<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 5, 2000
REGISTRATION NOS. 33-2081
811-04490
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. 24 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
AMENDMENT NO. 24 [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)
RONALD J. BOCAGE, 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)
[X] On May 1, 2000 pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] On (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] 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>
PATRIOT VERSION
As with all mutual funds, the Securities and Exchange Commission has not judged
whether these funds are good investments or whether the information in this
prospectus is adequate and accurate. Anyone who tells you otherwise is
committing a federal crime.
JOHN HANCOCK
VARIABLE SERIES TRUST I
PROSPECTUS
MAY 1, 2000
Managed Fund
Equity Index Fund
Large Cap Value Fund
Large Cap Growth Fund
Mid Cap Value Fund
Mid Cap Growth Fund
Real Estate Equity Fund
Small/Mid Cap CORE Fund
Small Cap Value Fund
Global Equity Fund
Global Balanced Fund
International Equity Index Fund
International Opportunities Fund
Emerging Markets Equity Fund
Short-Term Bond Fund
Bond Index Fund
Global Bond Fund
High Yield Bond Fund
Managed by John Hancock Life Insurance Company
John Hancock Place
Boston, MA 02117
<PAGE>
Contents
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John Hancock Variable Series Trust I ("Trust")
A fund-by-fund summary of goals, strategies and risks
<TABLE>
<S> <C>
Overview 2
Your Investment Choices 3
Managed Fund 6
Equity Index Fund 8
Large Cap Value Fund 10
Large Cap Growth Fund 12
Mid Cap Value Fund 14
Mid Cap Growth Fund 16
Real Estate Equity Fund 18
Small/Mid Cap CORE Fund 20
Small Cap Value Fund 22
Global Equity Fund 24
Global Balanced Fund 26
International Equity Index Fund 28
International Opportunities Fund 30
Emerging Markets Equity Fund 32
Short-Term Bond Fund 34
Bond Index Fund 36
Global Bond Fund 38
High Yield Bond Fund 40
Policies and instructions for opening, maintaining and closing an account in any
fund
Your Account 42
Investments in shares of the funds 42
Share price 42
Valuation 42
Conflicts 42
Further information on the funds
Funds' Expenses 43
Dividends and Taxes 43
Dividends 43
Taxes 43
Further information on the Trust
Trust Business Structure 44
Additional performance information
Appendix 45
For more information back cover
</TABLE>
<PAGE>
Overview
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FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on page 6. Each description provides
the following information:
Goal and Strategy The fund's particular investment goals and the principal
strategies it intends to use in pursuing those goals.
Subadviser/Manager The firm and individual(s) providing investment management
services to the fund.
Past Performance The fund's total return, measured year-by-year and over time.
Main Risks The significant risk factors associated with the fund. The risks are
categorized as "Primary" or "Secondary". The Primary Risks are considered major
factors in the fund's performance and are described first. The Secondary Risks
are not considered major factors in the fund's performance because the fund
would not normally commit a large portion of its assets to the investments
involved. However, the Secondary Risks are of such a nature that they could
significantly affect the fund's performance, even if the investments are held
in relatively small amounts.
Financial Highlights The fund's operating performance per share, measured year-
by-year.
THE FUNDS
The Trust offers investment choices, or funds, for the variable annuity and
variable life insurance contracts ("variable contracts") of:
. John Hancock Life Insurance Company ("John Hancock"),
. John Hancock Variable Life Insurance Company ("JHVLICO"), and
. Investors Partner Life Insurance Company and its subsidiaries ("IPL").
In some variable contract forms, the Trust is referred to as the "Fund" or "Se-
ries Fund" and the investment choices are referred to as "Portfolios."
RISKS OF FUNDS
These funds, like all mutual funds, are not bank deposits. They are not insured
or guaranteed by the FDIC or any other government agency. You could lose money
by investing in these funds. So, be sure to read all risk disclosure carefully
before investing.
MANAGEMENT
John Hancock is the investment adviser of each fund. John Hancock is a Massa-
chusetts stock life insurance company. On February 1, 2000, John Hancock
changed its form of organization and its name. Prior to that date, it was John
Hancock Mutual Life Insurance Company, a mutual life insurance company that was
chartered in 1862. At the end of 1999, John Hancock managed approximately $127
billion, of which it owned over $71 billion. Most of the funds have
subadvisers.
2
<PAGE>
Your Investment Choices
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The Trust offers a number of investment choices, or funds, to suit a variety
of objectives under variable contracts. There are 18 funds available under
your variable contract. Each fund has its own strategy and its own risk/reward
profile.The funds can be broadly categorized as equity funds, balanced funds,
bond funds, and international/global funds. Within these broad categories, the
funds can be further categorized as follows:
Equity Funds
Equity funds can be categorized in two ways--by capitalization and by invest-
ment style.
Capitalization Equity funds can be categorized by market capital-
ization, which is defined as the market value of
all shares of a company's stock. The following def-
initions for large, mid and small cap are based
upon statistics at year-end 1999, but are adjusted
periodically with broad equity market movements as
represented by the Russell 3000(R) Index or other
widely-recognized source of market capitalization
data. Adjustments are typically made on a quarterly
basis, but in extraordinary circumstances may be
made as frequently as monthly.
Large Cap Funds:
. Equity Index Fund
These funds invest in large, well-established com-
. Large Cap Value Fund panies that typically are very actively traded and
provide more stable investment returns over time.
. Large Cap Growth Fund Large cap companies represent the 300 largest
stocks in the Russell 3000(R) Index. Each of those
companies has a market capitalization greater than
$7.9 billion as of the end of 1999. Large cap funds
are appropriate for investors who want the least
volatile investment returns within the overall
equity markets.
Mid Cap Funds:
. Mid Cap Value Fund
These funds invest in medium-sized, less estab-
. Mid Cap Growth Fund lished companies that are less actively traded and
provide more share price volatility over time than
. Small/Mid Cap CORE Fund large cap stocks. Mid cap companies represent the
250th to 1000th largest stocks in the Russell
.Real Estate Equity Fund 3000(R) Index. Each of those companies has a market
capitalization between $1.4 billion and $9.7 bil-
lion as of the end of 1999. Mid cap funds are
appropriate for investors who are willing to accept
more volatile investment returns within the overall
equity markets with the potential reward of higher
long-term returns.
Small Cap Funds:
. Small Cap Value Fund These funds invest in small newly established com-
panies that are less actively traded and have a
high level of share price volatility over time.
Small cap companies represent the 2000 smallest
stocks in the Russell 3000(R) Index. Each of those
companies has a market capitalization of less than
$1.4 billion as of the end of 1999. Small cap funds
are appropriate for investors who are willing to
accept the most volatile investment returns within
the overall equity markets for the potential reward
of higher long-term returns.
Investment Style
Value Funds:
. Large Cap Value Fund
Value funds invest in companies that are attrac-
. Mid Cap Value Fund tively priced, considering their asset and earnings
history. These stocks typically pay above average
. Small Cap Value Fund dividends and have low stock prices relative to
measures of earnings and book value. Value funds
. Real Estate Equity Fund are appropriate for investors who want some divi-
dend income and the potential for capital gains,
but are less tolerant of share-price fluctuations.
3
<PAGE>
Growth Funds:
. Large Cap Growth Fund
Growth funds invest in companies believed to have
. Mid Cap Growth Fund above-average prospects for capital growth due to
their strong earnings and revenue potential. Growth
stocks typically have high stock prices relative to
measures of earnings and book value. Growth funds
are appropriate for investors who are willing to
accept more share-price volatility for the potential
reward of higher long-term returns.
Blend Funds:
. Equity Index Fund
Blend funds invest in both value and growth compa-
. Small/Mid Cap CORE nies. Blend funds are appropriate for investors who
Fund seek both dividend and capital appreciation charac-
teristics.
Balanced Funds
. Managed Fund
Balanced funds invest in a combination of stocks and
. Global Balanced bonds and actively manage the mix of stock and bonds
Fund within a target range. Domestic balanced funds
invest in U.S. stocks and bonds. Global balanced
funds invest in foreign and U.S. stocks and bonds.
Bond Funds
Bond funds can be categorized in two ways--by average maturity and by credit
quality:
Average Maturity Bond maturity is a key measure of interest rate
risk. A bond's maturity measures the time remaining
until the bond matures, or until the repayment of
the bond's principal comes due. The longer a bond's
maturity, the more sensitive the bond's price is to
changes in interest rates.
Short:
. Short Term Bond These funds invest primarily in bonds with short
Fund maturities, typically less than four years. These
funds have less interest rate risk than intermedi-
ate-term bond funds.
Intermediate:
. Bond Index Fund
These funds invest in bonds of all maturities and
. Global Bond Fund maintain an average maturity which is typically
between four and ten years. These funds have more
interest rate risk than short-term bond funds.
. High Yield Bond
Fund
Credit Quality Credit quality is a measure of the ability of a bond
issuer to meet its financial obligations and repay
principal and interest. High quality bonds have less
credit risk than lower quality bonds. Investment
grade bonds typically have "high" or "medium" credit
quality ratings (as defined below), while high-yield
bonds have "low" credit quality ratings.
High:
. Bond Index Fund
These funds focus on the highest-rated, most credit-
. Global Bond Fund worthy bonds and typically maintain an average
credit quality rating of AAA/Aaa or AA/Aa.
4
<PAGE>
Medium:
. Short Term Bond These funds invest in bonds of all credit quality
Fund levels with a focus on high-rated investment grade
bonds. These funds typically maintain an average
credit quality rating of A or BBB/Baa.
Low:
. High Yield Bond These funds invest primarily in lower rated bonds--
Fund known as high yield or "junk" bonds. These funds
typically maintain a below investment-grade average
credit quality rating of BB/Ba or B.
International/Global Equity Funds
International funds invest primarily in securities markets outside the United
States. Global funds invest both in the United States and abroad. These funds
can be categorized by the types of markets they invest in.
Developed Markets:
. Global Equity Fund These funds invest primarily in the larger, well-
established developed or industralized markets
. International around the world. These funds have less foreign
Equity Index Fund securities risk than emerging market funds.
. International
Opportunities Fund
Emerging Markets:
. Emerging Markets These funds invest primarily in developing or
Equity Fund emerging markets and have more foreign securities
risk than funds that invest primarily in well-
established, developed markets.
--------------
In the following pages, any fund investment strategy that is stated as a per-
centage of a fund's assets applies at all times, not just at the time the fund
buys or sells an investment security. The trustees of the Trust can change the
investment goals and strategy of any fund without shareholder (i.e.,
contractowner) approval.
The financial highlights tables on the following pages detail the historical
performance of each fund, including total return information showing the
increase or decrease of an investment in the fund each year (assuming rein-
vestment of all dividends and distributions). The "total investment return"
shown for each fund does not reflect the expenses and charges of the applica-
ble separate accounts and variable contracts. Those expenses and charges vary
considerably from contract to contract and are described in the variable con-
tract prospectus to which this prospectus is attached. If the earliest period
shown in the financial highlights table is less than a full calendar year, the
two "Ratios" shown for that period have been annualized (i.e., projected as if
the fund had been in effect for a full year). However, the "total investment
return" and "turnover rate" for that period have not been annualized.
In this prospectus, the term "stock"' is used as a shorthand reference for
equity investments generally and the term "bond" is used as a shorthand refer-
ence for debt obligations generally.
5
<PAGE>
Managed Fund
GOAL AND STRATEGY
This is a balanced stock and bond fund that seeks long-term growth in income
and capital.
The Fund invests primarily in a diversified mix of:
. common stocks of large established U.S. companies;
. bonds with maturities generally greater than 12 months; and
. money market and other short-term debt securities with maturities generally
not greater than 12 months.
The manager makes ongoing decisions about the mix between stocks and bonds. The
manager has a target mix of 60% in equities and 40% in bonds, but actively man-
ages the mix within (+/-) 10 percentage points of the target mix.
The manager selects stocks and bonds using a combination of proprietary
research and quantitative tools. Stocks are purchased that are undervalued rel-
ative to the stock's history and have improving earnings growth prospects.
Bonds are purchased that are attractively priced and have cheap, predictable
cash flows. The Fund is managed using risk control techniques that maintain
risk and industry characteristics similar to the overall market.
The Fund normally invests its equity portion in 80 to 150 stocks, with at least
65% (usually higher) of its equity assets in large cap companies. The Fund may
invest up to 20% of its bond assets in foreign debt securities of developed
countries (denominated in foreign currencies) and up to 15% of its bond assets
in high yield bonds. The Fund normally has 5% or less of its assets in cash and
cash equivalents.
The Fund may purchase other types of securities, for example: American
Depository Receipts (ADRs), and certain derivatives (investments whose value is
based on indices or other securities). The manager actively uses derivatives,
such as futures and forwards, to adjust the Fund's average maturity relative to
the Lehman Brothers Aggregate Bond Index and to implement currency strategies.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
John C. Forelli
(equity)
- -----------------
Senior Vice President of subadviser
Joined team in 1996
Joined subadviser in 1990
Jeffrey B. Saef
(fixed income)
- -----------------
Senior Vice President of subadviser
Joined team in 1994
Joined subadviser in 1994
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may also help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1990 3.80%
1991 22.00%
1992 7.70%
1993 11.60%
1994 -2.23%
1995 27.09%
1996 10.72%
1997 18.72%
1998 20.42%
1999 9.10%
Best quarter: up 14.77%, fourth quarter 1998 Worst quarter: down 7.22%, third
quarter 1998
Average annual total return -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 9.10% 12.00%
5 years 17.02% 18.85%
10 years 12.60% 13.48%
Life of fund 12.45% 13.06%
</TABLE>
Index:50% S&P 500 Index/50% Lehman Brothers Government/Corporate Bond Index
(for
periods through December 31, 1997)
60% S&P 500 Index/40% Lehman Brothers Government/Corporate Bond Index (for
periods from January 1, 1998 through April 30, 1998)
60% S&P 500 Index/40% Lehman Brothers Aggregate Bond Index (for periods
after April 30, 1998)
6
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "large cap" approach carries the risk that in certain markets large cap
stocks will underperform mid cap and small cap stocks.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest
rates fall, the reverse will generally occur. The longer the average remaining
maturity of bonds held by the Fund, the more sensitive the Fund is to interest
rate risk. This Fund has more interest rate risk than a short-term bond fund,
but less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obliga-
tion to pay interest and repay principal. Also, the credit rating of a bond
held by the fund may be downgraded. In either case, the value of the bond held
by the Trust would fall. All bonds have some credit risk, but in general low-
er-rated bonds have higher credit risk.
Market Allocation Risk: The allocation of the Fund's assets among major asset
classes (i.e., stocks, bonds, and short-term debt securities) may (1) reduce
the Fund's holdings in a class whose value then increases unexpectedly, or (2)
increase the Fund's holdings in a class just prior to its experiencing a loss
of value.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become
harder to value or to sell at a fair price.
Prepayment/Call Risk: The Fund's share price or yield could be hurt if inter-
est rate movements cause the Fund's mortgage-related and callable securities
to be paid off substantially earlier than expected.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December
31: 1995 1996 1997 1998 1999
Net asset value,
beginning of period $11.96 $13.73 $13.35 $14.35 $15.64
Income from investment
operations:
Net investment income
(loss) 0.62 0.61 0.59 0.46 0.44
Net realized and
unrealized gain (loss)
on investments* 2.56 0.81 1.86 2.43 0.94
Total from investment
operations 3.18 1.42 2.45 2.89 1.38
Less distributions:
Distributions from net
investment income and
capital paid in (0.62) (0.61) (0.67) (0.51) (0.43)
Distributions from net
realized gain on
investments sold (0.79) (1.19) (0.78) (1.09) (1.14)
Distributions in excess
of income, capital
paid in & gains -- -- -- -- --
Total distributions (1.41) (1.80) (1.45) (1.60) (1.57)
Net asset value, end of
period $13.73 $13.35 $14.35 $15.64 $15.45
Total investment return 27.09% 10.72% 18.72% 20.42% 9.10%
Ratios and supplemental
data
Net assets, end of
period (000s
omitted)($) $2,093,964 $2,386,660 $2,800,127 $3,301,910 $3,430,919
Ratio of expenses to
average net assets (%) 0.38% 0.36% 0.37% 0.36% 0.36%
Ratio of net investment
income (loss) to
average net assets (%) 4.66% 4.41% 4.18% 2.99% 2.75%
Turnover rate (%) 187.67% 113.61% 200.41% 160.57% 203.86%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
7
<PAGE>
Equity Index Fund
GOAL AND STRATEGY
This is a stock fund that seeks to track the performance of the S&P 500 Index,
which emphasizes the stocks of large U.S. companies.
The manager employs a passive management strategy by normally investing in all
500 stocks included in the Index. The manager invests in each stock in roughly
the same proportion as represented in the Index.
The manager seeks to replicate as closely as possible the aggregate risk char-
acteristics and industry diversification of the Index.
The Fund normally invests in all 500 stocks in the Index, but has no predeter-
mined number of stocks that it must hold. S&P may change the composition of the
Index from time to time. The manager will reflect those changes as soon as
practical.
The Fund is normally fully invested. The manager may invest in stock index
futures to maintain market exposure and manage cash flow.
The Fund may purchase other types of securities, for example: Standard & Poor's
Depository Receipts (SPDRs), American Depository Receipts (ADRs), cash equiva-
lents, and certain derivatives (investments whose value is based on indices or
other securities).
Note: "S&P 500 Index" means the Standard & Poor's 500 Composite Stock Price
Index. "Standard & Poor's", "S&P" and "S&P 500" are trademarks of McGraw Hill,
Inc. and have been licensed for use by the Trust.
- --------------------------------------------------------------------------------
SUBADVISER
State Street Bank and Trust Company
State Street Global Advisors Division
Two International Place
Boston, Massachusetts 02110
Managing since 1978
Managed approximately $667 billion in assets at the end of 1999
FUND MANAGERS
John A. Tucker
- -----------------
Principal of subadviser
Joined subadviser in 1988
James B. May
- -----------------
Principal of subadviser
Joined subadviser in 1989
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may also help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 32.79%
1998 28.45%
1999 21.08%
Best quarter: up 21.27%, fourth quarter 1998 Worst quarter: down 9.99%, third
quarter 1998
Average annual total return -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 21.08% 21.04%
Life of fund 26.36% 26.79%
</TABLE>
Index:S&P 500 Index
(1)Began operations on May 1, 1996.
8
<PAGE>
MAIN RISKS
Primary
Index Management Risk: Certain factors such as the following may cause the
Fund to track the Index less closely:
. The securities selected by the manager may not be fully representative of
the Index.
. Transaction expenses of the Fund may result in the Fund's performance being
different than that of the Index.
. The size and timing of the Fund's cash flows may result in the Fund's per-
formance being different than that of the Index.
Also, index funds like this one will have more difficulty in taking defensive
positions in abnormal market conditions.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "large cap" approach carries the risk that in certain markets large cap
stocks will underperform mid cap and small cap stocks.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $10.00 $11.10 $14.21 $17.70
Income from investment operations:
Net investment income (loss) 0.15 0.24 0.25 0.27
Net realized and unrealized gain
(loss) on investments* 1.26 3.41 3.76 3.41
Total from investment operations 1.41 3.65 4.01 3.68
Less distributions:
Distributions from net investment
income and capital paid in (0.21) (0.29) (0.24) (0.26)
Distributions from net realized gain
on investments sold (0.10) (0.25) (0.28) (0.66)
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions ($0.31) ($0.54) ($0.52) (0.92)
Net asset value, end of period $11.10 $14.21 $17.70 $20.46
Total investment return*** 14.23% 32.79% 28.45% 21.08%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $14,650 $101,390 $232,578 $451,296
Ratio of expenses to average net
assets (%)**** 0.00% 0.00% 0.00% 0.00%
Ratio of net investment income (loss)
to average net assets (%) 2.74% 1.97% 1.59% 1.42%
Turnover rate (%) 15.72% 64.56% 43.31% 55.24%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains
and losses in the fund securities for the period because of the timing
of purchases and withdrawals of shares in relation to the fluctuation in
market values of the fund.
** Fund began operations on May 1, 1996.
*** Includes the effect of a voluntary capital contribution from John Han-
cock of $0.06 per share for the period 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.
**** Expense ratio is net of expense reimbursement. Had such reimbursement
not been made the expense ratio would have been 1.61%, 0.65%, 0.34% and
0.22% for the years ended December 31, 1996, 1997, 1998 and 1999,
respectively.
9
<PAGE>
Large Cap Value Fund
GOAL AND STRATEGY
This is a large cap stock fund with a value emphasis that seeks long-term
growth in capital and substantial dividend income.
The Fund invests primarily in a diversified mix of common stocks of large
established U.S. companies that are believed to offer favorable prospects for
increasing dividends and growth in capital.
The manager employs a value approach in selecting stocks using proprietary
equity research. Stocks are purchased that are undervalued by various measures
such as the stock's current price relative to its earnings potential.
The manager looks for companies with:
. established operating history;
. above-average dividend yield relative to the S&P 500 Index;
. low price/earnings ratio relative to the S&P 500 Index;
. sound balance sheet and other positive financial characteristics; and
. low stock price relative to the company's underlying value.
The Fund normally invests in 100 to 175 stocks, with at least 65% (usually
higher) of its assets in large cap companies. The Fund normally has 5% or less
of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), foreign equity securities of developed countries, high
quality intermediate and short-term debt securities, and certain derivatives
(investments whose value is based on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
Note: "S&P 500 Index" means the Standard & Poor's 500 Composite Stock Price
Index. "Standard & Poor's", "S&P" and "S&P 500" are trademarks of McGraw Hill,
Inc. and have been licensed for use by the Trust.
- --------------------------------------------------------------------------------
SUBADVISER
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Managing since 1937
Managed approximately $180 billionin assets at the end of 1999
FUND MANAGERS
Management by Investment Advisory Committee
Brian C. Rogers
- -----------------
Committee Chairman
Director of subadviser
Managed fund since 1996 (its inception)
Joined subadviser in 1982
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may also help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 28.56%
1998 9.26%
1999 3.28%
Best quarter: up 12.86%, fourth quarter 1999 Worst quarter: down 8.58%, third
quarter 1999
Average annual total return -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 3.28% 7.35%
Life of fund 14.67% 19.54%
</TABLE>
Index:Russell 1000(R) Value Index
(1)Began operations on May 1, 1996.
10
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "large cap" approach car-
ries the risk that in certain markets large cap stocks will underperform small
cap and mid cap stocks.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 11.09 $ 13.57 $ 14.02
Income from investment operations:
Net investment income (loss) 0.16 0.29 0.28 0.27
Net realized and unrealized gain (loss)
on investments* 1.22 2.84 0.96 0.18
Total from investment operations 1.38 3.13 1.24 0.45
Less distributions:
Distributions from net investment
income and capital paid in (0.16) (0.29) (0.28) (0.27)
Distributions from net realized gain on
investments sold (0.13) (0.36) (0.51) (0.71)
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions ($0.29) ($0.65) ($0.79) (0.98)
Net asset value, end of period $ 11.09 $ 13.57 $ 14.02 $ 13.49
Total investment return 13.90% 28.56% 9.26% 3.28%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $19,781 $73,269 $123,365 $155,849
Ratio of expenses to average net assets
(%)*** 1.00% 1.00% 0.92% 0.85%
Ratio of net investment income (loss) to
average net assets (%) 2.74% 2.42% 2.08% 1.88%
Turnover rate (%) 19.95% 19.21% 18.46% 32.62%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.89% and 1.06% for the years
ended December 31, 1996 and 1997, respectively.
11
<PAGE>
Large Cap Growth Fund
GOAL AND STRATEGY
This is a large cap stock fund with a growth emphasis that seeks growth in
capital.
The Fund invests primarily in a diversified mix of common stocks of large
established U.S. companies that are believed to offer above-average potential
for growth in revenues and earnings.
The manager selects stocks using a combination of proprietary equity research
and quantitative tools. Stocks are purchased that are undervalued relative to
the stock's history and have improving earnings growth prospects. The Fund is
managed using risk control techniques that maintain risk and industry charac-
teristics similar to the Russell 1000(R) Growth Index.
The Fund normally invests in 80 to 150 stocks, with at least 65% (usually high-
er) of its assets in large cap companies. The Fund normally has 5% or less of
its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Mark C. Lapman
- -----------------
Executive Vice President of subadviser
Joined team in 1996
Joined subadviser in 1982
Began career in 1979
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1990 6.60%
1991 25.50%
1992 9.90%
1993 13.80%
1994 -0.98%
1995 31.64%
1996 18.27%
1997 30.89%
1998 39.51%
1999 24.07%
Best quarter: up 27.79%, fourth quarter 1998 Worst quarter: down 11.16%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 24.07% 33.16%
5 years 28.67% 32.18%
10 years 19.34% 19.86%
Life of fund 17.72% 18.46%
</TABLE>
Index:S&P 500 Index (for periods through April 30, 1996)
Russell 1000(R) Growth Index (for periods after April 30, 1996)
12
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "large cap" approach
carries the risk that in certain markets large cap stocks will underperform
small cap and mid cap stocks.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December
31: 1995 1996 1997 1998 1999
Net asset value,
beginning of period $ 14.41 $ 17.37 $ 17.49 $ 20.82 $ 26.19
Income from investment
operations:
Net investment income
(loss) 0.44 0.25 0.17 0.14 0.09
Net realized and
unrealized gain (loss)
on investments* 4.06 2.89 5.21 8.05 6.03
Total from investment
operations 4.50 3.14 5.38 8.19 6.12
Less distributions:
Distributions from net
investment income and
capital paid in (0.70) (0.25) (0.17) (0.14) (0.09)
Distributions from net
realized gain on
investments sold (0.84) (2.77) (1.88) (2.68) (4.89)
Distributions in excess
of income, capital
paid in & gains -- -- -- -- --
Total distributions ($1.54) ($3.02) ($2.05) ($2.82) (4.98)
Net asset value, end of
period $ 17.37 $ 17.49 $ 20.82 $ 26.19 $ 27.33
Total investment return 31.64% 18.27% 30.89% 39.51% 24.07%
Ratios and supplemental
data
Net assets, end of
period (000s
omitted)($) $380,276 $524,145 $754,398 $1,126,764 $1,382,473
Ratio of expenses to
average net assets (%) 0.47% 0.44% 0.44% 0.41% 0.39%
Ratio of net investment
income (loss) to
average net assets (%) 2.70% 1.35% 0.86% 0.59% 0.33%
Turnover rate (%) 90.18% 135.98% 83.82% 56.41% 37.42%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
13
<PAGE>
Mid Cap Value Fund
GOAL AND STRATEGY
This is a mid cap stock fund with a value emphasis that seeks long-term growth
in capital.
The Fund invests primarily in the common stocks of mid-sized U.S. companies
that are believed to sell at a discount to their intrinsic value.
The manager selects stocks using proprietary equity research. Stocks are pur-
chased that are undervalued by various measures such as the stock's current
price relative to its earnings potential.
The manager looks for undervalued companies with:
. sound balance sheet and other financial characteristics;
. consistent cash flow;
. strong position relative to the competition; and
. high level of stock ownership among management.
The Fund normally invests in 50 to 75 stocks, with at least 65% (usually high-
er) of its assets in mid cap companies. The Fund normally has 5% or less of its
assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Neuberger Berman, LLC
605 Third Avenue
New York, New York 10158
Managing since 1939
Managed approximately $54 billion
in assets at the end of 1999
FUND MANAGERS
Robert I. Gendelman
- -----------------
Managing Director of subadviser
Managed fund since 1996 (its inception)
Joined subadviser in 1993
Began career in 1984
S. Basu Mullick
- -----------------
Managing Director of subadvisor
Joined subadvisor in 1998
Began career in 1982
Portfolio Manager, Ark Asset
Management (1993-1998)
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 32.17%
1998 -11.33%
1999 5.52%
Best quarter: up 17.06%, third quarter 1997 Worst quarter: down 21.29%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 5.52% -0.11%
Life of fund 10.38% 13.54%
</TABLE>
Index:Russell Mid Cap(TM) Value Index
(1)Began operations on May 1, 1996.
14
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "mid cap" approach carries
the risk that in certain markets mid cap stocks will underperform small cap and
large cap stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. The
Fund had an unusually high turnover rate in 1999 due to the high volatility of
the market in 1999 and the subadviser's implementation of a more vigilant sell
discipline. Normally, the Fund's turnover rate will be less than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $10.00 $11.35 $13.87 $12.19
Income from investment operations:
Net investment income (loss) 0.04 0.05 0.11 0.08
Net realized and unrealized gain (loss)
on investments* 1.57 3.59 (1.68) 0.59
Total from investment operations 1.61 3.64 (1.57) 0.67
Less distributions:
Distributions from net investment income
and capital paid in (0.04) (0.05) (0.11) (0.08)
Distributions from net realized gain on
investments sold (0.22) (1.07) -- --
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions $(0.26) $(1.12) $(0.11) (0.08)
Net asset value, end of period $11.35 $13.87 $12.19 $12.78
Total investment return 16.18% 32.17% (11.33)% 5.52%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $10,926 $64,973 $94,820 $92,150
Ratio of expenses to average net assets
(%)*** 1.05% 1.05% 0.96% 0.92%
Ratio of net investment income (loss) to
average net assets (%) 0.69% 0.53% 0.93% 0.64%
Turnover rate (%) 62.99% 93.78% 173.33% 137.06%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.15% and 1.14% for the years
ended December 31, 1996, and 1997, respectively.
15
<PAGE>
Mid Cap Growth Fund
GOAL AND STRATEGY
This is a non-diversified mid cap stock fund with a growth emphasis that seeks
long-term growth in capital.
The Fund invests primarily in the common stocks of mid-sized U.S. companies
that are believed to offer above-average potential for growth in revenues and
earnings.
The manager selects stocks using proprietary equity research. Stocks are pur-
chased that are expected to have earnings growth potential that may not be rec-
ognized by the investment community. The manager selects stocks without regard
to any pre- defined industry or sector selection criteria.
The manager looks for companies experiencing:
. above-average growth relative to their peers or the general economy; and
. positive change due to new product developments, improved regulatory environ-
ment or a new management team.
The Fund is non-diversified, which means it can take larger positions in a
smaller number of issuers. Based upon its current size and strategy, the Fund
invests in 35 to 75 stocks, with at least 65% of its assets in mid cap compa-
nies. The Fund normally has 15% or less of its assets in cash and cash equiva-
lents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), foreign equity securities of developed countries, and
certain derivatives (investments whose value is based on indices or other
securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Janus Capital Corporation
100 Fillmore Street
Denver, Colorado 80206
Managing since 1970
Managed approximately $248 billionin assets at the end of 1999
FUND MANAGER
James P. Goff
- -----------------
Executive Vice President of subadviser
Managed fund since 1996 (its inception)
Joined subadviser in 1988
Began career in 1985
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 16.66%
1998 39.07%
1999 118.31%
Best quarter: up 59.33%, fourth quarter 1999 Worst quarter: down 12.96%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 118.31% 51.29%
Life of fund 42.19% 25.51%
</TABLE>
Index:Russell Mid Cap(TM) Growth Index
(1)Began operations on May 1, 1996.
16
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Non-Diversified Fund Risk: The Fund's larger position in individual issuers and
in a smaller number of issuers could produce more volatile performance relative
to more diversified funds. The less diversified a fund's holdings are, the more
likely it is that a specific security's poor performance will hurt the fund
significantly.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "mid cap" approach
carries the risk that in certain markets mid cap stocks will underperform small
cap and large cap stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could be- come harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share Interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.22 $ 11.93 $ 15.12
Income from investment operations:
Net investment income (loss) 0.05 (0.02) (0.09) (0.19)
Net realized and unrealized gain
(loss) on investments* 0.22 1.73 4.75 17.70
Total from investment operations 0.27 1.71 4.66 17.51
Less distributions:
Distributions from net investment
income and capital paid in (0.05) -- (0.15) --
Distributions from net realized gain
on investments sold -- -- (1.32) (3.41)
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions (0.05) -- (1.47) (3.41)
Net asset value, end of period $ 10.22 $ 11.93 $ 15.12 $ 29.22
Total investment return 2.69% 16.66% 39.07% 118.31%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $16,492 $40,235 $94,085 $452,937
Ratio of expenses to average net
assets (%)*** 1.10% 1.10% 1.10% 0.93%
Ratio of net investment income (loss)
to average net assets (%) 0.92% (0.26)% (0.64)% (0.68)%
Turnover rate (%) 71.25% 124.04% 137.01% 106.06%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.34%, 1.42% and 1.13% for the
years ended December 31, 1996, 1997, and 1998, respectively.
17
<PAGE>
Real Estate Equity Fund
GOAL AND STRATEGY
This is a real estate stock fund that seeks above-average income and long-term
growth in capital.
The Fund invests primarily in:
. equity securities of real estate investment trusts (REITs) that own commer-
cial and multi-family residential real estate; and
. equity securities of real estate operating companies (i.e., companies with at
least 75% of revenue, income or fair asset value derived from real estate).
The manager selects real estate stocks using a combination of proprietary,
equity research and quantitative tools. Real estate stocks are purchased that
are undervalued relative to the stock's history and the market and have improv-
ing earnings growth prospects.
The manager looks for real estate stocks with:
. proven track records,
. strong management whose interests are aligned with shareholders,
. attractive real estate holdings, and
. a flexible financial structure.
