracts. Financial futures contracts consist of interest
rate futures contracts, stock index futures contracts, and currency futures
contracts. An interest rate futures contract is a contract to buy or sell
specified
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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, these
Portfolios (other than the Equity Index Portfolio) 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 they wish to hedge against the possibility of lower interest rates or
increases in equity prices, these Portfolios (other than the Equity Index
Portfolio) may purchase financial futures contracts. These Portfolios (as well
as the Equity Index Portfolio) 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 these Portfolios (other than the Equity Index Portfolio) 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. These Portfolios (other
than the Equity Index Portfolio) also may purchase options on appropriate
financial futures contracts and stock indexes in connection with the above
hedging strategies. Similarly, the Sovereign Bond Portfolio may purchase
options on financial futures contracts in connection with such strategies. An
option on a financial futures contract gives the purchaser the right to assume
a position in the underlying futures contract, and therefore can serve the
same hedging function as owning the futures contract directly. Purchase of an
option on a stock index has a very similar economic effect.
The purchase of a put or call option entails the payment by a Portfolio of a
non-refundable option premium. The use of options for hedging purposes is in
this sense more costly to the Fund than the purchase of futures contracts
directly. Nevertheless, if a Portfolio purchases an option, the maximum loss
it can suffer is the option premium plus commission costs. The potential loss
on a futures contract transaction is not so limited, because the Portfolio
would be obligated, as the case may be, to purchase or sell the full amount of
the securities or index amount on which the futures contract is based.
Limitations. None of the Equity Index, Large Cap Value, Large Cap Growth,
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
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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 Value, Large Cap Growth, 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.
RISKS OF OPTIONS AND FUTURES TRANSACTIONS
Risks of Hedging. 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.
Other Risks for the Managed, Mid Cap Growth, Diversified Mid Cap Growth,
Small/Mid Cap CORE, Small Cap Growth, Global Equity, International Balanced,
International Equity Index, Emerging Markets Equity, Short-Term Bond,
Sovereign Bond, Strategic Bond, and High Yield Bond Portfolios. These
Portfolios may engage in types of options and futures transactions not
permitted to the Funds' other Portfolios, including over-the-counter options,
writing covered put options, and more types of transactions that are not
solely for hedging purposes or that otherwise are more speculative. Also, even
as to options and futures transactions of a type that are permitted to other
Portfolios, these Portfolios are, in certain cases, not as limited regarding
the amount of their assets that may be so employed. To the extent that these
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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USE OF OPTIONS AND FUTURES BY THE MANAGED, MID CAP GROWTH, DIVERSIFIED MID CAP
GROWTH, SMALL/MIDCAP CORE, SMALL CAP GROWTH, GLOBAL EQUITY, INTERNATIONAL
BALANCED, INTERNATIONAL EQUITY INDEX, EMERGING MARKETS EQUITY, SHORT-TERM
BOND, SOVEREIGN BOND, STRATEGIC BOND, AND HIGH YIELD BOND PORTFOLIOS
Writing Exchange-Traded Covered Call Options and Purchasing Exchange-Traded
Protective Put Options. These Portfolios (other than the Sovereign Bond
Portfolio) may engage in the same transactions described above under "Writing
Exchange-Traded Covered Call Options" and "Purchasing Exchange-Traded
Protective Put Options."
Writing Covered Put Options. These Portfolios (other than the Sovereign Bond
Portfolio) 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 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.
Purchasing Other Put and Call Options on Securities and Securities Indexes.
These Portfolios (which for this purpose include the Sovereign Bond Portfolio)
may also purchase put and call options in the same types of transactions
described above under "Other Hedging Strategies by the Equity Index, Large Cap
Value, Large Cap Growth, Mid Cap Value, Small Cap Value, and International
Opportunities Portfolios."
The Managed, Mid Cap Growth, Diversified Mid Cap Growth, Small/Mid Cap CORE,
Small Cap Growth, Global Equity, International Balanced, International Equity
Index, Emerging Markets Equity, Short-Term Bond, Strategic Bond, and High
Yield Bond Portfolios also may, for other purposes, purchase put and call
options on indexes composed of securities in which those Portfolios may
invest.
The Managed, Mid Cap Growth, Small/Mid Cap CORE, Small Cap Growth, Global
Equity, International Balanced, International Equity Index, Emerging Markets
Equity, Strategic Bond, and High Yield Bond Portfolios may also purchase put
and call options (in addition to those described above under "Purchasing
Exchange-Traded Protective Put Options") on securities in which they may
invest.
In purchasing a put or call option, a 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).
Covered Put and Call Options Written on Securities Indexes by the Managed,
Mid Cap Growth, Diversified Mid Cap Growth, Small/Mid Cap CORE, Small Cap
Growth, Global Equity, International Balanced, International Equity Index,
Short-Term Bond, Strategic Bond, and High Yield Bond Portfolios. These
Portfolios (but not the Emerging Markets Equity or Sovereign Bond 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.
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Using Options Traded Over-the-Counter or on Foreign Exchanges. These
Portfolios (which for this purpose include the Emerging Markets Equity
Portfolio but not the Sovereign Bond Portfolio) 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.
Using Futures Contracts and Options on Futures Contracts. These Portfolios
(which for this purpose include the Emerging Markets Equity and Sovereign Bond
Portfolios) may use futures contracts on securities or on market indexes, and
options on such futures contracts, to hedge against changes in securities
prices, interest rates, and currency exchange rates (including the techniques
described above under "Other Hedging Strategies by the Equity Index, Large Cap
Value, Large Cap Growth, Mid Cap Value, Small Cap Value, and International
Opportunities Portfolios") or for other purposes that may be more speculative.
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 these
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 that are not used for
bona fide hedging 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 related commissions.
OTHER DERIVATIVE TRANSACTIONS
The International Balanced, International Equity Index, Strategic Bond, and
High Yield 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. The Emerging Markets Equity Portfolio may also
engage in those transactions and, in addition, may engage in equity swap
transactions. 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.
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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.
Currency, index, and equity 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 currency, interest rate, or
equity 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 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.
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 in the paragraphs that follow. Certain Portfolios also may use
currency futures contracts and options thereon for these purposes, as
discussed above under "Financial Futures Contracts" and "Options on Futures
Contracts and Stock Indexes." In addition to the Portfolios listed there, the
Managed, Mid Cap Growth, Diversified Mid Cap Growth, Small Cap Growth, Global
Equity, International Balanced, International Equity Index, Short-Term Bond,
and Strategic Bond Portfolios may use those same currency management
techniques. Finally, currency swaps, caps, floors or collars may also be used
for these purposes by the Global Equity, International Balanced, International
Equity Index, Emerging Markets Equity, Strategic Bond, and High Yield Bond
Portfolios to the extent discussed above under "Other Derivative Transactions"
(although the Global Equity Portfolio will not use these techniques for the
other purposes described there).
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Transaction Hedging. When any Portfolio enters into a contract 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 to implement a
strategy known as "transaction hedging." The Portfolios that may enter into
forward exchange contracts are the Managed, Large Cap Value, Mid Cap Value,
Mid Cap Growth, Diversified Mid Cap Growth, Small Cap Value, Small Cap Growth,
Global Equity, International Balanced, International Equity Index,
International Opportunities, Emerging Markets Equity, Short-Term Bond,
Strategic Bond, and High Yield Bond Portfolios.
To effect the translation of the amount of foreign currencies involved in
the purchase and sale of foreign securities and to effect the "transaction
hedging" described above, the Portfolio may purchase or sell such foreign
currencies on a "spot" (i.e., cash) basis. Alternatively, the Portfolios
listed in the preceding paragraph may enter into forward exchange purchase or
sale contracts, whereby the Portfolio purchases or sells a specific amount of
foreign currency, at a price set at the time of the contract, for receipt or
delivery at a specified date which may be any fixed number of days in the
future. Such spot and forward foreign exchange transactions may also be
utilized to reduce the risk inherent in fluctuations in the exchange rate
between the United States dollar and the relevant foreign currency when
foreign securities are purchased or sold for settlement beyond customary
settlement time. Neither type of foreign currency transaction will eliminate
fluctuations in the prices of the Portfolio's securities or prevent loss if
the price of such securities should decline.
Portfolio Hedging. 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. A sub-investment manager may believe that it is
desirable to limit or reduce exposure in a foreign currency in order to
moderate potential changes in the value, expressed in U.S. dollars, of a
Portfolio's assests. In that case, certain Portfolios may enter into forward
foreign currency contracts to exchange a fixed number of U.S. dollars for an
amount of foreign currency equal to the Portfolio's carrying value for all or
part of the underlying foreign portfolio securities. 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 engage in "Transaction Hedging".
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.
Proxy Currencies. In implementing the above-described currency hedging
techniques, the Managed, Mid Cap Growth, Global Equity, International
Balanced, and International Equity Index 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.
Other Techniques for Managing Currency Exposure. The Managed, Mid Cap
Growth, Global Equity, International Balanced, International Equity Index,
International Opportunities, Emerging Markets Equity, and
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Strategic Bond Portfolios may use additional techniques 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. In that case, 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 Managed, International Balanced, International Opportunities,
and Strategic Bond 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.
Options on Currencies. The Managed, Mid Cap Growth, Global Equity,
International Balanced, International Equity Index, International
Opportunities, Emerging Markets Equity, Strategic Bond, and High Yield Bond
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 or
currency exchange volatility. Call options on foreign currencies written by a
Portfolio will be "covered," which means that the Portfolio will own at all
times an equal amount of, or an offsetting position in, the underlying foreign
currency. With respect to put options on foreign currencies written by a
Portfolio, the Portfolio will establish a segregated account with its
custodian bank consisting of cash, U.S. Government securities or other high
grade liquid debt securities in an amount equal at all times to the amount the
Portfolio would be required to 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 "Writing
Exchange-Traded Covered Call Options," "Purchasing Exchange-Traded Protective
Put Options," "Risks of Options and Futures Transactions," and "Use of Options
and Futures by the Managed, Mid Cap Growth, Diversified Mid Cap Growth,
Small/Mid Cap CORE, Small Cap Growth, Global Equity, International Balanced,
International Equity Index, Emerging Markets Equity, Short-Term Bond,
Sovereign Bond, Strategic Bond, and High Yield Bond Portfolios" above.
RULE 144A SECURITIES
All Portfolios, other than the Growth & Income, Large Cap Growth and Real
Estate Equity Portfolio, may purchase unregistered securities that are
eligible for resale to "qualified institutional buyers" pursuant to Rule 144A
under the Securities Act of 1933. The Trustees have directed the sub-
investment manager of each of the eligible Portfolios to determine on a case-
by-case basis whether each issue of Rule 144A securities owned by the
Portfolio is an illiquid security. If illiquid, a Rule 144A security may not
be purchased by the Money Market Portfolio, but may be purchased by any other
eligible Portfolio, subject to such Portfolio's limit on the amount of its
assets that can be invested in any illiquid securities (10% in the case of the
Diversified Mid Cap Growth and Short-Term Bond Portfolios, and 15% as to all
other eligible Portfolios). Purchasing this type of unregistered security
could have the effect of increasing the level of illiquidity and volatility in
the Portfolio.
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WHEN ISSUED SECURITIES AND FORWARD COMMITMENTS
The Managed, Equity Index, Large Cap Value, Mid Cap Value, Mid Cap Growth,
Diversified Mid Cap Growth, Small/Mid Cap CORE, Small Cap Value, Small Cap
Growth, Global Equity, International Balanced, International Equity Index,
International Opportunities, Emerging Markets Equity, Short-Term Bond, Bond
Index, Sovereign Bond, Strategic Bond, and High Yield Bond Portfolios may
purchase securities on a when-issued or delayed delivery basis. When such
transactions are negotiated, the price of such securities is fixed at the time
of commitment, but delivery and payment for the securities may take place a
month or more after the date of the commitment to purchase. The securities so
purchased are subject to market fluctuations, and no interest rate accrues to
the purchaser during this period.
In addition, these Portfolios may make contracts to purchase securities for
a fixed price at a future date beyond customary settlement time ("forward
commitments") because new issues of securities are typically offered to
investors on that basis. Forward commitments involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date.
This risk is in addition to the risk of decline in value of the Portfolio's
other assets. Although the Portfolio will enter into such contracts with the
intention of acquiring the securities, the Portfolio may dispose of a
commitment prior to settlement if the sub-investment managers deem it
appropriate to do so. The Portfolio may realize short-term profits or losses
upon the sale of forward commitments.
Each Portfolio will maintain in a segregated account with its custodian cash
or liquid high grade debt securities that at all times equal the amount of its
when-issued and forward commitments.
PORTFOLIO LENDING
The Equity Index, Large Cap Value, Mid Cap Value, Mid Cap Growth,
Diversified Mid Cap Growth, Small/Mid Cap CORE, Small Cap Value, Small Cap
Growth, Global Equity, International Balanced, International Equity Index,
International Opportunities, Emerging Markets Equity, Short-Term Bond, Bond
Index, Strategic Bond, and High Yield Bond 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.
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
The Short-Term Bond and Money Market Portfolios may engage in reverse
repurchase agreements to facilitate portfolio liquidity, a practice common in
the mutual fund industry, or for arbitrage transactions (discussed below). In
a reverse repurchase agreement, the Portfolio sells a security and enters into
an agreement to repurchase the security at a specified future date and price.
The Portfolio generally retains the right to interest and principal payments
on the security. Since the Portfolio receives cash upon entering into a
reverse repurchase agreement, it could be considered a borrowing. For this
reason, the Portfolio will set aside permissible liquid assets in a segregated
account to secure its obligation to repurchase the security.
The Managed, Short-Term Bond, Bond Index, Sovereign Bond, and Strategic Bond
Portfolios may also enter into mortgage dollar rolls, in which the Portfolio
sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to purchase substantially similar securities on a
specified future date. While
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the Portfolio foregoes principal and interest paid on the mortgage-backed
securities during the roll period, the Portfolio is compensated by the
difference between the current sale price and the lower price for the future
purchase as well as by any interest earned on the proceeds of the initial
sale. The Portfolio also could be compensated through the receipt of fee
income equivalent to a lower forward price. Mortgage dollar roll transactions
could also be considered a borrowing by the Portfolio. Therefore, the
Portfolio will set aside permissible liquid assets in a segregated account to
secure its obligation for the forward commitment to buy mortgage-backed
securities.
The mortgage dollar rolls and reverse repurchase agreements entered into by
a Portfolio may be used as arbitrage transactions in which the Portfolio will
maintain an offsetting position in investment-grade debt obligations or
repurchase agreements that mature on or before the settlement date of the
related mortgage dollar roll or reverse repurchase agreement. Since the
Portfolio will receive interest on the securities or repurchase agreements in
which it invests the transaction proceeds, such transactions may involve
leverage. However, since such securities or repurchase agreements will be high
quality and will mature on or before the settlement date of the mortgage
dollar roll or reverse repurchase agreement, the sub-investment manager
believes that such arbitrage transactions do not present the risks to the
Portfolio that are associated with other types of leverage.
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,
may be 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
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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.
THE LEHMAN BROTHERS GOVERNMENT/CORPORATE AND AGGREGATE BOND INDEXES
The Lehman Brothers Government/Corporate Index (the "Government/Corporate
Index") is intended to measure the performance of the domestic, fixed-rate
investment grade debt market. The Government/Corporate Index is composed of
(1) all public obligations of the U.S. Government, its agencies and
instrumentalities (excluding "flower" bonds and pass-through issues such as
GNMA certificates) and (2) all publicly issued, fixed-rate nonconvertible,
investment grade, dollar-denominated, SEC-registered obligations of domestic
corporations, foreign governments and supranational organizations.
The Lehman Brothers Aggregate Bond Index (the "Aggregate Bond Index") covers
the U.S. investment grade fixed-rate bond market, including government and
corporate securities, agency mortgage pass-through securities, and asset-
backed securities. The Aggregate Bond Index covers those securities in the
Government/Corporate Bond Index, plus those covered by the Lehman Mortgage-
Backed Securities Index ("MBS Index") and the Lehman Asset-Backed Securities
Index ("ABS Index"). The MBS Index covers fixed-rate securities backed by
mortgage pools of the Government National Mortgage Association ("GNMA"),
Freddie Mac and Fannie Mae. The ABS Index covers several subsectors--including
credit and charge cards, auto, utilities and home equity loans--and includes
pass-through, bullet, and controlled amortization structures.
All non-U.S. Government issues in the Government/Corporate Index and the
Aggregate Bond Index are rated at least Baa by Moody's Investors Service, Inc.
("Moody's") or, if unrated by Moody's, BBB by Standard & Poor's Ratings Group
("Standard & Poor's").
Lehman Brothers, Inc. is neither a sponsor of nor in any other way
affiliated with the Portfolio or the insurance products supported by the
Portfolio. Inclusion of a security in the Government/Corporate or Aggregate
Bond Indexes in no way implies an opinion of Lehman Brothers, Inc. as to its
attractiveness or appropriateness as an investment.
THE MSCI EAFE GDP INDEX
The International Equity Index Portfolio seeks to provide investment results
that correspond to the total return of the MSCI EAFE GDP Index. The MSCI EAFE
GDP Index weights countries such that a country with a larger GDP will have a
greater weight in the index. Stocks within those countries are capitalization
weighted; that is stocks with a larger capitalization have a greater weight in
the index.
The Fund, the Portfolio and the insurance products supported by the
Portfolio are not sponsored, endorsed, sold or promoted by MSCI. MSCI makes no
representation or warranty, express or implied, to the owners of the Fund, the
Portfolio or any member of the public regarding the advisability of investing
in funds generally or in the Fund or Portfolio particularly or the ability of
the MSCI EAFE GDP Index to track general stock market performance. MSCI is the
licensor of certain trademarks, service marks and trade names of MSCI and of
the MSCI EAFE GDP Index which is determined, composed and calculated by MSCI
without regard to the Fund or
55
<PAGE>
this Portfolio. "Morgan Stanley Capital International" is a service mark of
Morgan Stanley & Co., Incorporated, that has been licensed for use by the
Fund. MSCI has no obligation to take the needs of the Fund or the owners of
insurance products supported by this Portfolio into consideration in
determining, composing or calculating the MSCI EAFE GDP Index. MSCI is not
responsible for and has not participated in the determination of the prices or
amounts of insurance products supported by this Portfolio or the timing of the
issuance and sale of such products, or in the determination or calculation of
the equation by which such products are convertible into cash. MSCI has no
obligation or liability to owners of this Portfolio or of the insurance
products supported by this Portfolio in connection with the administration,
marketing or trading of this Portfolio.
ALTHOUGH MSCI OBTAINS INFORMATION FOR INCLUSION IN OR FOR USE IN THE
CALCULATION OF THE INDEX FROM SOURCES WHICH MSCI CONSIDERS RELIABLE, NEITHER
MSCI NOR ANY OTHER PARTY GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS OF
THE INDEX OR ANY DATA INCLUDED THEREIN. NEITHER MSCI NOR ANY OTHER PARTY MAKES
ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY OWNERS OF
THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA
INCLUDED THEREIN. NEITHER MSCI NOR ANY OTHER PARTY MAKES ANY EXPRESS OR
IMPLIED WARRANTIES, AND MSCI HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEX
OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO
EVENT SHALL MSCI OR ANY OTHER PARTY HAVE ANY LIABILITY FOR ANY DIRECT,
INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING
LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
INVESTMENT COMPANIES
Each Portfolio may invest up to 10% of its total assets in shares of other
investment companies investing exclusively in securities in which it may
otherwise invest. Because of restrictions on direct investment by U.S.
entities in certain countries, other investment companies may provide the most
practical or only way for a Portfolio to invest in certain markets. Such
investments may involve the payment of substantial premiums above the net
asset value of those investment companies' portfolio securities and are
subject to limitations under the Investment Company Act. A Portfolio also may
incur tax liability to the extent it invests in the stock of a foreign issuer
that is a "passive foreign investment company" regardless of whether such
"passive foreign investment company" makes distributions to the Portfolio. The
Portfolios do not intend to invest in other investment companies unless the
potential benefits are judged to exceed the associated costs. As a shareholder
in an investment company, a Portfolio would bear its ratable share of that
investment company's expenses, including advisory and administration fees. The
Emerging Markets Equity Portfolio is the most likely to invest in other
investment companies; and John Hancock and the sub-investment manager have
agreed to waive their own management fees with respect to the portion of that
Portfolio's assets invested in other open-end (but not closed-end) investment
companies.
The Mid Cap Growth Portfolio may also invest in money market funds managed
by Janus Capital, pursuant to an exemptive order received from the SEC. Janus
Capital will remit to the Mid Cap Growth Portfolio the fees it receives from
the Janus money market fund to the extent such fees are based on the Mid Cap
Growth Portfolio's assets. Janus Capital is seeking an amended and restated
exemptive order that would permit funds managed by Janus Capital to invest in
the Janus money market funds in excess of the limitations of Section 12(d)(1)
of the 1940 Act. There is no assurance that such amendment will be granted.
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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 serves as the Fund's investment manager. Total assets under
management by John Hancock and its subsidiaries as of December 31, 1997,
amounted to over $116 billion, of which over $62 billion was owned by John
Hancock. John Hancock's offices are located at John Hancock Place, Boston,
Massachusetts 02117.
Pursuant to five Investment Management Agreements (two dated as of April 12,
1988, one dated April 15, 1994, one dated February 14, 1996, and one dated
April 14, 1998), 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; serves as
the Fund's transfer agent and dividend disbursing agent; provides personnel,
office space, equipment, and supplies for the Fund; maintains records required
by the Investment Company Act of 1940 computes income and yield of each
Portfolio; and supervises activities of the sub-investment managers referred
to below and of other service providers to the Fund.
INVESTMENT ADVISORY FEES
The Fund will pay John Hancock an investment advisory fee at the following
rates:
<TABLE>
<CAPTION>
Investment Advisory Fee as an Annual Percentage of Each
Portfolio Portion of the Portfolios' Average Daily Net Assets
--------- -------------------------------------------------------
<C> <S>
Managed .... .40% of first $500 million; .35% of next $500
Large Cap Growth million; .30% of net assets
above $1 billion
Growth & Income
Sovereign Bond .... .25% of all net assets
Money Market
Large Cap Value
Small Cap Growth .... .75% of all net assets
Equity Index ........... .15% of first $75 million; .14% of next $50 million;
.13% of net assets above $125 million
Small Cap Value......... .80% of first $100 million; .75% of next $100
million; .65% of net assets above $200 million
Mid Cap Value........... .80% of first $250 million; .775% of next $250
million; .75% of next $250 million; .725% of net
assets above $750 million
Mid Cap Growth.......... .85% of first $100 million; .80% of net assets above
$100 million
Diversified Mid Cap
Growth................. .75% of first $250 million; .70% of next $250
million; .65% of net assets above $500 million
Real Estate Equity...... .60% of first $300 million; .50% of next $500
million; .40% of net assets above $800 million
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Investment Advisory Fee as an Annual Percentage of Each
Portfolio Portion of the Portfolios' Average Daily Net Assets
--------- -------------------------------------------------------
<S> <C>
Small/Mid Cap
CORE................... .80% of first $50 million; .70% of net assets above $50 million
Global Equity........... .90% of first $50 million; .80% of next $100 million; .70% of net assets above
$150 million
International Balanced.. .85% of first $100 million; .70% of net assets above $100 million
International Equity
Index.................. .18% of first $100 million; .15% of next $100 million; .11% of net assets above
$200 million
International Opportu-
nities................. 1% of first $20 million; .85% of next $30 million; .75% of net assets above $50
million
Emerging Markets Equi-
ty..................... 1.30% of first $10 million; 1.20% of next $140 million; 1.10% of net assets
above $150 million
Short-Term Bond......... .30% of all net assets
Bond Index.............. .15% of first $100 million; .13% on next $150 million; .11% of net assets over
$250 million
Strategic Bond.......... .75% of first $25 million; .65% of next $50 million; .55% of next $75 million;
.50% of net assets above $150 million
High Yield Bond......... .65% of first $100 million; .60% on next $100 million; .50% of net assets above
$200 million
</TABLE>
MANAGED, GROWTH & INCOME, LARGE CAP GROWTH, REAL ESTATE EQUITY AND SHORT-TERM
BOND 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 Managed, Growth & Income, and
Large Cap Growth Portfolios, and a Sub-Investment Management Agreement dated
as of April 15, 1994 as to the Short-Term Bond Portfolio.
IIA employs a team approach for the management of these Portfolios, with the
following individuals having day-to-day portfolio management responsibility.
John C. Forelli, Senior Vice President of IIA, has managed the equity portion
of the Managed Portfolio for approximately 2 years. He has been with IIA since
1990. Thomas D. Spicer, Vice President with IIA, has managed the fixed income
portion of the Managed Portfolio for approximately 12 years. He has been with
IIA since 1991. Mr. Spicer also has managed the Short-Term Bond Portfolio for
approximately 2 years. Paul F. McManus, Senior Vice President of IIA, has been
the portfolio manager of the Growth & Income Portfolio for approximately 2
years. He has been with IIA since its inception in 1982. Mark C. Lapman,
Executive Vice President of IIA, is the portfolio manager of the Large Cap
Growth Portfolio. He has been involved with the management of that Portfolio
for approximately 2 years and has been with IIA since its inception in 1982.
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
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<PAGE>
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.
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, 1997, it had over $399 billion of assets under management, $280 billion of
which were in equities, fixed income, and real estate, and $119 billion of
which were in short-term fixed income 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, dated 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 $127 billion for more than 6 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 of T. Rowe Price 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. He has managed the Large Cap Value Portfolio since its inception.
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, managed over $54 billion
of global stocks and bonds as of December 31, 1997 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 Principal 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 a Principal 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. Messrs.
Kassen and Gendelman have managed the Mid Cap Value Portfolio since its
inception.
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<PAGE>
MID CAP GROWTH PORTFOLIO
With respect to this Portfolio, John Hancock has, by a Sub-Investment
Management Agreement, dated 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 adviser, managed approximately $70 billion of assets
as of February 17, 1998, and has been in the investment advisory business
since 1970. Janus' address is 100 Fillmore Street, Denver, Colorado 80206. The
Mid Cap Growth Portfolio is 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. Mr. Goff has
managed this Portfolio since its inception.
DIVERSIFIED MID CAP GROWTH, SMALL CAP GROWTH AND SOVEREIGN BOND PORTFOLIOS
With respect to the Sovereign Bond Portfolio, John Hancock has, by a Sub-
Investment Management Agreement, dated May 1, 1995, contracted with John
Hancock Advisers, Inc. ("Advisers") to make investment decisions, place
investment orders, and perform certain recordkeeping functions. 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.
James K. Ho, C.F.A., 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. Mr. Ho has managed the Sovereign Bond Portfolio for approximately three
years.
With respect to the Diversified Mid Cap Growth 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 Diversified Mid Cap Growth Portfolio will
be managed on a day-to-day basis by an investment team overseen by Barbara C.
Friedman, C.F.A. This team represents the analytical expertise of sector and
global specialists from Advisers' equity group. A Senior Vice President of
Advisers, Ms. Friedman has been a member of the management team since joining
John Hancock Funds in January 1998, when her involvement with this Portfolio
also commenced. Ms. Friedman has been in the investment business since 1973.
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 is a Senior Vice President of Advisers and has been
associated with Advisers since 1991. She has managed the Small Cap Growth
Portfolio since its inception.
SMALL/MID CAP CORE PORTFOLIO
With respect to this Portfolio, John Hancock has, by a Sub-Investment
Management Agreement dated , 1998, contracted with Goldman Sachs
Asset Management ("Goldman Sachs") to make investment decisions, place
investment orders and to perform certain recordkeeping functions. Goldman
Sachs is a division of Goldman, Sachs & Co., a New York limited partnership
that is registered as an investment adviser. Goldman Sachs currently manages
assets in excess of $130 billion. Goldman Sachs' address is One New York
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<PAGE>
Plaza, New York, New York 10004. The Small/Mid Cap CORE Portfolio will be
managed on a day to day basis by Kent A. Clark, Vice President, Robert C.
Jones, Managing Director, and Victor H. Pinter, Vice President, of Goldman
Sachs. Mr. Clark joined Goldman Sachs in 1992. Prior to 1992, he was studying
for a Ph.D. in finance at the University of Chicago. Mr. Jones joined Goldman
Sachs in 1989. Mr. Pinter joined Goldman Sachs in 1990.
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 Daniel A. Kostyk and Robert S. Slotpole. Mr.
Kostyk is a portfolio manager and is responsible for the development and
testing of investment models and factors which may be useful in creating
optimized portfolios. Mr. Kostyk joined INVESCO in 1995 but he has only
recently become involved with this Portfolio. Prior to 1995, Mr. Kostyk was an
engineering economic economist for Fluor Daniel, Inc. 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, and he has managed the Small Cap
Value Portfolio since its inception.
GLOBAL EQUITY PORTFOLIO
With respect to this Portfolio, John Hancock has, by a Sub-Investment
Management Agreement dated April 24, 1998, contracted with Scudder Kemper
Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.) ("Scudder") to
make investment decisions, place investment orders, and to perform certain
recordkeeping functions. Scudder is a Delaware corporation having its address
at 345 Park Avenue, New York, New York 10154. Scudder is a registered
investment adviser and the assets that it manages for its international
investment company clients total more than $32 billion. The Global Equity
Portfolio is managed by a team of Scudder investment professionals. Lead
Portfolio Manager William E. Holzer, who has over 20 years' experience in
global investing, joined Scudder in 1980. Diego Espinosa, Portfolio Manager,
joined the team in 1997 and Scudder in 1996. Mr. Espinosa is also responsible
for development of the Portfolio's strategy and management of the Portfolio on
a daily basis. Mr. Espinosa has six years of investment industry experience.
Nicholas Bratt, Portfolio Manager, directs Scudder's overall global equity
investment strategies. Mr. Bratt joined Scudder in 1976 and the team in 1993.
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"). On
December 8, 1997, SBC and Union Bank of Switzerland announced their intention
to merge into a single organization, to be called UBS AG. Brinson will be,
with UBS Asset Management, a part of the Brinson Division of the new UBS AG.
Gary Brinson, President of Brinson, will be the Chief Executive Officer and
Chief Investment Officer of the UBS Brinson Division. The proposed merger has
been approved by the shareholders of both banks and, subject to regulatory
approval, it is anticipated
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<PAGE>
that the merger will be completed by the end of May 1998. Brinson Partners,
Inc. together with its predecessor organizations, has been managing
international investments since 1974. Brinson has over $89 billion in
institutional assets under management. It also serves as the advisor to the
SBC Private Banking mutual funds with assets totaling $53.8 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.
INTERNATIONAL EQUITY INDEX PORTFOLIO
With respect to this Portfolio, John Hancock has contracted for Independence
International Associates, Inc. ("International"), 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. International, a registered investment adviser wholly owned by IIA,
manages approximately $2 billion worth of international stocks for various
clients. International's address is 53 State Street, Boston, Massachusetts
02109. International, the Portfolio and John Hancock have entered into a Sub-
Investment Management Agreement dated as of May 1, 1998, as to the
International Equity Index Portfolio. The International Equity Index Portfolio
will be managed using a team approach for the day-to-day management of the
Portfolio. Norman H. Meltz and David P. Nolan lead the portfolio management
team. Both team members joined in October 1996, when IIA purchased
International, formerly Boston International Advisors, Inc. Mr. Meltz is a
Senior Vice President and senior portfolio manager for a number of
institutional portfolios. He has analyzed and managed equity portfolios since
1981. Mr. Nolan, Vice President, has analyzed and managed international
portfolios since 1994.
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 the U.S. Equivalent of approximately $30 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, Singapore, Hong Kong, and Buenos Aires. 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. Since before this Portfolio's inception, the
senior member of the advisory group has been Martin G. Wade, who joined the
firm in 1979 and began his investment career in 1979.
EMERGING MARKETS EQUITY PORTFOLIO
With respect to this Portfolio, John Hancock has, by a Sub-Investment
Management Agreement dated , 1998, contracted with Montgomery Asset
Management, LLC ("Montgomery") to make investment
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<PAGE>
decisions, place investment orders, and to perform certain recordkeeping
functions. Montgomery, a wholly-owned subsidiary of Commerzbank AG, is a
limited liability company organized in Delaware. Its principal business
address is 101 California Street, San Francisco, California 94111. Montgomery
is a registered investment adviser, with over $9.5 billion of assets under
management.
Josephine S. Jimenez, CFA, and Bryan L. Sudweeks, Ph.D. and CFA, are jointly
responsible for managing this Portfolio. Ms. Jimenez is a principal of
Montgomery, a senior portfolio manager and a founding partner of Montgomery's
emerging markets discipline. She has been co-manager of the Montgomery
Emerging Markets mutual fund since 1992. From 1988 through 1991, Ms. Jimenez
worked at Emerging Markets Investors Corporation/Emerging Markets Management
in Washington, D.C., as senior analyst and portfolio manager. Mr. Sudweeks is
a principal of Montgomery and senior portfolio manager. Before joining
Montgomery, he was a senior analyst and portfolio manager at Emerging Markets
Investors Corporation/Emerging Markets Management in Washington, D.C.
Previously, he was a Professor of International Finance and Investments at
George Washington University and served as Adjunct Professor of International
Investments from 1988 until May 1991.
BOND INDEX PORTFOLIO
With respect to this Portfolio, John Hancock has, by a Sub-Investment
Management Agreement dated April 20, 1998, contracted with Mellon Bond
Associates ("Mellon") to make investment decisions, place investment orders,
and to perform certain recordkeeping functions. Mellon is a Pennsylvania
limited liability company that is indirectly wholly-owned by Mellon Bank
Corporation. Mellon's principal business address is One Mellon Bank Center,
Suite 4135, Pittsburgh, Pennsylvania 15258. Mellon, a registered investment
adviser, is part of a global firm that has approximately $47 billion in assets
under management. The Diversified Bond Index Portfolio will be managed on a
day-to-day basis by Gregory D. Curran. Mr. Curran is a Senior Vice President
of Mellon. Mr. Curran joined the firm in 1995 and has been in the investment
business since 1986.
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. ("JPMIM") a Delaware corporation, to make investment
decisions, place investment orders and to perform certain recordkeeping
functions. JPMIM, a registered investment adviser with offices at 522 Fifth
Avenue, New York, New York 10036, is a Delaware corporation and is a wholly-
owned subsidiary of J.P. Morgan & Co. Incorporated ("Morgan"), a bank holding
company. Morgan, together with its predecessors, has been in the investment
advisory business for over 100 years and, through JPMIM and its other
subsidiaries, managed over $255 billion in assets as of December 31, 1997. The
Strategic Bond Portfolio is managed using a disciplined collaborative approach
for the day-to-day responsibility for managing the Portfolio and developing
and executing its investment policy. The team includes: Christopher J. Durbin
and Lili B.L. Dung. Mr. Durbin is a Managing Director and head of the U.S.
Fixed Income Group, which is responsible for all fixed income products.
Mr. Durbin joined JPMIM 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. Mr.
Durbin and Ms. Dung have managed this Portfolio since its inception.
HIGH YIELD BOND PORTFOLIO
With respect to this Portfolio, John Hancock has, by a Sub-Investment
Management Agreement dated April 20, 1998, contracted with Wellington
Management Company, LLP ("Wellington"), a registered investment adviser, to
make investment decisions, place investment orders, and to perform certain
recordkeeping
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<PAGE>
functions. Wellington is a Massachusetts limited liability partnership with
its principal business offices located at 75 State Street, Boston,
Massachusetts 02109. Wellington and its predecessor organizations have
provided investment advisory services since 1928. As of December 31, 1997,
Wellington had approximately $174.5 billion in assets under management.
Richard T. Crawford, Vice President at Wellington, is the portfolio manager
and is primarily responsible for the day-to-day investment management of the
Portfolio's securities. Mr. Crawford is a member of and draws upon the
dedicated High Yield Portfolio Management Team at Wellington Management, which
also includes Earl E. McEvoy and Catherine A. Smith. Mr. Crawford joined
Wellington in 1994. Prior to joining Wellington, Mr. Crawford was employed by
Pacholder Associates for four years as senior fixed income analyst and
portfolio manager.
MONEY MARKET PORTFOLIO
John Hancock has day-to-day responsibility for making investment decisions
and placing investment orders for the Money Market Portfolio.
----------------
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 also performs 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 or any of the sub-investment managers 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 contractholders of annual and semi-
annual reports and voting materials, tabulating votes,compensation for certain
accounting, valuation, and compliance services, legal expenses, registration
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 1997, the International
64
<PAGE>
Opportunities Portfolio paid commissions of $ and $ 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 % and % 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 1997, Neuberger & Berman, a registered broker-dealer
that also serves as sub-investment manager of the Mid Cap Value Portfolio,
executed transactions representing approximately % 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 $133,000, which represented just under 56% of all
commissions paid by that Portfolio during 1997. 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.
YEAR 2000 PROGRESS
The computer systems used to administer the Fund's operations must be
adjusted to continue to perform this function after the calendar changes to a
year beginning with the numeral "2" (i.e., beginning in the year 2000).
Because the Fund has no employees and does not own or lease any computer
systems, the Fund contracts with other entities to provide the services
essential to its operation. John Hancock has assured the Fund that John
Hancock's computer systems are expected to be compliant with the year 2000 on
time and in a way that will result in no disruption to the Fund or
contractholders. John Hancock has further advised the Fund that it is seeking
assurances from service providers to John Hancock and the Fund, including sub-
investment managers to the Fund, that the computer systems of the service
providers and sub-investment managers will be compliant with the year 2000.
However, risks and uncertainties exist, and nonperformance by any of these
entities, or other unforseen circumstances, could have a material adverse
impact on the operation of the Fund.
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.
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 Diversified Mid Cap Growth
65
<PAGE>
Portfolio, will be declared and distributed monthly. Dividends, if any, from
net investment income of the Diversified Mid Cap Growth 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.
66
<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 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.
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.
67
<PAGE>
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 DIVERSIFIED MID CAP GROWTH PORTFOLIO'S
INVESTMENT OBJECTIVE AND POLICIES
The current investment objective and policies of the Diversified Mid Cap
Growth Portfolio were approved by vote of that Portfolio's shareholders,
effective May 1, 1998; and that Portfolio's name was changed from "Special
Opportunities Portfolio" to "Diversified Mid Cap Growth Portfolio." The
principal changes were to (a) make the Portfolio's investments significantly
more diversified among the industries and individual companies in which the
Portfolio invests and (b) reduce the degree to which evaluations of the
relative attractiveness of various economic sectors influence the Portfolio's
investment decisions.
CHANGES IN INTERNATIONAL EQUITY INDEX PORTFOLIO'S
INVESTMENT OBJECTIVE AND POLICIES
The current investment objective and policies of the International Equity
Index Portfolio were approved by vote of that Portfolio's shareholders,
effective May 1, 1998; and that Portfolio's name was changed from
"International Equities Portfolio" to "International Equity Index Portfolio."
The principal changes were to (a) make the Portfolio's investment program,
which had been based on more active management, an indexed-based program, (b)
substitute one John Hancock affiliate for another as the Portfolio's sub-
investment manager, and (c) reduce the investment management fees payable by
the Portfolio.
CHANGES IN SHORT-TERM BOND PORTFOLIO'S
INVESTMENT OBJECTIVE AND POLICIES
The current investment objective and policies of the Short-Term Bond
Portfolio were approved by vote of that Portfolio's shareholders, effective
May 1, 1998; and that Portfolio's name was changed from "Short-Term U.S.
Government Portfolio" to "Short-Term Bond Portfolio." The principal changes
were to permit the Portfolio to invest in debt securities other than U.S.
Government securities, including debt issued by U.S. corporate issuers,
dollar-denominated debt issued by foreign entities, and, within limits, non-
investment grade debt.
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<PAGE>
APPENDIX A--PERFORMANCE FIGURES
This Appendix includes historical total return information for each of the
Portfolios offered by this Prospectus that existed at December 31, 1997, 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 such existing Portfolios, see "Investment
Performance," "Changes in Diversified Mid Cap Growth Portfolio's Investment
Objective and Policies," "Changes in International Equity Index Portfolio's
Investment Objectives and Policies," and "Changes in Short-Term Bond
Portfolio's Investment Objective 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. Certain other Portfolios have been offered only commencing in May
1998: Small/Mid Cap CORE, Global Equity, Emerging Market Equity, Bond Index,
and High Yield Bond Portfolios; and prior to May 1998, the International
Equity Index Portfolio was not managed on an indexed basis as it is now. The
Portfolios that commenced in May 1996 have only limited performance history;
the Portfolios that commenced in May 1998 do not have any performance history;
and the International Equity Index Portfolio does not have any performance
history as an index-based fund. Therefore, this Appendix also includes total
return information for certain similar accounts that are managed by these
Portfolios' respective sub-investment managers. In each case the Portfolio's
actual or estimated expenses (after reimbursement) as set forth in this
Prospectus under "Synopsis of Expense Information" have 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.
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<PAGE>
Managed Portfolio
Independence Investment Associates, Inc.
Annualized Total Return*
- ----------------------------------------------
Periods Ending Managed S&P 500(50%)/
On 12/31/97 Portfolio(1) LB G/C (50%)(2)
- -------------- ------------ ---------------
5 Years 12.76% 13.88%
3 Years 18.65% 20.52%
1 Year 18.72% 21.28%
Managed Portfolio (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Date Managed Portfolio S&P 500/LB G/C Index
- ---- ----------------- --------------------
12/31/92 10,000 10,000
12/31/93 11,160 11,057
12/31/94 10,911 10,940
12/31/95 13,868 14,013
12/31/96 15,354 15,791
12/31/97 18,228 19,151
* 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. 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 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-1
<PAGE>
Growth & Income Portfolio
Independence Investment Associates, Inc.
Annualized Total Return*
- ------------------------------------------
Periods Ending Growth & Income S&P 500
On 12/31/97 Portfolio (1) Index (2)
- -------------- --------------- ---------
5 Years 18.71% 20.24%
3 Years 27.90% 31.15%
1 Years 29.79% 33.56%
Growth & Income Portfolio (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Growth & Income
Date Portfolio S&P 500 Index
- ---- --------------- -------------
12/31/92 10,000 10,000
12/31/93 11,333 10,999
12/31/94 11,270 11,143
12/31/95 15,126 15,313
12/31/96 18,166 18,847
12/31/97 23,577 25,135
* 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.
A-2
<PAGE>
Equity Index Portfolio
and
State Street Global Advisors S&P 500 Flagship Fund (1)
State Street Global Advisors
Annualized Total Return*
- ---------------------------------------------------------------
Periods Ending SSGA S&P 500 S&P 500 Equity Index
On 12/31/97 Flagship Fund (1) Index (2) Portfolio (3)
- -------------- ----------------- --------- -------------
5 Years 19.83% 20.24% N/A
3 Years 30.68% 31.15% N/A
1 Year 32.89% 33.36% 32.79
Since Inception N/A 29.28% 28.31
SSGA S&P 500 Flagship Fund (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
SSGA S&P 500
Date Flagship Fund S&P 500 Index
---- ------------- -------------
12/92 10,000 10,000
12/93 10,962 10,999
12/94 11,070 11,143
12/95 15,171 15,313
12/96 18,592 18,847
12/97 24,706 25,135
Equity Index Portfolio (3) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Equity Index
Date Portfolio S&P 500 Index
---- ------------ -------------
4/30/96 10,000 10,000
12/31/96 11,423 11,504
12/31/97 15,169 16,342
* 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,
1997, the Fund had $44.2 billion in total assets and 202 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. The net return without the capital contribution would have been 32.47% for
the period ending December 31, 1997 and 28.14% since inception.
A-3
<PAGE>
Large Cap Value Portfolio
and
Equity Income Composite (1)
T. Rowe Price Associates, Inc.
Annualized Total Return*
- ------------------------------------------------------------------------
T. Rowe Price
Periods Ending Equity Income Russell 1000(R) Large Cap Value
On 12/31/97 Composite (1) Value Index (2) Portfolio (3)
- --------------- --------------- --------------- ---------------
5 Years 20.32% 21.37% N/A
3 Years 28.54% 31.52% N/A
1 Year 30.05% 35.18% 28.56%
Since Inception N/A 30.09% 25.63%
Equity Income Composite (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
TR Price Equity Russell 1000(R)
Date Income Composite Value Index
- ---- ---------------- ---------------
12/92 10,000 10,000
12/93 11,449 11,812
12/94 11,871 11,577
12/95 16,050 16,017
12/96 19,387 19,483
12/97 25,212 26,338
Large Cap Value Portfolio (3) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Russell 1000(R) Large Cap
Date Value Index Value Portfolio
- ---- --------------- ---------------
4/30/96 10,000 10,000
1997 12,024 11,699
12/31/97 15,503 14,643
* Past performance is not predictive of future performance.
1. The Equity Income Composite is an asset-weighted composite of 15 accounts
managed using a substantially similar investment strategy, with $1.3 billion
in total assets as of December 31, 1997. 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(R) Value Index contains those Russell 1000(R) Value Index
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(R) Growth Index. It is a capitalization-weighted index
calculated on a total return basis with dividends.
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.
Annualized Total Return*
- --------------------------------------------------------
Periods Ending Large Cap Large Cap Growth
On 12/31/97 Growth Portfolio (1) Benchmark (2)(3)
- -------------- -------------------- ----------------
5 Years 18.09% 19.50%
3 Years 26.78% 28.77%
1 Year 30.89% 30.48%
Large Cap Growth Portfolio (1) and Benchmark (2)(3)*
[LINE GRAPH APPEARS HERE]
Large Cap Growth Large Cap Growth
Date Benchmark Portfolio
- ---- ---------------- ----------------
12/31/92 10,000 10,000
12/31/93 11,008 11,380
12/30/94 11,153 11,268
12/29/95 15,345 14,834
12/31/96 18,679 17,544
12/31/97 24,373 22,964
* 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(R) Growth Index contains those Russell 1000(R) Value Index
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(R) Value Index. It is a capitalization-weighted index
calculated on a total return basis with dividends reinvested.
3. The 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(R) Growth Index for the period May 1996 to December 1997
(described above #2).
A-5
<PAGE>
Mid Cap Value Portfolio
and
Mid Cap Value Composite (1)
Neuberger & Berman Management, LLC
Annualized Total Return*
- ------------------------------------------------------------------------
N&B Mid Cap Russell
Periods Ending Value Midcap(TM) Mid Cap Value
On 12/31/97 Composite (1) Value Index (2) Portfolio (3)
- --------------- ------------- --------------- ---------------
5 Years 21.47% 19.80% N/A
3 Years 32.19% 29.67% N/A
1 Year 32.13% 34.37% 32.17%
Since Inception N/A 28.43% 29.26%
Mid Cap Value Composite (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
N&B Mid Cap Russell Midcap(TM)
Date Value Composite Value Index
- ---- --------------- ------------------
12/92 10,000 10,000
12/93 11,625 11,562
12/94 11,447 11,316
12/95 15,599 15,269
12/96 20,013 18,363
12/97 26,443 24,674
Mid Cap Value Portfolio (3) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Mid Cap Value Russell Midcap(TM)
Date Portfolio Value Index
- ---- ------------- ------------------
5/1/96 10,000 10,000
12/31/96 11,618 11,294
12/31/97 15,355 15,175
* 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 Midcap(TM) Value Index consists of the smallest 800 securities in the
Russell 1000(R) Value 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(R) Value Index total market
capitalization. The Russell Midcap(TM) 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
Annualized Total Return*
- --------------------------------------------------------------------------------
Periods Ending Janus Mid Cap Russell Midcap(TM) Mid Cap Growth
On 12/31/97 Growth Composite (1) Growth Index (2) Portfolio (3)
- -------------- -------------------- -------------------- --------------
5 Years 14.18% 15.98% N/A
3 Years 16.10 24.48% N/A
1 Year 11.58% 22.54% 16.66%
Since Inception N/A 16.83% 11.42%
Mid Cap Growth Composite (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Janus Mid Cap Russell Midcap(TM)
Date Growth Composite Growth Index
- ---- ---------------- --------------------
12/92 10,000 10,000
12/93 11,647 11,119
12/94 12,400 10,879
12/95 16,000 14,575
12/96 17,394 17,122
12/97 19,408 20,982
Mid Cap Growth Portfolio (3) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Mid Cap Growth Russell Midcap(TM)
Date Portfolio Growth Index
- ---- -------------- --------------------
5/01/96 10,000 10,000
12/31/96 10,269 10,528
12/31/97 11,980 12,959
* 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. As of December 31, 1997, the composite included 33
accounts with total assets of $2.2 billion.