The manager employs risk control techniques to maintain risk, style and indus-
try characteristics similar to the public equity real estate market. The Fund
normally invests in 30 to 60 securities. The Fund normally has 5% or less of
its assets in cash and cash equivalents.
The Fund also may purchase other types of securities, for example: American
Depository Receipts (ADRs), convertible securities, and equity securities of
non-real estate businesses whose real estate holdings are significant in rela-
tion to their market capitalization.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
Fund Managers
John F. DeSantis
- -----------------
Executive Vice President of subadviser
Managed fund since 1999
Joined subadviser in 1982
Thomas D. Spicer
- -----------------
Vice President of subadviser
Managed fund since 1999
Joined team in 1996
Joined subadviser in 1991
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1990 -21%
1991 33.50%
1992 16.00%
1993 17.29%
1994 2.86%
1995 12.31%
1996 33.07%
1997 17.22%
1998 -16.71%
1999 -1.69%
Best quarter: up 25.82%, first quarter 1991 Worst quarter: down 17.37%, third
quarter 1990
Average annual total returns -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -1.69% -3.19%
5 years 7.48% 8.30%
10 years 7.73% 4.11%
Life of fund 7.71% 4.52%
</TABLE>
Index: Wilshire Real Estate Securities Index
18
<PAGE>
MAIN RISKS
Primary
Real Estate Securities Risk: Real estate investment trusts (REITs) or other
real estate-related equity securities may be affected by changes in the value
of the underlying property owned by the trust. Mortgage REITs may be affected
by the quality of any credit extended. Other potential risks include the possi-
bility of failing to qualify for tax-free pass-through of income under the
Internal Revenue Code or failing to maintain exemption under the Investment
Company Act of 1940.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Secondary
None
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated):
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning of
period $11.16 $ 11.70 $ 14.64 $ 15.91 $ 12.46
Income from investment
operations:
Net investment income (loss) 0.77 0.76 0.77 0.77 0.78
Net realized and unrealized
gain (loss) on investments* 0.54 2.97 1.68 (3.38) (0.99)
Total from investment
operations 1.31 3.73 2.45 (2.61) (0.21)
Less distributions:
Distributions from net
investment income and capital
paid in (0.77) (0.76) (0.77) (0.70) (0.78)
Distributions from net realized
gain on investments sold (0.00) (0.03) (0.41) (0.14) --
Distributions in excess of
income, capital paid in &
gains -- -- -- -- --
Total distributions $(0.77) $ (0.79) $ (1.18) $ (0.84) (0.78)
Net asset value, end of period $11.70 $14.64 $ 15.91 $ 12.46 $ 11.47
Total investment return 12.31% 33.07% 17.22% (16.71)% (1.69)%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $9,301 $10,325 $12,830 $12,263 $11,000
Ratio of expenses to average net
assets (%) 0.73% 0.69% 0.69% 0.69 % 0.70%
Ratio of net investment income
(loss) to average net assets
(%) 6.85% 6.14% 5.12% 5.48 % 6.38%
Turnover rate (%) 19.81% 18.37% 20.04% 22.69 % 12.95%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chase and withdrawals of shares in relation to the fluctuation in market val-
ues of the fund.
19
<PAGE>
Small/Mid Cap CORE Fund
GOAL AND STRATEGY
This is a small/mid cap stock fund that seeks long-term growth in capital.
The Fund invests primarily in a diversified mix of the common stocks of small
and mid-sized U.S. companies that are believed to offer:
. favorable prospects for increasing dividends and capital appreciation (i.e.,
"value" companies); and
. above-average potential for growth in revenues and earnings (i.e. "growth"
companies).
The manager selects stocks using a combination of quantitative techniques and
equity research. The manager employs an investment process known as CORE, "Com-
puter Optimized, Research-Enhanced," that employs a proprietary quantitative
model. Stocks are purchased that have strong expected earnings growth and
momentum and better valuation and risk characteristics than the Russell
2500(TM) Index. The Fund is managed using risk control techniques to maintain
risk, style, capitalization and industry characteristics similar to the Russell
2500(TM) Index.
The Fund normally invests in 200 to 600 stocks, with at least 65% (usually
higher) of the Fund's assets in small cap and mid cap companies. The Fund nor-
mally has 10% or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Standard & Poor's Depository Receipts (SPDRs), and cer-
tain derivatives (investments whose value is based on indices or other securi-
ties).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Goldman Sachs Asset Management,
A unit of the Investment Management Division of Goldman Sachs and Co.
32 Old Slip
New York, New York 10005
Managing since 1988
Managed approximately $259 billion in assets at the end of 1999
FUND MANAGERS
Kent A. Clark
- -----------------
Managing Director of subadviser
Joined subadviser in 1992
Robert C. Jones
- -----------------
Managing Director of subadviser
Joined subadviser in 1989
Victor H. Pinter
- -----------------
Vice President of subadviser
Joined subadviser in 1990
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1999 20.54%
Best quarter: up 17.85%, second quarter 1999 Worst quarter: down 20.01%, fourth
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 20.54% 24.15%
Life of fund 5.13% 7.38%
</TABLE>
Index: Russell 2500(TM) Index
(1) Began operations on May 1, 1998.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
20
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "small/mid cap" approach carries the risk that in certain markets
small/mid cap stocks will underperform large cap stocks.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. The
Fund had unusually high turnover in 1999 and is expected to experience similar
turnover in 2000. This higher than expected turnover is due to (i) the rela-
tively small size of the Fund, which magnifies the effect of contributions and
redemptions, and (ii) the high volatility of the market, which in 1999 resulted
in the subadviser implementing procedures to reduce the Fund's tracking risk.
Normally, the Fund's turnover rate will be less than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $10.00 $ 9.02
Income from investment operations:
Net investment income (loss) -- 0.02
Net realized and unrealized gain (loss) on investments* (0.98) 1.77
Total from investment operations (0.98) 1.79
Less distributions:
Distributions from net investment income and capital paid
in -- (0.03)
Distributions from net realized gain on investments sold -- (0.96)
Distributions in excess of income, capital paid in & gains -- --
Total distributions -- (0.99)
Net asset value, end of period $ 9.02 $ 9.82
Total investment return (9.81)% 20.54%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $ 556 $ 840
Ratio of expenses to average net assets (%)*** 1.05 % 0.94 %
Ratio of net investment income (loss) to average net assets
(%) (0.01)% 0.30 %
Turnover rate (%) 60.51 % 109.12 %
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 4.55% and 2.24% for the years
ended December 31, 1998, and 1999, respectively.
21
<PAGE>
Small Cap Value Fund
GOAL AND STRATEGY
This is a small cap stock fund with a value emphasis that seeks long-term
growth in capital.
The Fund invests primarily in a diversified mix of the common stocks of small
U.S. companies that are believed to offer favorable prospects for increasing
dividends and capital appreciation.
The manager applies a combination of quantitative techniques and equity
research to identify the best values among small company stocks.
Stocks are evaluated based on multiple factors, including:
. earnings-to-price ratios;
. earnings estimate revisions;
. relative price strength; and
. share issuance/buyback.
The Fund is managed using risk control techniques to maintain risk, style, cap-
italization and industry characteristics similar to the Russell 2000(R) Value
Index. The Fund normally invests in 150 to 250 stocks, with at least 65% (usu-
ally higher) of its assets in small cap companies. The Fund normally has 5% or
less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
INVESCO, Inc.
101 Federal Street
Boston, Massachusetts 02110
Managing since 1957
Managed approximately $92 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Jeremy S. Lefkowitz
- -----------------
Managing Director of subadviser
Joined subadviser in 1998
Portfolio Manager, Chancellor
Capital Management and its predecessor (1982-1998)
Began career in 1974
Daniel A. Kostyk, CFA
- -----------------
Vice President of subadviser
Joined subadviser in 1995
Began career in 1991
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 25.57%
1998 -5.96%
1999 -3.43%
Best quarter: up 18.11%, second quarter 1997 Worst quarter: down 21.06%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/98(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -3.43% 1.23%
Life of fund 6.46% 8.34%
</TABLE>
Index: 50% Russell 2000(R) Index/50% Russell 2000(R) Value Index (For periods
through September 30, 1999
Russell 2000(R) Value Index (for periods after September 30, 1999)
(1)Began operations on May 1, 1996.
22
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "small cap" approach car-
ries the risk that in certain markets small cap stocks will underperform mid
cap and large cap stocks.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.73 $ 12.40 $ 11.59
Income from investment operations:
Net investment income (loss) 0.07 0.08 0.07 0.09
Net realized and unrealized gain (loss)
on investments* 0.96 2.66 (0.81) (0.50)
Total from investment operations 1.03 2.74 (0.74) (0.41)
Less distributions:
Distributions from net investment
income and capital paid in (0.07) (0.08) (0.07) (0.07)
Distributions from net realized gain on
investments sold (0.23) (0.99) -- (0.01)
Distributions in excess of income,
capital paid in & gains -- -- -- (0.18)
Total distributions (0.30) (1.07) (0.07) (0.26)
Net asset value, end of period $ 10.73 $ 12.40 $ 11.59 $ 10.92
Total investment return 10.33% 25.57% (5.96)% (3.43)%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $10,541 $43,261 $64,095 $68,900
Ratio of expenses to average net assets
(%)*** 1.05% 1.05% 1.05% 0.95%
Ratio of net investment income (loss) to
average net assets (%) 1.15% 0.68% 0.63% 0.78%
Turnover rate (%) 66.31% 126.10% 100.83% 117.33%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.06%, 1.30%, 1.08% and 0.96%
for the years ended December 31, 1996, 1997, 1998, and 1999, respectively.
23
<PAGE>
Global Equity Fund
GOAL AND STRATEGY
This is a global stock fund that seeks long-term growth in capital.
The Fund primarily invests in a diversified mix of common stocks of:
. large established U.S. companies; and
. large established foreign companies located in countries throughout the
world, including developed, newly industrialized, and emerging countries.
The manager makes ongoing decisions about the mix between U.S. and foreign
stocks. The manager has a target mix of 40% in U.S. stocks and 60% in foreign
stocks, but actively manages the mix within (+/-) 20 percentage points of the
target mix.
The manager uses global economic and industry analysis to identify global eco-
nomic and industry themes. The manager looks for companies that will benefit
from:
. global economic trends;
. promising technologies or products; and
. specific country opportunities resulting from changing geopolitical, currency
or economic relationships.
The manager purchases stocks of companies that are:
. in growth industries;
. efficient producers; and
. undervalued relative to long-term growth potential.
The Fund invests:
. in at least 3 different countries (including the U.S.), but normally in more
than 15 countries; and
. no more than 10% of its assets in emerging markets stocks.
Although the Fund may employ foreign currency hedging techniques, the Fund nor-
mally maintains the currency exposure of the underlying equity investments.
The Fund normally invests in 90 to 120 stocks, with at least 65% (usually high-
er) of its assets in large cap companies. The Fund normally has 5% or less of
its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Global Depository Receipts (GDRs), European Depository
Receipts (EDRs), and certain derivatives (investments whose value is based on
indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents or invest-
ing 100% of its assets in U.S. companies--that are inconsistent with the Fund's
primary investment strategy. In taking those measures, the Fund may not achieve
its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Managing since 1919
Managed approximately $290 billion in assets at the end of 1999
FUND MANAGERS
William E. Holzer
- -----------------
Lead Portfolio Manager of subadviser
Joined subadviser in 1980
Diego Espinosa
- -----------------
Vice President of subadvisor
Joined team in 1997
Joined subadviser in 1996
Research Analyst at Morgan
Stanley & Company (1994-1996)
Nicholas Bratt
- -----------------
Portfolio Manager of subadviser
Joined team in 1993
Joined subadviser in 1976
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1999 24.19%
Best quarter: up 15.94%, fourth quarter 1999 Worst quarter: down 12.39%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 24.19% 25.34%
Life of fund 13.48% 19.92%
</TABLE>
Index:MSCI World Index
(1)Began operations on May 1, 1998.
24
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than if it
invested exclusively in developed or newly-industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Market Allocation Risk: The allocation of the Fund's assets among domestic and
international equity regions may (1) reduce the Fund's holdings in a region
whose value then increases unexpectedly, or (2) increase the Fund's holdings
in a region just prior to its experiencing a loss of value.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31; 1998** 1999
Net asset value, beginning of period $ 10.00 $ 9.87
Income from investment operations:
Net investment income (loss) 0.07 0.10
Net realized and unrealized gain (loss) on investments* (0.13) 2.27
Total from investment operations (0.06) 2.37
Less distributions:
Distributions from net investment income and capital paid
in (0.07) (0.07)
Distributions from net realized gain on investments sold -- --
Distributions in excess of income, capital paid in & gains -- (0.04)
Total distributions (0.07) (0.11)
Net asset value, end of period $ 9.87 $ 12.13
Total investment return (0.55)% 24.19%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $15,281 $22,311
Ratio of expenses to average net assets (%)*** 1.15% 1.04%
Ratio of net investment income (loss) to average net assets
(%) 1.11% 0.96%
Turnover rate (%) 33.17% 49.51%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains
and losses in the fund securities for the period because of the timing of
purchases and withdrawals of shares in relation to the fluctuation in
market values of the fund.
** Fund began operations May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.47% and 1.26% for the years
ended December 31, 1998, and 1999, respectively.
25
<PAGE>
Global Balanced Fund
(Formerly International Balanced Fund)
GOAL AND STRATEGY
This is a non-diversified global balanced stock and bond fund that seeks long-
term growth in income and capital.
The Fund invests primarily in a mix of:
. U.S. and foreign common stocks of large companies within developed markets;
and
. U.S. and foreign investment grade bonds of issuers within developed markets
with maturities generally greater than 12 months.
The manager makes ongoing decisions about the mix between stocks and bonds. The
manager has a target mix of 65% stocks and 35% bonds, but actively manages the
mix within (+/-) 10 percentage points of the target mix.
The Fund invests:
. in at least 3 different countries, but normally invests in 10 to 20 coun-
tries; and
. no more than 10% of its assets in emerging market stocks and bonds.
The manager selects stocks and bonds using fundamental value analysis to iden-
tify fairly priced investments with long-term sustainable cash flows. The man-
ager determines fundamental value by focusing on:
. current market prices relative to fundamental values;
. broad-based indices for stocks, bonds, and markets; and
. economic variables such as productivity, inflation and global competitive-
ness.
The Fund is non-diversified, which means that it can take larger positions in a
smaller number of issuers. However, the Fund normally invests in 125 to 250
stocks within the stock portion. The Fund normally has 10% or less of its
assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Global Depository Receipts (GDRs), European Depository
Receipts (EDRs), high yield bonds, and certain derivatives (investments whose
value is based on indices or other securities).
The manager actively uses derivatives, such as futures and forwards, to manage
the Fund's average maturity relative to the Salomon Brothers World Government
Bond Index Unhedged and to implement foreign currency strategies. Currency man-
agement strategies are primarily used for hedging purposes and to protect
against anticipated changes in foreign currency exchange rates.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Brinson Partners, Inc.
209 South LaSalle Street
Chicago, Illinois 60604
Managing since 1974
Managed approximately $161 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Jeffrey Diermeier, CFA
- -----------------
Managing Director, Global Equities, of subadviser
Joined subadviser in 1989
Began career in 1977
Denis S. Karnosky, Ph.D.
- -----------------
Managing Director, Asset Allocation/Currency, of subadviser
Joined subadviser in 1989
Began career in 1967
Norman D. Cumming
- -----------------
Managing Director, Global Fixed Income, of subadviser's affiliate UBS Brinson,
Limited
Joined subadviser in 1989
Began career in 1977
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 2.65%
1998 17.99%
1999 5.11%
Best quarter: up 13.06%, fourth quarter 1998 Worst quarter: down 4.49%, fourth
quarter 1997
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 5.11% 15.42%
Life of fund 8.71% 9.88%
</TABLE>
Index: 65% MSCI World Index (Ex US) (Net of Withholding Taxes from a U.S. Tax
Perspective)/35% Salomon Brothers Non-US Government Bond Index Unhedged
(for periods through April 30, 2000)
65% MSCI World Index (Net of Withholding Taxes From a U.S. Tax
Perspective)/35% Salomon Brothers World Government Bond Index Unhedged
(for periods after April 30, 2000)
(1)Began operations on May 1, 1996.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
26
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than if it
invested exclusively in developed or newly-industrialized countries.
Non-Diversified Fund Risk: The Fund's larger position in foreign government
securities could produce more volatile performance relative to funds with
smaller positions. The less diversified a fund's holdings are, the more likely
it is that a specific security's poor performance will hurt the fund signifi-
cantly.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "large/mid cap" approach
carries the risk that large/mid cap stocks will underperform small cap stocks.
Market Allocation Risk: The allocation of the Fund's assets between the major
asset classes (i.e., stocks and bonds) may (1) reduce the Fund's holdings in a
class whose value then increases unexpectedly, or (2) increase the Fund's hold-
ings in a class just prior to its experiencing a loss of value.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Trust would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Turnover Risk. In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
High Yield Bond Risk. Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become harder
to value or to sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Global Balanced Fund (formerly
International Balanced Fund)--Period
ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.39 $ 10.11 $ 11.12
Income from investment operations:
Net investment income (loss) 0.24 0.33 0.34 0.29
Net realized and unrealized gain (loss)
on investments* 0.41 (0.05) 1.44 0.25
Total from investment operations 0.65 0.28 1.78 0.54
Less distributions:
Distributions from net investment income
and capital paid in (0.24) (0.34) (0.35) (0.35)
Distributions from net realized gain on
investments sold (0.02) (0.22) (0.42) (0.44)
Distributions in excess of income,
capital paid in & gain -- -- -- (0.16)
Total distributions $ (0.26) $ (0.56) $ (0.77) $ (0.95)
Net asset value, end of period $ 10.39 $ 10.11 $ 11.12 $ 10.71
Total investment return 6.73% 2.65% 17.99% 5.11%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $24,098 $25,420 $30,416 $31,577
Ratio of expenses to average net assets
(%)*** 1.10% 1.10% 1.10% 1.00%
Ratio of net investment income (loss) to
average net assets (%) 3.59% 3.18% 3.20% 2.73%
Turnover rate (%) 22.21% 81.04% 103.55% 131.21%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.44%, 1.56%, 1.82%, and 1.31%
for the years ended December 31, 1996, 1997, 1998, and 1999, respectively.
27
<PAGE>
International Equity Index Fund
GOAL AND STRATEGY
This is an international stock fund that seeks to track the performance of
broad-based equity indices of foreign companies in developed and emerging mar-
kets.
The Fund is managed relative to a target mix of 90% in the MSCI EAFE GDP Index
and 10% in the MSCI EMF Index. The EAFE GDP Index, known as the Europe Austral-
asia and Far East Index, includes foreign companies in developed markets, with
country index weights based upon a country's Gross Domestic Product (GDP). The
EMF Index, known as the Emerging Markets Free Index, includes foreign companies
in emerging markets, with country index weights based upon a country's market
capitalization.
The manager employs a passive management strategy using quantitative techniques
to invest in a representative sample of stocks in the Index. The manager
selects stocks in an attempt to track, as closely as possible, the characteris-
tics of the Index, including country and sector weights. The Fund normally
invests in 400 to 1,200 stocks.
The Index composition changes from time to time. The manager will reflect those
changes as soon as practical.
The Fund is normally fully invested. The manager may invest in stock index
futures to maintain market exposure and manage cash flow. Although the Fund may
employ foreign currency hedging techniques, the Fund normally maintains the
currency exposure of the underlying equity investments.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Global Depository Receipts (GDRs), European Depository
Receipts (EDRs), cash equivalents, and certain derivatives (investments whose
value is based on indices or other securities).
Note: "MSCI EAFE GDP Index" and "MSCI EMF Index" are the exclusive property of
Morgan Stanley & Co., Incorporated and are registered service marks of Morgan
Stanley Capital International.
- --------------------------------------------------------------------------------
SUBADVISER
Independence International Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1986
Managed approximately $2.2 billion in assets at the end of 1999
FUND MANAGERS
Bradford S. Greenleaf, CFA
- -----------------
Senior Vice President, Managing Director,
of subadviser
Joined team in 2000
Joined subadviser in 1994
Vice President, Franklin Portfolio Associates, Inc. (1986-1994)
David P. Nolan, CFA
- -----------------
Vice President of subadviser
Joined subadviser in 1996
Portfolio manager Boston
International Advisors, Inc. (1989-1996)
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1990 -7.80%
1991 23.40%
1992 -1.80%
1993 32.10%
1994 -6.25%
1995 8.01%
1996 9.19%
1997 -5.03%
1998 20.82%
1999 30.87%
Best quarter: up 20.91%, fourth quarter 1998 Worst quarter: down 14.75%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 30.87% 30.87%
5 years 12.11% 14.36%
10 years 9.39% 7.90%
Life of fund 9.72% 8.55%
</TABLE>
Index: MSCI EAFE Index (for periods through April 30, 1998)
MSCI EAFE GDP Index (for periods from May 1, 1998 through June 30, 1999)
90% MSCI EAFE GDP Index/10% MSCI EMF Index (for periods after June 30,
1999)
28
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than if it
invested exclusively in developed or newly-industrialized countries.
Index Management Risk: Certain factors such as the following may cause the
Fund to track the Index less closely:
. The securities selected by the manager may not be fully representative of
the Index.
. Transaction expenses of the Fund may result in the Fund's performance being
different than that of the Index.
. The size and timing of the Fund's cash flows may result in the Fund's per-
formance being different than that of the Index.
Also, index funds like this one will have more difficulty in taking defensive
positions in abnormal market conditions.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices.
Stocks tend to go up and down in value more than bonds. If the Fund's invest-
ments are concentrated in certain sectors, the Fund's performance could be
worse than the overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures
and swaps) can produce disproportionate gains or losses. They are generally
considered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning
of period $ 14.62 $ 15.61 $ 16.83 $ 15.20 $ 15.56
Income from investment
operations:
Net investment income
(loss) 0.17 0.21 0.13 0.23 0.21
Net realized and
unrealized gain (loss) on
investments* 0.99 1.22 (0.97) 2.91 4.51
Total from investment
operations 1.16 1.43 (0.84) 3.14 4.72
Less distributions:
Distributions from net
investment income and
capital paid-in (0.17) (0.21) (0.13) (0.23) (0.21)
Distributions from net
realized gain on
investments sold -- -- (0.66) (2.55) (0.38)
Distributions in excess of
income, capital paid in &
gains -- -- -- -- (0.05)
Total distributions (0.17) (0.21) (0.79) (2.78) (0.64)
Net asset value, end of
period $ 15.61 $ 16.83 $ 15.20 $ 15.56 $19.64
Total investment return 8.01% 9.19% (5.03)% 20.82% 30.87%
Ratios and supplemental
data
Net assets, end of period
(000s omitted) $126,803 $155,753 $152,359 $173,137 $244,017
Ratio of expenses to
average net assets (%)** 0.84% 0.76% 0.79% 0.56% 0.31%
Ratio of net investment
income (loss) to average
net assets (%) 1.34% 1.30% 0.78% 1.45% 1.26%
Turnover rate (%) 65.82% 92.03% 83.13% 158.63% 19.01%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains
and losses in the fund securities for the period because of the timing of
purchases and withdrawals of shares in relation to the fluctuation in
market values of the fund.
** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 0.87%, 0.63% and, 0.38% for
the years ended December 31, 1995, 1998, and 1999, respectively.
29
<PAGE>
International Opportunities Fund
GOAL AND STRATEGY
This is an international stock fund that seeks long-term growth in capital.
The Fund primarily invests in a diversified mix of common stocks of large
established and medium-sized foreign companies located throughout the world,
including developed, newly industrialized, and emerging countries.
The manager determines the distribution among countries and regions by using a
combination of fundamental research and economic analysis, emphasizing:
. prospects for relative economic growth between foreign countries;
. expected levels of inflation;
. government policies influencing business conditions; and
. outlook for currency relationships.
The manager selects stocks that have growth characteristics such as:
. leading market position or technological leadership;
. high return on invested capital;
. healthy balance sheets with relatively low debt;
. strong competitive advantage;
. strength of management; and
. earnings growth and cash flow sufficient to support growing dividends.
The Fund invests:
. in at least 3 different countries; and
. no more than 20% of its assets in emerging market stocks.
Although the Fund may employ foreign currency hedging techniques, the Fund nor-
mally maintains the currency exposure of the underlying equity investments.
The Fund normally invests in 200 to 300 stocks in 15 to 20 countries. The Fund
normally has 10% or less of its assets in cash and cash equivalents.
The Fund also may purchase other types of securities, for example: American
Depository Receipts (ADRs), Global Depository Receipts (GDRs), European Deposi-
tory Receipts (EDRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Rowe Price-Fleming International, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Managing since 1979
Managed approximately $42 billion in assets at the end of 1999
FUND MANAGERS
Management by Investment Advisory Group overseen by:
David J. L. Warren
- -----------------
Portfolio Manager of subadviser
Joined subadvisor in 1983
Began career in 1981
John R. Ford
- -----------------
Portfolio Manager of subadviser
Joined subadvisor in 1982
Began career in 1980
James B. M. Seddon
- -----------------
Portfolio Manager of subadvisor
Joined subadvisor in 1987
Began career in 1987
Mark Bickford-Smith
- -----------------
Portfolio Manager of subadvisor
Joined subadvisor in 1995
Began career in 1985
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 1.95%
1998 15.92%
1999 34.01%
Best quarter: up 24.44%, fourth quarter 1999 Worst quarter: down 13.70%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 34.01% 31.79%
Life of fund 15.38% 14.14%
</TABLE>
Index: MSCI Europe, Australia, Far East (EAFE) Index (for periods through
December 31, 1998)
MSCI All Country World Index, Excluding U.S. (for periods after December
31, 1998)
(1)Began operations on May 1, 1996.
30
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries,
it will have a significantly higher degree of foreign risk than if it invested
exclusively in developed or newly-industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.60 $ 10.63 $ 12.21
Income from investment operations:
Net investment income (loss) 0.07 0.10 0.11 0.10
Net realized and unrealized gain (loss)
on investments* 0.60 0.11 1.57 3.95
Total from investment operations 0.67 0.21 1.68 4.05
Less distributions:
Distributions from net investment income
and capital paid in (0.07) (0.10) (0.10) (0.11)
Distributions from net realized gain on
investments sold -- (0.08) -- (0.94)
Distributions in excess of income,
capital paid in & gains -- -- -- (0.04)
Total distributions (0.07) (0.18) (0.10) (1.09)
Net asset value, end of period $ 10.60 $ 10.63 $ 12.21 $ 15.17
Total investment return 6.72% 1.95% 15.92% 34.01%
Ratios and supplemental data
Net assets, end of period (000s omitted) $17,898 $30,631 $64,250 $79,794
Ratio of expenses to average net assets
(%)*** 1.25% 1.22% 1.16% 1.02%
Ratio of net investment income (loss) to
average net assets (%) 0.87% 0.65% 0.89% 0.77%
Turnover rate (%) 5.46% 21.09% 18.67% 34.02%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.76%, 1.57%, 1.46%, and 1.15%
for the years ended December 31, 1996, 1997, 1998, and 1999, respectively.
31
<PAGE>
Emerging Markets Equity Fund
GOAL AND STRATEGY
This is an emerging markets stock fund that seeks long-term growth in capital.
The Fund invests primarily in the stocks of companies in countries having econ-
omies or markets generally considered by the World Bank or United Nations to be
emerging or developing.
In making country allocation decisions, the manager analyzes the global envi-
ronment and selects countries with:
. Improving macroeconomic, political and social trends, and
. attractive valuation levels.
The manager selects stocks using fundamental proprietary research to identify
companies:
. having strong earnings growth potential,
. selling below their intrinsic value, and
. having shareholder-focused management, dominant products, and well estab-
lished distribution channels.
The Fund normally invests:
. in at least 15 emerging market countries, and
. no more than 30% of its assets in any single country.
The Fund normally invests in 100 to 250 stocks in 20 to 25 countries. The Fund
normally has 10% or less of its assets in cash and cash equivalents.
Although the Fund may employ foreign currency hedging techniques, the Fund
normally maintains the currency exposure of the underlying equity investments.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Global Depository Receipts (GDRs), European Depository
Receipts (EDRs), and certain derivatives (investments whose value is based on
indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Morgan Stanley Dean Witter Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Managing since 1975
Managed approximately $184 billion in assets at the end of 1999
Managing Fund since August 1, 1999
FUND MANAGERS
Robert L. Meyer, CFA
- -----------------
Managing Director of subadvisor
Joined subadviser in 1989
Andy Skov
- -----------------
Managing Director of subadviser
Joined subadviser in 1994
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1999 81.37%
Best quarter: up 50.45%, fourth quarter 1999 Worst quarter: down 20.40%, second
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 81.37% 66.41%
Life of fund 16.49% 10.60%
</TABLE>
Index:MSCI Emerging Markets Free Index
(1)Began operations on May 1, 1998.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
32
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, since the Fund invests primarily in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than funds
that invest primarily in developed or newly- industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the funds perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. The
Fund's turnover rate could be greater than 100% due to the relatively high vol-
atility associated with investing in emerging markets.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $10.00 $ 7.09
Income from investment operations:
Net investment income (loss) 0.03 0.03
Net realized and unrealized gain (loss) on investments* (2.91) 5.67
Total from investment operations (2.88) 5.70
Less distributions:
Distributions from net investment income and capital paid
in (0.03) (0.01)
Distributions from net realized gain on investments sold -- (0.10)
Distributions in excess of income, capital paid in & gains -- (0.42)
Total distributions (0.03) (0.53)
Net asset value, end of period $ 7.09 $ 12.26
Total investment return*** (28.87)% 81.37%
Ratios and supplemental data
Net assets, end of period (000s omitted) $7,310 $32,596
Ratio of expenses to average net assets (%)**** 1.55% 1.39%
Ratio of net investment income (loss) to average net assets
(%) 0.51% 0.19%
Turnover rate (%) 53.95% 196.32%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
**Fund began operations on May 1, 1998.
*** Includes the effect of a voluntary capital contribution from John Hancock
of $32 per share for the year ended 1999. The Total Investment Return
without the capital contribution would have been 79.02% for the year ended
1999.
**** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 3.69% and 3.44% for the years
ended December 31, 1998, and 1999, respectively.
33
<PAGE>
Short-Term Bond Fund
GOAL AND STRATEGY
This is a short-term bond fund that seeks high income consistent with low share
price fluctuation.
The Fund primarily invests in a diversified mix of short-term and intermediate-
term investment grade debt securities including:
. U.S. Treasury and Agency securities;
. U.S. corporate bonds;
. foreign corporate bonds of companies in developed countries (if dollar-
denominated);
. foreign government and agency securities of developed countries (if dollar
denominated); and
. mortgage-and asset-backed securities.
The manager selects bonds using a combination of proprietary research and quan-
titative tools. Bonds are purchased that are attractively priced and that pro-
vide cheap, predictable cash flows.
The Fund normally invests:
. mostly in corporate bonds;
. no more than 15% of its assets in high yield bonds; and
. no more than 25% of its assets in foreign debt securities.
The Fund normally has:
. an average maturity between one and three and a half years;
. an average credit quality rating of "A" or higher; and
. 10% or less of its assets in cash and cash equivalents.
The Fund only invests in securities that are rated at least BB- or Ba3 at time
of purchase.
The Fund may purchase other types of securities, for example: certain deriva-
tives (investments whose value is based on indexes or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGER
Jeffrey B. Saef
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1994
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1995 11.49%
1996 3.61%
1997 6.41%
1998 5.82%
1999 2.96%
Best quarter: up 3.87%, second quarter 1995 Worst quarter: down 0.42%, first
quarter 1999
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 2.96% 3.62%
5 year 6.02% 6.95%
Life of fund 5.35% 6.30%
</TABLE>
Index:Merrill Lynch 1-5 Year U.S. Government Bond Index (for periods through
April 30,
1998)
65% Lehman Brothers 1-3 Year Corporate Bond Index/35% Lehman Brothers 1-3
Year Government Bond Index (for periods after April 30, 1998)
(1)Began operations on May 1, 1994.
34
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest
rates fall, the reverse will generally occur. The longer the average remaining
maturity of bonds held by the Fund, the more sensitive the Fund is to interest
rate risk. This Fund has less interest rate risk than an intermediate-term or
long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obliga-
tion to pay interest and repay principal. Also, the credit rating of a bond
held by the fund may be downgraded. In either case, the value of the bond held
by the Trust would fall. All bonds have some credit risk, but in general low-
er-rated bonds have higher credit risk.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are,
the more likely it is a specific security's poor performance will hurt the
fund significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic,
political and social instability. Factors such as lack of liquidity, foreign
ownership limits and restrictions on removing currency also pose special
risks.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become
harder to value or to sell at a fair price.
Prepayment / Call Risk: The Fund's share price or yield could be hurt if
interest rate movements cause the Fund's mortgage-related and callable securi-
ties to be paid off substantially earlier than expected.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning of
period $ 9.66 $ 10.23 $ 10.05 $ 10.08 $ 10.05
Income from investment
operations:
Net investment income (loss) 0.50 0.54 0.59 0.61 0.61
Net realized and unrealized gain
(loss) on investments* 0.59 (0.18) 0.03 (0.03) (0.33)
Total from investment operations 1.09 0.36 0.62 (0.58) 0.28
Less distributions:
Distributions from net
investment income and capital
paid in (0.50) (0.54) (0.59) (0.61) (0.61)
Distributions from net realized
gain on investments sold (0.02) -- -- -- --
Distributions in excess of
income, capital paid in & gains -- -- -- -- --
Total distributions $ (0.52) $ (0.54) $ (0.59) $ (0.61) (0.61)
Net asset value, end of period $ 10.23 $ 10.05 $ 10.08 $ 10.05 $ 9.72
Total investment return 11.49% 3.61% 6.41% 5.82% 2.96%
Ratios and supplemental data
Net assets, end of period (000s
omitted) $17,911 $58,676 $51,120 $77,194 $68,844
Ratio of expenses to average net
assets (%)** 0.75% 0.75% 0.57% 0.53% 0.43%
Ratio of net investment income
(loss) to average net assets (%) 5.52% 5.66% 5.67% 6.17% 6.25%
Turnover rate (%) 109.77% 20.68% 108.29% 184.50% 100.04%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made, the expense ratio would have been 1.83% and 0.79% for the years
ended December 31, 1995 and 1996, respectively.
35
<PAGE>
Bond Index Fund
GOAL AND STRATEGY
This is a bond fund that seeks to track the performance of the Lehman Brothers
Government / Corporate Bond Index.
The manager employs a passive management strategy using quantitative techniques
to select individual securities that provide a representative sample of the
securities in the Index.
If the Fund reaches approximately $50 million in total assets, the manager will
seek to match the performance of the Lehman Brothers Aggregate Bond Index, a
broader market index that also includes mortgage-backed and asset-backed secu-
rities.
Both of these Indexes consist of dollar-denominated investment grade securities
with maturities greater than one year and outstanding par values of at least
$150 million issued primarily by:
. the U.S. Treasury and U.S. government agencies and instrumentalities;
. foreign governments and agencies; and
. U.S. and foreign corporations.
The manager selects securities to match, as closely as practical, the Index's
duration, cash flow, sector, credit quality, callability, and other key perfor-
mance characteristics. The Fund may hold some cash and cash equivalents, but is
normally fully invested.
The Index composition may change from time to time. The manager may keep secu-
rities that no longer meet the Index criteria as long as:
. such "ineligible" securities plus cash and money market instruments are less
than 20% of the Fund's assets; and
. high yield securities are less than 5% of the Fund's assets.
- --------------------------------------------------------------------------------
SUBADVISER
Mellon Bond Associates, LLP
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Managing since 1986
Managed approximately $50 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Gregory D. Curran, CFA
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1995
Began career in 1986
Vice President of Salomon Brothers (1986-1995)
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1999 -2.57%
Best quarter: up 5.35%, Fourth quarter 1998 Worst quarter: down 1.27%, first
quarter 1999
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -2.57% -2.15%
Life of fund 2.64% 2.96%
</TABLE>
Index:Lehman Brothers Government/Corporate Bond Index
(1)Began operations on May 1, 1998.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
36
<PAGE>
MAIN RISKS
Primary
Index Management Risk: Certain factors such as the following may cause the
Fund to track the Index less closely:
. The securities selected by the manager may not be fully representative of the
Index.
. Transaction expenses of the Fund may result in the Fund's performance being
different than that of the Index.
. The size and timing of the Fund's cash flows may result in the Fund's perfor-
mance being different than that of the Index.
Also, index funds like this one will have more difficulty in taking defensive
positions in abnormal market conditions.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Trust would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic, polit-
ical and social instability. Factors such as lack of liquidity, foreign owner-
ship limits and restrictions on removing currency also pose special risks. All
foreign securities have some degree of foreign risk. However, to the extent the
Fund invests in emerging market countries, it will have a significantly higher
degree of foreign risk than if it invested exclusively in developed or newly-
industrialized countries.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $10.00 $10.19
Income from investment operations:
Net investment income (loss) 0.42 0.63
Net realized and unrealized gain (loss) on investments* 0.29 (0.89)
Total from investment operations 0.71 (0.26)
Less distributions:
Distributions from net investment income and capital paid in (0.42) (0.61)
Distributions from net realized gain on investments sold (0.10) --
Distributions in excess of income, capital paid in & gains -- --
Total distributions (0.52) (0.61)
Net asset value, end of period $10.19 $ 9.32
Total investment return 7.20% (2.57)%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $2,748 $4,125
Ratio of expenses to average net assets (%)*** 0.40% 0.29%
Ratio of net investment income (loss) to average net assets
(%) 6.17% 6.56%
Turnover rate (%) 21.09% 17.06%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 0.71% and 0.35% for the years
ended December 31, 1998, and 1999, respectively.
37
<PAGE>
Global Bond Fund
GOAL AND STRATEGY
This is a global bond fund that seeks income and growth in capital.
The Fund primarily invests in a mix of debt securities of developed countries
throughout the world including:
. U.S. Treasury and agency securities;
. foreign government and agency securities;
. supranational securities (such as the World Bank);
. corporate bonds, both U.S. and foreign; and
. mortgage-backed and asset-backed securities.
The manager makes ongoing decisions regarding the Fund's mix of U.S. bonds and
non-U.S. bonds (denominated in foreign currencies). The manager has a target
mix of 35% U.S. bonds and 65% non-U.S. bonds, but actively manages the mix
within (+/-) 50 percentage points of the target mix.
The Fund invests in at least 3 countries, but normally in 5 to 15 countries.
The Fund normally has an average credit quality rating of "AA" or higher.
The manager makes ongoing decisions regarding the Fund's average maturity,
country and sector allocations and foreign currency exposures. The manager uses
proprietary research and economic analysis to try to anticipate market condi-
tions and interest rate movements and to purchase securities that appear com-
paratively undervalued.
The manager actively uses derivatives (investments whose value is based on
indices or other securities) such as futures, forwards, options and swaps to
adjust the Fund's average maturity and to implement currency strategies. The
Fund is typically 75% to 100% hedged to the U.S. dollar.
The manager actively uses cash and cash equivalents to manage the Fund's aver-
age maturity. However, the Fund normally invests 20% or less of its assets in
cash and cash equivalents.
The Fund may purchase other types of securities, for example: high yield debt
securities and emerging market debt securities.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
J.P. Morgan Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
Managing, with predecessors, since 1861
Managed approximately $349 billion in assets at the end of 1999
FUND MANAGERS
David Gibbon
- -----------------
Vice President of subadviser
Joined subadviser in 1992
Began career in 1992
Hubert Penot
- -----------------
Managing Director of subadviser
Joined subadviser in 1978
Began career in 1978
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 9.05%
1998 9.15%
1999 -2.16%
Best quarter: up 4.32%, third quarter 1998 Worst quarter: down 1.75%, second
quarter 1999
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -2.16% -0.17%
Life of fund 6.10% 7.16%
</TABLE>
Index: 75% Lehman Brothers Aggregate Bond Index / 25% JP Morgan Non-US Govern-
ment Bond Index, Hedged (for periods through April 30, 1999)
JP Morgan Global Government Bond Index, US Dollar Hedged (for periods after
April 30, 1999)
(1)Began operations on May 1, 1996.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
38
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, the Fund's investments in emerging market countries have a
significantly higher degree of foreign risk than investments in developed or
newly-industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Trust would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific securities poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Global Bond Fund (formerly Strategic Bond
Portfolio)-Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.16 $ 10.24 $ 10.60
Income from investment operations:
Net investment income (loss) 0.38 0.59 0.54 0.48
Net realized and unrealized gain (loss)
on investments* 0.28 0.30 0.38 (0.70)
Total from investment operations 0.66 0.89 0.92 (0.22)
Less distributions:
Distributions from net investment income
and capital paid in (0.38) (0.66) (0.47) (0.56)
Distributions from net realized gain on
investments sold (0.12) (0.15) (0.09) --
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions $ (0.50) $ (0.81) $ (0.56) (0.56)
Net asset value, end of period $ 10.16 $ 10.24 $ 10.60 $ 9.82
Total investment return 6.71% 9.05% 9.15% (2.16)%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $12,907 $28,647 $66,791 $70,991
Ratio of expenses to average net assets
(%)*** 1.00% 1.00% 0.95% 0.83%
Ratio of net investment income (loss) to
average net assets (%) 6.05% 5.80% 5.27% 4.70%
Turnover rate (%) 171.39% 69.38% 186.70% 332.06%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.57%, 1.32%, 1.02%, and 0.84%
for the years ended December 31, 1996, 1997, 1998, and 1999, respectively.
39
<PAGE>
High Yield Bond Fund
GOAL AND STRATEGY
This is a high yield bond fund that seeks high income and growth in capital.
The Fund invests primarily in a diversified mix of high yield debt securities,
commonly referred to as "junk bonds" (rated BB+/Ba1 or lower and their unrated
equivalents), including:
. corporate bonds, both U.S. and foreign (if dollar-denominated);
. foreign government and agency securities (if dollar-denominated);
. preferred stocks; and
. convertible securities (convertible into common stocks or other equity inter-
ests).
The manager will invest no more than 15% of the Fund's assets in emerging mar-
ket countries (with below investment-grade sovereign debt). The Fund normally
has 10% or less of its assets in cash and cash equivalents.
The manager seeks to purchase bonds with stable or improving credit quality
before the market widely perceives the improvement. Purchase and sale decisions
are primarily based upon the investment merits of the particular security.
The manager selects bonds using proprietary research, including:
. quantitative analysis of historical financial data;
. qualitative analysis of a company's future prospects; and
. economic and industry analysis.
The Fund's average maturity depends on security selection decisions rather than
interest rate decisions.
The Fund may purchase other types of securities, for example: equity securi-
ties, high quality debt securities (short-term and otherwise), certain deriva-
tives (investments whose value is based on indices or other securities), and
debt securities denominated in foreign currencies.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109
Managing, with predecessors, since 1928
Managed approximately $236 billion in assets at the end of 1999
FUND MANAGER
Richard T. Crawford
- -----------------
Vice President of subadviser
Joined subadviser in 1994
Began career in 1991
Manager draws upon the other members of the High Yield team, including:
Earl E. McEvoy
- -----------------
Partner of subadviser
Joined subadviser in 1978
Began career in 1972
Catherine A. Smith
- -----------------
Partner of subadviser
Joined subadviser in 1985
Began career in 1983
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar year
[CHART]
1999 5.13%
Best quarter: up 4.55%, fourth quarter 1998 Worst quarter: down 7.46%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 5.13% 2.39%
Life of fund 1.19% 0.31%
</TABLE>
Index:Lehman Brothers High-yield Bond Index
(1)Began operations on May 1, 1998.
Note:See the Appendix to this prospectus for further performance information
relevant to this Fund.
40
<PAGE>
MAIN RISKS
Primary
High Yield Bond Risk: High yield or junk bonds, defined as bond securities
rated below BBB-/Baa3, may be subject to more volatile or erratic price move-
ments due to investor sentiment. In a down market, these high yield securities
may become harder to value or to sell at a fair price.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Fund would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic, polit-
ical and social instability. Factors such as lack of liquidity, foreign owner-
ship limits and restrictions on removing currency also pose special risks. All
foreign securities have some degree of foreign risk. However, to the extent the
Fund invests in emerging market countries, it will have a significantly higher
degree of foreign risk than if it invested exclusively in developed or newly-
industrialized countries.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
Prepayment/Call Risk: The Fund's share price or yield could be hurt if interest
rate movements cause the Fund's mortgage-related and callable securities to be
paid off substantially earlier than expected.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $ 10.00 $ 9.23
Income from investment operations:
Net investment income (loss) 0.46 0.72
Net realized and unrealized gain (loss) on investments* (0.76) (0.26)
Total from investment operations (0.30) 0.46
Less distributions:
Distributions from net investment income and capital paid
in (0.46) (0.70)
Distributions from net realized gain on investments sold (0.01) --
Distributions in excess of income, capital paid in & gains -- --
Total distributions (0.47) (0.70)
Net asset value, end of period $ 9.23 $ 8.99
Total investment return (2.98)% 5.13%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $14,789 $19,921
Ratio of expenses to average net assets (%)*** 0.90% 0.80%
Ratio of net investment income (loss) to average net assets
(%) 7.43% 7.94%
Turnover rate (%) 17.67% 38.62%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.03% and 1.04% for the years
ended December 31, 1998, and 1999, respectively.
41
<PAGE>
Your Account
Investments in shares of the funds
Each fund sells its shares directly to separate accounts of John Hancock,
JHVLICO and IPL to fund variable contracts. Each fund also buys back its shares
on redemption by the separate accounts.
Under the variable contracts, a separate account buys or redeems a fund's
shares based on:
. instructions by you and other contractowners to invest or receive back monies
under a contract (such as making a premium payment or surrendering a con-
tract), and
. the operation of a contract (such as deduction of fees and charges).
The Trust, as law permits, may:
. refuse a buy order if the adviser believes it would disrupt management
. suspend a fund's offer of shares, or
. suspend a fund's redemption obligation or postpone a fund's payment of
redemption proceeds for more than seven days.
Share price
Each fund sells and buys back its shares at the net asset value per share
("NAV") next computed after receipt by a separate account of a contractowner's
instructions.
Each fund calculates its NAV:
. by dividing its net assets by the number of its outstanding shares,
. once daily as of the close of regular trading on the New York Stock Exchange
(generally at 4 p.m. New York time) on each day the Exchange is open.
Certain funds may hold securities primarily listed on foreign exchanges that
trade on weekends or other days when the Trust does not calculate NAV. Conse-
quently, NAV may change on days when contractowners will not be able to
instruct a separate account to buy or redeem fund shares.
Valuation
Each of the funds values securities based on:
. market quotations,
. amortized cost,
. valuations of independent pricing services, or
. fair value determined in accordance with procedures approved by the Trust's
trustees.
A fund may value securities at fair value where, for example:
. market quotations are not readily available, or
. the value of securities has been materially affected after the closing of a
foreign market.
Conflicts
The Trust's trustees monitor for possible material irreconcilable conflicts
among separate accounts buying shares of the funds. The Trust's net asset value
could decrease, if the Trust had to sell investment securities to pay redemp-
tion proceeds to a separate account withdrawing because of a conflict.
42
<PAGE>
Funds' Expenses
The advisory fee paid by each fund to the adviser last year was:
Funds % of net assets
Managed 0.32%
Equity Index 0.14%
Large Cap Value 0.74%
Large Cap Growth 0.36%
Mid Cap Value 0.80%
Mid Cap Growth 0.83%
Real Estate Equity 0.60%
Small/Mid Cap CORE 0.80%
Small Cap Value 0.80%
Global Equity 0.90%
Global Balanced 0.85%
International Equity Index 0.16%
International Opportunities 0.87%
Emerging Markets Equity 1.27%
Short-Term Bond 0.30%
Bond Index 0.15%
Global Bond 0.69%
High Yield Bond 0.65%
The adviser pays subadvisory fees out of its own assets. No fund pays a fee to
its subadviser.
The adviser has agreed to limit each fund's annual expenses (excluding advisory
fees and certain other expenses such as brokerage and taxes) to not more than
.10 percent of the fund's average daily net assets.
Dividends and Taxes
Dividends
Each fund automatically reinvests its dividends and distributions in additional
shares of the fund at NAV.
Each fund declares and pays dividends monthly.
Funds generally declare capital gains distributions annually.
Taxes
Each fund must meet investment diversification and other requirements under the
Internal Revenue Code, in order to:
. avoid federal income tax and excise tax, and
. assure the tax-deferred treatment of variable contracts under the Code.
You should read the prospectus for your variable contract for the federal
income tax consequences for contractowners, including the consequences of a
fund's failure to meet Code requirements.
43
<PAGE>
Trust Business Structure
The diagram below shows the basic business structure of the Trust. The Trust's
trustees oversee the Trust's investment and business activities and hire vari-
ous service providers to carry out the Trust's operations.
Variable
Contractowners
John Hancock,
JHVLICO and IPL
Separate Accounts
The Trust
Trustees oversee the
Trust's investment and
business activities.
Investment Adviser Custodian
John Hancock Life State Street Bank and
Insurance Company Trust
Company
Manages the Trust's
investment and business Holds the Trust's assets,
activities. settles all Trust
trades and collects most
of the valuation
data required for calcu-
lating the Trust's
NAV.
Subadvisers
Brinson Partners, Inc. Morgan Stanley Dean Wit-
Goldman Sachs Asset Management. ter Investment Manage-
ment, Inc.
Independence International Associates, Inc.
Neuberger Berman, LLC
Independence Investment Associates, Inc.
INVESCO, Inc. Rowe Price-Fleming International,
J.P. Morgan Investment Management Inc. Inc.
Janus Capital Corporation Scudder Kemper Investments, Inc.
Mellon Bond Associates, LLP State Street Bank and Trust Com-
pany
T. Rowe Price Associates, Inc.
Wellington Management Company,
LLP
Provide management to various funds.
44
<PAGE>
APPENDIX
Additional Performance Information
The "Past Performance" information shown earlier in this prospectus for certain
of the Funds may not be sufficient for you to make a complete assessment of the
risks and potential rewards of investing in those Funds. The Small/Mid Cap CORE
Fund, the Emerging Markets Equity Fund, the Bond Index Fund, and the High Yield
Bond Fund only began operations on May 1, 1998. The Global Balanced Fund and
the Global Bond Fund implemented significant changes in strategy as of May 1,
2000, and May 1, 1999, respectively.
Since each of these Funds has at best a very limited period of relevant perfor-
mance history, we have set forth below information for certain similar accounts
that are managed by the Funds' respective subadvisers. Each grouping of such
accounts is referred to as a "composite." In the case of each account included
in a composite, the total management fees and other operating expenses of the
Fund (based upon management fee schedules and allocation rules currently in
effect) have been substituted for the actual fees and expenses (other than bro-
kerage and other transaction expenses) of the account. Also, except as specifi-
cally noted below, each composite includes all of the investment company and
other accounts of the subadviser that satisfy the following requirements:
. they have been managed with investment objectives, policies, and strategies
substantially similar to those used in managing the Fund, and
. they are of sufficient size that their performance would be considered rele-
vant to the owner of a variable contract investing in that Fund.
Some of the accounts in the composites were not registered investment companies
and, therefore, were not subject to federal income tax and other legal require-
ments applicable to such companies. Had such accounts been subject to such
requirements, their performance could have been adversely affected. The perfor-
mance figures in this Appendix do not reflect the deduction of fees and charges
payable under the variable contracts. Such fees and charges would cause the
investment returns under the contacts to be less than that shown below.
The graphs below show how the composite's total return has varied from year to
year, while the tables show performance over time (along with a broad-based
index for reference). All figures assume dividend reinvestment. Past perfor-
mance does not indicate future results.
Small/Mid Cap CORE Composite (Corresponding to Small/Mid Cap CORE Fund)
The Small/Mid Cap CORE Composite is an asset-weighted composite of all fully
discretionary accounts managed using a substantially similar investment strate-
gy. As of December 31, 1999, the composite included 4 accounts with total
assets of $158 million.
Year-by-year total returns -- calendar years
[CHART]
1996* 19.55%
1997 29.42%
1998 -0.52%
1999 21.54%
* Composite inception April 1, 1996. 1996 total
return is not annualized.
Best quarter: up 17.87%, fourth quarter 1999 Worst
quarter: down 20.71%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 21.54% 24.15%
3 years 16.10% 15.72%
Since inception 18.18% 15.96%
</TABLE>
Index:Russell 2500TM Index
45
<PAGE>
Global Balanced Composite (Corresponding to Global Balanced Fund)
The Global Balanced Composite is an asset-weighted composite of all fully dis-
cretionary accounts managed using a substantially similar investment strategy.
As of December 31, 1999, the composite included 4 accounts with total assets of
$1.8 billion.
Year-by-year total returns -- calendar years
[CHART]
1995 24.85%
1996 14.15%
1997 10.75%
1998 8.71%
1999 1.60%
Best quarter: up 8.34%, second quarter 1997 Worst
quarter: down 5.13%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 1.60% 14.32%
3 years 6.95% 15.57%
5 years 11.76% 15.48%
</TABLE>
Index:65% MSCI World Index/35% Salomon Brothers
World Government Bond Index, Unhedged.
Emerging Markets Equity Composite (Corresponding to Emerging Markets Equity
Fund)
The Emerging Markets Equity Composite is an asset-weighted composite of all
fully discretionary mutual fund accounts managed using a substantially similar
investment strategy (excluding all separately managed accounts and the Emerging
Markets Equity Fund). As of December 31, 1999, the composite included 12
accounts with total assets of $5.2 billion.
Year-by-year total returns -- calendar years
[CHART]
1995 -13.42%
1996 11.84%
1997 -2.41%
1998 -24.33%
1999 102.74%
Best quarter: up 51.98%, fourth quarter 1999 Worst
quarter: down 23.57%, second quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 102.74% 66.41%
3 years 14.40% 3.18%
5 years 7.71% 2.00%
</TABLE>
Index:MSCI Emerging Markets Free Index
46
<PAGE>
Government/Corporate Bond Index Composite (Corresponding to Bond Index Fund)
The Government/Corporate Bond Index Composite is an asset-weighted composite of
all fully discretionary accounts (excluding mutual funds) managed using a sub-
stantially similar investment strategy. As of December 31, 1999, the composite
included 5 accounts with total assets of $1.3 billion.
Year-by-year total returns -- calendar years
[CHART]
1995 18.87%
1996 2.54%
1997 9.70%
1998 9.41%
1999 -2.42%
Best quarter: up 6.43%, second quarter 1995 Worst
quarter: down 2.44%, first quarter 1996
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year -2.42% -2.15%
3 years 5.41% 5.54%
5 years 7.38% 7.60%
</TABLE>
Index:Lehman Brothers Government/Corporate Bond
Index
Global Fixed Hedged Composite (Corresponding to Global Bond Fund)
The Global Fixed Hedged Composite is an asset-weighted composite of all fully
discretionary accounts managed using a substantially similar investment strat-
egy. As of December 31, 1999, the composite included 2 accounts with total
assets of $734 million.
Year-by-year total returns -- calendar years
[CHART]
1995 17.67%
1996 8.55%
1997 9.72%
1998 11.72%
1999 -1.36%
Best quarter: up 5.92%, third quarter 1998 Worst
quarter: down 1.59%, second quarter 1999
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year -1.36% 0.72%
3 years 6.54% 7.55%
5 years 9.08% 9.76%
</TABLE>
Index:J. P. Morgan Global Government Bond Index,
U.S. Dollar Hedged.
47
<PAGE>
High Yield Bond Composite (Corresponding to High Yield Bond Fund)
The High Yield Bond Composite is an asset-weighted composite of all fully dis-
cretionary accounts managed using a substantially similar investment strategy.
As of December 31, 1999, the composite included 13 accounts with total assets
of $850 million.
Year-by-year total returns -- calendar years
[CHART]
1995 20.48%
1996 12.77%
1997 11.85%
1998 -0.17%
1999 4.13%
Best quarter: up 6.18%, second quarter 1995 Worst
quarter: down 7.91%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 4.13% 2.39%
3 years 5.15% 5.56%
5 years 9.58% 9.31%
</TABLE>
Index:Lehman Brothers High Yield Bond Index.
48
<PAGE>
For more information
This prospectus Two documents are To request a free
should be used available that offer copy of the current
only with a vari- further information annual/semiannual
able contract on John Hancock report or the SAI,
prospectus. Variable Series please contact:
Trust I:
Annual/Semiannual By mail:
Report to shareholders
John Hancock Variable
Includes financial Series Trust I
statements, a dis- John Hancock Place
cussion of the mar- Boston, MA 02117
ket conditions and
investment strate- By phone: 1-800-732-
gies that signifi- 5543
cantly affected per-
formance, and the Or you may view or
auditors' report (in obtain these docu-
the annual report ments from the SEC:
only).
In person: at the
Statement of SEC's Public Refer-
Additional ence Room in Wash-
Information (SAI) ington, DC
The SAI contains By phone: 1-800-SEC-
more detailed infor- 0330
mation on all
aspects of the By mail: Public Refer-
funds. ence Section Securi-
ties and Exchange Com-
A current SAI has mission
John Hancock been filed with the Washington, DC
Variable Securities and 20549-6009
Series Trust I Exchange Commission (duplicating fee
John Hancock and is incorporated required)
Place by reference into
Boston, Massachu- (i.e., is legally a On the
setts 02117 part of) this pro- Internet: www.sec.gov
spectus.
SEC File Num-
ber: 811-4490
<PAGE>
As with all mutual funds, the Securities and Exchange Commission has not judged
whether these funds are good investments or whether the information in this
prospectus is adequate and accurate. Anyone who tells you otherwise is
committing a federal crime.
JOHN HANCOCK
VARIABLE SERIES TRUST I
PROSPECTUS
MAY 1, 2000
Aggressive Balanced Fund
Equity Index Fund
Large Cap Value CORE Fund
Large Cap Aggressive Growth Fund
Large/Mid Cap Value Fund
Mid Cap Blend Fund
Mid Cap Growth Fund
Fundamental Mid Cap Growth Fund
Small/Mid Cap CORE Fund
Small/Mid Cap Value Fund
Small/Mid Cap Growth Fund
Small Cap Growth Fund
Global Balanced Fund
International Equity Fund
Short-Term Bond Fund
Bond Index Fund
High Yield Bond Fund
Managed by John Hancock Life Insurance Company
John Hancock Place
Boston, MA 02117
<PAGE>
Contents
- --------------------------------------------------------------------------------
John Hancock Variable Series Trust I ("Trust")
Overview 2
A fund-by-fund summary of goals, strategies and risks.
Your Investment Choices 3
Aggressive Balanced Fund 6
Equity Index Fund 8
Large Cap Value CORE Fund 10
Large Cap Aggressive Growth Fund 12
Large/Mid Cap Value Fund 14
Mid Cap Blend Fund 16
Mid Cap Growth Fund 18
Fundamental Mid Cap Growth Fund 20
Small/Mid Cap CORE Fund 22
Small/Mid Cap Value Fund 24
Small/Mid Cap Growth Fund 26
Small Cap Growth Fund 28
Global Balanced Fund 30
International Equity Fund 32
Short-Term Bond Fund 34
Bond Index Fund 36
High Yield Bond Fund 38
Policies and instructions for opening, maintaining and closing an account in
any fund
Your Account 40
Investments in shares of the funds 40
Share price 40
Valuation 40
Conflicts 40
Further information on the funds
Funds' Expenses, Dividends and Taxes 41
Expenses 41
Dividends 41
Taxes 41
Further information on the Trust
Trust Business Structure 42
Additional performance information
Appendix 43
For more information back cover
<PAGE>
Overview
- --------------------------------------------------------------------------------
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on page 6. Each description provides
the following information:
Goal and Strategy The fund's particular investment goals and the principal
strategies it intends to use in pursuing those goals.
Subadviser/Manager The firm and individual(s) providing investment management
services to the fund.
Past Performance The fund's total return, measured year-by-year and over time.
Main Risks The significant risk factors associated with the fund. The risks are
categorized as "Primary" or "Secondary". The Primary Risks are considered major
factors in the fund's performance and are described first. The Secondary Risks
are not considered major factors in the fund's performance because the fund
would not normally commit a large portion of its assets to the investments
involved. However, the Secondary Risks are of such a nature that they could
significantly affect the fund's performance, even if the investments are held
in relatively small amounts.
Financial Highlights The fund's operating performance per share, measured year-
by-year.
THE FUNDS
The Trust offers investment choices, or funds, for the variable annuity and
variable life insurance contracts ("variable contracts") of:
. John Hancock Life Insurance Company ("John Hancock"),
. John Hancock Variable Life Insurance Company ("JHVLICO"), and
. Investors Partner Life Insurance Company and its subsidiaries ("IPL").
In some variable contract forms, the Trust is referred to as the "Fund" or "Se-
ries Fund" and the investment choices are referred to as "Portfolios."
RISKS OF FUNDS
These funds, like all mutual funds, are not bank deposits. They are not insured
or guaranteed by the FDIC or any other government agency. You could lose money
by investing in these funds. So, be sure to read all risk disclosure carefully
before investing.
MANAGEMENT
John Hancock is the investment adviser of each fund. John Hancock is a Massa-
chusetts stock life insurance company. On February 1, 2000, John Hancock
changed its form of organization and its name. Prior to that date, it was John
Hancock Mutual Life Insurance Company, a mutual life insurance company that was
chartered in 1862. At the end of 1999, John Hancock managed approximately $127
billion, of which it owned over $71 billion. All of the funds shown in this
prospectus have subadvisers.
2
<PAGE>
Your Investment Choices
- -------------------------------------------------------------------------------
The Trust offers a number of investment choices, or funds, to suit a variety
of objectives under variable contracts. There are 17 of these funds available
under your variable contract. Each fund has its own strategy and its own
risk/reward profile. The funds can be broadly categorized as equity funds,
balanced funds, bond funds, and international funds. Within these broad cate-
gories, the funds can be further categorized as follows:
Equity Funds
Equity funds can be categorized in two ways--by capitalization and by invest-
ment style.
Capitalization Equity funds can be categorized by market capital-
ization, which is defined as the market value of
all shares of a company's stock. The following def-
initions for large, mid and small cap are based
upon statistics at year-end 1999, but are adjusted
periodically with broad equity market movements as
represented by the Russell 3000(R) Index or other
widely-
recognized source of market capitalization data.
Adjustments are typically made on a quarterly
basis, but in extraordinary circumstances may be
made as frequently as monthly.
Large Cap Funds:
. Equity Index Fund These funds invest in large, well-established com-
panies that typically are very actively traded and
. Large Cap Value CORE provide more stable investment returns over time.
Fund Large cap companies represent the 300 largest
stocks in the Russell 3000(R) Index. Each of those
. Large Cap Aggressive companies has a market capitalization greater than
Growth Fund $7.9 billion as of the end of 1999. Large cap funds
are appropriate for investors who want the least
volatile investment returns within the overall
equity markets.
Large/Mid Cap Funds:
. Large/Mid Cap Value These funds invest in large cap and mid cap compa-
Fund nies. The capitalization of these funds can shift
over time from primarily large cap to primarily mid
cap or vice versa depending on where the manager
identifies investment opportunities. These funds
are generally more volatile than pure large cap
funds, but generally less volatile than pure mid
cap funds.
Mid Cap Funds:
. Mid Cap Blend Fund These funds invest in medium-sized, less estab-
lished companies that are less actively traded and
. Mid Cap Growth Fund provide more share price volatility over time than
large cap stocks. Mid cap companies represent the
. Fundamental Mid Cap 250th to 1000th largest stocks in the Russell
Growth Fund 3000(R) Index. Each of those companies has a market
capitalization between $1.4 billion and $9.7 bil-
lion as of the end of 1999. Mid cap funds are
appropriate for investors who are willing to accept
more volatile investment returns within the overall
equity markets with the potential reward of higher
long-term returns.
Small/Mid Cap Funds:
. Small/Mid Cap CORE Fund These funds invest in mid cap and small cap compa-
nies. The capitalization of these funds can shift
. Small/Mid Cap Value over time from primarily mid cap to primarily small
Fund cap or vice versa depending on where the manager
identifies investment opportunities. These funds
. Small/Mid Cap Growth are generally more volatile than pure mid cap
Fund funds, but generally less volatile than pure small
cap funds.
Small Cap Funds:
. Small Cap Growth Fund These funds invest in small newly established com-
panies that are less actively traded and have a
high level of share price volatility over time.
Small cap companies represent the 2000 smallest
stocks in the Russell 3000(R) Index. Each of those
companies has a market capitalization of less than
$1.4 billion as of the end of 1999. Small cap funds
are appropriate for investors who are willing to
accept the most volatile investment returns within
the overall equity markets for the potential reward
of higher long-term returns.
3
<PAGE>
Investment Style
Value Funds:
. Large Cap Value CORE Value funds invest in companies that are attrac-
Fund tively priced, considering their asset and earnings
history. These stocks typically pay above average
. Large/Mid Cap Value dividends and have low stock prices relative to
Fund measures of earnings and book value. Value funds
are appropriate for investors who want some divi-
. Small/Mid Cap Value dend income and the potential for capital gains,
Fund but are less tolerant of share-price fluctuations.
Growth Funds:
. Large Cap Aggressive Growth funds invest in companies believed to have
Growth Fund above-average prospects for capital growth due to
their strong earnings and revenue potential. Growth
. Mid Cap Growth Fund stocks typically have high stock prices relative to
measures of earnings and book value. Growth funds
. Fundamental Mid Cap are appropriate for investors who are willing to
Growth Fund accept more share-price volatility for the poten-
tial reward of higher long-term returns.
. Small Mid/Cap Growth
Fund
. Small Cap Growth Fund
Blend Funds:
. Equity Index Fund Blend funds invest in both value and growth compa-
nies. Blend funds are appropriate for investors who
. Mid Cap Blend Fund seek both dividend and capital appreciation charac-
teristics.
. Small/Mid Cap CORE Fund
Balanced Funds
. Aggressive Balanced Balanced funds invest in a combination of stocks
Fund and bonds and actively manage the mix of stock and
bonds within a target range. Domestic balanced
. Global Balanced Fund funds invest in U.S. stocks and bonds. Global bal-
anced funds invest in foreign and U.S. stocks and
bonds.