2. Russell Midcap(TM) Growth Index consists of the smallest 800 securities in
the Russell 1000(R) Growth 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(R) Growth Index total market
capitalization. The Russell Midcap(TM) 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
Prospectus.
A-7
<PAGE>
Diversified Mid Cap Growth Portfolio
(formerly Special Opportunities Portfolio)
John Hancock Advisers, Inc.
Annualized Total Return*
- ------------------------------------------------------------
Periods Ending Diversified Mid Cap Russell Mid Cap
On 12/31/97 Growth Portfolio (1) Growth Index (2)
- -------------- --------------------- ----------------
5 Years N/A N/A
3 Years 22.38% 24.38%
1 Year 3.44% 23.10%
Since Inception 18.20% 20.16%
Diversified Mid Cap Growth Portfolio (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Diversified Mid Cap Russell Mid Cap
Date Growth Portfolio (1) Growth Index (2)
---- -------------------- ----------------
5/1/94 10,000 10,000
5/94 10,019 10,015
8/94 10,359 10,437
12/94 10,056 10,121
1/95 9,934 10,243
12/95 13,672 13,560
1/96 14,151 13,800
12/96 17,820 15,930
1/97 17,845 16,635
12/97 18,432 19,610
* Prior to May 1, 1998, the investment objective of this Portfolio was to
achieve long-term capital appreciation by emphasizing investments in equity
securities of issuers in various economic sectors. As of May 1, 1998, the
investment objective and practices of the Portfolio were changed to those
shown in the "Investment Objectives and Policies" section of this Prospectus.
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 Midcap(TM) Growth Index consists of the smallest 800 securities in
the Russell 1000(R) Growth 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(R) Growth Index total market
capitalization. The Russell Midcap(TM) 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.
Annualized Total Return*
- -------------------------------------------------------------
Periods Ending Real Estate Wilshire Real
On 12/31/97 Equity Portfolio (1) Estate Index (2)
- --------------- -------------------- ----------------
5 Years 16.15% 16.90%
3 Years 20.55% 23.06%
1 Year 17.22% 19.80%
Real Estate Equity Portfolio (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Real Estate Equity Wilshire Real
Date Portfolio Estate Index
- ---- ------------------ -------------
12/92 10,000 10,000
12/93 11,729 11,524
12/94 12,065 11,713
12/95 13,551 13,312
12/96 18,031 18,221
12/97 21,137 21,828
* 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 about 125 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/Mid Cap CORE Composite(1)
Goldman Sachs Asset (corresponding to Small/Mid Cap Core portfolio) Management
Annualized Total Return*
- -----------------------------------------------------------
Periods Ending Goldman Small/Mid Cap Russell
On 12/31/97 CORE Composite (1) 2500 (2)
- -------------- --------------------- ---------------
5 Years N/A N/A
3 Years N/A N/A
1 Year 29.31% 24.36%
Since Inception 28.20% 21.12%
Small/Mid Cap CORE Composite (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Small/Mid Cap
Date CORE Composite Russell 2500
---- -------------- -------------
3/96 10,000 10,000
12/96 11,944 11,245
12/97 15,445 13,984
* Past performance is not predictive of future results.
1. The Small/Mid Cap CORE Composite is an asset-weighted composite of all
accounts managed using a substantially similar investment strategy. As of
December 31, 1997, the composite included 5 accounts with total assets of
$125 million.
2. Russell 2500(TM) Index consists of the bottom 500 securities in the Russell
1000(R) Index and all 2,000 securities in the Russell 2000(R) Index,
representing approximately 23% of the Russell 3000(R) total market
capitalization. This index is a good measure of small to medium-small stock
performance.
A-10
<PAGE>
Small Cap Value Portfolio
and
Small Cap Equity Account Composite (1)
INVESCO Management & Research, Inc.
Annualized Total Return*
- -------------------------------------------------------------------------------
Periods Ending INVESCO Small Cap Russell 2000(R) Small Cap Value
On 12/31/97 Equity Composite (1) Index (2) Portfolio (3)
- ---------------- -------------------- --------------- ---------------
5 Years 19.22% 16.41% N/A
3 Years 25.57% 22.33% N/A
1 Year 25.77% 22.36% 25.57%
Since Inception N/A 16.37% 21.54%
Small Cap Equity Composite (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Invesco Small Cap
Date Equity Composite Russell 2000(R) Index
- ---- ----------------- ---------------------
12/92 10,000 10,000
12/93 12,354 11,891
12/94 12,164 11,674
12/95 15,864 14,994
12/96 19,150 17,467
12/97 24,085 21,373
Small Cap Value Portfolio (3) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Date Small Cap Value Portfolio Russell 2000(R) Index
- ---- ------------------------- ---------------------
5/1/96 10,000 10,000
12/31/96 11,033 10,521
6/30/97 11,595 12,512
12/31/97 13,855 12,874
* 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. As of December 31, 1997 this
composite includes 16 accounts with $529 million in assets.
2. Russell 2000(R) Index consists of the smallest 2,000 securities in the
Russell 3000(R) Index, representing approximately 100% of the Russell
3000(R) Index 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-11
<PAGE>
Small Cap Growth Portfolio
and
Emerging Growth Composite (1)
John Hancock Advisers, Inc.
Annualized Total Return*
- --------------------------------------------------------------------------------
Periods Ending J.H. Advisers Emerging Russell 2000(R) Small Cap Growth
On 12/31/97 Growth Composite (1) Growth Index (2) Portfolio (3)
- --------------- ---------------------- ---------------- ----------------
5 Years 16.44% 12.74% N/A
3 Years 23.76% 18.09% N/A
1 Year 15.64% 12.95% 14.26%
Since Inception N/A 6.10% 7.98%
Emerging Growth Composite (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
J.H. Advisers Emerging Russell 2000(R)
Date Growth Composite Growth Index
- ---- ---------------------- ---------------
12/92 10,000 10,000
12/93 11,328 11,336
12/94 11,293 11,060
12/95 16,234 14,493
12/96 18,513 16,126
12/97 21,409 18,213
Small Cap Growth Portfolio (3) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Small Cap Growth Russell 2000(R)
Date Portfolio Growth Index
- ---- ---------------- ---------------
5/1/96 10,000 10,000
12/31/96 9,950 9,772
12/31/97 11,370 11,037
* 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(R) Growth Index contains those Russell 2000(R) Index
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(R) 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-12
<PAGE>
Global Equity Composite (1)
Scudder Kemper Investments, Inc.
(Corresponding to Global Equity Portfolio
Annualized Total Return*
- -----------------------------------------------------
Periods Ending Scudder Global Equity MSCI
On 12/31/97 Composite (1) World (2)
- --------------- ------------- ---------------
5 Years 17.08% 15.88%
3 Years 17.94% 17.14%
1 Year 16.78% 16.23%
Global Equity Composite (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Global Equity
Date Composite MSCI World
- ---- ------------- ----------
12/92 10,000 10,000
12/93 13,497 12,313
12/94 13,407 13,000
12/95 16,442 15,771
12/96 18,837 17,979
12/97 21,997 20,896
* Past performance is not predictive of future results.
1. The Global Equity Composite is an asset-weighted composite of all accounts
managed using a substantially similar investment strategy. As of December 31,
1997, the composite included 5 accounts with total assets of $1 billion.
2. The Morgan Stanley Capital International (MSCI) World Index is a market
capitalization weighted index composed of companies representative of the
market structure of 22 Developed Market countries in North America, Europe,
and the Asia/Pacific Region.
A-13
<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 International Balanced
On 12/31/97 Balanced Strategy (1) Strategy Benchmark (2) Portfolio (4) Portfolio Benchmark (3)
- -------------- --------------------- ---------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
5 Years 9.01% 10.56% N/A N/A
3 Years 11.10% 6.78% N/A N/A
1 Year 2.44% 0.20% 2.65% 0.09%
Since Inception N/A N/A 5.61% 1.71%
</TABLE>
International Balanced Strategy (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Brinson Intl. International
Date Balanced Strategy Balanced Benchmark
---- ----------------- ------------------
12/92 10,000 10,000
12/93 11,466 12,663
12/94 11,227 13,568
12/95 13,642 15,522
12/96 15,028 16,483
12/97 15,395 16,517
International Balanced Portfolio (4) and Benchmark (3)*
[LINE GRAPH APPEARS HERE]
International International
Date Balanced Portfolio Balanced Benchmark (A)
---- ------------------ ----------------------
5/1/96 10,000 10,000
12/31/96 10,673 10,278
12/31/97 10,955 10,287
* 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 substantially
similar investment strategy, consisting of a private account.
2. The International Balanced Strategy 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 a
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 International Balanced Portfolio benchmark represents the following two
indices, with a slightly different weighting:
a) a 65% 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.
b) A 35% weighting of the Salomon Brothers Non-US.
4. The performance results are net of Fund asset management expenses and are
total returns, which assume the reinvestment of dividend 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-14
<PAGE>
International Equity Index Portfolio
(formerly International Equities Portfolio)
and International Equity Index Composite(1)
Independence International Associates, Inc.
<TABLE>
<CAPTION>
Annualized Total Return*
- ---------------------------------------------------------------------------------------------
Periods Ending International Equity MSCI EAFE IIA International MSCI EAFE
On 12/31/97 Index Portfolio (4) Index (3) Index Composite (1) GDP Weighted (2)
- -------------- -------------------- --------- ------------------- ----------------
<S> <C> <C> <C> <C>
5 Years 6.79% 11.71% 11.39% 13.19%
3 Years 3.85% 6.59% 8.00% 8.59%
1 Year -5.03% 2.06% 6.22% 6.15%
</TABLE>
International Equity Index Composite (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
International Equity MSCI EAFE
Date Index Composite GDP Weighted
- ---- ------------------- ------------
12/31/91 10,000 10,000
12/92 9,704 8,815
12/93 11,891 11,719
12/94 12,314 12,664
12/95 12,975 14,127
12/96 14,349 15,025
International Equities Portfolio (4) and Benchmark (3)*
[LINE GRAPH APPEARS HERE]
International MSCI EAFE
Date Equities Portfolio Index
- ---- ------------------ ---------
12/31/91 10,000 10,000
12/92 13,294 13,229
12/93 14,366 12,401
12/94 16,026 13,395
12/95 17,045 14,626
12/96 17,396 13,891
* Prior to May 1, 1998, the investment objective of this Portfolio was to
achieve long-term growth of capital by investing primarily in foreign equity
securities. As of May 1, 1998, the investment objective and practices of the
Portfolio were changed to those shown in the "Investment Objectives and
Policies" section of this Prospectus.
1. The International Equity Index Composite is an asset-weighted composite of
all accounts managed using a substantially similar investment strategy. As of
December 31, 1997, the composite included one mutual fund with total assets
of $473 million.
2. This is the Gross Domestic Product Weighted Morgan Stanley Capital
International Europe, Australasia and Far East (Free) Index, which is a
broad-based benchmark made up of more than 1,000 companies in Europe and the
Pacific Rim. The MSCI EAFE GDP Index is constructed by Morgan Stanley Capital
International (MSCI), which chooses countries commonly known as developed
markets and weights them in the index based on their Gross Domestic Product
(GDP). Within each country, stocks are weighted by their market
capitalization.
3. 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 withholding taxes.
4. 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.
A-15
<PAGE>
International Opportunities Portfolio
and
Mainstream International Equities Composite Accounts (MIEC) (1)
Rowe Price-Fleming International, Inc.
Annualized Total Return*
- ------------------------------------------------------------------------
Rowe Price- International
Periods Ending Fleming MSCI EAFE Opportunities
On 12/31/97 MIEC (1) Index (2) Portfolio (3)
- --------------- ----------- --------- ---------------
5 Years 13.00% 11.71% N/A
3 Years 9.50% 6.59% N/A
1 Year 2.74% 2.06% 1.95%
Since Inception N/A 1.45% 5.18%
MIEC International Composite (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Date RP-Fleming MIEC MSCI EAFE Index
- ---- --------------- ---------------
12/92 10,000 10,000
12/93 14,152 13,294
12/94 14,032 14,366
12/95 15,637 16,026
12/96 17,931 17,045
12/97 18,422 17,369
International Opportunities Portfolio (3) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
International
Date Opportunities Portfolio MSCI EAFE Index
- ---- ----------------------- ---------------
5/1/96 10,000 10,000
12/31/96 10,672 10,036
12/31/97 10,880 10,242
* Past performance is not predictive of future performance.
1. The Mainstream International Equities Composite is an asset-weighted
composite of 18 accounts managed using a substantially similar investment
strategy, with $4.4 billion in total assets as of December 31, 1997. It
includes all private accounts with assets 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 1000 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.
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-16
<PAGE>
Global Emerging Markets Composite (1)
Montgomery Asset Management, LLC
(Corresponding to Emerging Markets Equity Portfolio)
Annualized Total Return*
- ----------------------------------------------------------------
Periods Ending Montgomery Global Emerging MSCI Emerging
On 12/31/97 Market Composite (1) Markets Free Index
- --------------- -------------------- -------------------
5 Years 8.97% 7.57%
3 Years 1.00% -3.86%
1 Year -2.24% -11.59%
Global Emerging Markets Composite (1) and Benchmark (2)*
Global Emerging MSCI Emerging Markets
Date Market Composite Free Index
- --------------------------------------------------------------------------------
12/92 10,000 10,000
12/93 16,372 17,484
12/94 14,916 16,205
12/95 13,884 15,360
12/96 15,717 16,287
12/97 15,366 14,400
* Past performance is not predictive of future results.
1. The Global Emerging Markets is an asset-weighted composite of all accounts
managed using a substantially similar investment strategy. As of December 31,
1997, the composite included 12 accounts with total assets of $1.1 billion.
2. The Morgan Stanley Capital International (MSCI) Emerging Markets Free (EMF)
Index is a market capitalization weighted index composed of companies
representative of the market structure of 26 Emerging market countries in
Europe, Latin America, and the Pacific Basin. The MSCI EMF Index excludes
closed markets and those shares in otherwise free markets which are not
purchased by foreigners.
A-17
<PAGE>
Short-Term Bond Portfolio
(formerly Short-Term U.S. Government Portfolio)
Independence Investment Associates, Inc.
Annualized Total Return*
- ------------------------------------------------------------
Periods Ending Short-Term Bond Merrill Lynch 1-5
on 12/31/97 Portfolio (1) Yr. Gov. Bond Index (2)
- -------------- --------------- -----------------------
5 Years N/A N/A
3 Years 6.85% 8.08%
1 Year 6.41% 7.12%
Since Inception 5.88% 6.86%
Short-Term Bond (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Short-Term Bond Merrill Lynch 1-5
Date Portfolio US Govt Bond Index
---- --------------- -------------------
5/01/94 10,000 10,000
5/31/94 9,999 10,013
12/94 10,033 10,102
12/95 11,187 11,398
12/96 11,591 11,907
12/97 12,334 12,755
* Prior to May 1, 1998, the investment objective of this Portfolio was 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. As of May 1, 1998, the
investment objective and practices of the Portfolio were changed to those
shown in the "Investment Objectives and Policies" section of this
Prospectus. 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-18
<PAGE>
Aggregate Bond Index Composite (1)
Mellon Bond Associates
(Corresponding to Bond Index Portfolio)
Annualized Total Return*
- -----------------------------------------------------------------------
Periods Ending Mellon Aggregate Bond Lehman Brothers
On 12/31/97 Index Composite (1) Aggregate Bond Index (2)
- -------------- --------------------- ------------------------
5 Years 7.10% 7.49%
3 Years 10.06% 10.42%
1 Year 9.36% 9.68%
Aggregate Bond Index Composite (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Aggregate Bond LB Aggregate
Date Index Composite Bond Index
- ---- --------------- ------------
12/31/92 10,000 10,000
12/31/93 10,941 10,975
12/31/94 10,573 10,655
12/29/95 12,478 12,623
12/31/96 12,887 13,080
12/31/97 14,094 14,346
* Past performance is not predictive of future results.
1. The Aggregate Bond Index Composite is an asset-weighted composite of all
accounts managed using a substantially similar investment strategy. As of
December 31, 1997, the composite included 2 accounts with total assets of
$650 million.
2. Lehman Brothers Aggregate Bond Index is composed of securities from Lehman
Brothers Government/Corporate Bond Index, 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.
A-19
<PAGE>
Sovereign Bond Portfolio
John Hancock Advisers, Inc.
Annualized Total Return*
- --------------------------------------------------------
Periods Ending Sovereign Bond LB Govt./Corp Bond
On 12/31/97 Portfolio (1) Index (2)
- -------------- ----------------- ------------------
5 Years 8.14% 7.61%
3 Years 11.07% 10.43%
1 Year 10.11% 9.75%
Sovereign Bond Portfolio (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
LB Govt./Corp Sovereign Bond
Date Bond Index Portfolio
---- ------------- -------------
12/92 10,000 10,000
12/93 11,106 11,076
12/94 10,716 12,901
12/95 12,778 13,431
12/96 13,149 14,788
12/97 14,432 12,111
* 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-20
<PAGE>
Strategic Bond Portfolio and
Strategic Bond Composite(1)
J.P. Morgan Investment Management Inc.
Annualized Total Return*
- ------------------------------------------------------------------------------
Periods Ending J.P. Morgan Strategic Strategic Bond Strategic Bond
On 12/31/97 Bond Composite (1) Benchmark (2) Portfolio (3)
- -------------- --------------------- -------------- --------------
5 Years 7.30% 8.07% N/A
3 Years 10.29% 11.28% N/A
1 Year 9.17% 10.10% 9.05%
Since Inception N/A 10.32% 9.50%
Strategic Bond Composite (1) and Benchmark(2)*
[LINE GRAPH APPEARS HERE]
J.P. Morgan Strategic Strategic Bond
Date Bond Composite Benchmark
- ---- --------------------- --------------
12/92 10,000 10,000
12/93 11,059 11,079
12/94 10,599 10,695
12/95 12,434 12,665
12/96 13,026 13,386
12/97 14,220 14,738
Strategic Bond Portfolio (3) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
Strategic Bond Strategic Bond
Date Portfolio Composite Index(A)
- ---- -------------- ------------------
5/1/96 10,000 10,000
1997 10,723 10,762
12/31/97 11,637 11,779
* Past performance is not predictive of future performance.
1. The Strategic Bond Composite represents the performance of all accounts
included in tow 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 heading 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.
A-21
<PAGE>
High Yield Bond Composite (1)
Wellington Management Company, LLC
(Corresponding to High Yield Bond Portfolio)
Annualized Total Return*
- ---------------------------------------------------------
Periods Ending Wellington High Yield LB High
On 12/31/97 Bond Composite (1) Yield Index (2)
- -------------- --------------------- ---------------
5 Years 13.18% 11.65%
3 Years 14.86% 14.38%
1 Year 11.73% 12.77%
High Yield Bond Composite (1) and Benchmark (2)*
[LINE GRAPH APPEARS HERE]
High Yield LB High
Date Bond Composite Yield Index
- ---- -------------- -----------
12/92 10,000 10,000
12/93 12,361 11,711
12/94 12,255 11,593
12/95 14,751 13,815
12/96 16,618 15,383
12/97 18,568 17,348
* Past performance is not predictive of future results.
1. The High Yield Bond Composite is an asset-weighted composite of all accounts
managed using a substantially similar investment strategy. As of December 31,
1997, the composite included 8 accounts with total assets of $649 million.
2. Lehman Brothers High Yield Index is composed of fixed rate, publicly issued,
noninvestment grade debt (Ba1 or lower by Moody's Investors Service, BB+ or
lower by S&P) registered with the SEC. All bonds must be dollar-denominated,
non-convertible, and have at least one year remaining to maturity as well as
an outstanding par value of $100 million.
A-22
<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, 1998. 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, 1998.
<PAGE>
TABLE OF CONTENTS
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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
Debt Securities of the High Yield Bond Portfolio........................ 8
U.S. Government Obligations............................................. 9
Other Money Market Portfolio Securities................................. 9
Commercial Paper Ratings................................................ 9
Corporate Bond Ratings.................................................. 10
Standard and Poor's Depository Receipts................................. 11
Financial Futures Contracts............................................. 11
Options on Financial Futures Contracts.................................. 12
Interest Rate Options................................................... 12
Margin Requirements for Futures and Options............................. 12
Stock Index Options..................................................... 13
Other Derivative Transactions........................................... 13
INVESTMENT RESTRICTIONS................................................... 14
BOARD OF TRUSTEES AND OFFICERS OF THE FUND................................ 18
INVESTMENT ADVISORY AND OTHER SERVICES.................................... 19
Investment Management and Operating Expenses............................ 19
Underwriting and Indemnity Agreement.................................... 22
Custodian Agreement..................................................... 22
Independent Auditors.................................................... 22
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION........................... 22
THE TRUST'S ORGANIZATION AND SHARES....................................... 25
VOTING RIGHTS............................................................. 26
REDEMPTION AND PRICING OF SHARES.......................................... 26
TAXES..................................................................... 27
CALCULATION OF PERFORMANCE DATA........................................... 29
Yield and Total Return Information for all Portfolios Other Than the
Money Market Portfolio................................................. 29
Calculation of Yield Quotations of the Money Market Portfolio........... 30
Charges Under Variable Life Insurance and Variable Annuity Policies..... 30
</TABLE>
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<TABLE>
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<S> <C>
ADDITIONAL INFORMATION..................................................... 31
Legal Matters............................................................ 31
Reports.................................................................. 31
FINANCIAL STATEMENTS....................................................... 31
</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 twenty-three 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 "Other Hedging Strategies by the Managed, Equity Index, Large Cap
Value, Large Cap Growth, Mid Cap Value, Small Cap Value, and International
Opportunities Portfolios." These strategies are discussed further below. The
Managed, Equity Index, Large Cap Value, Large Cap Growth, Mid Cap Value, Mid
Cap Growth, Diversified Mid Cap Growth, Small/Mid Cap CORE, Small Cap Value,
Small Cap Growth, Global Equity, International Balanced, International Equity
Index, International Opportunities, Emerging Markets Equity, Short-Term Bond,
Strategic Bond, and High Yield Bond Portfolios may engage in such transactions
in futures contracts, options on futures contracts, and options on indexes.
Similarly, the Sovereign Bond Portfolio may engage in such transactions in
futures contracts and options thereon.
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
1
<PAGE>
of any loss resulting from a decline in their value. Outright sales of such
securities may not be advantageous at that time, for example, because (in the
case of debt instruments) the proceeds would have to be invested in lower-
yielding, shorter-term instruments. Also, with respect to both debt and equity
securities held by a Portfolio, it may be difficult to liquidate positions
quickly when a market decline is anticipated. Similarly, it may be difficult
to re-establish such positions quickly when the decline is over or if the
decline fails to materialize. These difficulties can be reduced by, for
example, selling the appropriate futures contracts when a decline is
anticipated and closing out the futures position when such anticipations
changes.
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 high-grade liquid debt 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 purposes other than bona
fide hedgings, 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
2
<PAGE>
assets or might recover less than the full amount due. Also the value of such
assets could decline by the time the Fund could effect such recovery.
If on any day a Portfolio experiences net realized or unrealized gains with
respect to financial futures contracts held through a given broker, it will be
entitled immediately to receive from the broker the net amount of such gains.
The Fund will request payment of such amounts promptly after notification by
the broker that such amounts are due. Thereupon, these assets will be
deposited in the Fund's general or segregated account with the custodian, as
appropriate.
SHORT-TERM TRADING
The Managed, Large Cap Value, Mid Cap Value, Mid Cap Growth, Diversified Mid
Cap Growth, Small/Mid Cap CORE, Small Cap Value, Small Cap Growth,
International Balanced, International Equity Index, International
Opportunities, Short-Term Bond, Bond Index, Sovereign Bond, Strategic Bond,
and High Yield Bond 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
3
<PAGE>
hedging is the forward purchase or sale of foreign currency with respect to
specific receivables or payables of the Portfolio accruing in connection with
the purchase and sale of its securities denominated in foreign currencies.