Bond Funds
Bond funds can be categorized in two ways--by average maturity and by credit
quality:
Average Maturity Bond maturity is a key measure of interest rate
risk. A bond's maturity measures the time remaining
until the bond matures, or until the repayment of
the bond's principal comes due. The longer a bond's
maturity, the more sensitive the bond's price is to
changes in interest rates.
Short:
. Short Term Bond Fund These funds invest primarily in bonds with short
maturities, typically less than four years. These
funds have less interest rate risk than intermedi-
ate-term bond funds.
Intermediate:
. Bond Index Fund These funds invest in bonds of all maturities and
maintain an average maturity which is typically
. High Yield Bond Fund between four and ten years. These funds have more
interest rate risk than short-term bond funds.
4
<PAGE>
Credit Quality Credit quality is a measure of the ability of a
bond issuer to meet its financial obligations and
repay principal and interest. High quality bonds
have less credit risk than lower quality bonds.
Investment grade bonds typically have "high" or
"medium" credit quality ratings (as defined below),
while high-yield bonds have "low" credit quality
ratings.
High:
. Bond Index Fund These funds focus on the highest-rated, most
creditworthy bonds and typically maintain an aver-
age credit quality rating of AAA/Aaa or AA/Aa.
Medium:
. Short Term Bond Fund These funds invest in bonds of all credit quality
levels with a focus on high-rated investment grade
bonds. These funds typically maintain an average
credit quality rating of A or BBB/Baa.
Low:
. High Yield Bond Fund These funds invest primarily in lower rated bonds--
known as high yield or "junk" bonds. These funds
typically maintain a below investment-grade average
credit quality rating of BB/Ba or B.
International Funds
International funds invest primarily in securities markets outside the United
States. Funds that invest primarily in the larger, well-established developed
or industrialized markets around the world (like the International Equity Fund)
have less foreign securities risk than funds that invest primarily in emerging
markets.
. International Equity Fund
--------------
In the following pages, any fund investment strategy that is stated as a per-
centage of a fund's assets applies at all times, not just at the time the fund
buys or sells an investment security. The trustees of the Trust can change the
investment goals and strategy of any fund without shareholder (i.e.,
contractowner) approval.
The financial highlights tables on the following pages detail the historical
performance of each fund that had at least one full year of operations as of
December 31, 1999, including total return information showing the increase or
decrease of an investment in the fund each year (assuming reinvestment of all
dividends and distributions). The "total investment return" shown for each fund
does not reflect the expenses and charges of the applicable separate accounts
and variable contracts. Those expenses and charges vary considerably from con-
tract to contract and are described in the variable contract prospectus to
which this prospectus is attached. If the earliest period shown in the finan-
cial highlights table is less than a full calendar year, the two "Ratios" shown
for that period have been annualized (i.e., projected as if the fund had been
in effect for a full year). However, the "total investment return" and "turn-
over rate" for that period have not been annualized.
In this prospectus, the term "stock" is used as a shorthand reference for
equity investments generally and the term "bond" is used as a shorthand refer-
ence for debt obligations generally.
5
<PAGE>
Aggressive Balanced Fund
GOAL AND STRATEGY
This is a balanced stock and bond fund that seeks long-term growth in income
and capital.
The Fund invests primarily in a diversified mix of:
. common stocks of large established U.S. companies, and
. bonds with maturities generally greater than 12 months.
The manager makes ongoing decisions about the mix among stocks and bonds. The
manager has a target mix of 75% in equities and 25% in bonds, but actively man-
ages the mix within +/-10 percentage points of the target mix.
The manager selects stocks and bonds using a combination of proprietary
research and quantitative tools. Stocks are purchased that are undervalued rel-
ative to the stock's history and have improving earnings growth prospects.
Bonds are purchased that are attractively priced and have cheap, predictable
cash flows. The Fund is managed using risk control techniques that maintain
risk and industry characteristics similar to the overall market.
The Fund normally invests its equity portion in 80 to 150 stocks, with at least
65% (usually higher) of its equity assets in large cap companies. The Fund may
invest up to 20% of its bond assets in developed foreign countries (denominated
in foreign currencies) and up to 15% of its bond assets in high yield bonds.
The Fund normally has 5% or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities). The manager actively uses derivatives, such as
futures and forwards, to adjust the Fund's average maturity relative to the
Lehman Brothers Aggregate Bond Index and to implement currency strategies.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
John C. Forelli
(equity)
- -----------------
Senior Vice President of subadviser
Joined team in 1996
Joined subadviser in 1990
Jeffrey B. Saef
(fixed income)
- -----------------
Senior Vice President of subadviser
Joined team in 1994
Joined subadviser in 1994
PAST PERFORMANCE
Because this Fund did not have a full year of operations as of December 31,
1999, no year-by-year total returns or average annual total returns can be
shown for this Fund. However, the Appendix to this prospectus contains certain
performance information that is relevant to this Fund. The Appendix starts on
page 43.
6
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "large cap" approach carries the risk that in certain markets large cap
stocks will underperform mid cap and small cap stocks.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest
rates fall, the reverse will generally occur. The longer the average remaining
maturity of bonds held by the Fund, the more sensitive the Fund is to interest
rate risk. This Fund has more interest rate risk than a short-term bond fund,
but less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obliga-
tion to pay interest and repay principal. Also, the credit rating of a bond
held by the fund may be downgraded. In either case, the value of the bond held
by the Trust would fall. All bonds have some credit risk, but in general low-
er-rated bonds have higher credit risk.
Market Allocation Risk: The allocation of the Fund's assets among major asset
classes (i.e., stocks, bonds, and short-term debt securities) may (1) reduce
the Fund's holdings in a class whose value then increases unexpectedly, or (2)
increase the Fund's holdings in a class just prior to its experiencing a loss
of value.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become
harder to value or to sell at a fair price.
Prepayment/Call Risk: The Fund's share price or yield could be hurt if inter-
est rate movements cause the Fund's mortgage-related and callable securities
to be paid off substantially earlier than expected.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C>
Period ended December 31: 1999**
Net asset value, beginning of period $ 10.00
Income from investment operations:
Net investment income (loss) 0.06
Net realized and unrealized gain (loss) on investments* 0.64
Total from investment operations 0.70
Less distributions:
Distributions from net investment income and capital paid in (0.05)
Distributions from net realized gain on investments sold (0.03)
Distributions in excess of income, capital paid in & gains --
Total distributions (0.08)
Net asset value, end of period $ 10.62
Total investment return 7.09%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $11,883
Ratio of expenses to average net assets (%)*** 0.78%
Ratio of net investment income (loss) to average net assets (%) 1.68%
Turnover rate (%) 70.28%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on August 31, 1999.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 0.96% for the year ended
December 31.
7
<PAGE>
Equity Index Fund
GOAL AND STRATEGY
This is a stock fund that seeks to track the performance of the S&P 500 Index,
which emphasizes the stocks of large U.S. companies.
The manager employs a passive management strategy by normally investing in all
500 stocks included in the Index. The manager invests in each stock in roughly
the same proportion as represented in the Index.
The manager seeks to replicate as closely as possible the aggregate risk char-
acteristics and industry diversification of the Index.
The Fund normally invests in all 500 stocks in the Index, but has no predeter-
mined number of stocks that it must hold. S&P may change the composition of the
Index from time to time. The manager will reflect those changes as soon as
practical.
The Fund is normally fully invested. The manager may invest in stock index
futures to maintain market exposure and manage cash flow.
The Fund may purchase other types of securities, for example: Standard & Poor's
Depository Receipts (SPDRs), American Depository Receipts (ADRs), cash equiva-
lents, and certain derivatives (investments whose value is based on indices or
other securities).
Note: "S&P 500 Index" means the Standard & Poor's 500 Composite Stock Price
Index. "Standard & Poor's", "S&P" and "S&P 500" are trademarks of McGraw Hill,
Inc. and have been licensed for use by the Trust.
- --------------------------------------------------------------------------------
SUBADVISER
State Street Bank and Trust Company
State Street Global Advisors Division
Two International Place
Boston, Massachusetts 02110
Managing since 1978
Managed approximately $667 billion in assets at the end of 1999
FUND MANAGERS
John A. Tucker
- -----------------
Principal of subadviser
Joined subadviser in 1988
James B. May
- -----------------
Principal of subadviser
Joined subadviser in 1989
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may also help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1997 32.79%
1998 28.45%
1999 21.08%
Best quarter: up 21.27%, fourth quarter 1998 Worst quarter: down 9.99%, third
quarter 1998
Average annual total return -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 21.08% 21.04%
Life of fund 26.36% 26.79%
</TABLE>
Index:S&P 500 Index
(1)Began operations on May 1, 1996.
8
<PAGE>
MAIN RISKS
Primary
Index Management Risk: Certain factors such as the following may cause the
Fund to track the Index less closely:
. The securities selected by the manager may not be fully representative of
the Index.
. Transaction expenses of the Fund may result in the Fund's performance being
different than that of the Index.
. The size and timing of the Fund's cash flows may result in the Fund's per-
formance being different than that of the Index.
Also, index funds like this one will have more difficulty in taking defensive
positions in abnormal market conditions.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "large cap" approach carries the risk that in certain markets large cap
stocks will underperform mid cap and small cap stocks.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $10.00 $11.10 $14.21 $17.70
Income from investment operations:
Net investment income (loss) 0.15 0.24 0.25 0.27
Net realized and unrealized gain
(loss) on investments* 1.26 3.41 3.76 3.41
Total from investment operations 1.41 3.65 4.01 3.68
Less distributions:
Distributions from net investment
income and capital paid in (0.21) (0.29) (0.24) (0.26)
Distributions from net realized gain
on investments sold (0.10) (0.25) (0.28) (0.66)
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions ($0.31) ($0.54) ($0.52) (0.92)
Net asset value, end of period $11.10 $14.21 $17.70 $20.46
Total investment return*** 14.23% 32.79% 28.45% 21.08%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $14,650 $101,390 $232,578 $451,296
Ratio of expenses to average net
assets (%)**** 0.00% 0.00% 0.00% 0.00%
Ratio of net investment income (loss)
to average net assets (%) 2.74% 1.97% 1.59% 1.42%
Turnover rate (%) 15.72% 64.56% 43.31% 55.24%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains
and losses in the fund securities for the period because of the timing
of purchases and withdrawals of shares in relation to the fluctuation in
market values of the fund.
** Fund began operations on May 1, 1996.
*** Includes the effect of a voluntary capital contribution from John Han-
cock of $0.06 per share for the period 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.
**** Expense ratio is net of expense reimbursement. Had such reimbursement
not been made the expense ratio would have been 1.61%, 0.65%, 0.34% and
0.22% for the years ended December 31, 1996, 1997, 1998 and 1999,
respectively.
9
<PAGE>
Large Cap Value CORE Fund
GOAL AND STRATEGY
This is a large cap stock fund with a value emphasis that seeks long-term
growth in capital and dividend income.
The Fund invests primarily in a diversified mix of common stocks of large
established U.S. companies that are believed to offer favorable prospects for
increasing dividends and growth in capital.
The manager selects stocks using a combination of quantitative techniques and
fundamental equity research. The manager employs an investment process known as
CORE, "Computer Optimized, Research-Enhanced," that employs a proprietary quan-
titative model. The manager identifies stocks that have strong expected earn-
ings growth and momentum and better valuation and risk characteristics than the
Russell 1000 Value Index.
Stocks are purchased that have:
. Low to modest valuation characteristics relative to general market measures,
such as price/earnings ratio, book value and other fundamental accounting
measures, and
. favorable prospects for capital appreciation and/or dividend paying ability.
The Fund is managed using risk control techniques to maintain risk, style, cap-
italization and industry characteristics similar to the Russell 1000(R) Value
Index. The Fund is broadly diversified by industry.
The Fund normally invests in 100 to 250 stocks, with at least 65% (usually
higher) of the Fund's assets in large cap companies. The Fund normally has 10%
or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Standard & Poor's Depository Receipts (SPDRs), and cer-
tain derivatives (investments whose value is based on indices or other securi-
ties).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Goldman Sachs Asset Management,
A unit of the Investment Management
Division of Goldman, Sachs & Co.
32 Old Slip
New York, New York 10005
Managing since 1988
Managed approximately $259 billion
in assets at the end of 1999
FUND MANAGERS
Kent A. Clark
- -----------------
Managing Director of subadviser
Joined subadviser in 1992
Robert C. Jones
- -----------------
Managing Director of subadviser
Joined subadviser in 1989
Victor H. Pinter
- -----------------
Vice President of subadviser
Joined subadviser in 1990
PAST PERFORMANCE
Because this Fund did not have a full year of operations as of December 31,
1999, no year-by-year total returns or average annual total returns can be
shown for this Fund. However, the Appendix to this prospectus contains certain
performance information that is relevant to this Fund. The Appendix starts on
page 43.
10
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "large cap" approach car-
ries the risk that in certain markets large cap stocks will underperform small
and mid cap stocks.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C>
Period ended December 31: 1999**
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment income (loss) 0.04
Net realized and unrealized gain (loss) on investments* 0.31
Total from investment operations 0.35
Less distributions:
Distributions from net investment income and capital paid in (0.04)
Distributions from net realized gain on investments sold (0.14)
Distributions in excess of income, capital paid in & gains (0.01)
Total distributions (0.19)
Net asset value, end of period $10.16
Total investment return 3.58%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $6,371
Ratio of expenses to average net assets (%)*** 0.85%
Ratio of net investment income (loss) to average net assets (%) 1.13%
Turnover rate (%) 30.90%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on August 31, 1999.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.17% for the years ended
December 31.
11
<PAGE>
Large Cap Aggressive Growth Fund
GOAL AND STRATEGY
This is a non-diversified large cap stock fund with a growth emphasis that
seeks long-term growth in capital.
The Fund invests primarily in the common stocks of large established U.S. com-
panies that are believed to offer above-average potential for long-term growth
in revenues and earnings.
The manager selects stocks using proprietary company-specific research that
focuses on firms:
. offering superior earnings growth that is not fully reflected in current mar-
ket valuations,
. having prospective earnings growth rates substantially above that of the S&P
500, and
. exhibiting strong management, superior industry positions and excellent bal-
ance sheets.
The Fund employs aggressive investment strategies and invests most of its asset
in a relatively small number of companies, with the 25 most highly regarded
stocks representing at least 65% of the Fund's assets. The manager selects
stocks without regard to any predefined industry or sector selection criteria.
The manager actively trades and adjusts the Fund's holdings to capitalize on
market fluctuations. The manager typically:
. increases investment in favored securities and reduces the number of holdings
in declining markets, and
. decreases investment in favored securities and increases the number of hold-
ings in rising markets.
The Fund is a non-diversified fund, which means it can take larger positions in
a smaller number of issuers. The Fund normally invests in 35 to 55 stocks, with
at least 65% (usually higher) of its assets in large cap companies. The Fund
normally has 5% or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York, NY 10105
Managing, with predecessors, since 1971
Managed approximately $358 billion
in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
John H. Fogarty
- -----------------
Vice president of subadviser
Joined subadviser in 1988
Began career in 1988
Alfred Harrison
- -----------------
Vice chairman and Director of subadviser
Joined subadviser in 1978
Began career in 1962
PAST PERFORMANCE
Because this Fund did not have a full year of operations as of December 31,
1999, no year-by-year total returns or average annual total returns can be
shown for this Fund. However, the Appendix to this prospectus contains certain
performance information that is relevant to this Fund. The Appendix starts on
page 43.
12
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Non-Diversified Fund Risk: The Fund's larger position in individual issuers and
in a smaller number of issuers could produce more volatile performance relative
to more diversified funds. The less diversified a fund's holdings are, the more
likely it is that a specific security's poor performance will hurt the fund
significantly.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "large cap" approach
carries the risk that large cap stocks will underperform small cap and mid cap
stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C>
Period ended December 31: 1999**
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment income (loss) (0.01)
Net realized and unrealized gain (loss) on investments* 2.03
Total from investment operations 2.02
Less distributions:
Distributions from net investment income and capital paid in --
Distributions from net realized gain on investments sold (0.08)
Distributions in excess of income, capital paid in & gains --
Total distributions (0.08)
Net asset value, end of period $11.94
Total investment return 20.18%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $1,263
Ratio of expenses to average net assets (%)*** 1.08%
Ratio of net investment income (loss) to average net assets (%) (0.39)%
Turnover rate (%) 18.97%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on August 31, 1999.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.17% for the years ended
December 31.
13
<PAGE>
Large/Mid Cap Value Fund
GOAL AND STRATEGY
This is a large/mid cap stock fund with a value emphasis that seeks long-term
growth in capital.
The Fund invests primarily in a diversified mix of common stocks of large- and
mid-sized U.S. companies that are believed to offer favorable prospects for
increasing dividends and growth in capital.
The manager employs a value approach in selecting stocks, using proprietary
equity research to identify stocks having distinct value characteristics based
on industry- specific valuation criteria.
The manager screens the investable universe for stocks with:
. dividend yields greater than the Russell 1000(R) Value Index, and
. price/book ratios lower than the Russell 1000(R) Value Index.
The Fund's assets are allocated to industry-specific sub-portfolios that are
managed by each industry analyst. The manager oversees the Fund to maintain
capitalization and industry weights similar to the Russell 1000(R) Value Index.
The Fund normally invests in 100 to 130 stocks, with at least 65% (usually
higher) of its assets in large and mid cap companies. The Fund normally has 5%
or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109
Managing, with predecessors, since 1928
Managed approximately $236 billion
in assets at the end of 1999
FUND MANAGERS
Management by Global Research Team overseen by:
Doris Dwyer Chu
- -----------------
Vice President of subadviser
Joined subadviser in 1998
Partner and portfolio manager at Grantham,
Mayo, Van Otterloo & Co. (1985-1998)
Laurie A. Gabriel
- -----------------
Managing Partner of subadviser
Joined subadviser in 1976
PAST PERFORMANCE
Because this Fund did not have a full year of operations as of December 31,
1999, no year-by-year total returns or average annual total returns can be
shown for this Fund. However, the Appendix to this prospectus contains certain
performance information that is relevant to this Fund. The Appendix starts on
page 43.
14
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "large /mid cap" approach
carries the risk that large /mid cap stocks will underperform small cap stocks.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C>
Period ended December 31: 1999**
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment income (loss) 0.03
Net realized and unrealized gain (loss) on investments* 0.45
Total from investment operations 0.48
Less distributions:
Distributions from net investment income and capital paid in (0.03)
Distributions from net realized gain on investments sold (0.02)
Distributions in excess of income, capital paid in & gains (0.01)
Total distributions (0.06)
Net asset value, end of period $10.42
Total investment return 4.72%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $6,101
Ratio of expenses to average net assets (%)*** 1.05%
Ratio of net investment income (loss) to average net assets (%) 0.94%
Turnover rate (%) 23.03%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations August 31, 1999.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.42% for the year ended Decem-
ber 31.
15
<PAGE>
Mid Cap Blend Fund
GOAL AND STRATEGY
This is a mid cap stock fund that seeks long-term growth in capital.
The Fund invests primarily in a diversified mix of common stocks of mid-sized
U.S. companies that are believed to offer:
. favorable prospects for increasing dividends and capital appreciation
(i.e., "value" companies), and
. above-average potential for growth in revenues and earnings (i.e. "growth"
companies).
The manager selects stocks using a combination of proprietary equity research
and quantitative tools. Stocks are purchased that are undervalued relative to
the stock's history and have improving earnings growth prospects. The Fund is
managed using risk control techniques that maintain risk and industry charac-
teristics similar to the Russell Mid Cap(TM) Index.
The Fund normally invests in 100 to 150 stocks, with at least 65% (usually
higher) of its assets in mid cap companies. The Fund normally has 5% or less of
its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion
in assets at the end of 1999
FUND MANAGERS
Management by investment team
overseen by:
Coreen S. Kraysler, CFA
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1986
PAST PERFORMANCE
Because this Fund did not have a full year of operations as of December 31,
1999, no year-by-year total returns or average annual total returns can be
shown for this Fund. However, the Appendix to this prospectus contains certain
performance information that is relevant to this Fund. The Appendix starts on
page 43.
16
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "mid cap" approach carries the risk that in certain markets "mid cap"
stocks will underperform "large cap" and "small cap" stocks. Also, the Fund's
"blend" style carries the risk that in certain markets, "blend" styles will
underperform "growth" and "value" styles.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C>
Period ended December 31: 1999
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment income (loss) 0.03
Net realized and unrealized gain (loss) on investments* 1.10
Total from investment operations 1.13
Less distributions:
Distributions from net investment income and capital paid in (0.03)
Distributions from net realized gain on investments sold (0.40)
Distributions in excess of income, capital paid in & gains --
Total distributions (0.43)
Net asset value, end of period $10.70
Total investment return 11.53%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $5,810
Ratio of expenses to average net assets (%)*** 0.85%
Ratio of net investment income (loss) to average net assets (%) 0.82%
Turnover rate (%) 55.68%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on August 31, 1999.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.20% for the years ended
December 31.
17
<PAGE>
Mid Cap Growth Fund
GOAL AND STRATEGY
This is a non-diversified mid cap stock fund with a growth emphasis that seeks
long-term growth in capital.
The Fund invests primarily in the common stocks of mid-sized U.S. companies
that are believed to offer above-average potential for growth in revenues and
earnings.
The manager selects stocks using proprietary equity research. Stocks are pur-
chased that are expected to have earnings growth potential that may not be rec-
ognized by the investment community. The manager selects stocks without regard
to any pre- defined industry or sector selection criteria.
The manager looks for companies experiencing:
. above-average growth relative to their peers or the general economy; and
. positive change due to new product developments, improved regulatory environ-
ment or a new management team.
The Fund is non-diversified, which means it can take larger positions in a
smaller number of issuers. Based upon its current size and strategy, the Fund
invests in 35 to 75 stocks, with at least 65% of its assets in mid cap compa-
nies. The Fund normally has 15% or less of its assets in cash or cash equiva-
lents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), foreign equity securities of developed countries, and
certain derivatives (investments whose value is based on indices or other secu-
rities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Janus Capital Corporation
100 Fillmore Street
Denver, Colorado 80206
Managing since 1970
Managed approximately $248 billion
in assets at the end of 1999
FUND MANAGER
James P. Goff
- -----------------
Executive Vice President of subadviser
Managed fund since 1996 (its inception)
Joined subadviser in 1988
Began career in 1985
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1997 16.66%
1998 39.07%
1999 118.31%
Best quarter: up 59.33%, fourth quarter 1999 Worst quarter: down 12.96%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 118.31% 51.29%
Life of fund 42.19% 25.51%
</TABLE>
Index: Russell Mid Cap(TM) Growth Index
(1)Began operations on May 1, 1996.
18
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Non-Diversified Fund Risk: The Fund's larger position in individual issuers and
in a smaller number of issuers could produce more volatile performance relative
to more diversified funds. The less diversified a fund's holdings are, the more
likely it is that a specific security's poor performance will hurt the fund
significantly.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "mid cap" approach
carries the risk that in certain markets mid cap stocks will underperform small
cap and large cap stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could be- come harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share Interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.22 $ 11.93 $ 15.12
Income from investment operations:
Net investment income (loss) 0.05 (0.02) (0.09) (0.19)
Net realized and unrealized gain
(loss) on investments* 0.22 1.73 4.75 17.70
Total from investment operations 0.27 1.71 4.66 17.51
Less distributions:
Distributions from net investment
income and capital paid in (0.05) -- (0.15) --
Distributions from net realized gain
on investments sold -- -- (1.32) (3.41)
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions $ (0.05) -- $ (1.47) (3.41)
Net asset value, end of period $ 10.22 $ 11.93 $ 15.12 $ 29.22
Total investment return 2.69% 16.66% 39.07% 118.31%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $16,492 $40,235 $94,085 $452,937
Ratio of expenses to average net
assets (%)*** 1.10% 1.10% 1.10% 0.93%
Ratio of net investment income (loss)
to average net assets (%) 0.92% (0.26)% (0.64)% (0.68)%
Turnover rate (%) 71.25% 124.04% 137.01% 106.06%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.34%, 1.42% and 1.13% for the
years ended December 31, 1996, 1997, and 1998, respectively.
19
<PAGE>
Fundamental Mid Cap Growth Fund
GOAL AND STRATEGY
This is a mid cap stock fund with a growth emphasis that seeks long-term growth
in capital.
The Fund invests primarily in the common stocks of mid-sized U.S. companies
that are believed to offer above-average potential for growth in revenues and
earnings.
The manager selects stocks using both proprietary equity research and external
consensus earnings forecasts. Stocks are purchased that are believed to offer:
. High rate of sustainable earnings growth of 15% plus,
. revenue growth generated by operating results (unit volume); and
.sustainable revenue growth of 10% plus.
The manager looks for companies with:
. innovative management and strong leadership positions in unique market
niches;
. undiscovered and undervalued emerging growth opportunities; and,
. new products and services.
The Fund's industry exposures are a result of stock selection as opposed to
predetermined allocations.
The Fund normally invests in 60 to 80 stocks, with at least 65% (usually high-
er) of its assets in mid cap companies. The Fund normally has 5% or less of its
assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
OppenheimerFunds, Inc.
Two World Trade Center
New York, New York, 10048
Managing since 1959
Managed approximately $120 billion
in assets at the end of 1999
FUND MANAGERS
Bruce Bartlett
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1995
Vice President of First of America
Investment Corp. (1986-1995)
James Fullerton Turner II
- -----------------
Assistant Vice President of subadviser
Joined subadviser in 1996
Equity Analyst at First of America
Investment Corp. (1994-1996)
PAST PERFORMANCE
Because this Fund did not have a full year of operations as of December 31,
1999, no year-by-year total returns or average annual total returns can be
shown for this Fund.
20
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "mid cap" approach
carries the risk that mid cap stocks will underperform large cap and small cap
stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C>
Period ended December 31: 1999**
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment income (loss) (0.02)
Net realized and unrealized gain (loss) on investments* 5.34
Total from investment operations 5.32
Less distributions:
Distributions from net investment income and capital paid in --
Distributions from net realized gain on investments sold (0.90)
Distributions in excess of income, capital paid in & gains --
Total distributions (0.90)
Net asset value, end of period $14.42
Total investment return 54.57%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $9,175
Ratio of expenses to average net assets (%)*** 0.95%
Ratio of net investment income (loss) to average net assets (%) (0.55)%
Turnover rate (%) 61.66%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations August 31, 1999.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.09% for the year ended Decem-
ber 31.
21
<PAGE>
Small/Mid Cap CORE Fund
GOAL AND STRATEGY
This is a small/mid cap stock fund that seeks long-term growth in capital.
The Fund invests primarily in a diversified mix of the common stocks of small
and mid-sized U.S. companies that are believed to offer:
. favorable prospects for increasing dividends and capital appreciation (i.e.,
"value" companies); and
. above-average potential for growth in revenues and earnings (i.e. "growth"
companies).
The manager selects stocks using a combination of quantitative techniques and
equity research. The manager employs an investment process known as CORE, "Com-
puter Optimized, Research-Enhanced," that employs a proprietary quantitative
model. Stocks are purchased that have strong expected earnings growth and
momentum and better valuation and risk characteristics than the Russell
2500(TM) Index. The Fund is managed using risk control techniques to maintain
risk, style, capitalization and industry characteristics similar to the Russell
2500(TM) Index.
The Fund normally invests in 200 to 600 stocks, with at least 65% (usually
higher) of the Fund's assets in small cap and mid cap companies. The Fund nor-
mally has 10% or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Standard & Poor's Depository Receipts (SPDRs), and cer-
tain derivatives (investments whose value is based on indices or other securi-
ties).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Goldman Sachs Asset Management,
A unit of the Investment Management Division of Goldman Sachs and Co.
32 Old Slip
New York, New York 10005
Managing since 1988
Managed approximately $259 billion in assets at the end of 1999
FUND MANAGERS
Kent A. Clark
- -----------------
Managing Director of subadviser
Joined subadviser in 1992
Robert C. Jones
- -----------------
Managing Director of subadviser
Joined subadviser in 1989
Victor H. Pinter
- -----------------
Vice President of subadviser
Joined subadviser in 1990
PAST PERFORMANCE
Year-by-year total returns -- calendar years
[GRAPH]
1999 20.54%
Best quarter: up 17.85%, second quarter 1999 Worst quarter: down 20.01%, fourth
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 20.54% 24.15%
Life of fund 5.13% 7.38%
</TABLE>
Index: Russell 2500(TM) Index
(1) Began operations on May 1, 1998.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
22
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "small/mid cap" approach carries the risk that in certain markets
small/mid cap stocks will underperform large cap stocks.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. The
Fund had unusually high turnover in 1999 and is expected to experience similar
turnover in 2000. This higher than expected turnover is due to (i) the rela-
tively small size of the Fund, which magnifies the effect of contributions and
redemptions, and (ii) the high volatility of the market, which in 1999 resulted
in the subadviser implementing procedures to reduce the Fund's tracking risk.
Normally, the Fund's turnover rate will be less than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $10.00 $ 9.02
Income from investment operations:
Net investment income (loss) -- 0.02
Net realized and unrealized gain (loss) on investments* (0.98) 1.77
Total from investment operations (0.98) 1.79
Less distributions:
Distributions from net investment income and capital paid
in -- (0.03)
Distributions from net realized gain on investments sold -- (0.96)
Distributions in excess of income, capital paid in & gains -- --
Total distributions -- (0.99)
Net asset value, end of period $ 9.02 $ 9.82
Total investment return (9.81)% 20.54%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $ 556 $ 840
Ratio of expenses to average net assets (%)*** 1.05 % 0.94 %
Ratio of net investment income (loss) to average net assets
(%) (0.01)% 0.30 %
Turnover rate (%) 60.51 % 109.12 %
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 4.55% and 2.24% for the years
ended December 31, 1998, and 1999, respectively.
23
<PAGE>
Small/Mid Cap Value Fund
GOAL AND STRATEGY
This is a small/mid cap stock fund with a value emphasis that seeks long-term
growth in capital.
The Fund invests primarily in a diversified mix of the common stocks of small
and mid-sized U.S. companies that are believed to offer favorable prospects for
capital appreciation.
The manager selects stocks using a combination of proprietary quantitative
screening tools and fundamental equity research. The manager selects stocks
that have:
. attractive valuation characteristics, using measures such as low price-
/earnings and price/book ratios;
. strong business health, as measured by overall efficiency and profitability
(return on assets and/or equity); and
. business momentum, defined as a catalyst that the manager believes will
trigger a near-term price increase.
The Fund is broadly diversified by sector. The Fund normally invests in 70 to
150 stocks, with at least 65% (usually higher) of its assets in small and mid
cap companies. The Fund normally has 5% or less of its assets in cash and cash
equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
The Boston Company Asset
Management, LLC
One Boston Place
Boston, Massachusetts 02108
Managing since 1970
Managed approximately $24 billion
in assets at the end of 1999
FUND MANAGERS
Management by investment team
overseen by:
Peter I. Higgins, CFA
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1988
PAST PERFORMANCE
Because this Fund did not have a full year of operations as of December 31,
1999, no year-by-year total returns or average annual total returns can be
shown for this Fund. However, the Appendix to this prospectus contains perfor-
mance information that is relevant to this Fund. The Appendix starts on page
43.
24
<PAGE>
MAIN RISKS
Primary
Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "small/mid cap" approach
carries the risk that in certain markets small/mid cap stocks will underperform
large cap stocks.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C>
Period ended December 31: 1999**
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment income (loss) --
Net realized and unrealized gain (loss) on investments* 0.49
Total from investment operations 0.49
Less distributions:
Distributions from net investment income and capital paid in --
Distributions from net realized gain on investments sold (0.36)
Distributions in excess of income, capital paid in & gains --
Total distributions (0.36)
Net asset value, end of period $10.13
Total investment return 5.08%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $ 550
Ratio of expenses to average net assets (%)*** 1.05%
Ratio of net investment income (loss) to average net assets (%) (0.12)%
Turnover rate (%) 51.97%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on August 31, 1999.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.61% for the year ended Decem-
ber 31.
25
<PAGE>
Small/Mid Cap Growth Fund
GOAL AND STRATEGY
This is a small/mid cap stock fund with a growth emphasis that seeks long-term
growth in capital.
The Fund invests primarily in the common stocks of small and mid-sized U.S.
companies that are believed to offer above-average potential for growth in rev-
enues and earnings.
The manager selects stocks using a combination of proprietary quantitative and
qualitative equity research. Quantitative screening seeks to identify a group
of high-quality companies with above-average growth characteristics relative to
industry peers. Equity research seeks to identify
individual companies from that group with a higher potential for long term
earnings growth and capital appreciation.
The manager buys companies that seem attractive based on a combination of cri-
teria, among others:
. Superior historical earnings growth
. Prospects for above-average growth
. Attractive valuations
. Strong market positions
. Favorable new products
. Superior management
The Fund is broadly diversified by industry sector. The Fund normally invests
in 60 to 100 stocks, with at least 65% (usually higher) of its assets in small
and mid cap companies. The Fund normally has 5% or less of its assets in cash
and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109
Managing, with predecessors, since 1928
Managed approximately $236 billion
in assets at the end of 1999
Managing Fund since May 1, 1999
FUND MANAGER
Frank V. Wisneski
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1968
ASSOCIATE FUND MANAGER
John J. Harrington, CFA
- -----------------
Vice President of subadviser
Joined subadviser in 1995
Portfolio Manager at Munder Capital
Management (1991-1994)
PAST PERFORMANCE
The graph shows how the Fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the Fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable con-
tracts. Such fees and charges would cause the investment returns under the con-
tracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1995 35.96%
1996 30.33%
1997 3.44%
1998 5.61%
1999 5.15%
Best quarter: up 21.59%, fourth quarter 1998 Worst quarter: down 21.48%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 5.15% 57.36%
5 years 15.27% 29.03%
Life of fund 13.50% 25.49%
</TABLE>
Index:Russell Mid Cap(TM) Growth Index (For periods through April 30, 1999)
Russell 2500(TM) Growth Index (For period after pril 30, 1999)
(1) Began operations on May 1, 1994.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
26
<PAGE>
MAIN RISKS
Primary
Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "small/mid cap"
approach carries the risk that in certain markets small/mid cap stocks will
underperform large cap stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. The
Fund had a high turnover rate in 1999 because of a change in management and a
change in the Fund's investment strategy. These changes required a restructur-
ing of the Fund's investments. In future years, the Fund's turnover rate will
normally be less than 100%.
Secondary
None
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated) The following financial highlights have been
audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
Small/Mid Cap Growth Fund
- -------------------------
Period ended December 31: 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 9.94 $ 13.18 $ 16.52 $ 15.39 $ 15.94
Income from investment operations:
Net investment income (loss) (0.01) 0.02 0.01 (0.02) (0.07)
Net realized and unrealized gain
(loss) on investments* 3.58 3.99 0.56 0.88 0.74
Total from investment operations 3.57 4.01 0.57 0.86 0.67
Less distributions:
Distributions from net investment
income and capital paid in (0.01) (0.02) (0.01) -- (0.17)
Distributions from net realized
gain on investments sold (0.32) (0.65) (1.69) (0.31) (2.41)
Distributions in excess of
Income, capital paid in & gains -- -- -- -- --
Total distributions $(0.33) $ (0.67) $ (1.70) $ (0.31) $ (2.58)
Net asset value, end of period $13.18 $ 16.52 $ 15.39 $ 15.94 $ 14.03
Total investment return 35.96% 30.33% 3.44% 5.61% 5.15%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $4,133 $11,749 $13,884 $12,129 $12,963
Ratio of expenses to average net
assets (%)** 1.00% 0.84% 0.85% 0.89% 0.85%
Ratio of net investment income
(loss) to average net assets (%) (0.11)% 0.18% 0.09% (0.11)% (0.27)%
Turnover rate (%) 139.31% 217.84% 331.19% 162.21% 172.5%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made, the expense ratio would have been 1.91% for the year ended
December 31, 1995.
27
<PAGE>
Small Cap Growth Fund
GOAL AND STRATEGY
This is a small cap stock fund with a growth emphasis that seeks long-term
growth in capital.
The Fund invests primarily in a diversified mix of the common stocks of small
U.S. companies that are believed to offer above-average potential for growth in
revenues and earnings.
The manager selects stocks using proprietary equity research. Stocks are pur-
chased that are expected to have rapid earnings growth that is not yet widely
recognized by the investment community.
The manager looks for companies with:
. demonstrated annual 20% earnings growth over 3 years and/or similar future
growth expectations,
. dominant market niche or poised to become market leaders, and
. high quality senior management with coherent business strategies.
The Fund is highly diversified by sector and number of individual stocks. The
Fund's sector weightings are broadly diversified and managed relative to those
of the Russell 2000(R) Growth Index. The Fund normally invests in 150 to 220
stocks, with at least 65% (usually higher) of its assets in small cap compa-
nies. The Fund normally has 5% or less of its assets in cash and cash equiva-
lents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
Owned by John Hancock
Managing since 1968
Managed approximately $33 billion
in assets at the end of 1999
FUND MANAGERS
Management by investment team
overseen by:
Bernice S. Behar, CFA
- -----------------
Senior Vice President of
subadviser
Managed fund since 1996
(its inception)
Joined subadviser in 1991
Began career in 1986
PAST PERFORMANCE
The graph shows how the Fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the Fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable con-
tracts. Such fees and charges would cause the investment returns under the con-
tracts to be less than that shown below.
Year-by-year total returns--calendar years
[GRAPH]
1997 14.26%
1998 14.49%
1999 70.38%
Best quarter: up 45.57%, fourth quarter 1999 Worst quarter: down 21.55%, third
quarter 1998
Average annual total returns--for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 70.38% 43.09%
Life of fund 24.25% 13.65%
</TABLE>
Index: Russell 2000(R) Growth Index
(1) Began operations on May 1, 1996.
28
<PAGE>
MAIN RISKS
Primary
Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "small cap" approach
carries the risk that in certain markets small cap stocks will underperform mid
cap and large cap stocks.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated) The following financial highlights have been
audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
Period ended December 31: 1996** 1997 1998 1999
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.00 $ 9.93 $ 11.34 $ 12.99
Income from investment operations:
Net investment income (loss) 0.01 (0.02) (0.05) (0.21)
Net realized and unrealized gain
(loss) on investments* (0.06) 1.44 1.70 9.06
Total from investment operations (0.05) 1.42 1.65 8.85
Less distributions:
Distributions from net investment
income and capital paid in (0.02) (0.01) -- --
Distributions from net realized gain
on investments sold -- -- -- (2.72)
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions $ (0.02) $ (0.01) -- (2.72)
Net asset value, end of period $ 9.93 $ 11.34 $ 12.99 $ 19.12
Total investment return (0.50)% 14.26% 14.49% 70.38%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $20,633 $48,761 $74,849 $179,570
Ratio of expenses to average net
assets (%)*** 1.00% 1.00% 1.00% 0.89%
Ratio of net investment income (loss)
to average net assets (%) 0.12% (0.28)% (0.65)% (0.70)%
Turnover rate (%) 50.93% 86.23% 101.16% 113.11%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuations in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made, the expense ratio would have been 1.55%, 1.12% and 1.05% for
the years ended December 31, 1996, 1997, and 1998, respectively.
29
<PAGE>
Global Balanced Fund
(Formerly International Balanced Fund)
GOAL AND STRATEGY
This is a non-diversified global balanced stock and bond fund that seeks long-
term growth in income and capital.
The Fund invests primarily in a mix of:
. U.S. and foreign common stocks of large companies within developed markets;
and
. U.S. and foreign investment grade bonds of issuers within developed markets
with maturities generally greater than 12 months.
The manager makes ongoing decisions about the mix between stocks and bonds. The
manager has a target mix of 65% stocks and 35% bonds, but actively manages the
mix within (+/-) 10 percentage points of the target mix.
The Fund invests:
. in at least 3 different countries, but normally invests in 10 to 20 coun-
tries; and
. no more than 10% of its assets in emerging market stocks and bonds.
The manager selects stocks and bonds using fundamental value analysis to iden-
tify fairly priced investments with long-term sustainable cash flows. The man-
ager determines fundamental value by focusing on:
. current market prices relative to fundamental values;
. broad-based indices for stocks, bonds, and markets; and
. economic variables such as productivity, inflation and global competitive-
ness.
The Fund is non-diversified, which means that it can take larger positions in a
smaller number of issuers. However, the Fund normally invests in 125 to 250
stocks within the stock portion. The Fund normally has 10% or less of its
assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Global Depository Receipts (GDRs), European Depository
Receipts (EDRs), high yield bonds, and certain derivatives (investments whose
value is based on indices or other securities).
The manager actively uses derivatives, such as futures and forwards, to manage
the Fund's average maturity relative to the Salomon Brothers World Government
Bond Index Unhedged and to implement foreign currency strategies. Currency man-
agement strategies are primarily used for hedging purposes and to protect
against anticipated changes in foreign currency exchange rates.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Brinson Partners, Inc.
209 South LaSalle Street
Chicago, Illinois 60604
Managing since 1974
Managed approximately $161 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Jeffrey Diermeier, CFA
- -----------------
Managing Director, Global Equities, of subadviser
Joined subadviser in 1989
Began career in 1977
Denis S. Karnosky, Ph.D.
- -----------------
Managing Director, Asset Allocation/Currency, of subadviser
Joined subadviser in 1989
Began career in 1967
Norman D. Cumming
- -----------------
Managing Director, Global Fixed Income, of subadviser's affiliate UBS Brinson,
Limited
Joined subadviser in 1989
Began career in 1977
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1997 2.65%
1998 17.99%
1999 5.11%
Best quarter: up 13.06%, fourth quarter 1998 Worst quarter: down 4.49%, fourth
quarter 1997
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 5.11% 15.42%
Life of fund 8.71% 9.88%
</TABLE>
Index: 65% MSCI World Index (Ex US) (Net of Withholding Taxes from a U.S. Tax
Perspective)/35% Salomon Brothers Non-US Government Bond Index Unhedged
(for periods through April 30, 2000)
65% MSCI World Index (Net of Withholding Taxes From a U.S. Tax
Perspective)/35% Salomon Brothers World Government Bond Index Unhedged
(for periods after April 30, 2000)
(1)Began operations on May 1, 1996.
Note:See the Appendix to this prospectus for further performance information
relevant to this Fund.
30
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than if it
invested exclusively in developed or newly-industrialized countries.
Non-Diversified Fund Risk: The Fund's larger position in foreign government
securities could produce more volatile performance relative to funds with
smaller positions. The less diversified a fund's holdings are, the more likely
it is that a specific security's poor performance will hurt the fund signifi-
cantly.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "large/mid cap" approach
carries the risk that large/mid cap stocks will underperform small cap stocks.
Market Allocation Risk: The allocation of the Fund's assets between the major
asset classes (i.e., stocks and bonds) may (1) reduce the Fund's holdings in a
class whose value then increases unexpectedly, or (2) increase the Fund's hold-
ings in a class just prior to its experiencing a loss of value.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Trust would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Turnover Risk. In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
High Yield Bond Risk. Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become harder
to value or to sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Global Balanced Fund (formerly
International Balanced Fund)--Period
ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.39 $ 10.11 $ 11.12
Income from investment operations:
Net investment income (loss) 0.24 0.33 0.34 0.29
Net realized and unrealized gain (loss)
on investments* 0.41 (0.05) 1.44 0.25
Total from investment operations 0.65 0.28 1.78 0.54
Less distributions:
Distributions from net investment income
and capital paid in (0.24) (0.34) (0.35) (0.35)
Distributions from net realized gain on
investments sold (0.02) (0.22) (0.42) (0.44)
Distributions in excess of income,
capital paid in & gain -- -- -- (0.16)
Total distributions $ (0.26) $ (0.56) $ (0.77) $ (0.95)
Net asset value, end of period $ 10.39 $ 10.11 $ 11.12 $ 10.71
Total investment return 6.73% 2.65% 17.99% 5.11%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $24,098 $25,420 $30,416 $31,577
Ratio of expenses to average net assets
(%)*** 1.10% 1.10% 1.10% 1.00%
Ratio of net investment income (loss) to
average net assets (%) 3.59% 3.18% 3.20% 2.73%
Turnover rate (%) 22.21% 81.04% 103.55% 131.21%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.44%, 1.56%, 1.82%, and 1.31%
for the years ended December 31, 1996, 1997, 1998, and 1999, respectively.
31
<PAGE>
International Equity Fund
GOAL AND STRATEGY
This is an international stock fund that seeks long-term growth in capital.
The Fund primarily invests in a diversified mix of common stocks of large
established and medium-sized foreign companies located primarily in developed
countries outside of the U.S.
The manager selects stocks using proprietary equity research that identifies
companies having:
. strong market positions within their industry,
. management with a history of excellence focusing on core businesses,
. above average return on capital within their industry, and
. demonstrated ability to create long-term shareholder value.
The manager determines the allocation among regions and countries using a com-
bination of qualitative and quantitative inputs, including:
. quantitative models to rank the relative attractiveness of each
country/region based on valuation, credit risk and momentum, and
. qualitative assessment of regional portfolio managers to adjust model
results.
The Fund's industry exposures are largely the result of stock selection,
although the Fund maintains broad industry representation. The Fund is managed
using risk control techniques that maintain overall regional diversification.
The Fund may either (i) employ foreign currency hedging techniques in order to
maintain a neutral currency position to the benchmark or (ii) maintain the cur-
rency exposure of the underlying equity investments.
The Fund invests in at least 3 different countries, but normally invests in 10
to 20 countries.
The Fund will invest no more than 10% of its assets in emerging market stocks.
The Fund normally invests in 120 to 180 stocks and normally has 10% or less of
its assets in cash and cash equivalents.
The Fund also may purchase other types of securities, for example: American
Depository Receipts (ADRs), Global Depository Receipts (GDRs), European Deposi-
tory Receipts (EDRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Goldman Sachs Asset Management,
A unit of the Investment Management Division of Goldman, Sachs & Co.
32 Old Slip
New York, New York 10005
Managing since 1988
Managed approximately $259 billion
in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Shogo Maeda
- -----------------
Managing Director of subadviser
Joined subadviser in 1994
Senior Portfolio Manager at Nomura Investment Management, Inc. (1987-1994)
Susan Noble
- -----------------
Managing Director of subadviser
Joined subadviser in 1997
Portfolio Management Director at Fleming Investment Management (1986-1997)
Andrew Orchard
- -----------------
Executive Director of subadviser
Joined subadviser in 1999
Portfolio Manager at Morgan Grenfell
Asset Management (1994-1999)
PAST PERFORMANCE
Because this Fund did not have a full year of operations as of December 31,
1999, no year-by-year total returns or average annual total returns can be
shown for this Fund.
32
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than if it
invested exclusively in developed or newly-industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
Period ended December 31: 1999**
<S> <C>
Net asset value, beginning of period $ 10.00
Income from investment operations
Net investment income (loss) 0.01
Net realized and unrealized gain (loss) on investments* 2.12
Total from investment operations 2.13
Less distributions:
Distributions from net investment income and capital paid in (0.01)
Distributions from net realized gain on investment (0.17)
Distributions in excess of income, capital paid in & gains --
Total distributions (0.18)
Net asset value, end of period $ 11.95
Total investment return 21.49%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $12,430
Ratio of expenses to average net assets (%)*** 1.10%
Ratio of net investment income (loss) to average net assets (%) 0.21%
Turnover rate (%) 26.76%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations August 31, 1999.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.71% for the year ended
December 31.
33
<PAGE>
Short-Term Bond Fund
GOAL AND STRATEGY
This is a short-term bond fund that seeks high income consistent with low share
price fluctuation.
The Fund primarily invests in a diversified mix of short-term and intermediate-
term investment grade debt securities including:
. U.S. Treasury and Agency securities;
. U.S. corporate bonds;
. foreign corporate bonds of companies in developed countries (if dollar-
denominated);
. foreign government and agency securities of developed countries (if dollar
denominated); and
. mortgage-and asset-backed securities.
The manager selects bonds using a combination of proprietary research and quan-
titative tools. Bonds are purchased that are attractively priced and that pro-
vide cheap, predictable cash flows.
The Fund normally invests:
. mostly in corporate bonds;
. no more than 15% of its assets in high yield bonds; and
. no more than 25% of its assets in foreign debt securities.
The Fund normally has:
. an average maturity between one and three and a half years;
. an average credit quality rating of "A" or higher; and
. 10% or less of its assets in cash and cash equivalents.
The Fund only invests in securities that are rated at least BB- or Ba3 at time
of purchase.
The Fund may purchase other types of securities, for example: certain deriva-
tives (investments whose value is based on indexes or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGER
Jeffrey B. Saef
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1994
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1995 11.49%
1996 3.61%
1997 6.41%
1998 5.82%
1999 2.96%
Best quarter: up 3.87%, second quarter 1995 Worst quarter: down 0.42%, first
quarter 1999
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 2.96% 3.62%
5 year 6.02% 6.95%
Life of fund 5.35% 6.30%
</TABLE>
Index:Merrill Lynch 1-5 Year U.S. Government Bond Index (for periods through
April 30,
1998)
65% Lehman Brothers 1-3 Year Corporate Bond Index/35% Lehman Brothers 1-3
Year Government Bond Index (for periods after April 30, 1998)
(1)Began operations on May 1, 1994.
34
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest
rates fall, the reverse will generally occur. The longer the average remaining
maturity of bonds held by the Fund, the more sensitive the Fund is to interest
rate risk. This Fund has less interest rate risk than an intermediate-term or
long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obliga-
tion to pay interest and repay principal. Also, the credit rating of a bond
held by the fund may be downgraded. In either case, the value of the bond held
by the Trust would fall. All bonds have some credit risk, but in general low-
er-rated bonds have higher credit risk.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are,
the more likely it is a specific security's poor performance will hurt the
fund significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic,
political and social instability. Factors such as lack of liquidity, foreign
ownership limits and restrictions on removing currency also pose special
risks.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become
harder to value or to sell at a fair price.
Prepayment / Call Risk: The Fund's share price or yield could be hurt if
interest rate movements cause the Fund's mortgage-related and callable securi-
ties to be paid off substantially earlier than expected.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning of
period $ 9.66 $ 10.23 $ 10.05 $ 10.08 $ 10.05
Income from investment
operations:
Net investment income (loss) 0.50 0.54 0.59 0.61 0.61
Net realized and unrealized gain
(loss) on investments* 0.59 (0.18) 0.03 (0.03) (0.33)
Total from investment operations 1.09 0.36 0.62 (0.58) 0.28
Less distributions:
Distributions from net
investment income and capital
paid in (0.50) (0.54) (0.59) (0.61) (0.61)
Distributions from net realized
gain on investments sold (0.02) -- -- -- --
Distributions in excess of
income, capital paid in & gains -- -- -- -- --
Total distributions $ (0.52) $ (0.54) $ (0.59) $ (0.61) (0.61)
Net asset value, end of period $ 10.23 $ 10.05 $ 10.08 $ 10.05 $ 9.72
Total investment return 11.49% 3.61% 6.41% 5.82% 2.96%
Ratios and supplemental data
Net assets, end of period (000s
omitted) $17,911 $58,676 $51,120 $77,194 $68,844
Ratio of expenses to average net
assets (%)** 0.75% 0.75% 0.57% 0.53% 0.43%
Ratio of net investment income
(loss) to average net assets (%) 5.52% 5.66% 5.67% 6.17% 6.25%
Turnover rate (%) 109.77% 20.68% 108.29% 184.50% 100.04%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made, the expense ratio would have been 1.83% and 0.79% for the years
ended December 31, 1995 and 1996, respectively.
35
<PAGE>
Bond Index Fund
GOAL AND STRATEGY
This is a bond fund that seeks to track the performance of the Lehman Brothers
Government / Corporate Bond Index.
The manager employs a passive management strategy using quantitative techniques
to select individual securities that provide a representative sample of the
securities in the Index.
If the Fund reaches approximately $50 million in total assets, the manager will
seek to match the performance of the Lehman Brothers Aggregate Bond Index, a
broader market index that also includes mortgage-backed and asset-backed secu-
rities.
Both of these Indexes consist of dollar-denominated investment grade securities
with maturities greater than one year and outstanding par values of at least
$150 million issued primarily by:
. the U.S. Treasury and U.S. government agencies and instrumentalities;
. foreign governments and agencies; and
. U.S. and foreign corporations.
The manager selects securities to match, as closely as practical, the Index's
duration, cash flow, sector, credit quality, callability, and other key perfor-
mance characteristics. The Fund may hold some cash and cash equivalents, but is
normally fully invested.
The Index composition may change from time to time. The manager may keep secu-
rities that no longer meet the Index criteria as long as:
. such "ineligible" securities plus cash and money market instruments are less
than 20% of the Fund's assets; and
. high yield securities are less than 5% of the Fund's assets.
- --------------------------------------------------------------------------------
SUBADVISER
Mellon Bond Associates, LLP
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Managing since 1986
Managed approximately $50 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Gregory D. Curran, CFA
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1995
Began career in 1986
Vice President of Salomon Brothers (1986-1995)
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1999 -2.57%
Best quarter: up 5.35%, Fourth quarter 1998 Worst quarter: down 1.27%, first
quarter 1999
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -2.57% -2.15%
Life of fund 2.64% 2.96%
</TABLE>
Index:Lehman Brothers Government/Corporate Bond Index
(1)Began operations on May 1, 1998.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
36
<PAGE>
MAIN RISKS
Primary
Index Management Risk: Certain factors such as the following may cause the
Fund to track the Index less closely:
. The securities selected by the manager may not be fully representative of the
Index.
. Transaction expenses of the Fund may result in the Fund's performance being
different than that of the Index.
. The size and timing of the Fund's cash flows may result in the Fund's perfor-
mance being different than that of the Index.
Also, index funds like this one will have more difficulty in taking defensive
positions in abnormal market conditions.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Trust would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic, polit-
ical and social instability. Factors such as lack of liquidity, foreign owner-
ship limits and restrictions on removing currency also pose special risks. All
foreign securities have some degree of foreign risk. However, to the extent the
Fund invests in emerging market countries, it will have a significantly higher
degree of foreign risk than if it invested exclusively in developed or newly-
industrialized countries.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $10.00 $10.19
Income from investment operations:
Net investment income (loss) 0.42 0.63
Net realized and unrealized gain (loss) on investments* 0.29 (0.89)
Total from investment operations 0.71 (0.26)
Less distributions:
Distributions from net investment income and capital paid in (0.42) (0.61)
Distributions from net realized gain on investments sold (0.10) --
Distributions in excess of income, capital paid in & gains -- --
Total distributions (0.52) (0.61)
Net asset value, end of period $10.19 $ 9.32
Total investment return 7.20% (2.57)%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $2,748 $4,125
Ratio of expenses to average net assets (%)*** 0.40% 0.29%
Ratio of net investment income (loss) to average net assets
(%) 6.17% 6.56%
Turnover rate (%) 21.09% 17.06%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 0.71% and 0.35% for the years
ended December 31, 1998, and 1999, respectively.
37
<PAGE>
High Yield Bond Fund
GOAL AND STRATEGY
This is a high yield bond fund that seeks high income and growth in capital.
The Fund invests primarily in a diversified mix of high yield debt securities,
commonly referred to as "junk bonds" (rated BB+/Ba1 or lower and their unrated
equivalents), including:
. corporate bonds, both U.S. and foreign (if dollar-denominated);
. foreign government and agency securities (if dollar-denominated);
. preferred stocks; and
. convertible securities (convertible into common stocks or other equity inter-
ests).
The manager will invest no more than 15% of the Fund's assets in emerging mar-
ket countries (with below investment-grade sovereign debt). The Fund normally
has 10% or less of its assets in cash and cash equivalents.
The manager seeks to purchase bonds with stable or improving credit quality
before the market widely perceives the improvement. Purchase and sale decisions
are primarily based upon the investment merits of the particular security.
The manager selects bonds using proprietary research, including:
. quantitative analysis of historical financial data;
. qualitative analysis of a company's future prospects; and
. economic and industry analysis.
The Fund's average maturity depends on security selection decisions rather than
interest rate decisions.
The Fund may purchase other types of securities, for example: equity securi-
ties, high quality debt securities (short-term and otherwise), certain deriva-
tives (investments whose value is based on indices or other securities), and
debt securities denominated in foreign currencies.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109
Managing, with predecessors, since 1928
Managed approximately $236 billion in assets at the end of 1999
FUND MANAGER
Richard T. Crawford
- -----------------
Vice President of subadviser
Joined subadviser in 1994
Began career in 1991
Manager draws upon the other members of the High Yield team, including:
Earl E. McEvoy
- -----------------
Partner of subadviser
Joined subadviser in 1978
Began career in 1972
Catherine A. Smith
- -----------------
Partner of subadviser
Joined subadviser in 1985
Began career in 1983
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar year
[GRAPH]
1999 5.13%
Best quarter: up 4.55%, fourth quarter 1998 Worst quarter: down 7.46%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 5.13% 2.39%
Life of fund 1.19% 0.31%
</TABLE>
Index:Lehman Brothers High-yield Bond Index
(1)Began operations on May 1, 1998.
Note:See the Appendix to this prospectus for further performance information
relevant to this Fund.
38
<PAGE>
MAIN RISKS
Primary
High Yield Bond Risk: High yield or junk bonds, defined as bond securities
rated below BBB-/Baa3, may be subject to more volatile or erratic price move-
ments due to investor sentiment. In a down market, these high yield securities
may become harder to value or to sell at a fair price.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Fund would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic, polit-
ical and social instability. Factors such as lack of liquidity, foreign owner-
ship limits and restrictions on removing currency also pose special risks. All
foreign securities have some degree of foreign risk. However, to the extent the
Fund invests in emerging market countries, it will have a significantly higher
degree of foreign risk than if it invested exclusively in developed or newly-
industrialized countries.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
Prepayment/Call Risk: The Fund's share price or yield could be hurt if interest
rate movements cause the Fund's mortgage-related and callable securities to be
paid off substantially earlier than expected.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $ 10.00 $ 9.23
Income from investment operations:
Net investment income (loss) 0.46 0.72
Net realized and unrealized gain (loss) on investments* (0.76) (0.26)
Total from investment operations (0.30) 0.46
Less distributions:
Distributions from net investment income and capital paid
in (0.46) (0.70)
Distributions from net realized gain on investments sold (0.01) --
Distributions in excess of income, capital paid in & gains -- --
Total distributions (0.47) (0.70)
Net asset value, end of period $ 9.23 $ 8.99
Total investment return (2.98)% 5.13%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $14,789 $19,921
Ratio of expenses to average net assets (%)*** 0.90% 0.80%
Ratio of net investment income (loss) to average net assets
(%) 7.43% 7.94%
Turnover rate (%) 17.67% 38.62%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.03% and 1.04% for the years
ended December 31, 1998, and 1999, respectively.
39
<PAGE>
Your Account
Investments in shares of the funds
Each fund sells its shares directly to separate accounts of John Hancock,
JHVLICO and IPL to fund variable contracts. Each fund also buys back its shares
on redemption by the separate accounts.
Under the variable contracts, a separate account buys or redeems a fund's
shares based on:
. instructions by you and other contractowners to invest or receive back monies
under a contract (such as making a premium payment or surrendering a con-
tract), and
. the operation of a contract (such as deduction of fees and charges).
The Trust, as law permits, may:
. refuse a buy order if the adviser believes it would disrupt management,
. suspend a fund's offer of shares, or
. suspend a fund's redemption obligation or postpone a fund's payment of
redemption proceeds for more than seven days.
Share price
Each fund sells and buys back its shares at the net asset value per share
("NAV") next computed after receipt by a separate account of a contractowner's
instructions.
Each fund calculates its NAV:
. by dividing its net assets by the number of its outstanding shares,
. once daily as of the close of regular trading on the New York Stock Exchange
(generally at 4 p.m. New York time) on each day the Exchange is open.
Certain funds may hold securities primarily listed on foreign exchanges that
trade on weekends or other days when the Trust does not calculate NAV. Conse-
quently, NAV may change on days when contractowners will not be able to
instruct a separate account to buy or redeem fund shares.
Valuation
Each of the funds values securities based on:
. market quotations,
. amortized cost,
. valuations of independent pricing services, or
. fair value determined in accordance with procedures approved by the Trust's
trustees.
A fund may value securities at fair value where, for example:
. market quotations are not readily available, or
. the value of securities has been materially affected after the closing of a
foreign market.
Conflicts
The Trust's trustees monitor for possible material irreconcilable conflicts
among separate accounts buying shares of the funds. The Trust's net asset value
could decrease, if the Trust had to sell investment securities to pay redemp-
tion proceeds to a separate account withdrawing because of a conflict.
40
<PAGE>
Funds' Expenses, Dividends and Taxes
Expenses
The advisory fee paid by each of the following funds to the adviser last year
was:
Funds % of net assets
Aggressive Balanced 0.68%
Equity Index 0.14%
Large Cap Value CORE 0.75%
Large Cap Aggressive Growth 0.98%
Large/Mid Cap Value 0.95%
Mid Cap Blend 0.75%
Mid Cap Growth 0.83%
Fundamental Mid Cap Growth 0.85%
Small/Mid Cap CORE 0.80%
Small/Mid Cap Value 0.95%
Small/Mid Cap Growth 0.75%
Small Cap Growth 0.75%
Global Balanced 0.85%
International Equity 1.00%
Short-Term Bond 0.30%
Bond Index 0.15%
High Yield Bond 0.65%
The adviser pays subadvisory fees out of its own assets. No fund pays a fee to
its subadviser. The adviser has agreed to limit each fund's annual expenses
(excluding advisory fees and certain other expenses such as brokerage and tax-
es) to not more than .10 percent of the fund's average daily net assets.
Dividends
Each fund automatically reinvests its dividends and distributions in additional
shares of the fund at NAV.
Each fund declares and pays dividends monthly.
Funds generally declare capital gains distributions annually.
Taxes
Each fund must meet investment diversification and other requirements under the
Internal Revenue Code, in order to:
. avoid federal income tax and excise tax, and
. assure the tax-deferred treatment of variable contracts under the Code.
You should read the prospectus for your variable contract for the federal
income tax consequences for contractowners, including the consequences of a
fund's failure to meet Code requirements.
41
<PAGE>
Trust Business Structure
The diagram below shows the basic business structure of the Trust. The Trust's
trustees oversee the Trust's investment and business activities and hire vari-
ous service providers to carry out the Trust's operations.
Variable
Contractowners
John Hancock,
JHVLICO and IPL
Separate Accounts
The Trust
Trustees oversee the
Trust's investment and
business activities.
Investment Adviser Custodian
John Hancock Life State Street Bank and Trust
Insurance Company Company
Manages the Trust's Holds the Trust's assets,
investment and business settles all Trust
activities. trades and collects most of
the valuation
data required for calculat-
ing the Trust's
NAV.
Subadvisers
Alliance Capital Management, LLP John Hancock Advisers,
The Boston Company Asset Management, LLCInc.
Brinson Partners, Inc. Mellon Bond Associates,
Goldman Sachs Asset Management. LLP
Independence Investment Associates, Inc.OppenheimerFunds, Inc.
Janus Capital Corporation State Street Global
Advisers
Wellington Management
Company, LLP
Provide management to various funds.
42
<PAGE>
APPENDIX
Additional Performance Information
The "Past Performance" information shown earlier in this prospectus for certain
of the Funds may not be sufficient for you to make a complete assessment of the
risks and potential rewards of investing in those Funds. The Aggressive Bal-
anced Fund, the Large Cap Value CORE Fund, the Large Cap Aggressive Growth
Fund, the Large/Mid Cap Value Fund, the Mid Cap Blend Fund, and the Small/Mid
Cap Value Fund only began operations on August 31, 1999. The Small/Mid Cap CORE
Fund, the Bond Index Fund, and the High Yield Bond Fund only began operations
on May 1, 1998. Finally, the Global Balanced Fund and the Small/Mid Cap Growth
Fund each implemented a significant change in strategy as of May 1, 2000, and
May 1, 1999, respectively.
Since each of these Funds has at best a very limited period of relevant perfor-
mance history, we have set forth below information for certain similar accounts
that are managed by the Funds' respective subadvisers. Each grouping of such
accounts is referred to as a "composite." In the case of each account included
in a composite, the total management fees and other operating expenses of the
Fund (based upon management fee schedules and allocation rules currently in
effect) have been substituted for the actual fees and expenses (other than bro-
kerage and other transaction expenses) of the account. Also, except as specifi-
cally noted below, each composite includes all of the investment company and
other accounts of the subadviser that satisfy the following requirements:
. they have been managed with investment objectives, policies, and strategies
substantially similar to those used in managing the Fund, and
. they are of sufficient size that their performance would be considered rele-
vant to the owner of a variable contract investing in that Fund.
Some of the accounts in the composites were not registered investment companies
and, therefore, were not subject to federal income tax and other legal require-
ments applicable to such companies. Had such accounts been subject to such
requirements, their performance could have been adversely affected. The perfor-
mance figures in this Appendix do not reflect the deduction of fees and charges
payable under the variable contracts. Such fees and charges would cause the
investment returns under the contacts to be less than that shown below.
The graphs below show how the composite's total return has varied from year to
year, while the tables show performance over time (along with a broad-based
index for reference). All figures assume dividend reinvestment. Past perfor-
mance does not indicate future results.
Aggresive Balanced Composite (Corresponding to Aggressive Balanced Fund)
The Aggressive Balanced Composite represents the following blend of two other
composites: 75% Diversified Core Equity Composite and 25% Active Core Bond Com-
posite. Each composite is asset-weighted and contains all fully discretionary
accounts managed using a substantially similar investment strategy. As of
December 31, 1999, the Diversified Core Equity Composite included 97 accounts
with total assets of $8.9 billion, and the Active Core Bond Composite included
9 accounts with total assets of $1.1 billion.
Year-by-year total returns -- calendar years
[GRAPH]
1996* 15.43%
1997 25.08%
1998 24.84%
1999 10.06%
* Composite inception January 1, 1996.
Best quarter: up 18.04%, fourth quarter 1998 Worst
quarter: down 8.43%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 Year 10.06% 15.34%
3 Years 19.78% 22.06%
Since inception 18.68% 21.03%
</TABLE>
Index:75% S&P 500/25% Lehman Brothers Aggregate Bond
43
<PAGE>
Large Cap Value CORE Composite (Corresponding to Large Cap Value CORE Fund)
The Large Cap Value CORE Composite is an asset-weighted composite of all fully
discretionary accounts managed using a substantially similar investment strate-
gy. As of December 31, 1999, the composite included 6 accounts with total
assets of $668 million.