Portfolio hedging is the use of forward foreign currency exchange contracts
with respect to the Portfolio's security positions denominated or quoted in
such foreign currencies. Except as described in the Fund's Prospectus as to
the Managed, Mid Cap Growth, Global Equity, International Balanced,
International Equity Index, International Equities, and Strategic Bond
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 Managed, Mid
Cap Growth, Global Equity, International Balanced and International Equity
Index 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 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 Managed, Equity Index, Large Cap
Value, Mid Cap Value, Mid Cap Growth, Diversified Mid Cap Growth, Small/Mid
Cap CORE, Small Cap Value, Small Cap Growth, Global Equity, International
Balanced, International Equity Index, International Opportunities, Emerging
Markets Equity, Short-Term Bond, Bond Index, Sovereign Bond, Strategic Bond,
and High Yield Bond 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 Equity Index, Large Cap Value,
Mid Cap Value, Mid Cap Growth, Diversified Mid Cap Growth, Small/Mid Cap CORE,
Small Cap Value, Small Cap Growth, Global Equity, International Balanced,
International Equity Index, International Opportunities, Emerging Markets
Equity, Short-Term Bond, Bond Index, Strategic Bond, and High Yield Bond
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
5
<PAGE>
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.
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 Portfolio. 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 Global Equity, International Balanced, International Equity Index,
International Opportunities, Emerging Markets Equity, Short-Term Bond,
Strategic Bond, and High Yield Bond 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 necessarily 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).
6
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Because Yankees and Euros are U.S. dollar denominated, the risks associated
with foreign currency conversions are not present.
DEBT SECURITIES GENERALLY
The value of the debt securities in any Portfolio can be expected to vary
inversely to changes in prevailing interest rates, with the amount of such
variation depending primarily on the remaining duration of the security. Long-
term obligations usually fluctuate more in value than short-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
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a matter of policy by either Moody's or S&P, are considered by the sub-
investment manager to have comparable investment quality. The Portfolio will,
as a rule, seek to purchase debt securities which have protection against
immediate refunding. In recent years, corporate debt securities have
frequently been issued which have refunding protection for a period of five to
ten years and, in some cases, longer, although there can be no assurance that
securities containing similar provisions will continue to be issued.
The Portfolio may purchase corporate debt securities bearing fixed interest
as well as those which carry certain equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer, or participations based on revenues, sales, or profits. The
Portfolio will not exercise any such conversion, exchange or purchase rights
if, at the time, the value of all equity interests so owned would exceed 10%
of the Portfolio's total assets taken at market value.
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.
DEBT SECURITIES OF THE HIGH YIELD BOND PORTFOLIO
Under normal market and economic conditions, the High Yield Bond Portfolio
will invest at least 65% of its assets in debt obligations considered to be
below investment grade, including high yield/high risk or "junk" bonds,
preferred stock and convertible securities. High yield/high risk securities
are considered speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness than higher-rated
securities, and are more sensitive to changes in the issuer's capacity to pay.
Investing in high yield/high risk securities is an aggressive approach to
income investing. The 1980s saw a dramatic increase in the use of high
yield/high risk securities to finance highly leveraged corporate acquisitions
and restructurings. Past experience may not provide an accurate indication of
future performance of high yield/high risk securities, especially during
periods of economic recession. In fact, from 1989 to 1991, the percentage of
high yield/high risk securities that defaulted rose significantly above prior
levels.
High yield/high risk securities may be thinly traded, which can adversely
affect the prices at which they can be sold and can result in high transaction
costs. If market quotations are not available, these securities will be valued
in accordance with standards set by the Board of Trustees, including the use
of outside pricing services. Judgment plays a greater role in valuing high
yield/high risk securities than in the case of other securities for which more
extensive quotations and last-sale information are available. Adverse
publicity and changing investor perceptions may affect the ability of outside
pricing services used by the Portfolio to value its portfolio securities, and
the Portfolio's ability to dispose of the lower-rated bonds. The market prices
of high yield/high risk securities may decline significantly in periods of
general economic difficulty, which may follow periods of rising interest
rates. During an economic downturn or a prolonged period of rising interest
rates, the ability of issuers of lower-rated debt to service their payment
obligations, meet projected goals, or obtain additional financing may be
impaired. The Portfolio may choose, at its own expense or in conjunction with
others, to pursue litigation or otherwise exercise its rights as a security
holder to seek to protect the interests of security holders, if it determines
this to be in the interest of Portfolio investors.
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The considerations discussed above for lower-rated debt securities also are
applicable to lower quality unrated debt instruments of all types, including
loans and other direct indebtedness of businesses with poor credit standing.
Unrated debt instruments are not necessarily of lower quality than rated
securities but they may not be attractive to as many buyers.
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 Bond Portfolios. All of the other Portfolios may
also invest in U.S. Government obligations to some extent.
OTHER MONEY MARKET PORTFOLIO SECURITIES
Certificates of Deposit--are certificates issued against funds deposited in
a bank, are for a definite period of time, earn a specified rate of return,
and are normally negotiable.
Bankers' Acceptances--are short-term credit instruments issued by
corporations to finance the import, export, transfer or storage of goods. They
are termed "accepted" when a bank guarantees their payment at maturity. These
instruments reflect the obligation of both the bank and the drawer to pay the
face amount of the instrument at maturity.
Commercial Paper--refers to promissory notes issued by corporations to
finance their short-term credit needs. See "Commercial Paper Ratings," below.
Corporate Obligations--include bonds, debentures, and notes issued by
corporations in order to finance longer term credit needs. See "Corporate Bond
Ratings," below. These instruments may be considered money market securities
when they have a relatively short remaining maturity.
The foregoing types of money market instruments are used primarily by the
Money Market Portfolio, but may also be used by each of the other Portfolios
to some extent.
COMMERCIAL PAPER RATINGS
The rating A-1 is the highest rating assigned by Standard & Poor's
Corporation ("S&P") to commercial paper which is considered by S&P to have the
following characteristics: liquidity ratios of the issuer are adequate to meet
cash requirements; long-term senior debt is rated "A" or better; the issuer
has access to at least two additional channels of borrowing; basic earnings
and cash flow have an upward trend with allowance made for unusual
circumstances; typically, the issuer's industry is well established and the
issuer has a strong position within the industry.
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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 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.
Bonds which are rated Ba have speculative elements and their future cannot
be considered as well assured. The protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both
good and bad times over the future. Bonds in this class are characterized by
uncertainty of position.
Bonds which are rated B generally lack characteristics of a desirable
investment; assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca are speculative in a high degree. They are often in
default or have other marked shortcomings.
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Bonds which are rated C are the lowest rated class of bonds. They can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Standard & Poor's Corporation describes its 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.
BB, B, CCC, CC, C--Bonds rated in these categories are regarded, on
balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While this debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
C1--This rating is reserved for income bonds on which no interest in
being paid.
D--Bonds rated D are in default and payment of interest and/or repayment
of principal is in arrears.
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, bank certificates
of deposit, and various other domestic or foreign instruments and indexes. 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, the Value Line Stock Index, and various
other domestic or foreign indexes. 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.
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All of the Portfolios (except for the Growth & Income, Real Estate Equity,
Diversified Bond Index, and Money Market Portfolios) may use the above-
described and other available exchange traded financial futures contracts, and
options thereon, subject to the limitations set forth herein and in the Fund's
prospectus.
OPTIONS ON FINANCIAL FUTURES CONTRACTS
The writer of an option on a financial futures contract agrees to assume a
position in such financial futures contract if the purchaser exercises the
option and thereby assumes the opposite position in the financial futures
contract. A party that writes an option receives a premium for doing so, and
the party that purchases an option pays a premium therefor. The option writer
incurs the risk that the option will be exercised and the writer will suffer a
loss on the futures contract position it is thus required to assume that
exceeds the premium the writer received.
If the price of the debt instrument or stock index on which the futures
contract is based increases (in the case of a put option written by the
Portfolio) or decreases (in the case of a call option written by the
Portfolio), the Portfolio may incur losses that exceed the amount of the
premium received by the Portfolio for writing the option. Such losses may
arise because an option written by the Portfolio on a futures contract
requires the Portfolio to pay any amount by which the fluctuating price of the
underlying debt instrument or index exceeds (in the case of a put option) or
is less than (in the case of a call option) the price specified in the futures
contract to which the option relates.
INTEREST RATE OPTIONS
After payment of a specified premium at the time an interest rate option is
entered into, the purchaser of a call interest rate option obtains the right
to receive specified debt securities upon exercise of the option in exchange
for payment of a specified exercise price. The purchaser of a put option
obtains the right to sell the specified debt securities upon exercise of the
option and to receive the exercise price therefor. The writer of the interest
rate option receives a premium but has the obligation, upon exercise of the
option, to deliver the subject securities in exchange for the exercise price
(in the case of a call option) or to purchase the subject securities at the
exercise price (in the case of a put option).
Securities for which interest rate options are currently traded include
United States Treasury Bonds and United States Treasury Notes. Subject to the
limitations and conditions elsewhere set forth in this Statement of Additional
Information and in the Fund Prospectus, the Managed, Mid Cap Growth,
Diversified Mid Cap Growth, Small Cap Value, Small Cap Growth, Global Equity,
International Balanced, Short-Term Bond, Strategic Bond, and High Yield Bond
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
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<PAGE>
be required to post additional margin to that extent. The margin deposit is
returned, assuming the Fund's obligations have been met, when the futures
contract is terminated.
Similar margin requirements will apply in connection with any transactions
in which a Portfolio writes options on futures contracts, options on
securities indexes, or interest rate options.
STOCK INDEX OPTIONS
After payment of a specified premium at the time a stock index option is
entered into, the purchaser of a stock index call option obtains the right to
receive a sum of money upon exercise of the option equal to a multiple of the
excess of a specified stock index on the exercise date over the exercise or
"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 Managed, Equity Index, Large
Cap Value, Large Cap Growth, Mid Cap Value, Mid Cap Growth, Diversified Mid
Cap Growth, Small/Mid Cap CORE Portfolio, Small Cap Value, Small Cap Growth,
Global Equity, International Balanced, International Equity Index,
International Opportunities, and Emerging Markets Growth 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 Global
Equity, International Balanced, International Equity Index, Emerging Markets
Equity, Strategic Bond, and High Yield 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.
None of these Portfolios 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.
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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.
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 Equity Index, Large Cap Value, Mid Cap Value, Mid
Cap Growth, Diversified Mid Cap Growth, Small/Mid Cap CORE, Small Cap
Value, Small Cap Growth, Global Equity, International Balanced,
International Equity Index, International Opportunities, Emerging Markets
Equity, Short-Term Bond, Bond Index, Strategic Bond, and High Yield Bond
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 Managed, Equity Index, Large Cap Value, Large Cap Growth, Mid
Cap Value, Mid Cap Growth, Diversified Mid Cap Growth, Small/Mid Cap
CORE, Small Cap Value, Small Cap Growth, Global Equity, International
Balanced, International Equity Index, International Opportunities,
Emerging Markets Equity, Short-Term Bond, Bond Index, Strategic Bond,
and High Yield Bond 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
Portfolio if more than
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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 Value, Large Cap Growth, 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;
(B) with respect to the Managed, Equity Index, Large Cap Value, Mid
Cap Value, Mid Cap Growth, Diversified Mid Cap Growth, Small/Mid Cap
CORE, Small Cap Value, Small Cap Growth, Global Equity, International
Balanced, International Equity Index, International Opportunities,
Emerging Markets Equity, Short-Term Bond, Bond Index, Sovereign Bond,
Strategic Bond, and High Yield Bond 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 Managed, Mid Cap Growth, Diversified Mid Cap Growth,
Small/Mid Cap CORE, Small Cap Growth, Global Equity, International
Balanced, International Equity Index, Emerging Markets Equity, Short-
Term Bond, Bond Index, Strategic Bond, and High Yield Bond 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 none of these Portfolios may purchase, sell or write
such futures or options other than for bona fide hedging purposes if
immediately thereafter the Portfolio's margin deposits on such non-
hedging positions, plus the amount of premiums paid for outstanding
options on futures contracts, that are not for bona fide hedging
purposes, less any amount by which any such 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 Managed, Equity Index, Large Cap Value, Mid Cap Value, Mid
Cap Growth, Small/Mid Cap CORE, Global Equity, International Balanced,
International Equity Index, International
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Opportunities, Emerging Markets Equity, Strategic Bond, and High Yield
Bond 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, or 10% as to the
Small/Mid Cap CORE, Global Equity, International Equity Index, Emerging
Markets Equity, Bond Index and High Yield Bond Portfolios, subject to a
non-fundamental policy that none of these Portfolios will make additional
investments at any time when such borrowings plus any amounts payable by
the Portfolio under reverse repurchase agreements exceed 5% of that
Portfolio's total assets.
(6) Except as set forth herein as to the Managed, Diversified Mid Cap
Growth, Short-Term Bond, and Sovereign Bond Portfolios, neither such
portfolios, nor the Growth & Income, Large Cap Growth, Real Estate Equity,
or Money Market Portfolios may purchase securities which are subject to
legal or contractual delays in or restrictions on resale. The Managed and
Sovereign Bond 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
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 Value, Mid Cap Growth, Small/Mid
Cap CORE, Small Cap Value, Small Cap Growth, Global Equity, International
Balanced, International Opportunities, Emerging Markets Equity, Bond Index,
Strategic Bond, or High Yield Bond 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 Mid Cap Growth or International Balanced Portfolios.
16
<PAGE>
(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 Equity Index, Large Cap Value, Mid Cap Value, Mid Cap Growth,
Diversified Mid Cap Growth, Small/Mid Cap CORE, Small Cap Value, Small Cap
Growth, Global Equity, International Balanced, International Equity Index,
International Opportunities, Emerging Markets Equity, Short-Term Bond, Bond
Index, Sovereign Bond, Strategic Bond, and High Yield Bond 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. In conformity with its understanding
of current interpretations of the 1940 Act by the staff of the Securities and
Exchange Commission, the Fund, as a non-fundamental policy, interprets this
limitation not to apply to securities issued by the Federal government, or
state and local governments within the U.S., or political subdivisions
thereof; but this exception does not apply to securities of foreign
governmental entities. If these interpretations change, however, the Fund may
modify its practices to conform to such changes.
The Diversified Mid Cap Growth and Short-Term Bond 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.
17
<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, Independence
Investment Associates, Inc., and
Independence International
Associates, Inc.
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.
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.
18
<PAGE>
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 Managed,
Growth & Income, and Large Cap Growth Portfolios. For this, John Hancock pays
IIA a fee for the Large Cap Growth and Managed Portfolios 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. The
advisory fee payable to IIA by John Hancock for the Growth & Income Portfolio
is at an annual rate of .1875% of that Portfolio's average daily net assets.
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 Bond 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 sub-investment manager to the Diversified Mid Cap
Growth 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 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.
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.
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%
of the next $275 million; and .03% 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.
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
19
<PAGE>
$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.
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.
Goldman Sachs Asset Management ("Goldman Sachs"), a separate operating
division of Goldman, Sachs & Co., serves as sub-investment manager to the
Small/Mid Cap CORE Portfolio. For this John Hancock pays Goldman Sachs a fee
at an annual rate of .60% of the first $50 million of the Portfolio's average
daily net assets and .50% on 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.
Scudder Kemper Investments Inc. ("Scudder") serves as sub-investment manager
to the Global Equity Portfolio. For this John Hancock pays Scudder a fee at an
annual rate of .70% of the first $50 million of the Portfolio's average daily
net assets, .60% of the next $100 million, and .50% on 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.
Independence International Associates, Inc. ("International") serves as sub-
investment manager to the International Equity Index Portfolio. For this John
Hancock pays International a fee at an annual rate of .125% of the first $100
million of the Portfolio's average daily net assets, .10% of the next $100
million and .06% on all additional amounts.
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.
Montgomery Asset Management, LLC ("Montgomery"), a wholly-owned subsidiary
of Commerzbank AG, serves as sub-investment manager to the Emerging Markets
Equity Portfolio. For this John Hancock pays Montgomery a fee at an annual
rate of 1.10% of the first $10 million of the Portfolio's average daily net
assets, .90% of the next $140 million, and .80% on all additional amounts.
Mellon Bond Associates ("Mellon"), which is an indirect wholly-owned
subsidiary of Mellon Bank Corporation, serves as sub-investment manager to the
Bond Index Portfolio. For this John Hancock pays Mellon a fee at an annual
rate of .08% of the first $100 million of the Portfolio's average daily net
assets, .06% of the next $150 million, and .04% on all additional amounts.
J.P. Morgan Investment Management Inc. ("JPMIM") serves as sub-investment
manager to the Strategic Bond Portfolio. For this John Hancock pays JPMIM 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.
20
<PAGE>
Wellington Management Company, LLP ("Wellington") serves as sub-investment
manager to the High Yield Bond Portfolio. For this John Hancock pays
Wellington a fee at an annual rate of .50% of the first $100 million of the
Portfolio' average daily net assets, .45% of the next $100 million, and .35%
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, auditing, and custodian
fees, registration costs, proxy costs, organizational costs, association dues,
and other expenses related to the Fund's operations.
In 1995, 1996, and 1997, the Fund paid a total of approximately $14,458,000,
$19,148,000, and $23,253,000, 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. These reimbursements have been as follows for the past three years:
<TABLE>
<CAPTION>
PORTFOLIO 1997 1996 1995
--------- -------- -------- -------
<S> <C> <C> <C>
Equity Index...................................... $216,975 $102,406 $
Large Cap Value................................... 25,221 64,905
Mid Cap Value..................................... 29,275 54,886
Mid Cap Growth.................................... 85,540 63,755
Diversified Mid Cap Growth........................ 58,280
Small Cap Value................................... 57,422 55,765
Small Cap Growth.................................. 38,384 51,269
International Balanced............................ 116,241 50,057
International Equity Index........................ 38,026
International Opportunities....................... 85,649 145,385
Short-Term Bond................................... 11,154 81,642
Strategic Bond.................................... 60,618 49,882
</TABLE>
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
21
<PAGE>
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
State Street Bank and Trust Company of Boston, Massachusetts, is the
custodian of the assets of all Portfolios pursuant to a Custodian Agreement
dated as of January 30, 1995, and amended as of March 18, 1996 and April 14,
1998. The custodian's 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
State Street Bank, although such securities may be deposited in the Book-entry
system of the Federal Reserve System or with Depository Trust Company. The
Trustees of the Fund have determined that, except as otherwise permitted under
applicable Securities and Exchange Commission "no-action" letters or exemptive
orders, it is in the Fund's best interest to hold foreign assets in qualified
foreign banks and depositories meeting the requirements of Rule 17f-5 under
the Investment Company Act of 1940, as amended.
INDEPENDENT AUDITORS
LLP, 200 Clarendon Street, Boston, Massachusetts, are the independent
auditors of the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Portfolios are charged with securities brokers' commissions, transfer
taxes, and other fees relating to their portfolio transactions. Expenses
identifiable to a particular Portfolio are charged to that Portfolio;
otherwise, expenses are prorated according to the size of the Portfolio.
Investments in debt securities are, however, generally traded on a net basis
through issuers or dealers acting for their own account as principals and not
as brokers; therefore, no brokerage commissions are payable on such
transactions, although the price to the Fund usually reflects a dealer
"spread" or "mark-up."
Brokerage commissions paid by the Portfolio were as follows for the past
three years:
<TABLE>
<CAPTION>
PORTFOLIO 1997 1996 1995
--------- ---------- ---------- ----------
<S> <C> <C> <C>
Managed.................................... $1,626,154 $ 411,250 $1,158,098
Growth & Income............................ 1,646,997 2,669,585 1,612,272
Equity Index............................... 31,076 6,843
Large Cap Value............................ 45,619 14,960
Large Cap Growth........................... 680,933 1,008,291 448,290
Mid Cap Value.............................. 122,108 22,485
Mid Cap Growth............................. 71,998 24,888
Diversified Mid Cap Growth................. 1,876,203 849,200 120,439
Real Estate Equity......................... 122,897 118,195 105,581
Small Cap Value............................ 138,114 40,337
Small Cap Growth........................... 67,492 19,090
International Balanced..................... 27,745 41,380
International Equity Index................. 750,416 913,461 639,586
International Opportunities................ 63,138 46,838
</TABLE>
22
<PAGE>
In 1998, orders for the purchase and sale of Portfolio investments will be
placed by John Hancock with respect to the Money Market Portfolio and by the
respective sub-investment managers to the other Portfolios. 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 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; portfolio optimization software; 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 1997, such transactions totaled $808,172, with related
commissions of $2,809.
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
23
<PAGE>
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 in the United States. Settlement periods in
non-U.S. markets may differ from the normal settlement period in the United
States.
During 1997, 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, 1997.
<TABLE>
<CAPTION>
VALUE OF HOLDING
PORTFOLIO BROKER-DEALER AS OF 12/31/97
--------- ------------- ----------------
<S> <C> <C>
Mid Cap Value Equitable Companies, Inc. $
Large Cap Value J. P. Morgan Securities, Inc. $
International Opportunities Norman Securities $
International Opportunities Westpac Bank $
International Opportunities Nat West $
International Opportunities Deutsche Bank $
International Opportunities Banco Santander $
</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 23 series, each corresponding to one of the Fund's 23 Portfolios. 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
24
<PAGE>
each Portfolio, are segregated on the books of the Fund, and are to be charged
with the expenses of such Portfolio. Any assets which are not clearly
allocable to a particular Portfolio or Portfolios are allocated in a manner
determined by the Board of Trustees. Accrued liabilities which are not clearly
allocable to one or more Portfolios would generally be allocated among the
Portfolios in proportion to their relative net assets before adjustment for
such unallocated liabilities. Each issued and outstanding share in a Portfolio
is entitled to participate equally in dividends and distributions declared
with respect to such Portfolio and in the net assets of such Portfolio upon
liquidation or dissolution remaining after satisfaction of outstanding
liabilities.
The shares of each Portfolio, when issued, will be fully paid and non-
assessable, and will have no preference, preemptive, exchange or similar
rights. Shares do not have cumulative voting rights.
Under the Declaration of Trust of the Fund, the Fund is not required to hold
an Annual Meeting. Normally there will be no shareholder meetings for the
purpose of electing Trustees unless and until fewer than a majority of the
Trustees then in office have been elected by the shareholders. Trustees
elected at the Annual Meeting of shareholders on April 26, 1995, will continue
in office until the next Annual Meeting unless they die, resign or are
removed, either for cause or without cause, at any meeting of shareholders by
an affirmative vote of a majority of the outstanding shares entitled to vote
for the election of Trustees. The Trustees may elect their own successors and
appoint Trustees to fill any vacancy only if, after filling the vacancy, at
least two-thirds of the Trustees then in office have been elected by the
shareholders. If at any time less than a majority of Trustees in office have
been elected by the shareholders, the Trustees must call a special
shareholders' meeting promptly for the purpose of electing the Board of
Trustees.
The Trustees shall promptly call a meeting of shareholders for the purpose
of voting upon the question of removal of any Trustee or all of the Trustees
when requested in writing to do so by holders 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 Managed and Large Cap Growth Portfolios and through
Variable Life Account V $500,000 worth of shares each of the Diversified Mid
Cap Growth, Real Estate Equity, International Equity Index, and Short-Term
Bond Portfolios. John Hancock also provided additional capital for the Fund by
purchasing the following amounts of shares on May 1, 1998: $5 million for the
Small/Mid Cap CORE Portfolio; $15 million for the Income Equity Portfolio; $10
million for the Emerging Markets Equity Portfolio; $25 million for the Bond
Index Portfolio, and $10 million for the High Yield Bond Portfolio. JHVLICO or
John Hancock
25
<PAGE>
may withdraw such additional investment at some time. However, before
withdrawing any part of their interests in any Portfolio, John Hancock or
JHVLICO will consider any possible adverse impact the withdrawal might have on
that Portfolio.