Year-by-year total returns -- calendar years
[GRAPH]
1995 37.08%
1996 26.03%
1997 32.21%
1998 11.01%
1999 7.29%
Best quarter: up 16.09%, fourth quarter 1998 Worst
quarter: down 15.92%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 7.29% 7.35%
3 years 16.34% 18.83%
5 years 22.16% 23.07%
</TABLE>
Index:Russell 1000(R) Value Index
Large Cap Aggressive Growth Composite (Corresponding to Large Cap Aggressive
Growth Fund)
The Large Cap Aggressive Growth Composite is an asset-weighted composite of all
fully discretionary accounts (excluding mutual funds) managed using a substan-
tially similar investment strategy. As of December 31, 1999, the composite
included 245 accounts with total assets of $47.8 billion.
Year-by-year total returns -- calendar years
[GRAPH]
1995 38.60%
1996 22.37%
1997 36.27%
1998 50.75%
1999 31.82%
Best quarter: up 30.82%, fourth quarter 1998 Worst
quarter: down 11.51%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 31.82% 33.16%
3 years 39.38% 34.07%
5 years 35.65% 32.41%
</TABLE>
Index:Russell 1000(R) Growth Index
44
<PAGE>
Large/Mid Cap Value Composite (Corresponding to Large/Mid Cap Value Fund)
The Large/Mid Cap Value Composite is an asset-weighted composite of all fully
discretionary accounts managed using a substantially similar investment strate-
gy. As of December 31, 1999, the composite included 3 accounts with total
assets of $869 million.
Year-by-year total returns -- calendar years
[GRAPH]
1995 7.14%
1996 15.17%
1997 28.29%
1998 4.76%
1999 10.03%
* Composite inception October 1, 1995. 1995 total
return is not annualized.
Best quarter: up 19.41%, fourth quarter 1998 Worst
quarter: down 11.35%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 10.03% 7.35%
3 years 13.93% 18.83%
5 years 15.20% 20.08%
</TABLE>
Index:Russell 1000(R) Value Index
Mid Cap Diversified Equity Composite (Corresponding to Mid Cap Blend Fund)
The Mid Cap Diversified Equity Composite is an asset-weighted composite of all
fully discretionary accounts managed using a substantally similar investment
strategy. As of December 31, 1999, the composite included 8 accounts with total
assets of $407 million.
Year-by-year total returns -- calendar years
[GRAPH]
1995 7.14%
1996 15.17%
1997 28.29%
1998 4.76%
1999 10.03%
Best quarter: up 18.82%, fourth quarter 1998 Worst
quarter: down 16.30%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 8.40% 18.23%
3 years 18.40% 18.86%
5 years 21.14% 21.86%
</TABLE>
Index:Russell Mid Cap(TM) Index
45
<PAGE>
Small/Mid Cap CORE Composite (Corresponding to Small/Mid Cap CORE Fund)
The Small/Mid Cap CORE Composite is an asset-weighted composite of all fully
discretionary accounts managed using a substantially similar investment strate-
gy. As of December 31, 1999, the composite included 4 accounts with total
assets of $158 million.
Year-by-year total returns -- calendar years
* Composite inception April 1, 1996. 1996 total
return is not annualized.
Best quarter: up 17.87%, fourth quarter 1999 Worst
quarter: down 20.71%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 21.54% 24.15%
3 years 16.10% 15.72%
Since inception 18.18% 15.96%
</TABLE>
Index:Russell 2500TM Index
Premier Value Composite (Corresponding to Small/Mid Cap Value Fund)
The Premier Value Composite is an asset-weighted composite of all fully discre-
tionary accounts managed using a substantially similar investment strategy. As
of December 31, 1999, the composite included 21 accounts with total assets of
$1.27 billion.
Year-by-year total returns -- calendar years
[GRAPH]
1995 39.47%
1996 32.77%
1997 28.53%
1998 -2.82%
1999 27.61%
Best quarter: up 28.32%, second quarter 1999 Worst
quarter: down 27.05%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 27.61% 1.49%
3 years 16.81% 9.83%
5 years 24.17% 16.01%
</TABLE>
Index:Russell 2500TM Index
46
<PAGE>
Small/Mid Cap Growth Composite (Corresponding to Small/Mid Cap Growth Fund)
The Small/Mid Cap Growth Composite is an asset-weighted composite of all fully
discretionary accounts managed using a substantially similar investment strate-
gy. As of December 31, 1999, the composite included 31 accounts with total
assets of $1.9 billion.
Year-by-year total returns -- calendar years
[GRAPH]
1995 30.68%
1996 19.23%
1997 26.82%
1998 13.97%
1999 -1.65%
Best quarter: up 22.51%, fourth quarter 1998 Worst
quarter: down 15.81%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year -1.65% 55.48%
3 years 12.44% 22.53%
5 years 17.24% 23.10%
</TABLE>
Index:Russell 2500TM Growth Index
Global Balanced Composite (Corresponding to Global Balanced Fund)
The Global Balanced Composite is an asset-weighted composite of all fully dis-
cretionary accounts managed using a substantially similar investment strategy.
As of December 31, 1999, the composite included 4 accounts with total assets of
$1.8 billion.
Year-by-year total returns -- calendar years
[GRAPH]
1995 24.85%
1996 14.15%
1997 10.75%
1998 8.71%
1999 1.60%
Best quarter: up 8.34%, second quarter 1997 Worst
quarter: down 5.13%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 1.60% 14.32%
3 years 6.95% 15.57%
5 years 11.76% 15.48%
</TABLE>
Index:65% MSCI World Index/35% Salomon Brothers
World Government Bond Index, Unhedged.
47
<PAGE>
Government/Corporate Bond Index Composite (Corresponding to Bond Index Fund)
The Government/Corporate Bond Index Composite is an asset-weighted composite of
all fully discretionary accounts (excluding mutual funds) managed using a sub-
stantially similar investment strategy. As of December 31, 1999, the composite
included 5 accounts with total assets of $1.3 billion.
Year-by-year total returns -- calendar years
[GRAPH]
1995 18.87%
1996 2.54%
1997 9.70%
1998 9.41%
1999 -2.42%
Best quarter: up 6.43%, second quarter 1995 Worst
quarter: down 2.44%, first quarter 1996
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year -2.42% -2.15%
3 years 5.41% 5.54%
5 years 7.38% 7.60%
</TABLE>
Index:Lehman Brothers Government/Corporate Bond
Index
High Yield Bond Composite (Corresponding to High Yield Bond Fund)
The High Yield Bond Composite is an asset-weighted composite of all fully dis-
cretionary accounts managed using a substantially similar investment strategy.
As of December 31, 1999, the composite included 13 accounts with total assets
of $850 million.
Year-by-year total returns -- calendar years
[GRAPH]
1995 20.48%
1996 12.77%
1997 11.85%
1998 -0.17%
1999 4.13%
Best quarter: up 6.18%, second quarter 1995 Worst
quarter: down 7.91%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 4.13% 2.39%
3 years 5.15% 5.56%
5 years 9.58% 9.31%
</TABLE>
Index:Lehman Brothers High Yield Bond Index.
48
<PAGE>
For more information
This prospectus Two documents are To request a free
should be used available that offer copy of the current
only with a vari- further information annual/semiannual
able contract on John Hancock report or the SAI,
prospectus. Variable Series please contact:
Trust I:
By mail:
Annual/Semiannual
Report to shareholders John Hancock Variable
Series Trust I
Includes financial John Hancock Place
statements, a dis- Boston, MA 02117
cussion of the mar-
ket conditions and By phone: 1-800-732-
investment strate- 5543
gies that signifi-
cantly affected per- Or you may view or
formance, and the obtain these docu-
auditors' report (in ments from the SEC:
the annual report
only). In person: at the
SEC's Public Refer-
Statement of ence Room in Wash-
Additional ington, DC
Information (SAI)
By phone: 1-800-SEC-
The SAI contains 0330
more detailed infor-
mation on all By mail: Public Refer-
aspects of the ence Section Securi-
funds. ties and Exchange Com-
mission
A current SAI has Washington, DC
been filed with the 20549-6009
John Hancock Securities and (duplicating fee
Variable Exchange Commission required)
Series Trust I and is incorporated
John Hancock by reference into On the
Place (i.e., is legally a Internet: www.sec.gov
Boston, Massachu- part of) this pro-
setts 02117 spectus. SEC File Num-
ber: 811-4490
VSTPRO-R
<PAGE>
As with all mutual funds, the Securities and Exchange Commission has not judged
whether these funds are good investments or whether the information in this
prospectus is adequate and accurate. Anyone who tells you otherwise is
committing a federal crime.
JOHN HANCOCK
VARIABLE SERIES TRUST I
PROSPECTUS
MAY 1, 2000
Managed Fund
Growth & Income Fund
Equity Index Fund
Large Cap Value Fund
Large Cap Growth Fund
Mid Cap Value Fund
Mid Cap Growth Fund
Real Estate Equity Fund
Small/Mid Cap CORE Fund
Small/Mid Cap Growth Fund
Small Cap Value Fund
Small Cap Growth Fund
Global Equity Fund
Global Balanced Fund
International Equity Index Fund
International Opportunities Fund
Emerging Markets Equity Fund
Short-Term Bond Fund
Bond Index Fund
Active Bond Fund
Global Bond Fund
High Yield Bond Fund
Money Market Fund
Managed by John Hancock Life Insurance Company
John Hancock Place
Boston, MA 02117
<PAGE>
Contents
- --------------------------------------------------------------------------------
John Hancock Variable Series Trust I ("Trust")
Overview 2
Your Investment Choices 3
A fund-by-fund summary of goals, strategies and risks.
Managed Fund 6
Growth & Income Fund 8
Equity Index Fund 10
Large Cap Value Fund 12
Large Cap Growth Fund 14
Mid Cap Value Fund 16
Mid Cap Growth Fund 18
Real Estate Equity Fund 20
Small/Mid Cap CORE Fund 22
Small/Mid Cap Growth Fund 24
Small Cap Value Fund 26
Small Cap Growth Fund 28
Global Equity Fund 30
Global Balanced Fund 32
International Equity Index Fund 34
International Opportunities Fund 36
Emerging Markets Equity Fund 38
Short-Term Bond Fund 40
Bond Index Fund 42
Active Bond Fund 44
Global Bond Fund 46
High Yield Bond Fund 48
Money Market Fund 50
Policies and instructions for opening, maintaining and closing an account in
any fund
Your Account 52
Investments in shares of the funds 52
Share price 52
Valuation 52
Conflicts 52
Further information on the funds
Funds' Expenses 53
Dividends and Taxes 53
Dividends 53
Taxes 53
Further information on the Trust
Trust Business Structure 54
Additional performance information
Appendix 55
For more information back cover
<PAGE>
Overview
- --------------------------------------------------------------------------------
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on page 6. Each description provides
the following information:
Goal and Strategy The fund's particular investment goals and the principal
strategies it intends to use in pursuing those goals.
Subadviser/Manager The firm and individual(s) providing investment management
services to the fund.
Past Performance The fund's total return, measured year-by-year and over time.
Main Risks The significant risk factors associated with the fund. The risks are
categorized as "Primary" or "Secondary". The Primary Risks are considered major
factors in the fund's performance and are described first. The Secondary Risks
are not considered major factors in the fund's performance because the fund
would not normally commit a large portion of its assets to the investments
involved. However, the Secondary Risks are of such a nature that they could
significantly affect the fund's performance, even if the investments are held
in relatively small amounts.
Financial Highlights The fund's operating performance per share, measured year-
by-year.
THE FUNDS
The Trust offers investment choices, or funds, for the variable annuity and
variable life insurance contracts ("variable contracts") of:
. John Hancock Life Insurance Company ("John Hancock"),
. John Hancock Variable Life Insurance Company ("JHVLICO"), and
. Investors Partner Life Insurance Company and its subsidiaries ("IPL").
In some variable contract forms, the Trust is referred to as the "Fund" or "Se-
ries Fund" and the investment choices are referred to as "Portfolios."
RISKS OF FUNDS
These funds, like all mutual funds, are not bank deposits. They are not insured
or guaranteed by the FDIC or any other government agency. You could lose money
by investing in these funds. So, be sure to read all risk disclosure carefully
before investing.
MANAGEMENT
John Hancock is the investment adviser of each fund. John Hancock is a Massa-
chusetts stock life insurance company. On February 1, 2000, John Hancock
changed its form of organization and its name. Prior to that date, it was John
Hancock Mutual Life Insurance Company, a mutual life insurance company that was
chartered in 1862. At the end of 1999, John Hancock managed approximately $127
billion, of which it owned over
$71 billion. Most of the funds have subadvisers.
2
<PAGE>
Your Investment Choices
- -------------------------------------------------------------------------------
The Trust offers a number of investment choices, or funds, to suit a variety
of objectives under variable contracts. There are 23 funds available under
your variable contract. Each fund has its own strategy and its own risk/reward
profile.The funds can be broadly categorized as equity funds, balanced funds,
bond funds, and international/global funds. Within these broad categories, the
funds can be further categorized as follows:
Equity Funds
Equity funds can be categorized in two ways--by capitalization and by invest-
ment style.
Capitalization Equity funds can be categorized by market capital-
ization, which is defined as the market value of
all shares of a company's stock. The following def-
initions for large, mid and small cap are based
upon statistics at year-end 1999, but are adjusted
periodically with broad equity market movements as
represented by the Russell 3000(R) Index or other
widely-recognized source of market capitalization
data. Adjustments are typically made on a quarterly
basis, but in extraordinary circumstances may be
made as frequently as monthly.
Large Cap Funds:
. Growth & Income Fund These funds invest in large, well-established com-
panies that typically are very actively traded and
. Equity Index Fund provide more stable investment returns over time.
Large cap companies represent the 300 largest
. Large Cap Value Fund stocks in the Russell 3000(R) Index. Each of those
companies has a market capitalization greater than
. Large Cap Growth Fund $7.9 billion as of the end of 1999. Large cap funds
are appropriate for investors who want the least
volatile investment returns within the overall
equity markets.
Mid Cap Funds:
. Mid Cap Value Fund These funds invest in medium-sized, less estab-
lished companies that are less actively traded and
. Mid Cap Growth Fund provide more share price volatility over time than
large cap stocks. Mid cap companies represent the
. Small/Mid Cap CORE Fund 250th to 1000th largest stocks in the Russell
3000(R) Index. Each of those companies has a market
. Small Mid/Cap Growth capitalization between $1.4 billion and $9.7 bil-
Fund lion as of the end of 1999. Mid cap funds are
appropriate for investors who are willing to accept
. Real Estate Equity Fund more volatile investment returns within the overall
equity markets with the potential reward of higher
long-term returns.
Small Cap Funds:
. Small Cap Value Fund These funds invest in small newly established com-
panies that are less actively traded and have a
. Small Cap Growth Fund high level of share price volatility over time.
Small cap companies represent the 2000 smallest
stocks in the Russell 3000(R) Index. Each of those
companies has a market capitalization of less than
$1.4 billion as of the end of 1999. Small cap funds
are appropriate for investors who are willing to
accept the most volatile investment returns within
the overall equity markets for the potential reward
of higher long-term returns.
Investment Style
Value Funds:
. Large Cap Value Fund Value funds invest in companies that are attrac-
tively priced, considering their asset and earnings
. Mid Cap Value Fund history. These stocks typically pay above average
dividends and have low stock prices relative to
. Small Cap Value Fund measures of earnings and book value. Value funds
are appropriate for investors who want some divi-
. Real Estate Equity Fund dend income and the potential for capital gains,
but are less tolerant of share-price fluctuations.
3
<PAGE>
Growth Funds:
. Large Cap Growth Fund Growth funds invest in companies believed to have
above-average prospects for capital growth due to
. Mid Cap Growth Fund their strong earnings and revenue potential. Growth
stocks typically have high stock prices relative to
. Small Mid/Cap Growth measures of earnings and book value. Growth funds
Fund are appropriate for investors who are willing to
accept more share-price volatility for the poten-
. Small Cap Growth Fund tial reward of higher long-term returns.
. Growth & Income Fund Blend Funds:
. Equity Index Fund Blend funds invest in both value and growth compa-
nies. Blend funds are appropriate for investors who
. Small/Mid Cap CORE seek both dividend and capital appreciation charac-
Fund teristics.
Balanced Funds Balanced funds invest in a combination of stocks
and bonds and actively manage the mix of stock and
. Managed Fund bonds within a target range. Domestic balanced
funds invest in U.S. stocks and bonds. Global bal-
. Global Balanced Fund anced funds invest in foreign and U.S. stocks and
bonds.
Bond Funds
Bond funds can be categorized in two ways--by average maturity and by credit
quality:
Average Maturity Bond maturity is a key measure of interest rate
risk. A bond's maturity measures the time remaining
until the bond matures, or until the repayment of
the bond's principal comes due. The longer a bond's
maturity, the more sensitive the bond's price is to
changes in interest rates.
Short:
. Money Market Fund These funds invest primarily in bonds with short
maturities, typically less than four years. These
. Short Term Bond funds have less interest rate risk than intermedi-
Fund ate-term bond funds.
Intermediate:
. Bond Index Fund These funds invest in bonds of all maturities and
maintain an average maturity which is typically
. Active Bond Fund between four and ten years. These funds have more
interest rate risk than short-term bond funds.
. Global Bond Fund
. High Yield Bond Fund
Credit Quality Credit quality is a measure of the ability of a
bond issuer to meet its financial obligations and
repay principal and interest. High quality bonds
have less credit risk than lower quality bonds.
Investment grade bonds typically have "high" or
"medium" credit quality ratings (as defined below),
while high-yield bonds have "low" credit quality
ratings.
High:
. Money Market Fund These funds focus on the highest-rated, most
creditworthy bonds and typically maintain an aver-
. Bond Index Fund age credit quality rating of AAA/Aaa or AA/Aa.
. Global Bond Fund
4
<PAGE>
Medium:
. Short Term Bond Fund These funds invest in bonds of all credit quality
levels with a focus on high-rated investment grade
. Active Bond Fund bonds. These funds typically maintain an average
credit quality rating of A or BBB/Baa.
Low:
. High Yield Bond These funds invest primarily in lower rated bonds--
Fund known as high yield or "junk" bonds. These funds
typically maintain a below investment-grade average
credit quality rating of BB/Ba or B.
International/Global Equity Funds
International funds invest primarily in securities markets outside the United
States. Global funds invest both in the United States and abroad. These funds
can be categorized by the types of markets they invest in.
Developed Markets:
. Global Equity Fund These funds invest primarily in the larger, well-
established developed or industralized markets
. International around the world. These funds have less foreign
Equity Index Fund securities risk than emerging market funds.
. International
Opportunities Fund
Emerging Markets:
. Emerging Markets These funds invest primarily in developing or
Equity Fund emerging markets and have more foreign securities
risk than funds that invest primarily in well-
established, developed markets.
--------------
In the following pages, any fund investment strategy that is stated as a per-
centage of a fund's assets applies at all times, not just at the time the fund
buys or sells an investment security. The trustees of the Trust can change the
investment goals and stragtegy of any fund without shareholder (i.e.,
contractowner) approval.
The financial highlights tables on the following pages detail the historical
performance of each fund, including total return information showing the
increase or decrease of an investment in the fund each year (assuming rein-
vestment of all dividends and distributions). The "total investment return"
shown for each fund does not reflect the expenses and charges of the applica-
ble separate accounts and variable contracts. Those expenses and charges vary
considerably from contract to contract and are described in the variable con-
tract prospectus to which this prospectus is attached. If the earliest period
shown in the financial highlights table is less than a full calendar year, the
two "Ratios" shown for that period have been annualized (i.e., projected as if
the fund had been in effect for a full year). However, the "total investment
return" and "turnover rate" for that period have not been annualized.
In this prospectus, the term "stock"' is used as a shorthand reference for
equity investments generally and the term "bond" is used as a shorthand refer-
ence for debt obligations generally.
5
<PAGE>
Managed Fund
GOAL AND STRATEGY
This is a balanced stock and bond fund that seeks long-term growth in income
and capital.
The Fund invests primarily in a diversified mix of:
. common stocks of large established U.S. companies;
. bonds with maturities generally greater than 12 months; and
. money market and other short-term debt securities with maturities generally
not greater than 12 months.
The manager makes ongoing decisions about the mix between stocks and bonds. The
Manager has a target mix of 60% in equities and 40% in bonds, but actively man-
ages the mix within (+/-) 10 percentage points of the target mix.
The manager selects stocks and bonds using a combination of proprietary
research and quantitative tools. Stocks are purchased that are undervalued rel-
ative to the stock's history and have improving earnings growth prospects.
Bonds are purchased that are attractively priced and have cheap, predictable
cash flows. The Fund is managed using risk control techniques that maintain
risk and industry characteristics similar to the overall market.
The Fund normally invests its equity portion in 80 to 150 stocks, with at least
65% (usually higher) of its equity assets in large cap companies. The Fund may
invest up to 20% of its bond assets in foreign debt securities of developed
countries (denominated in foreign currencies) and up to 15% of its bond assets
in high yield bonds. The Fund normally has 5% or less of its assets in cash and
cash equivalents.
The Fund may purchase other types of securities, for example: American
Depository Receipts (ADRs), and certain derivatives (investments whose value is
based on indices or other securities). The manager actively uses derivatives,
such as futures and forwards, to adjust the Fund's average maturity relative to
the Lehman Brothers Aggregate Bond Index and to implement currency strategies.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
John C. Forelli
(equity)
- -----------------
Senior Vice President of subadviser
Joined team in 1996
Joined subadviser in 1990
Jeffrey B. Saef
(fixed income)
- -----------------
Senior Vice President of subadviser
Joined team in 1994
Joined subadviser in 1994
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may also help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1990 3.80%
1991 22.00%
1992 7.70%
1993 11.60%
1994 -2.23%
1995 27.09%
1996 10.72%
1997 18.72%
1998 20.42%
1999 9.10%
Best quarter: up 14.77%, fourth quarter 1998 Worst quarter: down 7.22%, third
quarter 1998
Average annual total return -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 9.10% 12.00%
5 years 17.02% 18.85%
10 years 12.60% 13.48%
Life of fund 12.45% 13.06%
</TABLE>
Index:50% S&P 500 Index/50% Lehman Brothers Government/Corporate Bond Index
(for
periods through December 31, 1997)
60% S&P 500 Index/40% Lehman Brothers Government/Corporate Bond Index (for
periods from January 1, 1998 through April 30, 1998)
60% S&P 500/40% Lehman Brothers Aggregate Bond Index (for periods after
April 30, 1998)
6
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "large cap" approach carries the risk that in certain markets large cap
stocks will underperform mid cap and small cap stocks.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest
rates fall, the reverse will generally occur. The longer the average remaining
maturity of bonds held by the Fund, the more sensitive the Fund is to interest
rate risk. This Fund has more interest rate risk than a short-term bond fund,
but less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obliga-
tion to pay interest and repay principal. Also, the credit rating of a bond
held by the fund may be downgraded. In either case, the value of the bond held
by the Trust would fall. All bonds have some credit risk, but in general low-
er-rated bonds have higher credit risk.
Market Allocation Risk: The allocation of the Fund's assets among major asset
classes (i.e., stocks, bonds, and short-term debt securities) may (1) reduce
the Fund's holdings in a class whose value then increases unexpectedly, or (2)
increase the Fund's holdings in a class just prior to its experiencing a loss
of value.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become
harder to value or to sell at a fair price.
Prepayment/Call Risk: The Fund's share price or yield could be hurt if inter-
est rate movements cause the Fund's mortgage-related and callable securities
to be paid off substantially earlier than expected.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December
31: 1995 1996 1997 1998 1999
Net asset value,
beginning of period $11.96 $13.73 $13.35 $14.35 $15.64
Income from investment
operations:
Net investment income
(loss) 0.62 0.61 0.59 0.46 0.44
Net realized and
unrealized gain (loss)
on investments* 2.56 0.81 1.86 2.43 0.94
Total from investment
operations 3.18 1.42 2.45 2.89 1.38
Less distributions:
Distributions from net
investment income and
capital paid in (0.62) (0.61) (0.67) (0.51) (0.43)
Distributions from net
realized gain on
investments sold (0.79) (1.19) (0.78) (1.09) (1.14)
Distributions in excess
of income, capital
paid in & gains -- -- -- -- --
Total distributions (1.41) (1.80) (1.45) (1.60) (1.57)
Net asset value, end of
period $13.73 $13.35 $14.35 $15.64 $15.45
Total investment return 27.09% 10.72% 18.72% 20.42% 9.10%
Ratios and supplemental
data
Net assets, end of
period (000s
omitted)($) $2,093,964 $2,386,660 $2,800,127 $3,301,910 $3,430,919
Ratio of expenses to
average net assets (%) 0.38% 0.36% 0.37% 0.36% 0.36%
Ratio of net investment
income (loss) to
average net assets (%) 4.66% 4.41% 4.18% 2.99% 2.75%
Turnover rate (%) 187.67% 113.61% 200.41% 160.57% 203.86%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
7
<PAGE>
Growth & Income Fund
GOAL AND STRATEGY
This is a large cap stock fund that seeks long-term growth in income and capi-
tal.
The Fund invests primarily in a diversified mix of common stocks of large
established U.S. companies that are believed to offer:
. favorable prospects for increasing dividends and growth in capital (i.e.,
"value" companies); or
. above-average potential for growth in revenues and earnings (i.e., "growth"
companies).
The manager selects stocks using a combination of proprietary equity research
and quantitative tools. Stocks are purchased that are undervalued relative to
the stock's history and have improving earnings growth prospects. The Fund is
managed using risk control techniques that maintain risk and industry charac-
teristics similar to the S&P 500 Index.
The Fund normally invests in 80 to 150 stocks, with at least 65% (usually high-
er) of its assets in large cap companies. The Fund normally has 5% or less of
its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
Note: "S&P 500 Index" means the Standard & Poor's 500 Composite Stock Price
Index. "Standard & Poor's", "S&P" and "S&P 500" are trademarks of McGraw Hill,
Inc. and have been licensed for use by the Trust.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at end of 1999
FUND MANAGER
Management by investment team overseen by:
Paul F. McManus
- -----------------
Senior Vice President of subadviser
Joined team in 1996
Joined subadviser in 1982
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may also help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1990 4.10%
1991 26.00%
1992 8.90%
1993 13.33%
1994 -0.56%
1995 34.21%
1996 20.10%
1997 29.79%
1998 30.25%
1999 16.23%
Best quarter: up 24.07%, fourth quarter 1998 Worst quarter: down 12.05%, third
quarter 1998
Average annual total return -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 16.23% 21.04%
5 years 25.93% 28.55%
10 years 17.70% 18.20%
Life of fund 16.46% 17.27%
</TABLE>
Index:S & P 500 Index
8
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value
more than bonds. If the Fund's investments are concentrated in certain sectors,
the Fund's performance could be worse than the overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "large cap" approach carries the risk that in certain markets large cap
stocks will underperform mid cap and small cap stocks.
Secondary
None
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Period ended December
31: 1995 1996 1997 1998 1999
Net asset value,
beginning of period $ 11.50 $ 13.94 $ 14.65 $ 16.61 $ 19.49
Income from investment
operations:
Net investment income
(loss) 0.36 0.34 0.27 0.23 0.20
Net realized and
unrealized gain (loss)
on investments* 3.53 2.43 4.07 4.75 2.88
Total from investment
operations 3.89 2.77 4.34 4.98 3.08
Less distributions:
Distributions from net
investment income and
capital paid in (0.36) (0.34) (0.27) (0.23) (0.20)
Distributions from net
realized gain on
investments sold (1.09) (1.72) (2.11) (1.87) (2.36)
Distributions in excess
of income, capital
paid in & gains -- -- -- -- --
Total distributions $ (1.45) $ (2.06) $ (2.38) $ (2.10) $ (2.56)
Net asset value, end of
period $ 13.94 $ 14.65 $ 16.61 $ 19.49 $ 20.01
Total investment return 34.21% 20.10% 29.79% 30.25% 16.23%
Ratios and supplemental
data
Net assets, end of
period (000s
omitted)($) $1,598,585 $2,047,927 $2,785,964 $3,670,785 $4,218,841
Ratio of expenses to
average net assets (%) 0.28% 0.27% 0.28% 0.27% 0.28%
Ratio of net investment
income (loss) to
average net assets (%) 2.70% 2.24% 1.61% 1.24% 0.98%
Turnover rate (%) 73.54% 81.02% 74.56% 48.45% 70.16%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
9
<PAGE>
Equity Index Fund
GOAL AND STRATEGY
This is a stock fund that seeks to track the performance of the S&P 500 Index,
which emphasizes the stocks of large U.S. companies.
The manager employs a passive management strategy by normally investing in all
500 stocks included in the Index. The manager invests in each stock in roughly
the same proportion as represented in the Index.
The manager seeks to replicate as closely as possible the aggregate risk char-
acteristics and industry diversification of the Index.
The Fund normally invests in all 500 stocks in the Index, but has no predeter-
mined number of stocks that it must hold. S&P may change the composition of the
Index from time to time. The manager will reflect those changes as soon as
practical.
The Fund is normally fully invested. The manager may invest in stock index
futures to maintain market exposure and manage cash flow.
The Fund may purchase other types of securities, for example: Standard & Poor's
Depository Receipts (SPDRs), American Depository Receipts (ADRs), cash equiva-
lents, and certain derivatives (investments whose value is based on indices or
other securities).
Note: "S&P 500 Index" means the Standard & Poor's 500 Composite Stock Price
Index. "Standard & Poor's", "S&P" and "S&P 500" are trademarks of McGraw Hill,
Inc. and have been licensed for use by the Trust.
- --------------------------------------------------------------------------------
SUBADVISER
State Street Bank and Trust Company
State Street Global Advisors Division
Two International Place
Boston, Massachusetts 02110
Managing since 1978
Managed approximately $667 billion in assets at the end of 1999
FUND MANAGERS
John A. Tucker
- -----------------
Principal of subadviser
Joined subadviser in 1988
James B. May
- -----------------
Principal of subadviser
Joined subadviser in 1989
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may also help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1997 32.79%
1998 28.45%
1999 21.08%
Best quarter: up 21.27%, fourth quarter 1998 Worst quarter: down 9.99%, third
quarter 1998
Average annual total return -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 21.08% 21.04%
Life of fund 26.36% 26.79%
</TABLE>
Index:S&P 500 Index
(1)Began operations on May 1, 1996.
10
<PAGE>
MAIN RISKS
Primary
Index Management Risk: Certain factors such as the following may cause the
Fund to track the Index less closely:
. The securities selected by the manager may not be fully representative of
the Index.
. Transaction expenses of the Fund may result in the Fund's performance being
different than that of the Index.
. The size and timing of the Fund's cash flows may result in the Fund's per-
formance being different than that of the Index.
Also, index funds like this one will have more difficulty in taking defensive
positions in abnormal market conditions.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
invest-ment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "large cap" approach carries the risk that in certain markets large cap
stocks will underperform mid cap and small cap stocks.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $10.00 $11.10 $14.21 $17.70
Income from investment operations:
Net investment income (loss) 0.15 0.24 0.25 0.27
Net realized and unrealized gain
(loss) on investments* 1.26 3.41 3.76 3.41
Total from investment operations 1.41 3.65 4.01 3.68
Less distributions:
Distributions from net investment
income and capital paid in (0.21) (0.29) (0.24) (0.26)
Distributions from net realized gain
on investments sold (0.10) (0.25) (0.28) (0.66)
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions ($0.31) ($0.54) ($0.52) (0.92)
Net asset value, end of period $11.10 $14.21 $17.70 $20.46
Total investment return*** 14.23% 32.79% 28.45% 21.08%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $14,650 $101,390 $232,578 $451,296
Ratio of expenses to average net
assets (%)**** 0.00% 0.00% 0.00% 0.00%
Ratio of net investment income (loss)
to average net assets (%) 2.74% 1.97% 1.59% 1.42%
Turnover rate (%) 15.72% 64.56% 43.31% 55.24%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains
and losses in the fund securities for the period because of the timing
of purchases and withdrawals of shares in relation to the fluctuation in
market values of the fund.
** Fund began operations on May 1, 1996.
*** Includes the effect of a voluntary capital contribution from John Han-
cock of $0.06 per share for the period 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.
**** Expense ratio is net of expense reimbursement. Had such reimbursement
not been made the expense ratio would have been 1.61%, 0.65%, 0.34% and
0.22% for the years ended December 31, 1996, 1997, 1998 and 1999,
respectively.
11
<PAGE>
Large Cap Value Fund
GOAL AND STRATEGY
This is a large cap stock fund with a value emphasis that seeks long-term
growth in capital and substantial dividend income.
The Fund invests primarily in a diversified mix of common stocks of large
established U.S. companies that are believed to offer favorable prospects for
increasing dividends and growth in capital.
The manager employs a value approach in selecting stocks using proprietary
equity research. Stocks are purchased that are undervalued by various measures
such as the stock's current price relative to its earnings potential.
The manager looks for companies with:
. established operating history;
. above-average dividend yield relative to the S&P 500 Index;
. low price/earnings ratio relative to the S&P 500 Index;
. sound balance sheet and other positive financial characteristics; and
. low stock price relative to the company's underlying value.
The Fund normally invests in 100 to 175 stocks, with at least 65% (usually
higher) of its assets in large cap companies. The Fund normally has 5% or less
of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), foreign equity securities of developed countries, high
quality intermediate and short-term debt securities, and certain derivatives
(investments whose value is based on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
Note: "S&P 500 Index" means the Standard & Poor's 500 Composite Stock Price
Index. "Standard & Poor's", "S&P" and "S&P 500" are trademarks of McGraw Hill,
Inc. and have been licensed for use by the Trust.
- --------------------------------------------------------------------------------
SUBADVISER
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Managing since 1937
Managed approximately $180 billionin assets at the end of 1999
FUND MANAGERS
Management by Investment Advisory Committee
Brian C. Rogers
- -----------------
Committee Chairman
Director of subadviser
Managed fund since 1996 (its inception)
Joined subadviser in 1982
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may also help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1997 28.56%
1998 9.26%
1999 3.28%
Best quarter: up 12.86%, fourth quarter 1999 Worst quarter: down 8.58%, third
quarter 1999
Average annual total return -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 3.28% 7.35%
Life of fund 14.67% 19.54%
</TABLE>
Index:Russell 1000(R) Value Index
(1)Began operations on May 1, 1996.
12
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "large cap" approach car-
ries the risk that in certain markets large cap stocks will underperform small
cap and mid cap stocks.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 11.09 $ 13.57 $ 14.02
Income from investment operations:
Net investment income (loss) 0.16 0.29 0.28 0.27
Net realized and unrealized gain (loss)
on investments* 1.22 2.84 0.96 0.18
Total from investment operations 1.38 3.13 1.24 0.45
Less distributions:
Distributions from net investment
income and capital paid in (0.16) (0.29) (0.28) (0.27)
Distributions from net realized gain on
investments sold (0.13) (0.36) (0.51) (0.71)
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions ($0.29) ($0.65) ($0.79) (0.98)
Net asset value, end of period $ 11.09 $ 13.57 $ 14.02 $ 13.49
Total investment return 13.90% 28.56% 9.26% 3.28%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $19,781 $73,269 $123,365 $155,849
Ratio of expenses to average net assets
(%)*** 1.00% 1.00% 0.92% 0.85%
Ratio of net investment income (loss) to
average net assets (%) 2.74% 2.42% 2.08% 1.88%
Turnover rate (%) 19.95% 19.21% 18.46% 32.62%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.89% and 1.06% for the years
ended December 31, 1996 and 1997, respectively.
13
<PAGE>
Large Cap Growth Fund
GOAL AND STRATEGY
This is a large cap stock fund with a growth emphasis that seeks growth in
capital.
The Fund invests primarily in a diversified mix of common stocks of large
established U.S. companies that are believed to offer above-average potential
for growth in revenues and earnings.
The manager selects stocks using a combination of proprietary equity research
and quantitative tools. Stocks are purchased that are undervalued relative to
the stock's history and have improving earnings growth prospects. The Fund is
managed using risk control techniques that maintain risk and industry charac-
teristics similar to the Russell 1000(R) Growth Index.
The Fund normally invests in 80 to 150 stocks, with at least 65% (usually high-
er) of its assets in large cap companies. The Fund normally has 5% or less of
its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Mark C. Lapman
- -----------------
Executive Vice President of subadviser
Joined team in 1996
Joined subadviser in 1982
Began career in 1979
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1990 6.60%
1991 25.50%
1992 9.90%
1993 13.80%
1994 -0.98%
1995 31.64%
1996 18.27%
1997 30.89%
1998 39.51%
1999 24.07%
Best quarter: up 27.79%, fourth quarter 1998 Worst quarter: down 11.16%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 24.07% 33.16%
5 years 28.67% 32.18%
10 years 19.34% 19.86%
Life of fund 17.72% 18.46%
</TABLE>
Index:S&P 500 Index (for periods through April 30, 1996)
Russell 1000(R) Growth Index (for periods after April 30, 1996)
14
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "large cap" approach
carries the risk that in certain markets large cap stocks will underperform
small cap and mid cap stocks.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December
31: 1995 1996 1997 1998 1999
Net asset value,
beginning of period $ 14.41 $ 17.37 $ 17.49 $ 20.82 $ 26.19
Income from investment
operations:
Net investment income
(loss) 0.44 0.25 0.17 0.14 0.09
Net realized and
unrealized gain (loss)
on investments* 4.06 2.89 5.21 8.05 6.03
Total from investment
operations 4.50 3.14 5.38 8.19 6.12
Less distributions:
Distributions from net
investment income and
capital paid in (0.70) (0.25) (0.17) (0.14) (0.09)
Distributions from net
realized gain on
investments sold (0.84) (2.77) (1.88) (2.68) (4.89)
Distributions in excess
of income, capital
paid in & gains -- -- -- -- --
Total distributions ($1.54) ($3.02) ($2.05) ($2.82) (4.98)
Net asset value, end of
period $ 17.37 $ 17.49 $ 20.82 $ 26.19 $ 27.33
Total investment return 31.64% 18.27% 30.89% 39.51% 24.07%
Ratios and supplemental
data
Net assets, end of
period (000s
omitted)($) $380,276 $524,145 $754,398 $1,126,764 $1,382,473
Ratio of expenses to
average net assets (%) 0.47% 0.44% 0.44% 0.41% 0.39%
Ratio of net investment
income (loss) to
average net assets (%) 2.70% 1.35% 0.86% 0.59% 0.33%
Turnover rate (%) 90.18% 135.98% 83.82% 56.41% 37.42%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
15
<PAGE>
Mid Cap Value Fund
GOAL AND STRATEGY
This is a mid cap stock fund with a value emphasis that seeks long-term growth
in capital.
The Fund invests primarily in the common stocks of mid-sized U.S. companies
that are believed to sell at a discount to their intrinsic value.
The manager selects stocks using proprietary equity research. Stocks are pur-
chased that are undervalued by various measures such as the stock's current
price relative to its earnings potential.
The manager looks for undervalued companies with:
. sound balance sheet and other financial characteristics;
. consistent cash flow;
. strong position relative to the competition; and
. high level of stock ownership among management.
The Fund normally invests in 50 to 75 stocks, with at least 65% (usually high-
er) of its assets in mid cap companies. The Fund normally has 5% or less of its
assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Neuberger Berman, LLC
605 Third Avenue
New York, New York 10158
Managing since 1939
Managed approximately $54 billion
in assets at the end of 1999
FUND MANAGERS
Robert I. Gendelman
- -----------------
Managing Director of subadviser
Managed fund since 1996 (its inception)
Joined subadviser in 1993
Began career in 1984
S. Basu Mullick
- -----------------
Managing Director of subadvisor
Joined subadvisor in 1998
Began career in 1982
Portfolio Manager, Ark Asset
Management (1993-1998)
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1997 32.17%
1998 -11.33%
1999 5.52%
Best quarter: up 17.06%, third quarter 1997 Worst quarter: down 21.29%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 5.52% -0.11%
Life of fund 10.38% 13.54%
</TABLE>
Index:Russell Mid Cap(TM) Value Index
(1)Began operations on May 1, 1996.
16
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "mid cap" approach carries
the risk that in certain markets mid cap stocks will underperform small cap and
large cap stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $10.00 $11.35 $13.87 $12.19
Income from investment operations:
Net investment income (loss) 0.04 0.05 0.11 0.08
Net realized and unrealized gain (loss)
on investments* 1.57 3.59 (1.68) 0.59
Total from investment operations 1.61 3.64 (1.57) 0.67
Less distributions:
Distributions from net investment income
and capital paid in (0.04) (0.05) (0.11) (0.08)
Distributions from net realized gain on
investments sold (0.22) (1.07) -- --
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions $(0.26) $(1.12) $(0.11) (0.08)
Net asset value, end of period $11.35 $13.87 $12.19 $12.78
Total investment return 16.18% 32.17% (11.33)% 5.52%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $10,926 $64,973 $94,820 $92,150
Ratio of expenses to average net assets
(%)*** 1.05% 1.05% 0.96% 0.92%
Ratio of net investment income (loss) to
average net assets (%) 0.69% 0.53% 0.93% 0.64%
Turnover rate (%) 62.99% 93.78% 173.33% 137.06%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.15% and 1.14% for the years
ended December 31, 1996, and 1997, respectively.
17
<PAGE>
Mid Cap Growth Fund
GOAL AND STRATEGY
This is a non-diversified mid cap stock fund with a growth emphasis that seeks
long-term growth in capital.
The Fund invests primarily in the common stocks of mid-sized U.S. companies
that are believed to offer above-average potential for growth in revenues and
earnings.
The manager selects stocks using proprietary equity research. Stocks are pur-
chased that are expected to have earnings growth potential that may not be rec-
ognized by the investment community. The manager selects stocks without regard
to any pre- defined industry or sector selection criteria.
The manager looks for companies experiencing:
. above-average growth relative to their peers or the general economy; and
. positive change due to new product developments, improved regulatory environ-
ment or a new management team.
The Fund is non-diversified, which means it can take larger positions in a
smaller number of issuers. Based upon its current size and strategy, the Fund
invests in 35 to 75 stocks, with at least 65% of its assets in mid cap compa-
nies. The Fund normally has 15% or less of its assets in cash and cash equiva-
lents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), foreign equity securities of developed countries, and
certain derivatives (investments whose value is based on indices or other
securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Janus Capital Corporation
100 Fillmore Street
Denver, Colorado 80206
Managing since 1970
Managed approximately $248 billionin assets at the end of 1999
FUND MANAGER
James P. Goff
- -----------------
Executive Vice President of subadviser
Managed fund since 1996 (its inception)
Joined subadviser in 1988
Began career in 1985
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1997 16.66%
1998 39.07%
1999 118.31%
Best quarter: up 59.33%, fourth quarter 1999 Worst quarter: down 12.96%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 118.31% 51.29%
Life of fund 42.19% 25.51%
</TABLE>
Index:Russell Mid Cap(TM) Growth Index
(1)Began operations on May 1, 1996.
18
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Non-Diversified Fund Risk: The Fund's larger position in individual issuers and
in a smaller number of issuers could produce more volatile performance relative
to more diversified funds. The less diversified a fund's holdings are, the more
likely it is that a specific security's poor performance will hurt the fund
significantly.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "mid cap" approach
carries the risk that in certain markets mid cap stocks will underperform small
cap and large cap stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could be- come harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share Interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.22 $ 11.93 $ 15.12
Income from investment operations:
Net investment income (loss) 0.05 (0.02) (0.09) (0.19)
Net realized and unrealized gain
(loss) on investments* 0.22 1.73 4.75 17.70
Total from investment operations 0.27 1.71 4.66 17.51
Less distributions:
Distributions from net investment
income and capital paid in (0.05) -- (0.15) --
Distributions from net realized gain
on investments sold -- -- (1.32) (3.41)
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions (0.05) -- (1.47) (3.41)
Net asset value, end of period $ 10.22 $ 11.93 $ 15.12 $ 29.22
Total investment return 2.69% 16.66% 39.07% 118.31%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $16,492 $40,235 $94,085 $452,937
Ratio of expenses to average net
assets (%)*** 1.10% 1.10% 1.10% 0.93%
Ratio of net investment income (loss)
to average net assets (%) 0.92% (0.26)% (0.64)% (0.68)%
Turnover rate (%) 71.25% 124.04% 137.01% 106.06%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.34%, 1.42% and 1.13% for the
years ended December 31, 1996, 1997, and 1998, respectively.
19
<PAGE>
Real Estate Equity Fund
GOAL AND STRATEGY
This is a real estate stock fund that seeks above-average income and long-term
growth in capital.
The Fund invests primarily in:
. equity securities of real estate investment trusts (REITs) that own commer-
cial and multi-family residential real estate; and
. equity securities of real estate operating companies (i.e., companies with at
least 75% of revenue, income or fair asset value derived from real estate).
The manager selects real estate stocks using a combination of proprietary,
equity research and quantitative tools. Real estate stocks are purchased that
are undervalued relative to the stock's history and the market and have improv-
ing earnings growth prospects.
The manager looks for real estate stocks with:
. proven track records,
. strong management whose interests are aligned with shareholders,
. attractive real estate holdings, and
. a flexible financial structure.
The manager employs risk control techniques to maintain risk, style and indus-
try characteristics similar to the public equity real estate market. The Fund
normally invests in 30 to 60 securities. The Fund normally has 5% or less of
its assets in cash and cash equivalents.
The Fund also may purchase other types of securities, for example: American
Depository Receipts (ADRs), convertible securities, and equity securities of
non-real estate businesses whose real estate holdings are significant in rela-
tion to their market capitalization.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
Fund Managers
John F. DeSantis
- -----------------
Executive Vice President of subadviser
Managed fund since 1999
Joined subadviser in 1982
Thomas D. Spicer
- -----------------
Vice President of subadviser
Managed fund since 1999
Joined team in 1996
Joined subadviser in 1991
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1990 -21%
1991 33.50%
1992 16.00%
1993 17.29%
1994 2.86%
1995 12.31%
1996 33.07%
1997 17.22%
1998 -16.71%
1999 -1.69%
Best quarter: up 25.82%, first quarter 1991 Worst quarter: down 17.37%, third
quarter 1990
Average annual total returns -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -1.69% -3.19%
5 years 7.48% 8.30%
10 years 7.73% 4.11%
Life of fund 7.71% 4.52%
</TABLE>
Index: Wilshire Real Estate Securities Index
20
<PAGE>
MAIN RISKS
Primary
Real Estate Securities Risk: Real estate investment trusts (REITs) or other
real estate-related equity securities may be affected by changes in the value
of the underlying property owned by the trust. Mortgage REITs may be affected
by the quality of any credit extended. Other potential risks include the possi-
bility of failing to qualify for tax-free pass-through of income under the
Internal Revenue Code or failing to maintain exemption under the Investment
Company Act of 1940.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Secondary
None
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated):
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning of
period $11.16 $ 11.70 $ 14.64 $ 15.91 $ 12.46
Income from investment
operations:
Net investment income (loss) 0.77 0.76 0.77 0.77 0.78
Net realized and unrealized
gain (loss) on investments* 0.54 2.97 1.68 (3.38) (0.99)
Total from investment
operations 1.31 3.73 2.45 (2.61) (0.21)
Less distributions:
Distributions from net
investment income and capital
paid in (0.77) (0.76) (0.77) (0.70) (0.78)
Distributions from net realized
gain on investments sold (0.00) (0.03) (0.41) (0.14) --
Distributions in excess of
income, capital paid in &
gains -- -- -- -- --
Total distributions $(0.77) $ (0.79) $ (1.18) $ (0.84) (0.78)
Net asset value, end of period $11.70 $14.64 $ 15.91 $ 12.46 $ 11.47
Total investment return 12.31% 33.07% 17.22% (16.71)% (1.69)%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $9,301 $10,325 $12,830 $12,263 $11,000
Ratio of expenses to average net
assets (%) 0.73% 0.69% 0.69% 0.69 % 0.70%
Ratio of net investment income
(loss) to average net assets
(%) 6.85% 6.14% 5.12% 5.48 % 6.38%
Turnover rate (%) 19.81% 18.37% 20.04% 22.69 % 12.95%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chase and withdrawals of shares in relation to the fluctuation in market val-
ues of the fund.
21
<PAGE>
Small/Mid Cap CORE Fund
GOAL AND STRATEGY
This is a small/mid cap stock fund that seeks long-term growth in capital.
The Fund invests primarily in a diversified mix of the common stocks of small
and mid-sized U.S. companies that are believed to offer:
. favorable prospects for increasing dividends and capital appreciation (i.e.,
"value" companies); and
. above-average potential for growth in revenues and earnings (i.e. "growth"
companies).
The manager selects stocks using a combination of quantitative techniques and
equity research. The manager employs an investment process known as CORE, "Com-
puter Optimized, Research-Enhanced," that employs a proprietary quantitative
model. Stocks are purchased that have strong expected earnings growth and
momentum and better valuation and risk characteristics than the Russell
2500(TM) Index. The Fund is managed using risk control techniques to maintain
risk, style, capitalization and industry characteristics similar to the Russell
2500(TM) Index.
The Fund normally invests in 200 to 600 stocks, with at least 65% (usually
higher) of the Fund's assets in small cap and mid cap companies. The Fund nor-
mally has 10% or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Standard & Poor's Depository Receipts (SPDRs), and cer-
tain derivatives (investments whose value is based on indices or other securi-
ties).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Goldman Sachs Asset Management,
A unit of the Investment Management Division of Goldman Sachs and Co.
32 Old Slip
New York, New York 10005
Managing since 1988
Managed approximately $259 billion in assets at the end of 1999
FUND MANAGERS
Kent A. Clark
- -----------------
Managing Director of subadviser
Joined subadviser in 1992
Robert C. Jones
- -----------------
Managing Director of subadviser
Joined subadviser in 1989
Victor H. Pinter
- -----------------
Vice President of subadviser
Joined subadviser in 1990
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1999 20.54%
Best quarter: up 17.85%, second quarter 1999 Worst quarter: down 20.01%, fourth
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 20.54% 24.15%
Life of fund 5.13% 7.38%
</TABLE>
Index: Russell 2500(TM) Index
(1) Began operations on May 1, 1998.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
22
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "small/mid cap" approach carries the risk that in certain markets
small/mid cap stocks will underperform large cap stocks.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. The
Fund had unusually high turnover in 1999 and is expected to experience similar
turnover in 2000. This higher than expected turnover is due to (i) the rela-
tively small size of the Fund, which magnifies the effect of contributions and
redemptions, and (ii) the high volatility of the market, which in 1999 resulted
in the subadviser implementing procedures to reduce the Fund's tracking risk.
Normally, the Fund's turnover rate will be less than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $10.00 $ 9.02
Income from investment operations:
Net investment income (loss) -- 0.02
Net realized and unrealized gain (loss) on investments* (0.98) 1.77
Total from investment operations (0.98) 1.79
Less distributions:
Distributions from net investment income and capital paid
in -- (0.03)
Distributions from net realized gain on investments sold -- (0.96)
Distributions in excess of income, capital paid in & gains -- --
Total distributions -- (0.99)
Net asset value, end of period $ 9.02 $ 9.82
Total investment return (9.81)% 20.54%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $ 556 $ 840
Ratio of expenses to average net assets (%)*** 1.05 % 0.94 %
Ratio of net investment income (loss) to average net assets
(%) (0.01)% 0.30 %
Turnover rate (%) 60.51 % 109.12 %
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 4.55% and 2.24% for the years
ended December 31, 1998, and 1999, respectively.
23
<PAGE>
Small/Mid Cap Growth Fund
GOAL AND STRATEGY
This is a small/mid cap stock fund with a growth emphasis that seeks long-term
growth in capital.
The Fund invests primarily in the common stocks of small and mid-sized U.S.
companies that are believed to offer above-average potential for growth in rev-
enues and earnings.
The manager selects stocks using a combination of proprietary quantitative and
qualitative equity research. Quantitative screening seeks to identify a group
of high-quality companies with above-average growth characteristics relative to
industry peers. Equity research seeks to identify individual companies from
that group with a higher potential for long term earnings growth and capital
appreciation.
The manager buys companies that seem attractive based on a combination of cri-
teria, among others:
. Superior historical earnings growth,
. Prospects for above-average growth,
. Attractive valuations,
. Strong market positions,
. Favorable new products, and
. Superior management.
The Fund is broadly diversified by industry sector. The Fund normally invests
in 60 to 100 stocks, with at least 65% (usually higher) of its assets in small
and mid cap companies. The Fund normally has 5% or less of its assets in cash
and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109
Managing, with predecessors, since 1928
Managed approximately $236 billion in assets at the end of 1999
Managing Fund since May 1, 1999
FUND MANAGER
Frank V. Wisneski
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1968
ASSOCIATE FUND MANAGER
John J. Harrington, CFA
- -----------------
Vice President of subadviser
Joined subadviser in 1995
Portfolio Manager at Munder Capital Management (1991-1994)
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1995 35.96%
1996 30.33%
1997 3.44%
1998 5.61%
1999 5.15%
Best quarter: up 21.59%, fourth quarter 1998 Worst quarter: down 21.48%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 5.15% 57.36%
5 Years 15.27% 29.03%
Life of fund 13.50% 25.49%
</TABLE>
Index:Russell Mid Cap(TM) Growth Index (for periods through April 30, 1999)
Russell 2500(TM) Growth Index (for periods after April 30, 1999)
(1)Began operations on May 1, 1994.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
24
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its 25 peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "small/mid cap"
approach carries the risk that in certain markets small/mid cap stocks will
underperform large cap stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. The
Fund had a high turnover rate in 1999 because of a change in management and a
change in the Fund's investment strategy. These changes required a restructur-
ing of the Fund's investments. In future years, the Fund's turnover rate will
normally be less than 100%.
Secondary
None
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Small/Mid Cap Growth Fund
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning of
period $ 9.94 $ 13.18 $ 16.52 $ 15.39 $15.94
Income from investment
operations:
Net investment income (loss) (0.01) 0.02 0.01 (0.02) (0.07)
Net realized and unrealized
gain (loss) on investments* 3.58 3.99 0.56 0.88 0.74
Total from investment
operations 3.57 4.01 0.57 0.86 0.67
Less distributions:
Distributions from net
investment income and capital
paid in (0.01) (0.02) (0.01) -- (0.17)
Distributions from net realized
gain on investments sold (0.32) (0.65) (1.69) (0.31) (2.41)
Distributions in excess of
income, capital paid in & gains -- -- -- -- --
Total distributions $(0.33) $ (0.67) $ (1.70) $ (0.31) (2.58)
Net asset value, end of period $13.18 $ 16.52 $ 15.39 $ 15.94 $ 14.03
Total investment return 35.96% 30.33% 3.44% 5.61% 5.15%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $4,133 $11,749 $13,884 $12,129 $12,963
Ratio of expenses to average net
assets (%)** 1.00% 0.84% 0.85% 0.89% 0.85%
Ratio of net investment income
(loss) to average net assets
(%) (0.11)% 0.18% 0.09% (0.11)% (0.27)%
Turnover rate (%) 139.31% 217.84% 331.19% 162.21% 172.58%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made, the expense ratio would have been 1.91% for the year ended Decem-
ber 31, 1995.
<PAGE>
Small Cap Value Fund
GOAL AND STRATEGY
This is a small cap stock fund with a value emphasis that seeks long-term
growth in capital.
The Fund invests primarily in a diversified mix of the common stocks of small
U.S. companies that are believed to offer favorable prospects for increasing
dividends and capital appreciation.
The manager applies a combination of quantitative techniques and equity
research to identify the best values among small company stocks.
Stocks are evaluated based on multiple factors, including:
. earnings-to-price ratios;
. earnings estimate revisions;
. relative price strength; and
. share issuance/buyback.
The Fund is managed using risk control techniques to maintain risk, style, cap-
italization and industry characteristics similar to the Russell 2000(R) Value
Index. The Fund normally invests in 150 to 250 stocks, with at least 65% (usu-
ally higher) of its assets in small cap companies. The Fund normally has 5% or
less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
INVESCO, Inc.
101 Federal Street
Boston, Massachusetts 02110
Managing since 1957
Managed approximately $92 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Jeremy S. Lefkowitz
- -----------------
Managing Director of subadviser
Joined subadviser in 1998
Portfolio Manager, Chancellor
Capital Management and its predecessor (1982-1998)
Began career in 1974
Daniel A. Kostyk, CFA
- -----------------
Vice President of subadviser
Joined subadviser in 1995
Began career in 1991
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1997 25.57%
1998 -5.96%
1999 -3.43%
Best quarter: up 18.11%, second quarter 1997 Worst quarter: down 21.06%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/98(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -3.43% 1.23%
Life of fund 6.46% 8.34%
</TABLE>
Index: 50% Russell 2000(R) Index/50% Russell 2000(R) Value Index (for periods
through September 30, 1999)
Russell 2000(R) Value Index (for periods after September 30, 1999)
(1)Began operations on May 1, 1996.
26
<PAGE>
MAIN RISKS
Primary
Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "small cap" approach car-
ries the risk that in certain markets small cap stocks will underperform mid
cap and large cap stocks.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.73 $ 12.40 $ 11.59
Income from investment operations:
Net investment income (loss) 0.07 0.08 0.07 0.09
Net realized and unrealized gain (loss)
on investments* 0.96 2.66 (0.81) (0.50)
Total from investment operations 1.03 2.74 (0.74) (0.41)
Less distributions:
Distributions from net investment
income and capital paid in (0.07) (0.08) (0.07) (0.07)
Distributions from net realized gain on
investments sold (0.23) (0.99) -- (0.01)
Distributions in excess of income,
capital paid in & gains -- -- -- (0.18)
Total distributions (0.30) (1.07) (0.07) (0.26)
Net asset value, end of period $ 10.73 $ 12.40 $ 11.59 $ 10.92
Total investment return 10.33% 25.57% (5.96)% (3.43)%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $10,541 $43,261 $64,095 $68,900
Ratio of expenses to average net assets
(%)*** 1.05% 1.05% 1.05% 0.95%
Ratio of net investment income (loss) to
average net assets (%) 1.15% 0.68% 0.63% 0.78%
Turnover rate (%) 66.31% 126.10% 100.83% 117.33%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.06%, 1.30%, 1.08% and 0.96%
for the years ended December 31, 1996, 1997, 1998, and 1999, respectively.
27
<PAGE>
Small Cap Growth Fund
GOAL AND STRATEGY
This is a small cap stock fund with a growth emphasis that seeks long-term
growth in capital.
The Fund invests primarily in a diversified mix of the common stocks of small
U.S. companies that are believed to offerabove-average potential for growth in
revenues and earnings.
The manager selects stocks using proprietary equity research. Stocks are pur-
chased that are expected to have rapid earnings growth that is not yet widely
recognized by the investment community.
The manager looks for companies with:
. demonstrated annual 20% earnings growth over 3 years and/or similar future
growth expectations;
. dominant market niche or poised to become market leaders; and
. high quality senior management with coherent business strategies.
The Fund is highly diversified by sector and number of individual stocks. The
Fund's sector weightings are broadly diversified and managed relative to those
of the Russell 2000(R) Growth Index. The Fund normally invests in 150 to 220
stocks, with at least 65% (usually higher) of its assets in small cap compa-
nies. The Fund normally has 5% or less of its assets in cash and cash equiva-
lents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
Owned by John Hancock
Managing since 1968
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Bernice S. Behar, CFA
- -----------------
Senior Vice President of subadviser
Managed fund since 1996 (its inception)
Joined subadviser in 1991
Began career in 1986
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1997 14.26%
1998 14.49%
1999 70.38%
Best quarter: up 45.57%, fourth quarter 1999 Worst quarter: down 21.55%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 70.38% 43.09%
Life of fund 24.25% 13.65%
</TABLE>
Index: Russell 2000(R) Growth Index
(1)Began operations on May 1, 1996.
28
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results.
The Fund could underperform its peers or lose money if the manager's investment
strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "small cap" approach
carries the risk that in certain markets small cap stocks will underperform mid
cap and large cap stocks.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 9.93 $11.34 $ 12.99
Income from investment operations:
Net investment income (loss) 0.01 (0.02) (0.05) (0.21)
Net realized and unrealized gain (loss)
on investments* (0.06) 1.44 1.70 9.06
Total from investment operations (0.05) 1.42 1.65 8.85
Less distributions:
Distributions from net investment income
and capital paid in (0.02) (0.01) -- --
Distributions from net realized gain on
investments sold -- -- -- (2.72)
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions $ (0.02) $ (0.01) -- (2.72)
Net asset value, end of period $ 9.93 $ 11.34 $ 12.99 $19.12
Total investment return (0.50)% 14.26% 14.49% 70.38%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $20,633 $48,761 $74,849 $179,570
Ratio of expenses to average net assets
(%)*** 1.00% 1.00% 1.00% 0.89%
Ratio of net investment income (loss) to
average net assets (%) 0.12% (0.28)% (0.65)% (0.70)
Turnover rate (%) 50.93% 86.23% 101.16% 113.11%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuations in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made, the expense ratio would have been 1.55%, 1.12% and 1.05% for the
years ended December 31, 1996, 1997, and 1998, respectively.
29
<PAGE>
Global Equity Fund
GOAL AND STRATEGY
This is a global stock fund that seeks long-term growth in capital.
The Fund primarily invests in a diversified mix of common stocks of:
. large established U.S. companies; and
. large established foreign companies located in countries throughout the
world, including developed, newly industrialized, and emerging countries.
The manager makes ongoing decisions about the mix between U.S. and foreign
stocks. The manager has a target mix of 40% in U.S. stocks and 60% in foreign
stocks, but actively manages the mix within (+/-) 20 percentage points of the
target mix.
The manager uses global economic and industry analysis to identify global eco-
nomic and industry themes. The manager looks for companies that will benefit
from:
. global economic trends;
. promising technologies or products; and
. specific country opportunities resulting from changing geopolitical, currency
or economic relationships.
The manager purchases stocks of companies that are:
. in growth industries;
. efficient producers; and
. undervalued relative to long-term growth potential.
The Fund invests:
. in at least 3 different countries (including the U.S.), but normally in more
than 15 countries; and
. no more than 10% of its assets in emerging markets stocks.
Although the Fund may employ foreign currency hedging techniques, the Fund nor-
mally maintains the currency exposure of the underlying equity investments.
The Fund normally invests in 90 to 120 stocks, with at least 65% (usually high-
er) of its assets in large cap companies. The Fund normally has 5% or less of
its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Global Depository Receipts (GDRs), European Depository
Receipts (EDRs), and certain derivatives (investments whose value is based on
indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents or invest-
ing 100% of its assets in U.S. companies--that are inconsistent with the Fund's
primary investment strategy. In taking those measures, the Fund may not achieve
its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Managing since 1919
Managed approximately $290 billion in assets at the end of 1999
FUND MANAGERS
William E. Holzer
- -----------------
Lead Portfolio Manager of subadviser
Joined subadviser in 1980
Diego Espinosa
- -----------------
Vice President of subadvisor
Joined team in 1997
Joined subadviser in 1996
Research Analyst at Morgan
Stanley & Company (1994-1996)
Nicholas Bratt
- -----------------
Portfolio Manager of subadviser
Joined team in 1993
Joined subadviser in 1976
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1999 24.19%
Best quarter: up 15.94%, fourth quarter 1999 Worst quarter: down 12.39%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 24.19% 25.34%
Life of fund 13.48% 19.92%
</TABLE>
Index:MSCI World Index
(1)Began operations on May 1, 1998.
30
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than if it
invested exclusively in developed or newly-industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Market Allocation Risk: The allocation of the Fund's assets among domestic and
international equity regions may (1) reduce the Fund's holdings in a region
whose value then increases unexpectedly, or (2) increase the Fund's holdings
in a region just prior to its experiencing a loss of value.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31; 1998** 1999
Net asset value, beginning of period $ 10.00 $ 9.87
Income from investment operations:
Net investment income (loss) 0.07 0.10
Net realized and unrealized gain (loss) on investments* (0.13) 2.27
Total from investment operations (0.06) 2.37
Less distributions:
Distributions from net investment income and capital paid
in (0.07) (0.07)
Distributions from net realized gain on investments sold -- --
Distributions in excess of income, capital paid in & gains -- (0.04)
Total distributions (0.07) (0.11)
Net asset value, end of period $ 9.87 $ 12.13
Total investment return (0.55)% 24.19%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $15,281 $22,311
Ratio of expenses to average net assets (%)*** 1.15% 1.04%
Ratio of net investment income (loss) to average net assets
(%) 1.11% 0.96%
Turnover rate (%) 33.17% 49.51%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains
and losses in the fund securities for the period because of the timing of
purchases and withdrawals of shares in relation to the fluctuation in
market values of the fund.
** Fund began operations May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.47% and 1.26% for the years
ended December 31, 1998, and 1999, respectively.
31
<PAGE>
Global Balanced Fund
(Formerly International Balanced Fund)
GOAL AND STRATEGY
This is a non-diversified global balanced stock and bond fund that seeks long-
term growth in income and capital.
The Fund invests primarily in a mix of:
. U.S. and foreign common stocks of large companies within developed markets;
and
. U.S. and foreign investment grade bonds of issuers within developed markets
with maturities generally greater than 12 months.
The manager makes ongoing decisions about the mix between stocks and bonds. The
manager has a target mix of 65% stocks and 35% bonds, but actively manages the
mix within (+/-) 10 percentage points of the target mix.
The Fund invests:
. in at least 3 different countries, but normally invests in 10 to 20 coun-
tries; and
. no more than 10% of its assets in emerging market stocks and bonds.
The manager selects stocks and bonds using fundamental value analysis to iden-
tify fairly priced investments with long-term sustainable cash flows. The man-
ager determines fundamental value by focusing on:
. current market prices relative to fundamental values;
. broad-based indices for stocks, bonds, and markets; and
. economic variables such as productivity, inflation and global competitive-
ness.
The Fund is non-diversified, which means that it can take larger positions in a
smaller number of issuers. However, the Fund normally invests in 125 to 250
stocks within the stock portion. The Fund normally has 10% or less of its
assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Global Depository Receipts (GDRs), European Depository
Receipts (EDRs), high yield bonds, and certain derivatives (investments whose
value is based on indices or other securities).