If the contractholders show minimal interest in any Portfolio, the Fund's
Board of Trustees, by majority vote, may eliminate the Portfolio or substitute
shares of another investment company. Any such action by the Board would be
subject to compliance with any requirements for governmental approvals or
exemptions or for shareholder approval. The contractholders of such Portfolios
will be notified in writing of the Fund's intention to eliminate the Portfolio
and given 30 days to transfer amounts from such Portfolio to other Portfolios
without incurring a transaction fee. Amounts not transferred or withdrawn will
automatically be transferred, at the discretion of the Fund's management.
VOTING RIGHTS
All shares of the Fund of whatever class are entitled to one vote, and the
votes of all classes are cast on an aggregate basis, except on matters where
the interests of the Portfolios differ. Where the interests of the Portfolios
differ, the voting is on a Portfolio-by-Portfolio basis. Approval or
disapproval by the shareholders in one Portfolio on such a matter would not
generally be a prerequisite of approval or disapproval by shareholders in
another Portfolio; and shareholders in a Portfolio not affected by a matter
generally would not be entitled to vote on that matter. Examples of matters
which would require a Portfolio-by-Portfolio vote are changes in the
fundamental investment policy of a particular Portfolio and approval of
investment management or sub-investment management agreements.
REDEMPTION AND PRICING OF SHARES
Redemptions are normally made in cash, but the Fund reserves the right, at
its discretion, to make full or partial payment by assignment to the
appropriate Separate Account of portfolio securities at their value used in
determining the redemption price. In such cases, the Separate Account would
incur brokerage costs should it wish to liquidate these portfolio securities.
The right to redeem shares or to receive payment with respect to any
redemption of shares of any Portfolio may only be suspended (a) for 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-
26
<PAGE>
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.
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.
27
<PAGE>
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.
28
<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 their existing
Portfolios for the 30-day period ended December 31, 1997:
<TABLE>
<CAPTION>
PORTFOLIO CURRENT YIELD
--------- -------------
<S> <C>
Large Cap Growth............................................... 1.5 %
Sovereign Bond................................................. 6.8 %
International Equity Index..................................... (0.2)%
Real Estate Equity............................................. 9.3 %
Growth & Income................................................ 1.6 %
Managed........................................................ 3.7 %
Short-Term Bond................................................ 5.1 %
Diversified Mid Cap Growth..................................... 0.4 %
Equity Index................................................... 1.9 %
Large Cap Value................................................ 2.0 %
Mid Cap Growth................................................. (0.4)%
Mid Cap Value.................................................. 0.6 %
Small Cap Growth............................................... (0.2)%
Small Cap Value................................................ 1.3 %
Strategic Bond................................................. 4.8 %
International Opportunities.................................... (0.4)%
International Balanced......................................... 0.9 %
</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
29
<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, 1997, the Money Market
Portfolio's current yield was 5.47%; its effective yield was 5.67%.
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.
30
<PAGE>
ADDITIONAL INFORMATION
LEGAL MATTERS
Freedman, Levy, Kroll & Simonds of Washington, D.C., advises 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.
31
<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, 1997 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, 1997.
b. Statement of Operations, for the year ended December 31, 1997.
c. Statements of Changes in Net Assets, for each of the two years in
the period ended December 31, 1997.
d. Schedule of Investments, at December 31, 1997.
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.
II-1
<PAGE>
d. Investment Management Agreement by and between John Hancock Variable
Series Trust I and John Hancock Mutual Life Insurance Company dated as of
April 12, 1988, relating to the Real Estate Equity and International Equity
Index Portfolios, included in Post-Effective Amendment No. 3 to this File No.
33-208l, filed in April, 1988.
e. Amendment dated as of May 1, 1998 to the Investment Management
Agreement dated as of April 12, 1998 relating to the Real Estate Equity and
International Equity Index Portfolios. Filed herewith.
f. Investment Management Agreement By and Between John Hancock Variable
Series Trust I and John Hancock Mutual Life Insurance Company relating to the
Short-Term Bond and Diversified Mid Cap Growth Portfolios, included in Post-
Effective Amendment No. 9 to this File No. 33-2081, filed March 1, 1994.
g. 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 Bond Portfolio, 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, John Hancock Advisers, Inc., and John Hancock Mutual Life Insurance
Company relating to the Diversified Mid Cap Growth 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 Sovereign Bond Portfolio, included in
Post-Effective Amendment No. 11 to this File No. 33-2081, filed April 29,
1995.
j. 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.
k. 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 Bond Portfolio and
the Equity Index Portfolio, included in Post-Effective Amendment No. 16 to
this File No. 33-2081, filed on May 1, 1997.
l. 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.
m. 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.
n. 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.
o. 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.
p. 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.
q. 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>
r. 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.
s. 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.
t. 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, included in Post-
Effective Amendment No. 16 to this File No. 33-2081, filed on May 1, 1997.
u. Amendment to Sub-Investment Management Agreement among John Hancock
Variable Series Trust I, State Street Bank and Trust Company, and John Hancock
Mutual Life Insurance Company. Filed herewith.
v. Investment Management Agreement dated as of April 14, 1998 By and
Between John Hancock Variable Series Trust I and John Hancock Mutual Life
Insurance Company relating to the Small/Mid Cap CORE, Global Equity,
International Equity Index, Emerging Markets Equity, Bond Index, and High
Yield Bond Portfolio. Filed herewith.
w. Form of Sub-Investment Management Agreement Among John Hancock Variable
Series Trust I, Goldman Sachs Asset Management, and John Hancock Mutual Life
Insurance Company, relating to the Small/Mid Cap CORE Portfolio. Filed
herewith.
x. Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Scudder Kemper Investments, Inc., and John Hancock Mutual Life
Insurance Company, relating to the Global Equity Portfolio. Filed
herewith.
y. Form of Sub-Investment Management Agreement Among John Hancock Variable
Series Trust I, Independence International Associates, Inc., and John Hancock
Mutual Life Insurance Company, relating to the International Equity Index
Portfolio. Filed herewith.
z. Form of Sub-Investment Management Agreement Among John Hancock Variable
Series Trust I, Montgomery Asset Management, LLC, and John Hancock Mutual
Life Insurance Company, relating to the Emerging Markets Equity Portfolio.
Filed herewith.
aa. Sub-Investment Management Agreement Among John Hancock Variable
Series Trust I, Mellon Bond Associates, and John Hancock Mutual Life Insurance
Company, relating to the Bond Index Portfolio. Filed herewith.
bb. Sub-Investment Management Agreement Among John Hancock Variable
Series Trust I, Wellington Management Company, LLP, and John Hancock Mutual
Life Insurance Company, relating to the High Yield Bond Portfolio.
Filed herewith.
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 Between John Hancock Variable Series Trust I and
State Street Bank and Trust Company, dated January 30, 1995, relating to
the International Equity Index and Small/Mid Cap CORE Portfolio, included
in Post-Effective Amendment No. 10 to this File No. 33-2081, filed March 2,
1995.
b. Amendment dated as of March 18, 1996 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 .
c. Amendment dated as of April 14, 1998 to Custodian Agreement dated January
30, 1995, between John Hancock Variable Series Trust I and State Street Bank
and Trust Company, expanding this agreement to cover additional Portfolios.
Filed herewith.
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, previously filed electronically on February 13,
1998.
11. (a) Consent of Ernst & Young LLP, independent auditors. Filed herewith.
11. (b) Representation of Counsel pursuant to Rule 485(b). Included in the
transmittal letter for this filing.
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,
previously filed electronically on February 13, 1998.
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. Filed herewith.
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. 17
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
Short-Term Bond Portfolio Shares Seven
Diversified Mid Cap Growth 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
Small/Mid Cap CORE Portfolio Shares Seven
Global Equity Portfolio Shares Seven
International Equity Index Portfolio Shares Seven
Emerging Markets Equity Portfolio Shares Seven
Bond Index Portfolio Shares Seven
High Yield Bond 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 filed in 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.
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<PAGE>
Sections 6.3 through 6.17 of the Declaration of Trust (Exhibit 1 to Post-
Effective Amendment No. 3 to this Registration Statement filed in April, 1988),
relate to the indemnification of trustees, shareholders, officers and
employees and are hereby incorporated by reference. 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. 13 to this Registration
Statement filed April 30, 1996), Section 14 of the Investment Management
Agreement by and between John Hancock Variable Series Trust I and John Hancock
Mutual Life Insurance Company (Exhibit 5(g) to Post-Effective Amendment No. 9 to
this Registration Statement filed March 1, 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 Post-Effective
Amendment No. 4 to this Registration Statement, filed in April, 1989), Section
14 of the Investment Management Agreement by and between John Hancock Variable
Series Trust I and John Hancock Mutual Life Insurance Company (Exhibit 5(v) to
Post-Effective Amendment No. 19 to this Registration Statement filed in 1998),
Section 7 of the Underwriting and Administrative Services Agreement by and
between John Hancock Variable Series Trust I, and John Hancock Mutual Life
Insurance Company (Exhibit 6 to Post-Effective Amendment No. 4 to this
Registration Statement filed in April, 1989), 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 filed 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
filed 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. ("JPMIM"), Rowe Price-Fleming International,
Inc. ("Rowe Price-Fleming"), Brinson Partners, Inc. ("Brinson"), Goldman Sachs
Asset Management ("Goldman Sachs"), Scudder Kemper Investments, Inc.("Scudder
Kemper"), Independence International Associates, Inc. ("Independence
International"), Montgomery Asset Management, LLC ("Montgomery"), Mellon Bond
Associates ("Mellon"), and Wellington Management Company, LLP ("Wellington") 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), JPMIM (File No.
801-21011), Rowe Price-Fleming (File No. 801-14713), Brinson (File No. 801-
34910) Goldman Sachs (File No. 801-3111), Scudder Kemper (File No. 801-252),
Independence International (File No. 801-28785), Montgomery (File No. 801-
54803), Mellon (File No. 801-50865), Wellington (File No. 801-41552) 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, JPMIM, Rowe Price-Fleming, Brinson Goldman Sachs, Scudder
Kemper, Independence International, Montgomery, Mellon, and Wellington 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, except that Distributors
serves as the principal underwriter for the separate accounts referred to in
the response to Item 25 above.
(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:
II-6
<PAGE>
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110 serves as custodian for the Registrant and in such capacity
keeps 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 Bond 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.
JPMIM, 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.
Goldman Sachs, One New York Plaza, New York, New York 10004, will serve as
Registrant's sub-investment manager and, in such capacity, will keep the records
related to transactions in the portfolio securities of the Small/Mid Cap CORE
Equity Portfolio.
Scudder Kemper, 345 Park Avenue, New York, New York 10154, will serve as
Registrant's sub-investment manager and, in such capacity, will keep the records
related to transactions in the portfolio securities of the Global Equity
Portfolio.
Independence International, 53 State Street, Boston, Massachusetts 02109, will
serve as Registrant's sub-investment manager and, in such capacity, will keep
the records related to transactions in the portfolio securities of the
International Equity Index Portfolio.
Montgomery, 101 California Street, San Francisco, California 94111, will serve
as Registrant's sub-investment manager and, in such capacity, will keep the
records related to transactions in the portfolio securities of the Emerging
Markets Equity Portfolio.
Mellon, One Mellon Bank Center, Suite 4135, Pittsburgh, Pennsylvania 15258,
will serve as Registrant's sub-investment manager and, in such capacity, will
keep the records related to transactions in the portfolio securities of the
Diversified Bond Index Portfolio.
Wellington, 75 State Street, Boston, Massachusetts 02109, will serve as
Registrant's sub-investment manager and, in such capacity, will keep the records
related to transactions in the portfolio securities of the High Yield Bond
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 THIS AMENDMENT
MEETS ALL REQUIREMENTS FOR EFFECTIVENESS PURSUANT TO RULE 485(b) UNDER SAID 1933
ACT 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 28TH DAY OF APRIL 1998.
John Hancock Variable Series
Trust I
By: /s/ Henry D. Shaw
--------------------------------
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
By: /s/ Raymond F. Skiba April 28, 1998
-------------------------------------
Raymond F. Skiba
Treasurer (Principal Financial and
Accounting Officer)
By: /s/ Henry D. Shaw April 28, 1998
-------------------------------------
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(e)
Amendment to Management Agreement
Reference is made to that certain Management Agreement dated as of April 12,
1988, by and between John Hancock Variable Series Trust I (the "Series") and
John Hancock Mutual Life Insurance Company ("JHMLICO"), relating to the
investment management of the Real Estate Portfolio and the Global Portfolio, as
heretofore amended (the "Agreement").
WHEREAS, the Series desires to amend the investment objectives, policies and
operating guidelines of the International Equities Portfolio, formerly known as
the Global Portfolio, and to rename such portfolio the "International Equity
Index Portfolio" (hereinafter, the "Subject Portfolio"), all as more fully
described in the proxy solicitation materials provided to shareholders of the
International Equities Portfolio; and
WHEREAS, the Series and JHMLICO desire to hire Independence International
Associates, Inc. to serve as sub-investment manager of the International Equity
Index Portfolio and to manage the same in accordance with the amended investment
objectives, policies and operating guidelines; and
WHEREAS, all such changes are to be effective as of May 1, 1998, subject to
the approval of shareholders, as required by law;
NOW THEREFORE, the Series and JHMLICO do hereby mutually agree to amend the
Agreement as follows:
1. The last sentence of the first paragraph of Section 4 (titled "Sub-
Investment Managers") is hereby amended to read as follows:
It is anticipated that JHMLICO and the Series will agree to contract with
Independence Investment Associates, Inc. to be Sub-Investment Manager for
the Real Estate Equity Portfolio and with Independence International
Associates, Inc. to be Sub-Investment Manager of the International Equity
Index Portfolio.
2. Subsection (b) of Section 5 (titled "Investment Advisory Fee and Expense
Limitation") is hereby amended to read as follows:
(b) For the International Equity Index Portfolio:
(i) 0.18 % on an annual basis of the first $100,000,000 of the
Current Net Assets of such Portfolio; and
(ii) 0.15 % on an annual basis of that portion of the Current Net
Assets in excess of $100,000,000 and not over $200,000,000 of such
Portfolio; and
(iii) 0.11 % on an annual basis for that portion of the Current Net
Assets in excess of $200,000,000 of such Portfolio.
<PAGE>
3. All other references, if any, to "Global Portfolio" in the Agreement are
hereby amended to read: "International Equity Index Portfolio."
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
this 14th day of April, 1998, to be effective as of May 1, 1998, subject only
such approval of the shareholders as may be required by law.
JOHN HANCOCK VARIABLE SERIES TRUST I
By: /s/ Henry D. Shaw
---------------------------------
Name: Henry D. Shaw
Title: Chairman and CEO
JOHN HANCOCK MUTUAL LIFE INSURANCE
COMPANY
By: /s/ Robert R. Reitano
--------------------------------
Name: Robert R. Reitano
Title: Vice President
<PAGE>
John Hancock Variable Series Trust I
Henry D. Shaw
Chairman and Chief Executive Officer
[LOGO OF JOHN HANCOCK(R) APPEARS HERE]
April 14, 1998
State Street Bank and Trust Company
Two International Place
34th Floor
Boston, MA 02110
Attn: Mark J. Duggan
Vice President and Associate Counsel
Re: Sub-Investment Management Agreement
dated as of March 18, 1997
--------------------------------
Gentlemen:
This letter will memorialize our mutual agreement to amend Schedule I to
the above-referenced Sub-Investment Management Agreement, effective as of May 1,
1998, to provide an additional break point in the decremental fee schedule.
Attached is a revised copy of Schedule I which caps the 5 basis point charge
step at $400 million and introduces a 3 basis point charge step for all amounts
over $400 million. Please substitute copies of the attached Schedule I for the
old copies of Schedule I in your files.
Kindly acknowledge receipt of this letter and the attachment, and indicate
your agreement to the amendment of Schedule I, by signing and returning the
duplicate of this letter. Thank you.
JOHN HANCOCK MUTUAL JOHN HANCOCK VARIABLE
LIFE INSURANCE COMPANY SERIES TRUST I
By: /s/ Robert R. Reitano By: /s/ Henry D. Shaw
------------------------ -----------------
Robert R. Reitano Henry D. Shaw
Vice President Chairman and CEO
Received and agreed to:
STATE STREET BANK AND TRUST
COMPANY
By: /s/ Timothy B. Harbert
-----------------------------
Name: Timothy B. Harbert
------------------------
Title: Executive Vice President
-------------------------
<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 the next $275,000,000 Five (5) basis points (0.05%)
On amounts over $400,000,000 Three (3) basis points (0.03%)
<PAGE>
INVESTMENT MANAGEMENT AGREEMENT
BY AND BETWEEN
JOHN HANCOCK VARIABLE SERIES TRUST I
AND
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
<PAGE>
MANAGEMENT AGREEMENT
AGREEMENT made as of the 14th day of April, 1998 by and between John
Hancock Variable Series Trust I, a Massachusetts business trust having a place
of business at John Hancock Place, Boston, Massachusetts 02117 (hereinafter
called the "Series") and John Hancock Mutual Life Insurance Company, a
Massachusetts corporation having its principal place of business at John Hancock
Place, Boston, Massachusetts 02117 (hereinafter called "JHMLICO").
WHEREAS, the Series is organized and 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 is engaged in the business of rendering investment
management services and is registered as an investment adviser under the
Investment Advisers Act of 1940; and
WHEREAS, the Series is authorized to issue shares of beneficial interest in
separate classes with each such class representing interests in a separate
portfolio of securities and other assets; and
WHEREAS, the Series currently offers shares of beneficial interest in
eighteen classes which are subject to separate management agreements with
JHMLICO that do not apply to the Portfolios referred to below, and
WHEREAS, the Series intends to offer shares of beneficial interest in five
additional classes (the "Initial Portfolios" under this Agreement) designated as
Small/Mid Cap CORE Portfolio, High Yield Bond Portfolio, Bond Index Portfolio,
Global Equity Portfolio, and Emerging Markets Equity Portfolio, (together with
other classes subsequently established by the Series, the "Portfolios) and the
Series desires to retain JHMLICO to render investment advisory services under
this Agreement, and JHMLICO is willing to do so.
NOW, THEREFORE, WITNESSETH: That it is hereby agreed between the parties
hereto as follows:
<PAGE>
2
1. APPOINTMENT OF JHMLICO AS MANAGER.
(a) Initial Portfolios. The Series hereby appoints JHMLICO and JHMLICO
------------------
hereby accepts the appointment, to act as investment adviser and manager to each
of the Initial Portfolios for the period and on the terms herein set forth, for
the compensation herein provided.
(b) Additional Portfolios. In the event that the Series establishes one or
---------------------
more classes of shares other than the Initial Portfolios with respect to which
it desires to retain JHMLICO to render investment advisory and management
services hereunder, it shall so notify JHMLICO in writing. If it is willing to
render such services JHMLICO shall notify the Series in writing, whereupon such
class of shares shall become a Portfolio hereunder.
(c) Independent Contractor. JHMLICO 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.
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>
3
(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.
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.
<PAGE>
4
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 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;
<PAGE>
5
(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:
(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.
<PAGE>
6
(vi) fees and costs of independent counsel to Series not incurred in
the actual conduct of the Series' affairs.
4. SUB-INVESTMENT MANAGERS.
Notwithstanding any other provision hereof, JHMLICO, with the approval of
the Series, may contract with one or more Sub-Investment Managers to perform any
of the investment management services required of JHMLICO under this Agreement;
provided, however, that the compensation of any such Sub-Investment Manager will
be the sole responsibility of JHMLICO and the duties and responsibilities of any
such Sub-Investment Manager shall be as set forth in an agreement between the
Series, JHMLICO and such Sub-Investment Manager. It is anticipated that JHMLICO
and the Series will agree to contract initially with Goldman Sachs Asset
Management (a division of Goldman, Sachs & Co.) to be Sub-Investment Manager for
the Small/Mid Cap CORE Portfolio, with Wellington Management Company, LLP to be
Sub-Investment Manager for the High Yield Bond Portfolio, with Mellon Bond
Associates, LLP to be Sub-Investment Manager for the Bond Index Portfolio, with
Scudder Kemper Investments, Inc. to be Sub-Investment Manager for the Global
Equity Portfolio, and with Montgomery Asset Management, LLC to be Sub-Investment
Manager for the Emerging Markets Equity Portfolio.
JHMLICO shall exercise reasonable care in selecting, for approval by the
Series, any Sub-Investment Manager and in monitoring and supervising the
performance of any Sub-Investment Manager but, except as provided in Section 14
hereof, shall not otherwise be legally responsible or liable for any action of
any Sub-Investment Manager. It shall be a particular responsibility of JHMLICO
to evaluate the investment performance of Sub-Investment Managers and that of
potential Sub-Investment Managers and
to supervise and monitor the practices of Sub-Investment Managers in selecting
brokers and dealers to effect portfolio transactions, including the negotiation
of commissions and the evaluation of services provided by such brokers and
dealers.
5. INVESTMENT ADVISORY FEE AND EXPENSE LIMITATION.
<PAGE>
7
For all of the services rendered, facilities furnished and expenses paid or
assumed as herein provided,the Series shall pay to JHMLICO a fee, which fee
shall, with respect to each Portfolio, be at an effective rate of:
(a) For the Small/Mid Cap CORE Portfolio:
------------------------------------
(i) 0.80 % on an annual basis of the first $50,000,000 of the
Current Net Assets of such Portfolio; and
(ii) 0.70 % on an annual basis of that portion of the Current Net
Assets in excess of $50,000,000 of such Portfolio.
(b) For the High Yield Bond Portfolio:
---------------------------------
(i) 0.65 % on an annual basis of the first $100,000,000 of the
Current Net Assets of such Portfolio; and
(ii) 0.60 % on an annual basis of that portion of the Current Net
Assets in excess of $100,000,000 and not over $200,000,000 of such
Portfolio; and
(iii) 0.50 % on an annual basis of that portion of the Current Net
Assets in excess of $200,000,000 of such Portfolio.
(c) For the Bond Index Portfolio:
----------------------------
(i) 0.15 % on an annual basis of the first $100,000,000 of the
Current Net Assets of such Portfolio; and
(ii) 0.13 % on an annual basis of that portion of the Current Net
Assets in excess of $100,000,000 and not over $250,000,000 of such
Portfolio; and
(iii) 0.11 % on an annual basis for that portion of the Current Net
Assets in excess of $250,000,000 of such Portfolio.
(d) For the Global Equity Portfolio:
-------------------------------
(i) 0.90 % on an annual basis of the first $50,000,000 of the
Current Net Assets of such Portfolio; and
<PAGE>
8
(ii) 0.80 % on an annual basis of that portion of the Current Net
Assets in excess of $50,000,000 and not over $150,000,000 of such
Portfolio; and
(iii) 0.70 % on an annual basis for that portion of the Current Net
Assets in excess of $150,000,000 of such Portfolio.
(e) For the Emerging Markets Equity Portfolio:
-----------------------------------------
(i) 1.30 % on an annual basis of the first $10,000,000 of the
Current Net Assets of such Portfolio; and
(ii) 1.20 % on an annual basis of that portion of the Current Net
Assets in excess of $10,000,000 but not over $150,000,000; and
(iii) 1.10 % on an annual basis of that portion of the Current Net
Assets in excess of $150,000,000 of such Portfolio.
The fee shall be accrued daily and payable monthly as soon as possible
after the last day of each calendar month. In the case of termination of this
Agreement with respect to any Portfolio during any calendar month, the amount of
the fee accrued to the date of termination shall be paid.
"Current Net Assets" of any Portfolio for purposes of computing the amount
of advisory fee accrued for any day shall mean that Portfolio's net assets for
the most recent preceding day for which that Portfolio's net assets were
computed.
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
JHMLICO exceed 0.25% of that Portfolio's average daily net assets, JHMLICO will
reimburse that Portfolio promptly after the end of the fiscal year in an amount
equal to such excess. In the event of termination of this Agreement as of a date
other than the last day of Series' fiscal year, JHMLICO shall pay any Portfolio
of Series the amount by which such expenses incurred by that Portfolio prior to
the date of termination exceeds a pro rata portion of the expense limitation.
6. PORTFOLIO TRANSACTIONS.
<PAGE>
9
In connection with the investment and reinvestment of the assets of the
Portfolios, JHMLICO is authorized to select the brokers or dealers that will
execute purchase and sale transactions for the Series 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 the Series.
JHMLICO 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 Series and its shareholders, JHMLICO shall
have the right, subject to the control of the Board of Trustees, and to the
extent authorized by the Securities and Exchange Act of 1934, to follow a policy
of selecting brokers who furnish brokerage and research services to the Series
or to JHMLICO, who charge a higher commission rate to the Series than may result
when allocating brokerage solely on the basis of seeking the most favorable
price and execution. JHMLICO shall determine in good faith that such higher
cost was reasonable in relation to the value of the brokerage and research
services provided.
The fees payable to JHMLICO by the Series hereunder shall be reduced by any
tender solicitation fees or similar payments received by JHMLICO, or any
affiliated person of JHMLICO, in connection with the tender of investments of
any Portfolio (less any direct expenses incurred by JHMLICO, or any affiliated
person of JHMLICO, in connection with obtaining such fees or payments). JHMLICO
shall use its best efforts to recapture all available tender offer solicitation
fees and similar payments in connection with tenders of the securities of any
Portfolio, provided, however, that neither JHMLICO nor any affiliated person
shall be required to register as a broker-dealer for this purpose. JHMLICO
shall advise the Board of Trustees of any fees or payments of whatever type
which it may be possible for JHMLICO or an affiliate of JHMLICO to receive in
connection with the purchase or sale of investment securities for any Portfolio.
7. INFORMATION, RECORDS, AND CONFIDENTIALITY.
The Series shall own and control all records maintained hereunder by
JHMLICO 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 promptly be returned to the Series, free from any claim or
retention
<PAGE>
10
of rights by JHMLICO. JHMLICO also agrees, upon request of the Series, promptly
to surrender such books and records or, at JHMLICO's expense, copies thereof to
the Series or make such books and records available for inspection by
representatives of regulatory authorities or other persons reasonably designated
by the Series. JHMLICO 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. JHMLICO shall supply all
information requested by any insurance regulatory authorities to determine
whether all insurance laws and regulations are being complied with.
JHMLICO 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.
JHMLICO shall supply the Board of Trustees and officers of the Series with
all statistical information regarding investments of the Portfolios which is
reasonably required by them and reasonably available to JHMLICO.
8. LIABILITY.
No provision of this Agreement shall be deemed to protect 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. 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 of his duties or the reckless disregard of his
obligations and duties.
9. DURATION AND TERMINATION OF THIS AGREEMENT.
(a) Duration. This Agreement shall become effective with respect to each
--------
Initial Portfolio on the date hereof and, with respect to any additional
Portfolio, on the date of receipt by the Series of notice
<PAGE>
11
from JHMLICO in accordance with Paragraph 1(b) hereof that JHMLICO 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 Portfolios and, with respect to each
additional Portfolio until two years following the date on which such Portfolio
becomes a Portfolio hereunder, and shall continue in full force and effect
thereafter with respect to each Portfolio so long as such continuance with
respect to any such Portfolio is approved at least annually (i) by either the
Board of Trustees of the Series or by vote of a majority of the outstanding
voting shares of such Portfolio, and (ii) in either event by the vote of a
majority of the Board of 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 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
-----------
Portfolio at any time, without payment of any penalty, by vote of the Board of
Trustees of the Series, by vote of a majority of the outstanding shares of such
Portfolio, or by JHMLICO on at least sixty (60) days written notice to the
Series.
(c) Automatic Termination. This Agreement shall automatically and
---------------------
immediately terminate in the event of its assignment.
<PAGE>
12
10. NAME OF JOHN HANCOCK.
It is understood that the name "John Hancock", or any name derived from or
similar to that name, and any logo associated with that name, is the valuable
property of JHMLICO, and that the Series has the right to include "John Hancock"
as a part of its name only so long as this Agreement shall continue. Upon
termination of this Agreement the Series shall forthwith cease to use the John
Hancock name and logos and shall submit to its shareholders, if necessary, an
amendment to its Declaration of Trust to change the Series' name.
11. SERVICES NOT EXCLUSIVE.
The services of JHMLICO to the Series with respect to the Portfolios are
not to be deemed exclusive and JHMLICO 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 JHMLICO 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.
12. AVOIDANCE OF INCONSISTENT POSITION.
In connection with the purchase and sale of portfolio securities of the
Portfolios, JHMLICO and its directors, officers and employees will not act as
principal or agent or receive any commission. Nothing in this Agreement,
however, shall preclude the combination of orders for the sale or purchase of
portfolio securities of the Series with those for other registered investment
companies managed by JHMLICO or its affiliates, if orders are allocated in a
manner deemed equitable by JHMLICO among the accounts and at a price
approximately averaged.
13. 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
<PAGE>
13
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.
14. INDEMNIFICATION
Except to the extent that a member of the Board of Trustees would thereby
be protected against any liability to the Series or its shareholders to which he
or she would otherwise be subject by reason of willful misfeasance, bad faith,
or gross negligence in the performance of the member's duties, or by reason of
the member's reckless disregard either of the member's obligations and duties
under this Agreement or of the duties involved in the conduct of the member's
office, JHMLICO hereby indemnifies each person who is or has been a member of
the Board of Trustees and will hold each harmless against any and all losses,
claims, damages, liabilities or litigation (including legal and other expenses)
to which the member may become subject under the 1940 Act or any other statute
or at common law or otherwise, by reason of his or her failure or alleged
failure to take any action relating to the investment or reinvestment of assets
in the Portfolios, regardless of whether a Sub-Investment Manager has been
retained in connection with the Portfolio concerned, including any failure or
alleged failure to seek or retain investment advice or management in addition to
or in place of that provided by JHMLICO and its Sub-Investment Managers, if any.
With respect to any losses, claims, damages, liabilities or litigation arising
out of events occurring prior to the termination of this Agreement, this
indemnity shall survive said termination.
15. 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 bind only the trust property of the Series,
as provided in the Series' Declaration of Trust.
<PAGE>
14
16. 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.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first set forth above.
JOHN HANCOCK VARIABLE SERIES TRUST I
ATTEST:
/s/ Sandra M. DaDalt By: /s/ Henry D. Shaw
- ------------------------- ---------------------------------
Assistant Secretary Title: Chairman and CEO
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
ATTEST:
/s/ Antoniette Ricci By: /s/ Robert R. Reitano
- ------------------------- ---------------------------------
Assistant Secretary Title: Vice President
JEE0226
<PAGE>
Exhibit 5(w)
SUB-INVESTMENT MANAGEMENT AGREEMENT
AMONG
JOHN HANCOCK VARIABLE SERIES TRUST I
GOLDMAN SACHS ASSET MANAGEMENT
AND
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
<PAGE>
SUB-INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made as of the ___ day of April, 1998 by and among John Hancock
Variable Series Trust I, a Massachusetts business trust (the "Series"),Goldman
Sachs Asset Management, a separate operating division of Goldman, Sachs & Co., a
New York limited partnership ("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 under the Investment Advisers Act of 1940; 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 Small/Mid Cap CORE 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 April 14, 1998 (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 to act as investment adviser and manager to the
Small/Mid Cap CORE Portfolio (the "Subject Portfolio") for the period and on the
terms herein set forth, for the compensation herein provided.
(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 registered as an investment adviser under the Investment Advisers Act
of 1940, and that it will remain so registered and will comply with the
requirements of said Act, and the rules and regulations thereunder, at all times
while this Agreement remains in effect, (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, (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, and (v) that it has furnished the
Series and JHMLICO each with a copy of Advisers' Form ADV, as most recently
filed with the SEC, and will promptly furnish copies of each future amendment
thereto.
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. From
time 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.
-2-
<PAGE>
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 reasonable 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, electronic access to trade records, or other means
to verify trade data received by the custodian from third parties for each
transaction effected for the Subject Portfolio;
(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
(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
-3-
<PAGE>
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. Without limiting the foregoing, JHMLICO will perform
quarterly and annual tax compliance tests to measure whether the Subject
Portfolio is in compliance with Subchapter M and Section 817(h) of the Internal
Revenue Code. JHMLICO will apprise Advisers promptly after each quarter end of
any non-compliance with the diversification requirements in such provisions of
the Internal Revenue Code. If so apprised, Advisers will take prompt action to
remedy any such non-compliance identified by JHMLICO and bring the Subject
Portfolio back into compliance with such diversification provisions of the
Internal Revenue Code.
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 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.
-4-
<PAGE>
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
(including affiliated broker-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. 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, is required by applicable law, legal process or in
connection with any litigation arising out of the subject matter of this
Agreement, or is otherwise publicly disclosed and such public disclosure is not
in breach of any confidentiality restriction.
-5-
<PAGE>
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 gross
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.
Advisers 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, 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, and shall not be obligated to comply with any applicable
insurance laws and regulations unless previously notified thereof in writing by
JHMLICO or the Series.
8. DURATION AND TERMINATION OF THIS AGREEMENT.
(a) Duration. This Agreement shall become effective with respect to the
--------
Subject Portfolio on the date 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 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
-6-
<PAGE>
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 (unless a
later effective date is specified in such notice). 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. In the event of any
termination of this Agreement with respect to a Subject Portfolio, the parties
agree to cooperate and to use reasonable efforts to effect the transition of
daily management services for such Subject Portfolio from Advisers to JHMLICO
(or to another sub-investment manager identified by JHMLICO); it being
understood and agreed that Advisers shall not be liable for any loss, cost or
expense (including without limitation any loss, cost or expense arising out of
any termination pursuant to the first sentence of this Section 8(b) which is
effective upon less than 30 days' prior written notice) incurred by the Series
or by the Subject Portfolio arising out of any such termination and transition
of daily management services, except as may be caused by Advisers' willful
misfeasance, bad faith, gross negligence or reckless disregard of its duties
under this Agreement. On the effective date of any termination, Advisers shall
cease its activities under this Agreement with respect to, and shall cease to be
responsible for, the continuing management of any terminated Subject Portfolio.
(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. 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.
-7-
<PAGE>
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 as may be permitted
under the 1940 Act, including but not limited to securities or futures
transactions complying with Rule 17e-1 under the 1940 Act and joint repurchase
transactions complying with the conditions of any exemptive order obtained by
Advisers. 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 or other clients 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: Goldman Sachs Asset Management
One New York Plaza, 42nd Floor
New York, NY 10004
Attention: Daniel Dumont
Fax #: 212-902-2561
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
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<PAGE>
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
/s/ Sandra M. DaDalt By: /s/ Henry D. Shaw
- -------------------------- ------------------------------
Assistant Secretary Title: Chairman and CEO
ATTEST: JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
/s/ Antoniette Ricci By: /s/ Robert R. Reitano
- -------------------------- ------------------------------
Assistant Secretary Title: Vice President
ATTEST: GOLDMAN SACHS ASSET MANAGEMENT,
a separate operating division of
Goldman, Sachs & Co.
By:
- -------------------------- ------------------------------
Title: Vice President
<PAGE>
SCHEDULE I
FEES
----
Current Net Assets Under Management Sub-Advisory Fee
- ----------------------------------- ----------------
On the first $50,000,000 60 basis points (0.60%) per annum
On amounts over $50,000,000 50 basis points (0.50%) per annum
<PAGE>
JEE0225
Exhibit 5(x)
SUB-INVESTMENT MANAGEMENT AGREEMENT
AMONG
JOHN HANCOCK VARIABLE SERIES TRUST I
SCUDDER KEMPER INVESTMENTS, INC.
AND
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
<PAGE>
SUB-INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made as of the 24th day of April, 1998 by and among John Hancock
Variable Series Trust I, a Massachusetts business trust (the "Series"), Scudder
Kemper Investments, Inc., a Delaware 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 under the Investment Advisers Act of 1940; 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 Global Equity 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 April 14, 1998 (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 to act as investment adviser and manager to the Global
Equity Portfolio (the "Subject Portfolio") for the period and on the terms
herein set forth, for the compensation herein provided.
(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 registered as an investment adviser under the Investment Advisers Act
of 1940, and that it will remain so registered and will comply with the
requirements of said Act, and the rules and regulations thereunder, at all times
while this Agreement remains in effect, (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, (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, and (v) that it has furnished the
Series and JHMLICO each with a copy of Advisers' Form ADV, as most recently
filed with the SEC, and will promptly furnish copies of each future amendment
thereto.
(f) JHMLICO's Representations. JHMLICO represents, warrants and agrees (i)
-------------------------
that it is registered as an investment adviser under the Investment Advisers Act
of 1940, and that it will remain so registered and will comply with the
requirements of said Act, and the rules and regulations thereunder, at all times
while this Agreement remains in effect, (ii) that it will promptly notify
Advisers 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 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 has
adopted procedures designed to prevent violations of such code, and (iv) that as
long as this Agreement remains in effect it will furnish Advisers with a copy of
each future amendment to the Series' Declaration of Trust, Bylaws, prospectus
and statement of additional information, and no such amendment will be effective
as to Advisers until its receipt thereof.
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. From
time to time, JHMLICO or the Series may provide Advisers with
-2-
<PAGE>
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 reasonable 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
(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.
-3-
<PAGE>
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 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, within
ten (10) days 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"
-4-
<PAGE>
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 (including
Advisers' affiliate, Scudder Investor Services, Inc.) 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 in its possession or reasonably available to
it, as may be requested by any insurance regulatory authorities to determine
whether all insurance laws and regulations are being complied with. 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.
-5-
<PAGE>
It is understood that any information or recommendation supplied by Advisers
in connection with the performance of its obligations hereunder is to be
regarded as confidential and for use only by JHMLICO, the Series, or such
persons JHMLICO may designate in connection with the Subject Portfolio.
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 use all commercially
reasonable efforts and good faith in the performance of its services hereunder.
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 on the date 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 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
-6-
<PAGE>
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-transferrable 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. 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. 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.
-7-
<PAGE>
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: Scudder Kemper Investments, Inc.
345 Park Avenue
New York, NY 10154
Attention: Nicholas J. Griparich
Fax #: 212-593-9093
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.
-8-
<PAGE>
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
/s/ Sandra M. DaDalt By: Henry D. Shaw
Assistant Secretary -------------------------
Title: Chairman and CEO
ATTEST: JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
/s/ Antoniette Ricci By: Robert R. Reitano
Assistant Secretary -------------------------
Title: Vice President
ATTEST: SCUDDER KEMPER INVESTMENTS, INC.
/s/ John D. Lamb By: /s/ Cornelius Small
Vice President -------------------------
Title: Vice President
<PAGE>
SCHEDULE I
FEES
----
Current Net Assets Under Management Sub-Advisory Fee
----------------------------------- ----------------
On the first $50,000,000 70 basis points (0.70%)
per annum
On the next $100,000,000 60 basis points (0.60%)
per annum
On amounts over $150,000,000 50 basis points (0.50%)
per annum
<PAGE>
Exhibit 5(y)
SUB-INVESTMENT MANAGEMENT AGREEMENT
AMONG
JOHN HANCOCK VARIABLE SERIES TRUST I
INDEPENDENCE INTERNATIONAL ASSOCIATES, INC.
AND
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
<PAGE>
SUB-INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made as of the _____ day of April, 1998, by and among John Hancock
Variable Series Trust I, a Massachusetts business trust (the "Series"),
Independence International Associates, Inc., a Massachusetts corporation ("Sub-
Manager"), 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 Sub-Manager are engaged in the business of rendering
investment advice under the Investment Advisers Act of 1940; 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 International Equity Index Portfolio, (together with all other
classes established by the Series, 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 April 14, 1998 (the "Investment Management Agreement"), pursuant to which it
may contract with 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. Sub-Manager is hereby appointed and Sub-Manager
-----------------
hereby accepts the appointment to act as investment adviser and manager to the
International Equity Index Portfolio (the "Subject Portfolio") for the period
and on the terms herein set forth, for the compensation herein provided.
(b) Additional Subject portfolios. In the event that the Series and JHMLICO
-----------------------------
desire to retain Sub-Manager to render investment advisory services hereunder
for any other Portfolio, they shall so notify Sub-Manager in writing. If it is
willing to render such services, Sub-Manager shall notify the Series in writing,
whereupon such Portfolio shall become a Subject Portfolio hereunder.
<PAGE>
(c) Independent Contractor. Sub-Manager 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.
2. PROVISION OF INVESTMENT MANAGEMENT SERVICES.
Sub-Manager will provide for the Subject Portfolio a continuing and suitable
investment program consistent with the investment policies, objectives and
restrictions of said Portfolio, as furnished to Sub-Manager by JHMLICO in
writing from time to time. 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 the Board of Trustees of the Series, JHMLICO and, as in effect from
time to time, the provisions of the Series' Declaration of Trust, Bylaws,
prospectus, statement of additional information (all as furnished to Sub-Manager
by JHMLICO in writing 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, all
as delivered to Sub-Manager in writing by JHMLICO or the Series from time to
time).
Sub-Manager will have investment discretion with respect to the Subject
Portfolio and will, at its own expense:
(a) upon request, advise the Series in connection with investment
decisions to be made by its Board of Trustees or any committee thereof regarding
the Subject Portfolio and furnish the Series with research, economic and
statistical data in connection with said Portfolio's investments and investment
policies;
-2-
<PAGE>
(b) submit such reports relating to the valuation of the Subject
Portfolio's securities as the Series' Board of Trustees may reasonably request;
(c) place orders for purchases and sales of portfolio investments for the
Subject Portfolio;
(d) maintain and preserve the records relating to its activities
hereunder, including those records required by the 1940 Act to be maintained by
it and preserved by the Series, to the extent not maintained by the Series'
custodian, transfer agent or JHMLICO; and
(e) subject to its receipt of all necessary voting materials, in its
discretion, as it deems advisable in the best interests of the Subject
Portfolio, vote any or all proxies with respect to investments of the Subject
Portfolio in accordance with Sub-Manager's proxy voting policy as most recently
provided to JHMLICO.
The Series and JHMLICO will provide timely information to the Sub-Manager
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, and all information as may be reasonably necessary or appropriate
in order for the Sub-Manager to perform its responsibilities hereunder. On its
own initiative, the Sub-Manager will apprise JHMLICO and the Series of important
developments materially affecting 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.
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:
(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) all taxes, including issuance and transfer taxes, and reserves for
taxes payable by the Series to federal, state or other governmental agencies;
and
(iii) 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.
-3-
<PAGE>
4. SUB-ADVISORY FEES.
For all of the services rendered as herein provided, JHMLICO shall pay to the
Sub-Manager a fee (for payment of which the Series shall have no obligation or
liability), with respect to the Subject Portfolio, at an effective annual rate
of 0.125% on the first $100 million of the Current Net Assets of such Portfolio,
0.10% on the next $100 million of the Current Net Assets of such Portfolio, and
0.06% on all Current Net Assets in excess of $200 million. The 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 termination shall be paid.
"Current Net Assets" of the Portfolio for purposes of computing the amount of
advisory fee accrued for any day shall mean the Portfolio's net assets as of the
most recent preceding day for which the Portfolio's net assets were computed.
5. PORTFOLIO TRANSACTIONS.
In connection with the investment and reinvestment of the assets of the
Subject Portfolio, the Sub-Manager 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. The Sub-Manager 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, the Sub-Manager 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 the Sub
Manager, 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. The Sub-Manager shall determine in good faith
that such higher cost was reasonable in relation to the value of the brokerage
and research services provided.
-4-
<PAGE>
The fees payable to the Sub-Manager by JHMLICO hereunder shall be reduced by
any tender offer solicitation fees or similar payments received by the Sub-
Manager, in connection with the tender of investments of any Portfolio (less
direct expenses incurred by the Sub-Manager in connection with obtaining such
fees or payments).
6. INFORMATION, RECORDS, AND CONFIDENTIALITY.
The Series shall own and control all records maintained hereunder by the Sub-
Manager on the Series' behalf and, in the event of termination of this Agreement
with respect to any Portfolio for any reason, all records (or true and complete
copies thereof) relating to that Portfolio shall be promptly returned to the
Series, free from any claim or retention of rights by the Sub-Manager. The Sub-
Manager 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 inspection by representatives of regulatory
authorities or other persons reasonably designated by the Series. The Sub-
Manager 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 in its possession or
reasonably available to it, requested by any insurance regulatory authorities to
determine whether all insurance laws and regulations are being complied with.
The Sub-Manager 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 (i) to Independence Investment Associates, Inc.,
John Hancock Assets Management, Inc. and John Hancock Subsidiaries, Inc., (ii)
if the Series or JHMLICO has authorized such disclosure, or (iii) if such
disclosure is expressly required by applicable federal or state regulatory
authorities or court proceedings.
The Sub-Manager 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 it.
7. LIABILITY.
No provision of this Agreement shall be deemed to protect the Sub-Manager 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
-5-
<PAGE>
negligence in the performance of its duties or the reckless disregard of its
obligations and duties under this Agreement or the Investment Management
Agreement, as applicable. 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.
8. DURATION AND TERMINATION OF THIS AGREEMENT.
(a) Duration. This Agreement shall become effective with respect to the
--------
International Equity Index Portfolio on the date hereof and, with respect to any
additional Subject Portfolio, on the date of receipt by the Series of notice
from the Sub-Manager 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 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 vote of the
trustees of the Series, by vote of a majority of the outstanding shares of such
Portfolio, by the Sub-Manager on at least sixty days' written notice to the
Series and JHMLICO, or by JHMLICO on at
-6-
<PAGE>
least sixty days' written notice to the Series and the Sub-Manager. Transactions
already entered into by the Sub-Manager but not yet settled at the time of any
such termination shall settle for the account of the Series.
(c) Automatic Termination. This Agreement shall automatically and
---------------------
immediately terminate in the event of its assignment or if the Investment
Management Agreement is terminated.
9. SERVICES NOT EXCLUSIVE.
The services of the Sub-Manager 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 the Sub-Manager 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.
Nothing in this Agreement shall limit or restrict the Sub-Manager or any of
its officers, affiliates or employees from buying, selling or trading in any
securities for its or their own accounts; provided, however, that no such person
shall purchase securities from or sell securities to the Subject Portfolio
except as permitted under applicable laws and regulations, including without
limitation the 1940 Act and the Investment Advisers Act of 1940, and the rules
and regulations thereunder. The Series acknowledges that the Sub-Manager and
its officers, affiliates and employees, and its and their other clients, may at
any time have, acquire, increase, decrease or dispose of positions in
investments which are at the same time being acquired or disposed of under this
Agreement. The Sub-Manager shall have no obligation to acquire for the Subject
Portfolio a position in any investment which the Sub-Manager, its officers,
affiliates or employees may acquire for their own accounts or for the accounts
of another client, if in the sole discretion of the Sub-Manager it is not
feasible or desirable to do so.
10. AVOIDANCE OF INCONSISTENT POSITION.
In connection with the purchase and sale of portfolio securities of the
Subject Portfolio, the Sub-Manager and its directors, officers and employees
will not act as principal or agent or receive any commission. Nothing in this
Agreement, however, shall preclude the combination of orders for the sale or
purchase of portfolio securities of the
-7-
<PAGE>
Subject Portfolio with those for other accounts managed by the Sub-Manager or
its affiliates, if orders are allocated in a manner deemed equitable by Sub-
Manager 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 signed by a duly
authorized officer of the party or parties intending to be bound thereby. 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. 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.
14. 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:
SUB-MANAGER: Independence International Associates, Inc.
53 State Street
Boston, MA 02109
-8-
<PAGE>
Attention:
Fax #: 617-
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
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the day first set forth above.
JOHN HANCOCK VARIABLE SERIES TRUST I
ATTEST:
By:
- -------------------------- ---------------------------------
Title:
- -------------------------- ------------------------------
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
ATTEST:
By:
- -------------------------- ---------------------------------
Title:
- -------------------------- ------------------------------
INDEPENDENCE INTERNATIONAL ASSOCIATES, INC.
ATTEST:
By:
- -------------------------- ---------------------------------
Title:
- -------------------------- ------------------------------
-9-
<PAGE>
Exhibit 5(z)
SUB-INVESTMENT MANAGEMENT AGREEMENT
AMONG
JOHN HANCOCK VARIABLE SERIES TRUST I
MONTGOMERY ASSET MANAGEMENT, LLC
AND
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
<PAGE>
SUB-INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made as of the ___ day of April, 1998 by and among John Hancock
Variable Series Trust I, a Massachusetts business trust (the "Series"),
Montgomery Asset Management, LLC, a Delaware limited liability company
("Montgomery"), 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 Montgomery are each engaged in the business of rendering
investment advice under the Investment Advisers Act of 1940; 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 Emerging Markets Equity 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 April 14, 1998 (the "Investment Management Agreement"), pursuant to which it
may contract with Montgomery 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. Montgomery is hereby appointed and Montgomery hereby
-----------------
accepts the appointment to act as investment adviser and manager to the Emerging
Markets Equity Portfolio (the "Subject Portfolio") for the period and on the
terms herein set forth, for the compensation herein provided. As of the date of
this Agreement, Montgomery is the sole sub-manager of the Subject Portfolio.
Although it is not contemplated that additional sub-managers will be employed
for any portion of the Subject Portfolio, if additional sub-managers are
employed by JHMLICO and the Series for the Subject Portfolio, Montgomery's
responsibility hereunder shall be limited to that portion of the Subject
Portfolio over which it retains investment discretion.
(b) Additional Subject Portfolios. In the event that the Series and JHMLICO
-----------------------------
desire to retain Montgomery to render investment advisory services hereunder for
any other Portfolio, they shall so notify Montgomery in writing. If it is
willing to render such services, Montgomery shall notify the Series in writing,
whereupon such Portfolio shall become a Subject Portfolio hereunder.
<PAGE>
(c) Incumbency Certificates. Montgomery shall furnish to JHMLICO,
-----------------------
immediately upon execution of this Agreement, a certificate of a senior officer
of Montgomery setting forth (by name and title, and including specimen
signatures) those officers of Montgomery who are authorized to make investment
decisions for the Subject Portfolio pursuant to the provisions of this
Agreement. Montgomery 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
Montgomery so named.
(d) Independent Contractor. Montgomery 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) Montgomery's Representations. Montgomery represents, warrants and
----------------------------
agrees (i) that it is registered as an investment adviser under the Investment
Advisers Act of 1940, and that it will remain so registered and will comply with
the requirements of said Act, and the rules and regulations thereunder, at all
times while this Agreement remains in effect, (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 Montgomery, or of any change in the identity of the senior
personnel who manage the Subject Portfolio, (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, and (v) that it has
furnished the Series and JHMLICO each with a copy of Montgomery' Form ADV, as
most recently filed with the SEC, and will promptly furnish copies of each
future material amendment thereto.
(f) JHMLICO's Representations. JHMLICO represents that the Series is an
-------------------------
"accredited investor" as defined in Rule 501(a)(3) of Regulation D under the
Securities Act of 1933 (the "1933 Act"), and a "qualified institutional buyer"
as defined in Rule 144A(a)(1) under the 1933 Act.
2. PROVISION OF INVESTMENT MANAGEMENT SERVICES.
Montgomery 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. From
time to time, JHMLICO or the Series may provide Montgomery with additional or
amended investment policies, guidelines and restrictions. Montgomery, 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
-2-
<PAGE>
state insurance laws and regulations or any directions or instructions delivered
to Montgomery in writing by JHMLICO or the Series from time to time). By its
signature below, Montgomery 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.
Montgomery 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, and a daily summary sufficient to verify trade
data received by the custodian from third parties for each transaction effected
for the Subject Portfolio, and promptly forward (or cause to be forwarded) 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
(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
Montgomery's proxy voting policy as most recently provided to JHMLICO.
On its own initiative, Montgomery 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
-3-
<PAGE>
appropriate for this purpose. Montgomery will also make its personnel available
in Boston or other reasonable locations as often as annually to discuss the
Subject Portfolio and Montgomery's 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 Montgomery
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 Montgomery 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 Montgomery 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 Montgomery a fee (for the payment of which
the Series shall have no 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.
-4-
<PAGE>
5. PORTFOLIO TRANSACTIONS.
In connection with the investment and reinvestment of the assets of the
Subject Portfolio, Montgomery 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. Montgomery 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, Montgomery 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 Montgomery, 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.
Montgomery shall determine in good faith that such higher cost was reasonable in
relation to the value of the brokerage and research services provided.
Montgomery 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
Montgomery 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 Montgomery, provided that (subject to the last paragraph
of this Section 6) Montgomery may retain copies of such records. Montgomery
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. Montgomery
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. Montgomery 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
Montgomery.
Montgomery 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.
-5-
<PAGE>
7. LIABILITY; STANDARD OF CARE.
No provision of this Agreement shall be deemed to protect Montgomery 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, Montgomery 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 on the date hereof and, with respect to any additional Subject
Portfolio, on the date of receipt by the Series of notice from Montgomery 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 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
-6-
<PAGE>
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 Montgomery and JHMLICO. This
Agreement may be terminated by Montgomery 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 Montgomery.
(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 MONTGOMERY'S NAME AND LOGO.
The services of Montgomery 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 Montgomery 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-transferrable right to use Montgomery's 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 Montgomery,
JHMLICO shall consult with Montgomery and shall furnish to Montgomery a copy of
such materials. Montgomery agrees to cooperate with JHMLICO and to review such
materials promptly. JHMLICO shall not distribute such materials if Montgomery
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, Montgomery and its directors, officers and employees will not
act as principal or agent or receive any 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 and portfolios or accounts of other advisory clients
managed by Montgomery or its affiliates, if orders are allocated in a manner
deemed equitable by Montgomery among the accounts and at a price approximately
averaged.
-7-
<PAGE>
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:
SUB-MANAGER: Montgomery Asset Management, LLC
101 California Street
San Francisco, CA 94117
Attn: Dana Schmidt
Fax #: 415-248-6520
JHMLICO: John Hancock Mutual Life Insurance Company
200 Clarendon Street
P.O. Box 111
Boston, MA 02117
Attention: Raymod F. Skiba
Fax #: 617-572-4953
SERIES: John Hancock Variable Series Trust I
200 Clarendon Street
P.O. Box 111
Boston, MA 02117
Attention: Raymod F. Skiba
Fax #: 617-572-4953
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<PAGE>
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.
16. CLIENT INFORMATION.
JHMLICO and the Series hereby consent to the disclosure to third parties by
Montgomery of (i) the identity of JHMLICO or the Series as a part of any
representative list of other clients of Montgomery, (ii) investment results and
other data of the Subject Portfolio (other than the identity of JHMLICO or the
Series) in connection with providing composite investment results of clients of
Montgomery, and (iii) investments and transactions of the Subject Portfolio
(other than the identity of JHMLICO or the Series) in connection with providing
composite information of clients of Montgomery.
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
/s/ Sandra M. DaDalt By: /s/ Henry D. Shaw
Assistant Secretary -------------------------------
Title: Chairman and CEO
ATTEST: JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
/s/ Antoniette Ricci By: /s/ Robert R. Reitano
Assistant Secretary -------------------------------
Title: Vice President
ATTEST: MONTGOMERY ASSET MANAGEMENT, LLC
By:
-------------------------------
Title: Executive Vice President
<PAGE>
SCHEDULE I
FEES
----
Current Net Assets Under Management Sub-Advisory Fee
----------------------------------- ----------------
On the first $10,000,000 110 basis points (1.10%) per annum
On the next $140,000,000 90 basis points (0.90%) per annum
On amounts over $150,000,000 80 basis points (0.80%) per annum
<PAGE>
Exhibit 5(aa)
SUB-INVESTMENT MANAGEMENT AGREEMENT
AMONG
JOHN HANCOCK VARIABLE SERIES TRUST I
MELLON BOND ASSOCIATES, LLP
AND
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
<PAGE>
SUB-INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made as of the 20th day of April, 1998 by and among John Hancock
Variable Series Trust I, a Massachusetts business trust (the "Series"), Mellon
Bond Associates, LLP, a Pennsylvania limited liability partnership ("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 under the Investment Advisers Act of 1940; 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 Bond 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 April 14, 1998 (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 to act as investment adviser and manager to the Bond
Index Portfolio (the "Subject Portfolio") for the period and on the terms herein
set forth, for the compensation herein provided.
(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 registered as an investment adviser under the Investment Advisers Act
of 1940, and that it will remain so registered and will comply with the
requirements of said Act, and the rules and regulations thereunder, at all times
while this Agreement remains in effect, (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, (iv) that it has adopted a Confidential
Information and Securities Trading Policy which is described in Advisers' Form
ADV and which complies with the requirements of Rule 17j-1 of the Securities and
Exchange Commission (the "SEC") under the 1940 Act, and has adopted procedures
designed to prevent violations of such policy, and (v) that it has furnished the
Series and JHMLICO each with a copy of Advisers' Form ADV, as most recently
filed with the SEC, and will promptly furnish copies of each future amendment
thereto.
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
communicated to Advisers in writing. From time to time, JHMLICO or the Series
shall promptly provide Advisers with any additional or amended investment
policies, guidelines and restrictions in writing. 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 and as
communicated in writing to Advisers 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 as may be delivered to Advisers in writing by JHMLICO or the
Series from time to time). By its signature below, Advisers
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<PAGE>
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 Subject 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, electronic access to trade records, or other means
to verify trade data received by the custodian from third parties 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 Subject 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
(h) absent specific written 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.
-3-
<PAGE>
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 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 best execution with respect to all such purchases
-4-
<PAGE>
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 after considering the potential 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 Advisers, and who charge a higher
commission rate to the Subject Portfolio than may result when allocating
brokerage solely on the basis of best 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 Subject 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 Subject Portfolio for any reason, all records relating to that
Subject 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 with respect to the
Subject Portfolio's transactions in accordance with the 1940 Act and rules
thereunder, including but not limited to subparagraphs (b)(5),(6),(7),(9),(10)
and (11) and paragraph (f) of Rule 31a-1, and to supply all information
requested by any insurance regulatory authorities to determine whether all
insurance laws and regulations are being complied with. For the duration of
this Agreement, Advisers shall preserve for the periods prescribed by Rule 31a-2
under the 1940 Act any such records as are required to be maintained by it
pursuant to this Agreement and shall transfer said records to JHMLICO upon
termination of this Agreement. 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
-5-
<PAGE>
of its obligations and duties under this Agreement or, with respect to JHMLICO,
under 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 as communicated to it in writing; 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 on the date 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 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 Subject 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
-6-
<PAGE>
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
Subject 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. 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. 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 Subject 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 Subject 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.
-7-
<PAGE>
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: Mellon Bond Associates
One Mellon Bank Center
Suite 4135
Pittsburgh, PA 15258-0001
Attention: Paul R. McCann, President and CEO
Fax #: 412-234-9763
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.
-8-
<PAGE>
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
/s/ Sandra M. DaDalt By: /s/ Henry D. Shaw
Assistant Secretary -------------------------------
Title: Chairman and CEO
ATTEST: JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
/s/ Antoniette Ricci By: /s/ Robert R. Reitano
Assistant Secretary -------------------------------
Title: Vice President
ATTEST: MELLON BOND ASSOCIATES, LLP
/s/ Robert W. Gray By: /s/ Paul R. McCann
Vice President -------------------------------
Title: President and CEO
<PAGE>
SCHEDULE I
FEES
----
Current Net Assets Under Management Sub-Advisory Fee
- ----------------------------------- ----------------
On the first $100,000,000 8 basis points (0.08%) per annum
On the next $150,000,000 6 basis points (0.06%) per annum
On amounts over $250,000,000 4 basis points (0.04%) per annum
<PAGE>
Exhibit 5(bb)
SUB-INVESTMENT MANAGEMENT AGREEMENT
AMONG
JOHN HANCOCK VARIABLE SERIES TRUST I
WELLINGTON MANAGEMENT COMPANY, LLP
AND
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
<PAGE>
SUB-INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made as of the 20th day of April, 1998 by and among John Hancock
Variable Series Trust I, a Massachusetts business trust (the "Series"),
Wellington Management Company, LLP, a Massachusetts limited liability
partnership ("Wellington Management"), 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 Wellington Management are each engaged in the business
of rendering investment advice under the Investment Advisers Act of 1940; 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 High Yield 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 April 14, 1998 (the "Investment Management Agreement"), pursuant to which it
may contract with Wellington Management 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. Wellington Management is hereby appointed and
-----------------
Wellington Management hereby accepts the appointment to act as investment
adviser and manager to the High Yield Portfolio (the "Subject Portfolio") for
the period and on the terms herein set forth, for the compensation herein
provided.
(b) Additional Subject Portfolios. In the event that the Series and JHMLICO
-----------------------------
desire to retain Wellington Management to render investment advisory services
hereunder for any other Portfolio, they shall so notify Wellington Management in
writing. If it is willing to render such services, Wellington Management shall
notify the Series in writing, whereupon such Portfolio shall become a Subject
Portfolio hereunder.
<PAGE>
(c) Incumbency Certificates. Wellington Management shall furnish to
-----------------------
JHMLICO, immediately upon execution of this Agreement, a certificate of a senior
officer of Wellington Management setting forth (by name and title, and including
specimen signatures) those officers of Wellington Management who are authorized
to give instructions for the Subject Portfolio pursuant to the provisions of
this Agreement. Wellington Management 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
Wellington Management so named.
(d) Independent Contractor. Wellington Management 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) Wellington Management's Representations. Wellington Management
---------------------------------------
represents, warrants and agrees (i) that it is registered as an investment
adviser under the Investment Advisers Act of 1940, and that it will remain so
registered and will comply with the requirements of said Act, and the rules and
regulations thereunder, at all times while this Agreement remains in effect,
(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 ownership of Wellington Management, or of any change in
the identity of the personnel who manage the Subject Portfolio, (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, and (v) that
it has furnished the Series and JHMLICO each with a copy of Wellington
Management' Form ADV, as most recently filed with the SEC, and will promptly
furnish copies of each future amendment thereto.
2. PROVISION OF INVESTMENT MANAGEMENT SERVICES.
Wellington Management 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.
From time to time, JHMLICO or the Series may provide Wellington Management with
additional or amended investment policies, guidelines and restrictions.
Wellington Management, 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 other
directions or instructions delivered to Wellington Management in writing by
JHMLICO or
-2-
<PAGE>
the Series from time to time). By its signature below, Wellington Management
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.
Wellington Management 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 or prior to the close of business each day, provide JHMLICO and the
custodian with trade information for each transaction effected for the Subject
Portfolio, and promptly provide to the custodian information on all brokerage or
dealer confirmations;
(g) as soon as practicable following the end of each calendar month, provide
JHMLICO with information on 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
(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
Wellington Management's proxy voting policy as most recently provided to
JHMLICO.
On its own initiative, Wellington Management 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. Wellington Management will also make its personnel available in Boston
or other reasonable locations as often as quarterly to discuss the Subject
Portfolio and Wellington Management's management thereof, to educate JHMLICO
sales personnel with respect thereto, and for such other purposes as the Series
or JHMLICO may reasonably request.
-3-
<PAGE>
The Series and JHMLICO will provide timely information to Wellington
Management 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 Wellington Management
with 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 Wellington Management 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 Wellington Management a fee (for the
payment of which the Series shall have no 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, Wellington Management is authorized to select the brokers or
dealers that will execute purchase and most favorable execution with respect to
all such purchases and sales of portfolio securities for said Portfolio.
Wellington Management shall maintain records adequate to demonstrate
-4-
<PAGE>
compliance with this requirement. Subject to this primary requirement, and
maintaining as its first consideration the benefits to the Subject Portfolio and
its shareholders, Wellington Management 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 Wellington
Management, 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. Wellington Management shall determine in
good faith that such higher cost was reasonable in relation to the value of the
brokerage and research services provided.
Wellington Management 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
Wellington Management 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 Wellington Management, provided that
(subject to the last paragraph of this Section 6) Wellington Management may
retain copies of such records. Wellington Management 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. Wellington Management 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, to the extent such records are not maintained by the custodian,
transfer agent or JHMLICO, and to supply all information requested by any
insurance regulatory authorities to determine whether all insurance laws and
regulations are being complied with. Wellington Management 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 Wellington Management.
Wellington Management 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 Wellington
Management 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
-5-
<PAGE>
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, Wellington Management 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 on the date hereof and, with respect to any additional Subject
Portfolio, on the date of receipt by the Series of notice from Wellington
Management 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 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 written notice thereof to Wellington Management and
-6-
<PAGE>
JHMLICO. This Agreement may be terminated by Wellington Management 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 Wellington Management.
(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 WELLINGTON MANAGEMENT'S NAME AND LOGO.
The services of Wellington Management 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 Wellington Management 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, subject to Wellington Management's consent
(which consent shall not be unreasonably withheld and which may be presumed
unless an objection is made to a proposed use as hereinafter provided), JHMLICO
and the Series shall have the non-exclusive and non-transferrable right to use
Wellington Management's 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
printing or distributing of any materials which refer to Wellington Management,
JHMLICO shall consult with Wellington Management and shall furnish to Wellington
Management a copy of such materials. Wellington Management agrees to cooperate
with JHMLICO and to review such materials promptly. JHMLICO shall not print or
distribute such materials if Wellington Management 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, Wellington Management and its directors, officers and
employees will not act as principal or agent or receive any 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 Wellington Management or its
affiliates, if orders are allocated in a manner deemed equitable by Wellington
Management 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
-7-
<PAGE>
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:
SUB-MANAGER: Wellington Management Company, LLP
75 State Street
Boston, MA 02109
Attention: Legal Department
Fax #: 617-790-7760
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.
-8-
<PAGE>
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
/s/ Sandra M. DaDalt By: /s/ Henry D. Shaw
Assistant Secretary ------------------------
Title: Chairman and CEO
ATTEST: JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
/s/ Antoniette Ricci By: /s/ Robert R. Reitano
Assistant Secretary ------------------------
Title: Vice President
ATTEST: WELLINGTON MANAGEMENT
COMPANY, LLP
/s/ Christine C. Carsman By: /s/ Robert W. Doran
Vice President ------------------------
Title: Chairman
<PAGE>
SCHEDULE I
FEES
----
Current Net Assets Under Management Sub-Advisory Fee
----------------------------------- ----------------
On the first $100,000,000 50 basis points (0.50%)
per annum
On the next $100,000,000 45 basis points (0.45%)
per annum
On amounts over $200,000,000 35 basis points (0.35%)
per annum
<PAGE>
John Hancock Variable Series Trust I Exhibit 8.c
Henry D. Shaw
Chairman and Chief Executive Officer
[LOGO OF JOHN HANCOCK (R) APPEARS HERE]
April 14, 1998
State Street Bank and Trust Company
P.O. Box 9111
Boston, MA 02209-9111
Attention: William Marvin
Re: Amended and Restated Custodian Agreement
dated as of January 30, 1995, as amended
----------------------------------------
Gentlemen:
This letter will memorialize our mutual agreement to add to the above-
referenced Custodian Agreement, effective as of May 1, 1998, the following five
portfolios of the John Hancock Variable Series Trust I: Small/Mid Cap CORE
Portfolio; High Yield Bond Portfolio; Bond Index Portfolio; Global Equity
Portfolio; and Emerging Markets Equity Portfolio. In addition, effective May 1,
1998, the investment policy of the International Equities Portfolio will be
changed, Independence International Associates, Inc. will become its Sub-
Investment Manager, and the portfolio will be renamed the International Equity
Index Portfolio. Finally, effective May 1, 1998, the Special Opportunities
Portfolio will be renamed the Diversified Mid Cap Growth Portfolio, and the
Short Term US Government Portfolio will be renamed the Short Term Bond
Portfolio.
Attached is a revised copy of Appendix A to the Custodian Agreement
which reflects all of the Portfolios that are now subject to the Custodian
Agreement, including the five portfolios named above. Please substitute copies
of the attached Appendix A for the old copies of Appendix A in your files.
Kindly acknowledge receipt of this letter and the attachment, and your
agreement with the terms hereof, by signing and returning the duplicate of this
letter. Thank you.
Sincerely,
JOHN HANCOCK VARIABLE
SERIES TRUST I
/s/ Henry D. Shaw
Henry D. Shaw
Chairman and CEO
<PAGE>
Received and agreed to:
STATE STREET BANK AND TRUST COMPANY
By: /s/ William M. Marvin
-----------------------------
Name: William M. Marvin
---------------------------
Title: Vice President
---------------------------
<PAGE>
APPENDIX A
Name of Portfolio Portfolio Sub-Manager
----------------- ---------------------
<TABLE>
<CAPTION>
<S> <C> <C>
1. International Equity Index Portfolio Independence International Associates, Inc.
2. Diversified Mid Cap Growth Portfolio John Hancock Advisers, Inc.
3. Small Cap Growth Portfolio John Hancock Advisers, Inc.
4. Small Cap Value Portfolio INVESCO Management & Research, Inc.
5. Mid Cap Growth Portfolio Janus Capital Corporation
6. Mid Cap Value Portfolio Neuberger & Berman L.P.
7. International Balanced Portfolio Brinson Partners, Inc.
8. International Opportunities Portfolio Rowe Price-Fleming International, Inc.
9. Large Cap Value Portfolio T. Rowe Price Associates, Inc.
10. Strategic Bond Portfolio J.P. Morgan Investment Management Inc.
11. Equity Index Portfolio State Street Bank and Trust Company
12. Managed Portfolio Independence Investment Associates, Inc.
13. Money Market Portfolio John Hancock Mutual Life Insurance Company
14. Large Cap Growth Portfolio Independence Investment Associates, Inc.
15. Growth and Income Portfolio Independence Investment Associates, Inc.
16. Real Estate Equity Portfolio Independence Investment Associates, Inc.
17. Short Term Bond Portfolio Independence Investment Associates, Inc.
18. Sovereign Bond Portfolio John Hancock Advisers, Inc.
19. Small/Mid Cap CORE Portfolio Goldman Sachs Asset Management (a division of
Goldman, Sachs & Co.)
20. High Yield Bond Portfolio Wellington Management Company, LLP
21. Bond Index Portfolio Mellon Bond Associates, LLP
22. Global Equity Portfolio Scudder Kemper Investments, Inc.
23. Emerging Markets Equity Portfolio Montgomery Asset Management, LLC
</TABLE>
<PAGE>
EXHIBIT 11(a)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference 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 19 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 into the Statement of
Additional Information of our report dated February 6, 1998 on the financial
statements included in the Annual Report of the John Hancock Variable Series
Trust I for the year ended December 31, 1997.
/s/ ERNST & YOUNG, LLP
Boston, Massachusetts
April 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN
HANCOCK VARIABLE SERIES TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785303
<NAME> JOHN HANCOCK VARIABLE SERIES TRUST I
<SERIES>
<NUMBER> 1
<NAME> LARGE CAP GROWTH
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 597,368
<INVESTMENTS-AT-VALUE> 753,059
<RECEIVABLES> 1,437
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 754,496
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 98
<TOTAL-LIABILITIES> 98
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 603,554
<SHARES-COMMON-STOCK> 36,236
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,050)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 151,894
<NET-ASSETS> 754,398
<DIVIDEND-INCOME> 7,924
<INTEREST-INCOME> 525
<OTHER-INCOME> 0
<EXPENSES-NET> 2,843
<NET-INVESTMENT-INCOME> 5,606
<REALIZED-GAINS-CURRENT> 62,455
<APPREC-INCREASE-CURRENT> 101,020
<NET-CHANGE-FROM-OPS> 169,081
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,606)
<DISTRIBUTIONS-OF-GAINS> (62,455)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,923
<NUMBER-OF-SHARES-REDEEMED> (2,941)
<SHARES-REINVESTED> 3,289
<NET-CHANGE-IN-ASSETS> 230,253
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,520
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,843
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 17.49
<PER-SHARE-NII> 0.17
<PER-SHARE-GAIN-APPREC> 5.21
<PER-SHARE-DIVIDEND> (0.17)
<PER-SHARE-DISTRIBUTIONS> (1.88)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.82
<EXPENSE-RATIO> 0.44
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN
HANCOCK VARIABLE SERIES TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERNCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785303
<NAME> JOHN HANCOCK VARIABLE SERIES TRUST I
<SERIES>
<NUMBER> 2
<NAME> SOVEREIGN BOND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 738,165
<INVESTMENTS-AT-VALUE> 810,787
<RECEIVABLES> 13,547
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1,568
<TOTAL-ASSETS> 825,902
<PAYABLE-FOR-SECURITIES> 21,967
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 165
<TOTAL-LIABILITIES> 22,132
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 775,414
<SHARES-COMMON-STOCK> 80,789
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,937
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 24,143
<NET-ASSETS> 803,770
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 56,352
<OTHER-INCOME> 0
<EXPENSES-NET> 2,310
<NET-INVESTMENT-INCOME> 54,042
<REALIZED-GAINS-CURRENT> 5,170
<APPREC-INCREASE-CURRENT> 13,744
<NET-CHANGE-FROM-OPS> 72,956
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (54,042)
<DISTRIBUTIONS-OF-GAINS> (5,170)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,549
<NUMBER-OF-SHARES-REDEEMED> (8,085)
<SHARES-REINVESTED> 6,020
<NET-CHANGE-IN-ASSETS> 77,659
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,881
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,310
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 9.77
<PER-SHARE-NII> .71
<PER-SHARE-GAIN-APPREC> .24
<PER-SHARE-DIVIDEND> (.71)
<PER-SHARE-DISTRIBUTIONS> (.06)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.95
<EXPENSE-RATIO> .31
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN HANCOCK
VARIABLE SERIES TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785303
<NAME> JOHN HANCOCK VARIABLE SERIES TRUST I
<SERIES>
<NUMBER> 3
<NAME> MONEY MARKET
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 228,185
<INVESTMENTS-AT-VALUE> 228,185
<RECEIVABLES> 1,320
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 229,443
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 63
<TOTAL-LIABILITIES> 63
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 229,443
<SHARES-COMMON-STOCK> 22,944
<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> 22,944
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,734
<OTHER-INCOME> 0
<EXPENSES-NET> 735
<NET-INVESTMENT-INCOME> 11,999
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 11,999
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (11,999)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18,333
<NUMBER-OF-SHARES-REDEEMED> (17,913)
<SHARES-REINVESTED> 1,200
<NET-CHANGE-IN-ASSETS> 16,028
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 564
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 735
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (.53)
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.53)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> .33
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN
HANCOCK VARIABLE SERIES TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785303
<NAME> JOHN HANCOCK VARIABLE SERIES TRUST I
<SERIES>
<NUMBER> 4
<NAME> GROWTH & INCOME
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 2,057,385
<INVESTMENTS-AT-VALUE> 2,787,525
<RECEIVABLES> 5,836
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,787,361
<PAYABLE-FOR-SECURITIES> 1,032
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 365
<TOTAL-LIABILITIES> 1,397
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,152,150
<SHARES-COMMON-STOCK> 167,773
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 1,482
<ACCUMULATED-NET-GAINS> (362)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 632,694
<NET-ASSETS> 2,785,964
<DIVIDEND-INCOME> 43,249
<INTEREST-INCOME> 3,271
<OTHER-INCOME> 0
<EXPENSES-NET> 6,944
<NET-INVESTMENT-INCOME> 39,576
<REALIZED-GAINS-CURRENT> 313,348
<APPREC-INCREASE-CURRENT> 272,766
<NET-CHANGE-FROM-OPS> 625,690
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (39,576)
<DISTRIBUTIONS-OF-GAINS> (313,348)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15,437
<NUMBER-OF-SHARES-REDEEMED> (8,699)
<SHARES-REINVESTED> 21,287
<NET-CHANGE-IN-ASSETS> 738,037
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,126
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,944
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 14.65
<PER-SHARE-NII> .27
<PER-SHARE-GAIN-APPREC> 4.07
<PER-SHARE-DIVIDEND> (.27)
<PER-SHARE-DISTRIBUTIONS> (2.11)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.61
<EXPENSE-RATIO> .69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN
HANCOCK VARIABLE SERIES TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785303
<NAME> JOHN HANCOCK VARIABLE SERIES TRUST I
<SERIES>
<NUMBER> 5
<NAME> MANAGED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 2,422,183
<INVESTMENTS-AT-VALUE> 2,780,465
<RECEIVABLES> 257,141
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,037,606
<PAYABLE-FOR-SECURITIES> 237,170
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 390
<TOTAL-LIABILITIES> 237,479
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,455,752
<SHARES-COMMON-STOCK> 195,139
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (921)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 345,296
<NET-ASSETS> 2,800,127
<DIVIDEND-INCOME> 22,739
<INTEREST-INCOME> 94,915
<OTHER-INCOME> 0
<EXPENSES-NET> 9,551
<NET-INVESTMENT-INCOME> 108,103
<REALIZED-GAINS-CURRENT> 157,179
<APPREC-INCREASE-CURRENT> 2,272,766
<NET-CHANGE-FROM-OPS> 444,378
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (108,103)
<DISTRIBUTIONS-OF-GAINS> (142,668)
<DISTRIBUTIONS-OTHER> (14,546)
<NUMBER-OF-SHARES-SOLD> 13,184
<NUMBER-OF-SHARES-REDEEMED> (15,347)
<SHARES-REINVESTED> 18,557
<NET-CHANGE-IN-ASSETS> 413,467
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 8,515
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9,515
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 13.35
<PER-SHARE-NII> .59
<PER-SHARE-GAIN-APPREC> 1.03
<PER-SHARE-DIVIDEND> (.59)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.08
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN
HANCOCK VARIABLE SERIES TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785303
<NAME> JOHN HANCOCK VARIABLE SERIES TRUST I
<SERIES>
<NUMBER> 6
<NAME> INTERNATIONAL EQUITIES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 140,720
<INVESTMENTS-AT-VALUE> 148,376
<RECEIVABLES> 5,720
<ASSETS-OTHER> 3,276
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 157,372
<PAYABLE-FOR-SECURITIES> 4,861
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 152
<TOTAL-LIABILITIES> 5,013
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 148,887
<SHARES-COMMON-STOCK> 10,024
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 262
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,210
<NET-ASSETS> 152,359
<DIVIDEND-INCOME> 2,302
<INTEREST-INCOME> 230
<OTHER-INCOME> 0
<EXPENSES-NET> 1,269
<NET-INVESTMENT-INCOME> 1,263
<REALIZED-GAINS-CURRENT> 6,237
<APPREC-INCREASE-CURRENT> (15,763)
<NET-CHANGE-FROM-OPS> (8,260)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,251)
<DISTRIBUTIONS-OF-GAINS> (6,315)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,174
<NUMBER-OF-SHARES-REDEEMED> (1,893)
<SHARES-REINVESTED> 489
<NET-CHANGE-IN-ASSETS> (3,394)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 968
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,269
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 16.83
<PER-SHARE-NII> 0.13
<PER-SHARE-GAIN-APPREC> (.97)
<PER-SHARE-DIVIDEND> (.13)
<PER-SHARE-DISTRIBUTIONS> (.66)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.20
<EXPENSE-RATIO> .79
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN
HANCOCK VARIABLE SERIES TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785303
<NAME> JOHN HANCOCK VARIABLE SERIES TRUST I
<SERIES>
<NUMBER> 7
<NAME> REAL ESTATE EQUITY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 152,813
<INVESTMENTS-AT-VALUE> 203,444
<RECEIVABLES> 1,111
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 204,554
<PAYABLE-FOR-SECURITIES> 372
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 51
<TOTAL-LIABILITIES> 423
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 156,732
<SHARES-COMMON-STOCK> 12,830
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 1,170
<ACCUMULATED-NET-GAINS> (15)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 46,244
<NET-ASSETS> 204,131
<DIVIDEND-INCOME> 9,895
<INTEREST-INCOME> 298
<OTHER-INCOME> 0
<EXPENSES-NET> 1,212
<NET-INVESTMENT-INCOME> 8,981
<REALIZED-GAINS-CURRENT> 5,143
<APPREC-INCREASE-CURRENT> 14,800
<NET-CHANGE-FROM-OPS> 28,924
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,255)
<DISTRIBUTIONS-OF-GAINS> (5,072)
<DISTRIBUTIONS-OTHER> (726)
<NUMBER-OF-SHARES-SOLD> 3,046
<NUMBER-OF-SHARES-REDEEMED> (2,446)
<SHARES-REINVESTED> 905
<NET-CHANGE-IN-ASSETS> 53,026
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,053
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,944
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 14.64
<PER-SHARE-NII> 0.77
<PER-SHARE-GAIN-APPREC> 1.68
<PER-SHARE-DIVIDEND> (0.71)
<PER-SHARE-DISTRIBUTIONS> (0.41)
<RETURNS-OF-CAPITAL> (0.06)
<PER-SHARE-NAV-END> 15.91
<EXPENSE-RATIO> 0.69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN
HANCOCK VARIABLE SERIES TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785303
<NAME> JOHN HANCOCK VARIABLE SERIES TRUST I
<SERIES>
<NUMBER> 8
<NAME> SPECIAL OPPORTUNITIES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 179,567
<INVESTMENTS-AT-VALUE> 208,965
<RECEIVABLES> 9,908
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 218,063
<PAYABLE-FOR-SECURITIES> 4,381
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 70
<TOTAL-LIABILITIES> 4,451
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 193,843
<SHARES-COMMON-STOCK> 13,884
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,487
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,278
<NET-ASSETS> 213,612
<DIVIDEND-INCOME> 1,303
<INTEREST-INCOME> 650
<OTHER-INCOME> 0
<EXPENSES-NET> 1,771
<NET-INVESTMENT-INCOME> 182
<REALIZED-GAINS-CURRENT> 23,003
<APPREC-INCREASE-CURRENT> (14,445)
<NET-CHANGE-FROM-OPS> 8,740
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (182)
<DISTRIBUTIONS-OF-GAINS> (21,000)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,921
<NUMBER-OF-SHARES-REDEEMED> (757)
<SHARES-REINVESTED> 452
<NET-CHANGE-IN-ASSETS> 19,504
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,565
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,771
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 16.52
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> 0.56
<PER-SHARE-DIVIDEND> (0.01)
<PER-SHARE-DISTRIBUTIONS> (1.69)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.39
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN
HANCOCK VARIABLE SERIES TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785303
<NAME> JOHN HANCOCK VARIABLE SERIES TRUST I
<SERIES>
<NUMBER> 9
<NAME> SHORT TERM U.S. GOVERNMENT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 48,349
<INVESTMENTS-AT-VALUE> 50,499
<RECEIVABLES> 675
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 51,174
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 54
<TOTAL-LIABILITIES> 54
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 51,161
<SHARES-COMMON-STOCK> 5,070
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 8
<ACCUMULATED-NET-GAINS> (66)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17
<NET-ASSETS> 51,120
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,773
<OTHER-INCOME> 0
<EXPENSES-NET> 345
<NET-INVESTMENT-INCOME> 3,428
<REALIZED-GAINS-CURRENT> (31)
<APPREC-INCREASE-CURRENT> 374
<NET-CHANGE-FROM-OPS> 3,771
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,466)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,595
<NUMBER-OF-SHARES-REDEEMED> (3,708)
<SHARES-REINVESTED> 343
<NET-CHANGE-IN-ASSETS> (7,556)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 220
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 345
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.05
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> 0.03
<PER-SHARE-DIVIDEND> (0.59)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.08
<EXPENSE-RATIO> 0.68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN
HANCOCK VARIABLE SERIES TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785303
<NAME> JOHN HANCOCK VARIABLE SERIES TRUST I
<SERIES>
<NUMBER> 10
<NAME> SMALL CAP GROWTH
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 40,147
<INVESTMENTS-AT-VALUE> 48,743
<RECEIVABLES> 301
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 49,085
<PAYABLE-FOR-SECURITIES> 310
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14
<TOTAL-LIABILITIES> 324
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 44,869
<SHARES-COMMON-STOCK> 4,298
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,774)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,667
<NET-ASSETS> 48,761
<DIVIDEND-INCOME> 112
<INTEREST-INCOME> 130
<OTHER-INCOME> 0
<EXPENSES-NET> 335
<NET-INVESTMENT-INCOME> (93)
<REALIZED-GAINS-CURRENT> (1,285)
<APPREC-INCREASE-CURRENT> 5,855
<NET-CHANGE-FROM-OPS> 24,477
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (19)
<NUMBER-OF-SHARES-SOLD> 3,175
<NUMBER-OF-SHARES-REDEEMED> (956)
<SHARES-REINVESTED> 2
<NET-CHANGE-IN-ASSETS> 28,128
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 251
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 373
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 9.93
<PER-SHARE-NII> (.02)
<PER-SHARE-GAIN-APPREC> 1.44
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.01)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.34
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN
HANCOCK VARIABLE SERIES TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785303
<NAME> JOHN HANCOCK VARIABLE SERIES TRUST I
<SERIES>
<NUMBER> 11
<NAME> INTERNATIONAL BALANCED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 24,296
<INVESTMENTS-AT-VALUE> 24,976
<RECEIVABLES> 373
<ASSETS-OTHER> 251
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 25,600
<PAYABLE-FOR-SECURITIES> 41
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 139
<TOTAL-LIABILITIES> 180
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25,289
<SHARES-COMMON-STOCK> 2,514
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (124)
<ACCUMULATED-NET-GAINS> 119
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 136
<NET-ASSETS> 25,420
<DIVIDEND-INCOME> 316
<INTEREST-INCOME> 765
<OTHER-INCOME> 0
<EXPENSES-NET> 278
<NET-INVESTMENT-INCOME> 803
<REALIZED-GAINS-CURRENT> 533
<APPREC-INCREASE-CURRENT> (530)
<NET-CHANGE-FROM-OPS> 618
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (793)
<DISTRIBUTIONS-OF-GAINS> (530)
<DISTRIBUTIONS-OTHER> (29)
<NUMBER-OF-SHARES-SOLD> 863
<NUMBER-OF-SHARES-REDEEMED> 798
<SHARES-REINVESTED> 130
<NET-CHANGE-IN-ASSETS> 1,322
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 215
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 394
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.39
<PER-SHARE-NII> 0.33
<PER-SHARE-GAIN-APPREC> (.05)
<PER-SHARE-DIVIDEND> (0.33)
<PER-SHARE-DISTRIBUTIONS> (0.22)
<RETURNS-OF-CAPITAL> (.01)
<PER-SHARE-NAV-END> 10.11
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN
HANCOCK VARIABLE SERIES TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785303
<NAME> JOHN HANCOCK VARIABLE SERIES TRUST I
<SERIES>
<NUMBER> 12
<NAME> MID CAP GROWTH
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 32,059
<INVESTMENTS-AT-VALUE> 40,313
<RECEIVABLES> 1,037
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 41,350
<PAYABLE-FOR-SECURITIES> 1,041
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 74
<TOTAL-LIABILITIES> 1,115
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 34,538
<SHARES-COMMON-STOCK> 3,374
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (12)
<ACCUMULATED-NET-GAINS> (503)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,212
<NET-ASSETS> 40,235
<DIVIDEND-INCOME> 91
<INTEREST-INCOME> 136
<OTHER-INCOME> 0
<EXPENSES-NET> 298
<NET-INVESTMENT-INCOME> (71)
<REALIZED-GAINS-CURRENT> (165)
<APPREC-INCREASE-CURRENT> 5,635
<NET-CHANGE-FROM-OPS> 5,357
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,214
<NUMBER-OF-SHARES-REDEEMED> (454)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 23,743
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 230
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 383
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.22
<PER-SHARE-NII> (0.02)
<PER-SHARE-GAIN-APPREC> 1.73
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.93
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN
HANCOCK VARIABLE SERIES TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785303
<NAME> JOHN HANCOCK VARIABLE SERIES TRUST I
<SERIES>
<NUMBER> 13
<NAME> LARGE CAP VALUE
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 58,211
<INVESTMENTS-AT-VALUE> 73,126
<RECEIVABLES> 465
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 75,591
<PAYABLE-FOR-SECURITIES> 305
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17
<TOTAL-LIABILITIES> 322
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 64,194
<SHARES-COMMON-STOCK> 5,399
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 12
<ACCUMULATED-NET-GAINS> (10)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,073
<NET-ASSETS> 73,269
<DIVIDEND-INCOME> 1,187
<INTEREST-INCOME> 309
<OTHER-INCOME> 0
<EXPENSES-NET> 439
<NET-INVESTMENT-INCOME> 1,057
<REALIZED-GAINS-CURRENT> 1,866
<APPREC-INCREASE-CURRENT> 7,862
<NET-CHANGE-FROM-OPS> 10,785
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,057)
<DISTRIBUTIONS-OF-GAINS> (1,847)
<DISTRIBUTIONS-OTHER> (14)
<NUMBER-OF-SHARES-SOLD> 3,809
<NUMBER-OF-SHARES-REDEEMED> (414)
<SHARES-REINVESTED> 220
<NET-CHANGE-IN-ASSETS> 53,488
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 329
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 464
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 11.09
<PER-SHARE-NII> 0.29
<PER-SHARE-GAIN-APPREC> 2.84
<PER-SHARE-DIVIDEND> (0.29)
<PER-SHARE-DISTRIBUTIONS> (0.36)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.57
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN HANCOCK
VARIABLE SERIES TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785303
<NAME> JOHN HANCOCK VARIABLE SERIES TRUST I
<SERIES>
<NUMBER> 14
<NAME> MID CAP VALUE
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 54,486
<INVESTMENTS-AT-VALUE> 64,569
<RECEIVABLES> 416
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 64,896
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12
<TOTAL-LIABILITIES> 12
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 62,219
<SHARES-COMMON-STOCK> 4,686
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (480)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,240
<NET-ASSETS> 64,973
<DIVIDEND-INCOME> 292
<INTEREST-INCOME> 203
<OTHER-INCOME> 0
<EXPENSES-NET> 330
<NET-INVESTMENT-INCOME> 165
<REALIZED-GAINS-CURRENT> 4,133
<APPREC-INCREASE-CURRENT> 2,209
<NET-CHANGE-FROM-OPS> 6,507
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (165)
<DISTRIBUTIONS-OF-GAINS> (4,605)
<DISTRIBUTIONS-OTHER> (4)
<NUMBER-OF-SHARES-SOLD> 3,902
<NUMBER-OF-SHARES-REDEEMED> (526)
<SHARES-REINVESTED> 347
<NET-CHANGE-IN-ASSETS> 54,047
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 252
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 360
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 11.35
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 3.59
<PER-SHARE-DIVIDEND> (.05)
<PER-SHARE-DISTRIBUTIONS> (1.07)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.87
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN
HANCOCK VARIABLE SERIES TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785303
<NAME> JOHN HANCOCK VARIABLE SERIES TRUST I
<SERIES>
<NUMBER> 15
<NAME> SMALL CAP VALUE
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 36,721
<INVESTMENTS-AT-VALUE> 42,993
<RECEIVABLES> 276
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 43,269
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8
<TOTAL-LIABILITIES> 8
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 41,236
<SHARES-COMMON-STOCK> 3,488
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 7
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,024
<NET-ASSETS> 43,261
<DIVIDEND-INCOME> 266
<INTEREST-INCOME> 138
<OTHER-INCOME> 0
<EXPENSES-NET> 245
<NET-INVESTMENT-INCOME> 159
<REALIZED-GAINS-CURRENT> 3,158
<APPREC-INCREASE-CURRENT> 1,324
<NET-CHANGE-FROM-OPS> 4,641
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (159)
<DISTRIBUTIONS-OF-GAINS> (3,158)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,708
<NUMBER-OF-SHARES-REDEEMED> (471)
<SHARES-REINVESTED> 269
<NET-CHANGE-IN-ASSETS> 32,720
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 187
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 303
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.73
<PER-SHARE-NII> 0.08
<PER-SHARE-GAIN-APPREC> 2.66
<PER-SHARE-DIVIDEND> (0.08)
<PER-SHARE-DISTRIBUTIONS> (0.99)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.40
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN
HANCOCK VARIABLE SERIES TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785303
<NAME> JOHN HANCOCK VARIABLE SERIES TRUST I
<SERIES>
<NUMBER> 16
<NAME> INTERNATIONAL OPPORTUNITIES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 89,445
<INVESTMENTS-AT-VALUE> 101,315
<RECEIVABLES> 583
<ASSETS-OTHER> 83
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 102,008
<PAYABLE-FOR-SECURITIES> 3
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 41
<TOTAL-LIABILITIES> 44
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 30,423
<SHARES-COMMON-STOCK> 2,882
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (48)
<ACCUMULATED-NET-GAINS> (8)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 264
<NET-ASSETS> 30,631
<DIVIDEND-INCOME> 370
<INTEREST-INCOME> 81
<OTHER-INCOME> 0
<EXPENSES-NET> 295
<NET-INVESTMENT-INCOME> 156
<REALIZED-GAINS-CURRENT> 268
<APPREC-INCREASE-CURRENT> (771)
<NET-CHANGE-FROM-OPS> (347)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (188)
<DISTRIBUTIONS-OF-GAINS> (235)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,704
<NUMBER-OF-SHARES-REDEEMED> (471)
<SHARES-REINVESTED> 269
<NET-CHANGE-IN-ASSETS> 12,733
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 235
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 381
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.60
<PER-SHARE-NII> 0.10
<PER-SHARE-GAIN-APPREC> .11
<PER-SHARE-DIVIDEND> (.10)
<PER-SHARE-DISTRIBUTIONS> (.08)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.63
<EXPENSE-RATIO> 1.22
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN
HANCOCK VARIABLE SERIES TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785303
<NAME> JOHN HANCOCK VARIABLE SERIES TRUST I
<SERIES>
<NUMBER> 17
<NAME> EQUITY INDEX
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 89,445
<INVESTMENTS-AT-VALUE> 101,315
<RECEIVABLES> 610
<ASSETS-OTHER> 83
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 102,008
<PAYABLE-FOR-SECURITIES> 617
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1
<TOTAL-LIABILITIES> 618
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 89,871
<SHARES-COMMON-STOCK> 7,134
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (153)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,671
<NET-ASSETS> 101,390
<DIVIDEND-INCOME> 1,020
<INTEREST-INCOME> 35
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 1,055
<REALIZED-GAINS-CURRENT> 1,622
<APPREC-INCREASE-CURRENT> 10,498
<NET-CHANGE-FROM-OPS> 13,125
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,055)
<DISTRIBUTIONS-OF-GAINS> (1,534)
<DISTRIBUTIONS-OTHER> (202)
<NUMBER-OF-SHARES-SOLD> 6,622
<NUMBER-OF-SHARES-REDEEMED> 201
<SHARES-REINVESTED> (1,009)
<NET-CHANGE-IN-ASSETS> 86,740
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 132
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 349
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 11.10
<PER-SHARE-NII> 0.24
<PER-SHARE-GAIN-APPREC> 3.41
<PER-SHARE-DIVIDEND> (.24)
<PER-SHARE-DISTRIBUTIONS> (.25)
<RETURNS-OF-CAPITAL> (.05)
<PER-SHARE-NAV-END> 14.21
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOHN
HANCOCK VARIABLE SERIES TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785303
<NAME> JOHN HANCOCK VARIABLE SERIES TRUST I
<SERIES>
<NUMBER> 18
<NAME> STRATEGIC BOND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 25,953
<INVESTMENTS-AT-VALUE> 27,252
<RECEIVABLES> 654
<ASSETS-OTHER> 776
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 28,682
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 35
<TOTAL-LIABILITIES> 35
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 28,217
<SHARES-COMMON-STOCK> 2,797
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (124)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 554
<NET-ASSETS> 28,647
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,290
<OTHER-INCOME> 0
<EXPENSES-NET> 190
<NET-INVESTMENT-INCOME> 1,100
<REALIZED-GAINS-CURRENT> 373
<APPREC-INCREASE-CURRENT> 288
<NET-CHANGE-FROM-OPS> 1,761
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (537)
<DISTRIBUTIONS-OF-GAINS> (55)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,515
<NUMBER-OF-SHARES-REDEEMED> (255)
<SHARES-REINVESTED> 59
<NET-CHANGE-IN-ASSETS> 24,098
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 142
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 250
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.16
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> .30
<PER-SHARE-DIVIDEND> (0.61)
<PER-SHARE-DISTRIBUTIONS> (0.15)
<RETURNS-OF-CAPITAL> (0.05)
<PER-SHARE-NAV-END> 10.24
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