The manager actively uses derivatives, such as futures and forwards, to manage
the Fund's average maturity relative to the Salomon Brothers World Government
Bond Index Unhedged and to implement foreign currency strategies. Currency man-
agement strategies are primarily used for hedging purposes and to protect
against anticipated changes in foreign currency exchange rates.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Brinson Partners, Inc.
209 South LaSalle Street
Chicago, Illinois 60604
Managing since 1974
Managed approximately $161 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Jeffrey Diermeier, CFA
- -----------------
Managing Director, Global Equities, of subadviser
Joined subadviser in 1989
Began career in 1977
Denis S. Karnosky, Ph.D.
- -----------------
Managing Director, Asset Allocation/Currency, of subadviser
Joined subadviser in 1989
Began career in 1967
Norman D. Cumming
- -----------------
Managing Director, Global Fixed Income, of subadviser's affiliate UBS Brinson,
Limited
Joined subadviser in 1989
Began career in 1977
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1997 2.65%
1998 17.99%
1999 5.11%
Best quarter: up 13.06%, fourth quarter 1998 Worst quarter: down 4.49%, fourth
quarter 1997
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 5.11% 15.42%
Life of fund 8.71% 9.88%
</TABLE>
Index: 65% MSCI World Index (Ex US) (Net of Withholding Taxes from a U.S. Tax
Perspective)/35% Salomon Brothers Non-US Government Bond Index Unhedged
(for periods through April 30, 2000)
65% MSCI World Index (Net of Withholding Taxes From a U.S. Tax
Perspective)/35% Salomon Brothers World Government Bond Index Unhedged
(for periods after April 30, 2000)
(1)Began operations on May 1, 1996.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
32
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than if it
invested exclusively in developed or newly-industrialized countries.
Non-Diversified Fund Risk: The Fund's larger position in foreign government
securities could produce more volatile performance relative to funds with
smaller positions. The less diversified a fund's holdings are, the more likely
it is that a specific security's poor performance will hurt the fund signifi-
cantly.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "large/mid cap" approach
carries the risk that large/mid cap stocks will underperform small cap stocks.
Market Allocation Risk: The allocation of the Fund's assets between the major
asset classes (i.e., stocks and bonds) may (1) reduce the Fund's holdings in a
class whose value then increases unexpectedly, or (2) increase the Fund's hold-
ings in a class just prior to its experiencing a loss of value.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Trust would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Turnover Risk. In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
High Yield Bond Risk. Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become harder
to value or to sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Global Balanced Fund (formerly
International Balanced Fund)--Period
ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.39 $ 10.11 $ 11.12
Income from investment operations:
Net investment income (loss) 0.24 0.33 0.34 0.29
Net realized and unrealized gain (loss)
on investments* 0.41 (0.05) 1.44 0.25
Total from investment operations 0.65 0.28 1.78 0.54
Less distributions:
Distributions from net investment income
and capital paid in (0.24) (0.34) (0.35) (0.35)
Distributions from net realized gain on
investments sold (0.02) (0.22) (0.42) (0.44)
Distributions in excess of income,
capital paid in & gain -- -- -- (0.16)
Total distributions $ (0.26) $ (0.56) $ (0.77) $ (0.95)
Net asset value, end of period $ 10.39 $ 10.11 $ 11.12 $ 10.71
Total investment return 6.73% 2.65% 17.99% 5.11%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $24,098 $25,420 $30,416 $31,577
Ratio of expenses to average net assets
(%)*** 1.10% 1.10% 1.10% 1.00%
Ratio of net investment income (loss) to
average net assets (%) 3.59% 3.18% 3.20% 2.73%
Turnover rate (%) 22.21% 81.04% 103.55% 131.21%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.44%, 1.56%, 1.82%, and 1.31%
for the years ended December 31, 1996, 1997, 1998, and 1999, respectively.
33
<PAGE>
International Equity Index Fund
GOAL AND STRATEGY
This is an international stock fund that seeks to track the performance of
broad-based equity indices of foreign companies in developed and emerging mar-
kets.
The Fund is managed relative to a target mix of 90% in the MSCI EAFE GDP Index
and 10% in the MSCI EMF Index. The EAFE GDP Index, known as the Europe Austral-
asia and Far East Index, includes foreign companies in developed markets, with
country index weights based upon a country's Gross Domestic Product (GDP). The
EMF Index, known as the Emerging Markets Free Index, includes foreign companies
in emerging markets, with country index weights based upon a country's market
capitalization.
The manager employs a passive management strategy using quantitative techniques
to invest in a representative sample of stocks in the Index. The manager
selects stocks in an attempt to track, as closely as possible, the characteris-
tics of the Index, including country and sector weights. The Fund normally
invests in 400 to 1,200 stocks.
The Index composition changes from time to time. The manager will reflect those
changes as soon as practical.
The Fund is normally fully invested. The manager may invest in stock index
futures to maintain market exposure and manage cash flow. Although the Fund may
employ foreign currency hedging techniques, the Fund normally maintains the
currency exposure of the underlying equity investments.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Global Depository Receipts (GDRs), European Depository
Receipts (EDRs), cash equivalents, and certain derivatives (investments whose
value is based on indices or other securities).
Note: "MSCI EAFE GDP Index" and "MSCI EMF Index" are the exclusive property of
Morgan Stanley & Co., Incorporated and are registered service marks of Morgan
Stanley Capital International.
- --------------------------------------------------------------------------------
SUBADVISER
Independence International Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1986
Managed approximately $2.2 billion in assets at the end of 1999
FUND MANAGERS
Bradford S. Greenleaf, CFA
- -----------------
Senior Vice President, Managing Director,
of subadviser
Joined team in 2000
Joined subadviser in 1994
Vice President, Franklin Portfolio Associates, Inc. (1986-1994)
David P. Nolan, CFA
- -----------------
Vice President of subadviser
Joined subadviser in 1996
Portfolio manager Boston
International Advisors, Inc. (1989-1996)
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1990 -7.80%
1991 23.40%
1992 -1.80%
1993 32.10%
1994 -6.25%
1995 8.01%
1996 9.19%
1997 -5.03%
1998 20.82%
1999 30.87%
Best quarter: up 20.91%, fourth quarter 1998 Worst quarter: down 14.75%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 30.87% 30.87%
5 years 12.11% 14.36%
10 years 9.39% 7.90%
Life of fund 9.72% 8.55%
</TABLE>
Index: MSCI EAFE Index (for periods through April 30, 1998)
MSCI EAFE GDP Index (for periods from May 1, 1998 through June 30, 1999)
90% MSCI EAFE GDP Index/10% MSCI EMF Index (for periods after June 30,
1999)
34
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than if it
invested exclusively in developed or newly-industrialized countries.
Index Management Risk: Certain factors such as the following may cause the
Fund to track the Index less closely:
. The securities selected by the manager may not be fully representative of
the Index.
. Transaction expenses of the Fund may result in the Fund's performance being
different than that of the Index.
. The size and timing of the Fund's cash flows may result in the Fund's per-
formance being different than that of the Index.
Also, index funds like this one will have more difficulty in taking defensive
positions in abnormal market conditions.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices.
Stocks tend to go up and down in value more than bonds. If the Fund's invest-
ments are concentrated in certain sectors, the Fund's performance could be
worse than the overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures
and swaps) can produce disproportionate gains or losses. They are generally
considered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning
of period $ 14.62 $ 15.61 $ 16.83 $ 15.20 $ 15.56
Income from investment
operations:
Net investment income
(loss) 0.17 0.21 0.13 0.23 0.21
Net realized and
unrealized gain (loss) on
investments* 0.99 1.22 (0.97) 2.91 4.51
Total from investment
operations 1.16 1.43 (0.84) 3.14 4.72
Less distributions:
Distributions from net
investment income and
capital paid-in (0.17) (0.21) (0.13) (0.23) (0.21)
Distributions from net
realized gain on
investments sold -- -- (0.66) (2.55) (0.38)
Distributions in excess of
income, capital paid in &
gains -- -- -- -- (0.05)
Total distributions (0.17) (0.21) (0.79) (2.78) (0.64)
Net asset value, end of
period $ 15.61 $ 16.83 $ 15.20 $ 15.56 $19.64
Total investment return 8.01% 9.19% (5.03)% 20.82% 30.87%
Ratios and supplemental
data
Net assets, end of period
(000s omitted) $126,803 $155,753 $152,359 $173,137 $244,017
Ratio of expenses to
average net assets (%)** 0.84% 0.76% 0.79% 0.56% 0.31%
Ratio of net investment
income (loss) to average
net assets (%) 1.34% 1.30% 0.78% 1.45% 1.26%
Turnover rate (%) 65.82% 92.03% 83.13% 158.63% 19.01%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains
and losses in the fund securities for the period because of the timing of
purchases and withdrawals of shares in relation to the fluctuation in
market values of the fund.
** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 0.87%, 0.63% and, 0.38% for
the years ended December 31, 1995, 1998, and 1999, respectively.
35
<PAGE>
International Opportunities Fund
GOAL AND STRATEGY
This is an international stock fund that seeks long-term growth in capital.
The Fund primarily invests in a diversified mix of common stocks of large
established and medium-sized foreign companies located throughout the world,
including developed, newly industrialized, and emerging countries.
The manager determines the distribution among countries and regions by using a
combination of fundamental research and economic analysis, emphasizing:
. prospects for relative economic growth between foreign countries;
. expected levels of inflation;
. government policies influencing business conditions; and
. outlook for currency relationships.
The manager selects stocks that have growth characteristics such as:
. leading market position or technological leadership;
. high return on invested capital;
. healthy balance sheets with relatively low debt;
. strong competitive advantage;
. strength of management; and
. earnings growth and cash flow sufficient to support growing dividends.
The Fund invests:
. in at least 3 different countries; and
. no more than 20% of its assets in emerging market stocks.
Although the Fund may employ foreign currency hedging techniques, the Fund nor-
mally maintains the currency exposure of the underlying equity investments.
The Fund normally invests in 200 to 300 stocks in 15 to 20 countries. The Fund
normally has 10% or less of its assets in cash and cash equivalents.
The Fund also may purchase other types of securities, for example: American
Depository Receipts (ADRs), Global Depository Receipts (GDRs), European Deposi-
tory Receipts (EDRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Rowe Price-Fleming International, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Managing since 1979
Managed approximately $42 billion in assets at the end of 1999
FUND MANAGERS
Management by Investment Advisory Group overseen by:
David J. L. Warren
- -----------------
Portfolio Manager of subadviser
Joined subadvisor in 1983
Began career in 1981
John R. Ford
- -----------------
Portfolio Manager of subadviser
Joined subadvisor in 1982
Began career in 1980
James B. M. Seddon
- -----------------
Portfolio Manager of subadvisor
Joined subadvisor in 1987
Began career in 1987
Mark Bickford-Smith
- -----------------
Portfolio Manager of subadvisor
Joined subadvisor in 1995
Began career in 1985
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1997 1.95%
1998 15.92%
1999 34.01%
Best quarter: up 24.44%, fourth quarter 1999 Worst quarter: down 13.70%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 34.01% 31.79%
Life of fund 15.38% 14.14%
</TABLE>
Index: MSCI Europe, Australia, Far East (EAFE) Index (for periods through
December 31, 1998)
MSCI All Country World Index, Excluding U.S. (for periods after December 31,
1998)
(1)Began operations on May 1, 1996.
36
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries,
it will have a significantly higher degree of foreign risk than if it invested
exclusively in developed or newly-industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.60 $ 10.63 $ 12.21
Income from investment operations:
Net investment income (loss) 0.07 0.10 0.11 0.10
Net realized and unrealized gain (loss)
on investments* 0.60 0.11 1.57 3.95
Total from investment operations 0.67 0.21 1.68 4.05
Less distributions:
Distributions from net investment income
and capital paid in (0.07) (0.10) (0.10) (0.11)
Distributions from net realized gain on
investments sold -- (0.08) -- (0.94)
Distributions in excess of income,
capital paid in & gains -- -- -- (0.04)
Total distributions (0.07) (0.18) (0.10) (1.09)
Net asset value, end of period $ 10.60 $ 10.63 $ 12.21 $ 15.17
Total investment return 6.72% 1.95% 15.92% 34.01%
Ratios and supplemental data
Net assets, end of period (000s omitted) $17,898 $30,631 $64,250 $79,794
Ratio of expenses to average net assets
(%)*** 1.25% 1.22% 1.16% 1.02%
Ratio of net investment income (loss) to
average net assets (%) 0.87% 0.65% 0.89% 0.77%
Turnover rate (%) 5.46% 21.09% 18.67% 34.02%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.76%, 1.57%, 1.46%, and 1.15%
for the years ended December 31, 1996, 1997, 1998, and 1999, respectively.
37
<PAGE>
Emerging Markets Equity Fund
GOAL AND STRATEGY
This is an emerging markets stock fund that seeks long-term growth in capital.
The Fund invests primarily in the stocks of companies in countries having econ-
omies or markets generally considered by the World Bank or United Nations to be
emerging or developing.
In making country allocation decisions, the manager analyzes the global envi-
ronment and selects countries with:
. Improving macroeconomic, political and social trends, and
. attractive valuation levels.
The manager selects stocks using fundamental proprietary research to identify
companies:
. having strong earnings growth potential,
. selling below their intrinsic value, and
. having shareholder-focused management, dominant products, and well estab-
lished distribution channels.
The Fund normally invests:
. in at least 15 emerging market countries, and
. no more than 30% of its assets in any single country.
The Fund normally invests in 100 to 250 stocks in 20 to 25 countries. The Fund
normally has 10% or less of its assets in cash and cash equivalents.
Although the Fund may employ foreign currency hedging techniques, the Fund
normally maintains the currency exposure of the underlying equity investments.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Global Depository Receipts (GDRs), European Depository
Receipts (EDRs), and certain derivatives (investments whose value is based on
indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Morgan Stanley Dean Witter Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Managing since 1975
Managed approximately $184 billion in assets at the end of 1999
Managing Fund since August 1, 1999
FUND MANAGERS
Robert L. Meyer, CFA
- -----------------
Managing Director of subadvisor
Joined subadviser in 1989
Andy Skov
- -----------------
Managing Director of subadviser
Joined subadviser in 1994
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1999 81.37%
Best quarter: up 50.45%, fourth quarter 1999 Worst quarter: down 20.40%, second
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 81.37% 66.41%
Life of fund 16.49% 10.60%
</TABLE>
Index:MSCI Emerging Markets Free Index
(1)Began operations on May 1, 1998.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
38
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, since the Fund invests primarily in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than funds
that invest primarily in developed or newly- industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the funds perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. The
Fund's turnover rate could be greater than 100% due to the relatively high vol-
atility associated with investing in emerging markets.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $10.00 $ 7.09
Income from investment operations:
Net investment income (loss) 0.03 0.03
Net realized and unrealized gain (loss) on investments* (2.91) 5.67
Total from investment operations (2.88) 5.70
Less distributions:
Distributions from net investment income and capital paid
in (0.03) (0.01)
Distributions from net realized gain on investments sold -- (0.10)
Distributions in excess of income, capital paid in & gains -- (0.42)
Total distributions (0.03) (0.53)
Net asset value, end of period $ 7.09 $ 12.26
Total investment return*** (28.87)% 81.37%
Ratios and supplemental data
Net assets, end of period (000s omitted) $7,310 $32,596
Ratio of expenses to average net assets (%)**** 1.55% 1.39%
Ratio of net investment income (loss) to average net assets
(%) 0.51% 0.19%
Turnover rate (%) 53.95% 196.32%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
**Fund began operations on May 1, 1998.
*** Includes the effect of a voluntary capital contribution from John Hancock
of $32 per share for the year ended 1999. The Total Investment Return
without the capital contribution would have been 79.02% for the year ended
1999.
**** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 3.69% and 3.44% for the years
ended December 31, 1998, and 1999, respectively.
39
<PAGE>
Short-Term Bond Fund
GOAL AND STRATEGY
This is a short-term bond fund that seeks high income consistent with low share
price fluctuation.
The Fund primarily invests in a diversified mix of short-term and intermediate-
term investment grade debt securities including:
. U.S. Treasury and Agency securities;
. U.S. corporate bonds;
. foreign corporate bonds of companies in developed countries (if dollar-
denominated);
. foreign government and agency securities of developed countries (if dollar
denominated); and
. mortgage-and asset-backed securities.
The manager selects bonds using a combination of proprietary research and quan-
titative tools. Bonds are purchased that are attractively priced and that pro-
vide cheap, predictable cash flows.
The Fund normally invests:
. mostly in corporate bonds;
. no more than 15% of its assets in high yield bonds; and
. no more than 25% of its assets in foreign debt securities.
The Fund normally has:
. an average maturity between one and three and a half years;
. an average credit quality rating of "A" or higher; and
. 10% or less of its assets in cash and cash equivalents.
The Fund only invests in securities that are rated at least BB- or Ba3 at time
of purchase.
The Fund may purchase other types of securities, for example: certain deriva-
tives (investments whose value is based on indexes or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGER
Jeffrey B. Saef
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1994
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1995 11.49%
1996 3.61%
1997 6.41%
1998 5.82%
1999 2.96%
Best quarter: up 3.87%, second quarter 1995 Worst quarter: down 0.42%, first
quarter 1999
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 2.96% 3.62%
5 year 6.02% 6.95%
Life of fund 5.35% 6.30%
</TABLE>
Index:Merrill Lynch 1-5 Year U.S. Government Bond Index (for periods through
April 30,
1998)
65% Lehman Brothers 1-3 Year Corporate Bond Index/35% Lehman Brothers 1-3
Year Government Bond Index (for periods after April 30, 1998)
(1)Began operations on May 1, 1994.
40
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest
rates fall, the reverse will generally occur. The longer the average remaining
maturity of bonds held by the Fund, the more sensitive the Fund is to interest
rate risk. This Fund has less interest rate risk than an intermediate-term or
long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obliga-
tion to pay interest and repay principal. Also, the credit rating of a bond
held by the fund may be downgraded. In either case, the value of the bond held
by the Trust would fall. All bonds have some credit risk, but in general low-
er-rated bonds have higher credit risk.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are,
the more likely it is a specific security's poor performance will hurt the
fund significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic,
political and social instability. Factors such as lack of liquidity, foreign
ownership limits and restrictions on removing currency also pose special
risks.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become
harder to value or to sell at a fair price.
Prepayment / Call Risk: The Fund's share price or yield could be hurt if
interest rate movements cause the Fund's mortgage-related and callable securi-
ties to be paid off substantially earlier than expected.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning of
period $ 9.66 $ 10.23 $ 10.05 $ 10.08 $ 10.05
Income from investment
operations:
Net investment income (loss) 0.50 0.54 0.59 0.61 0.61
Net realized and unrealized gain
(loss) on investments* 0.59 (0.18) 0.03 (0.03) (0.33)
Total from investment operations 1.09 0.36 0.62 (0.58) 0.28
Less distributions:
Distributions from net
investment income and capital
paid in (0.50) (0.54) (0.59) (0.61) (0.61)
Distributions from net realized
gain on investments sold (0.02) -- -- -- --
Distributions in excess of
income, capital paid in & gains -- -- -- -- --
Total distributions $ (0.52) $ (0.54) $ (0.59) $ (0.61) (0.61)
Net asset value, end of period $ 10.23 $ 10.05 $ 10.08 $ 10.05 $ 9.72
Total investment return 11.49% 3.61% 6.41% 5.82% 2.96%
Ratios and supplemental data
Net assets, end of period (000s
omitted) $17,911 $58,676 $51,120 $77,194 $68,844
Ratio of expenses to average net
assets (%)** 0.75% 0.75% 0.57% 0.53% 0.43%
Ratio of net investment income
(loss) to average net assets (%) 5.52% 5.66% 5.67% 6.17% 6.25%
Turnover rate (%) 109.77% 20.68% 108.29% 184.50% 100.04%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made, the expense ratio would have been 1.83% and 0.79% for the years
ended December 31, 1995 and 1996, respectively.
41
<PAGE>
Bond Index Fund
GOAL AND STRATEGY
This is a bond fund that seeks to track the performance of the Lehman Brothers
Government / Corporate Bond Index.
The manager employs a passive management strategy using quantitative techniques
to select individual securities that provide a representative sample of the
securities in the Index.
If the Fund reaches approximately $50 million in total assets, the manager will
seek to match the performance of the Lehman Brothers Aggregate Bond Index, a
broader market index that also includes mortgage-backed and asset-backed secu-
rities.
Both of these Indexes consist of dollar-denominated investment grade securities
with maturities greater than one year and outstanding par values of at least
$150 million issued primarily by:
. the U.S. Treasury and U.S. government agencies and instrumentalities;
. foreign governments and agencies; and
. U.S. and foreign corporations.
The manager selects securities to match, as closely as practical, the Index's
duration, cash flow, sector, credit quality, callability, and other key perfor-
mance characteristics. The Fund may hold some cash and cash equivalents, but is
normally fully invested.
The Index composition may change from time to time. The manager may keep secu-
rities that no longer meet the Index criteria as long as:
. such "ineligible" securities plus cash and money market instruments are less
than 20% of the Fund's assets; and
. high yield securities are less than 5% of the Fund's assets.
- --------------------------------------------------------------------------------
SUBADVISER
Mellon Bond Associates, LLP
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Managing since 1986
Managed approximately $50 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Gregory D. Curran, CFA
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1995
Began career in 1986
Vice President of Salomon Brothers (1986-1995)
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1999 -2.57%
Best quarter: up 5.35%, Fourth quarter 1998 Worst quarter: down 1.27%, first
quarter 1999
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -2.57% -2.15%
Life of fund 2.64% 2.96%
</TABLE>
Index:Lehman Brothers Government/Corporate Bond Index
(1)Began operations on May 1, 1998.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
42
<PAGE>
MAIN RISKS
Primary
Index Management Risk: Certain factors such as the following may cause the
Fund to track the Index less closely:
. The securities selected by the manager may not be fully representative of the
Index.
. Transaction expenses of the Fund may result in the Fund's performance being
different than that of the Index.
. The size and timing of the Fund's cash flows may result in the Fund's perfor-
mance being different than that of the Index.
Also, index funds like this one will have more difficulty in taking defensive
positions in abnormal market conditions.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Trust would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic, polit-
ical and social instability. Factors such as lack of liquidity, foreign owner-
ship limits and restrictions on removing currency also pose special risks. All
foreign securities have some degree of foreign risk. However, to the extent the
Fund invests in emerging market countries, it will have a significantly higher
degree of foreign risk than if it invested exclusively in developed or newly-
industrialized countries.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $10.00 $10.19
Income from investment operations:
Net investment income (loss) 0.42 0.63
Net realized and unrealized gain (loss) on investments* 0.29 (0.89)
Total from investment operations 0.71 (0.26)
Less distributions:
Distributions from net investment income and capital paid in (0.42) (0.61)
Distributions from net realized gain on investments sold (0.10) --
Distributions in excess of income, capital paid in & gains -- --
Total distributions (0.52) (0.61)
Net asset value, end of period $10.19 $ 9.32
Total investment return 7.20% (2.57)%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $2,748 $4,125
Ratio of expenses to average net assets (%)*** 0.40% 0.29%
Ratio of net investment income (loss) to average net assets
(%) 6.17% 6.56%
Turnover rate (%) 21.09% 17.06%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 0.71% and 0.35% for the years
ended December 31, 1998, and 1999, respectively.
43
<PAGE>
Active Bond Fund
(Formerly Sovereign Bond Fund)
GOAL AND STRATEGY
This is a bond fund that seeks income and growth in capital.
The Fund primarily invests in a diversified mix of debt securities including:
. U.S. Treasury and agency securities;
. foreign government and agency securities (if dollar-denominated);
. corporate bonds, both U.S. and foreign (if dollar-denominated); and
. mortgage-backed and asset-backed securities.
The manager normally invests:
. mostly in investment grade debt securities;
. no more than 25% of the Fund's assets in high yield bonds; and
. no more than 25% of the Fund's assets in foreign securities, excluding Cana-
dian securities.
The manager seeks to identify specific bond sectors, industries and specific
bonds that are attractively priced. The manager tries to anticipate shifts in
the business cycle, using economic and industry analysis to determine which
sectors and industries might benefit over the next 12 months. The manager uses
proprietary research to identify securities that are undervalued.
The manager evaluates bonds of all quality levels and maturities from many dif-
ferent issuers. The Fund normally has an average credit rating A or higher.
The Fund normally has 10% or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: emerging market
debt securities, and certain derivatives (investments whose value is based on
indices or other securities). The manager actively uses derivatives, such as
futures, to adjust the Fund's average maturity relative to the
Lehman Brothers Aggregate Bond Index and seeks to keep the Fund's interest rate
sensitivity in line with the overall market.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
Owned by John Hancock
Managing since 1968
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGER
James K. Ho, CFA
- -----------------
Executive Vice President of subadviser
Managed fund since 1995
Associated with subadviser since 1985
Began career in 1977
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1990 6.90%
1991 16.70%
1992 7.70%
1993 10.80%
1994 -2.57%
1995 19.55%
1996 4.10%
1997 10.11%
1998 8.23%
1999 -0.94%
Best quarter: up 7.14%, second quarter 1989 Worst quarter: down 2.51%, first
quarter 1994
Average annual total returns -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -0.94% -1.87%
5 years 8.00% 7.66%
10 years 7.90% 7.69%
Life of fund 7.86% 7.80%
</TABLE>
Index:Lehman Brothers Government/Corporate Bond Index (For periods through Sep-
tember 30, 1999)
Lehman Brothers Aggregate Bond Index (For periods after September 30, 1999)
44
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest
rates fall, the reverse will generally occur. The longer the average remaining
maturity of bonds held by the Fund, the more sensitive the Fund is to interest
rate risk. This Fund has more interest rate risk than a short-term bond fund,
but less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obliga-
tion to pay interest and repay principal. Also, the credit rating of a bond
held by the fund may be downgraded. In either case, the value of the bond held
by the Fund would fall. All bonds have some credit risk, but in general lower-
rated bonds have higher credit risk.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic,
political and social instability. Factors such as lack of liquidity, foreign
ownership limits and restrictions on removing currency also pose special
risks. All foreign securities have some degree of foreign risk. However, to
the extent the Fund invests in emerging market countries, it will have a sig-
nificantly higher degree of foreign risk than if it invested exclusively in
developed or newly-industrialized countries.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become
harder to value or to sell at a fair price.
Prepayment/Call Risk: The Fund's share price or yield could be hurt if inter-
est rate movements cause the Fund's mortgage-related and callable securities
to be paid off substantially earlier than expected.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Active Bond Fund (Formerly
Sovereign Bond Fund)
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning
of period $ 9.19 $ 10.13 $ 9.77 $ 9.95 $9.92
Income from investment
operations:
Net investment income
(loss) 0.71 0.69 0.71 0.69 0.67
Net realized and
unrealized gain (loss) on
investments* 1.03 (0.31) 0.24 0.11 (0.76)
Total from investment
operations 1.74 0.38 0.95 0.80 (0.09)
Less distributions:
Distributions from net
investment income and
capital paid in (0.71) (0.69) (0.71) (0.69) (0.71)
Distributions from net
realized gain on
investments sold (0.09) (0.05) (0.06) (0.14) --
Distributions in excess of
income, capital paid in &
gains -- -- -- -- --
Total distributions $ (0.80) $ (0.74) $ (0.77) $ (0.83) (0.71)
Net asset value, end of
period $ 10.13 $ 9.77 $ 9.95 $ 9.92 $ 9.12
Total investment return 19.55% 4.10% 10.11% 8.23% (0.94)%
Ratios and supplemental
data
Net assets, end of period
(000s omitted)($) $700,309 $726,111 $803,770 $907,121 $850,286
Ratio of expenses to
average net assets (%) 0.30% 0.29% 0.31% 0.29% 0.28%
Ratio of net investment
income (loss) to average
net assets (%) 7.20% 7.07% 7.18% 6.84% 6.97%
Turnover rate (%) 63.31% 119.12% 138.29% 228.74% 182.90%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
45
<PAGE>
Global Bond Fund
GOAL AND STRATEGY
This is a global bond fund that seeks income and growth in capital.
The Fund primarily invests in a mix of debt securities of developed countries
throughout the world including:
. U.S. Treasury and agency securities;
. foreign government and agency securities;
. supranational securities (such as the World Bank);
. corporate bonds, both U.S. and foreign; and
. mortgage-backed and asset-backed securities.
The manager makes ongoing decisions regarding the Fund's mix of U.S. bonds and
non-U.S. bonds (denominated in foreign currencies). The manager has a target
mix of 35% U.S. bonds and 65% non-U.S. bonds, but actively manages the mix
within (+/-) 50 percentage points of the target mix.
The Fund invests in at least 3 countries, but normally in 5 to 15 countries.
The Fund normally has an average credit quality rating of "AA" or higher.
The manager makes ongoing decisions regarding the Fund's average maturity,
country and sector allocations and foreign currency exposures. The manager uses
proprietary research and economic analysis to try to anticipate market condi-
tions and interest rate movements and to purchase securities that appear com-
paratively undervalued.
The manager actively uses derivatives (investments whose value is based on
indices or other securities) such as futures, forwards, options and swaps to
adjust the Fund's average maturity and to implement currency strategies. The
Fund is typically 75% to 100% hedged to the U.S. dollar.
The manager actively uses cash and cash equivalents to manage the Fund's aver-
age maturity. However, the Fund normally invests 20% or less of its assets in
cash and cash equivalents.
The Fund may purchase other types of securities, for example: high yield debt
securities and emerging market debt securities.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
J.P. Morgan Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
Managing, with predecessors, since 1861
Managed approximately $349 billion in assets at the end of 1999
FUND MANAGERS
David Gibbon
- -----------------
Vice President of subadviser
Joined subadviser in 1992
Began career in 1992
Hubert Penot
- -----------------
Managing Director of subadviser
Joined subadviser in 1978
Began career in 1978
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1997 9.05%
1998 9.15%
1999 -2.16%
Best quarter: up 4.32%, third quarter 1998 Worst quarter: down 1.75%, second
quarter 1999
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -2.16% -0.17%
Life of fund 6.10% 7.16%
</TABLE>
Index:75% Lehman Brothers Aggregate Bond Index / 25% JP Morgan Non-US Govern-
ment Bond Index, Hedged (for periods through April 30, 1999)
JP Morgan Global Government Bond Index, US Dollar Hedged (for periods after
April 30, 1999)
(1)Began operations on May 1, 1996.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
46
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, the Fund's investments in emerging market countries have a
significantly higher degree of foreign risk than investments in developed or
newly-industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Trust would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific securities poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Global Bond Fund (formerly Strategic Bond
Portfolio)-Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.16 $ 10.24 $ 10.60
Income from investment operations:
Net investment income (loss) 0.38 0.59 0.54 0.48
Net realized and unrealized gain (loss)
on investments* 0.28 0.30 0.38 (0.70)
Total from investment operations 0.66 0.89 0.92 (0.22)
Less distributions:
Distributions from net investment income
and capital paid in (0.38) (0.66) (0.47) (0.56)
Distributions from net realized gain on
investments sold (0.12) (0.15) (0.09) --
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions $ (0.50) $ (0.81) $ (0.56) (0.56)
Net asset value, end of period $ 10.16 $ 10.24 $ 10.60 $ 9.82
Total investment return 6.71% 9.05% 9.15% (2.16)%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $12,907 $28,647 $66,791 $70,991
Ratio of expenses to average net assets
(%)*** 1.00% 1.00% 0.95% 0.83%
Ratio of net investment income (loss) to
average net assets (%) 6.05% 5.80% 5.27% 4.70%
Turnover rate (%) 171.39% 69.38% 186.70% 332.06%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.57%, 1.32%, 1.02%, and 0.84%
for the years ended December 31, 1996, 1997, 1998, and 1999, respectively.
47
<PAGE>
High Yield Bond Fund
GOAL AND STRATEGY
This is a high yield bond fund that seeks high income and growth in capital.
The Fund invests primarily in a diversified mix of high yield debt securities,
commonly referred to as "junk bonds" (rated BB+/Ba1 or lower and their unrated
equivalents), including:
. corporate bonds, both U.S. and foreign (if dollar-denominated);
. foreign government and agency securities (if dollar-denominated);
. preferred stocks; and
. convertible securities (convertible into common stocks or other equity inter-
ests).
The manager will invest no more than 15% of the Fund's assets in emerging mar-
ket countries (with below investment-grade sovereign debt). The Fund normally
has 10% or less of its assets in cash and cash equivalents.
The manager seeks to purchase bonds with stable or improving credit quality
before the market widely perceives the improvement. Purchase and sale decisions
are primarily based upon the investment merits of the particular security.
The manager selects bonds using proprietary research, including:
. quantitative analysis of historical financial data;
. qualitative analysis of a company's future prospects; and
. economic and industry analysis.
The Fund's average maturity depends on security selection decisions rather than
interest rate decisions.
The Fund may purchase other types of securities, for example: equity securi-
ties, high quality debt securities (short-term and otherwise), certain deriva-
tives (investments whose value is based on indices or other securities), and
debt securities denominated in foreign currencies.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109
Managing, with predecessors, since 1928
Managed approximately $236 billion in assets at the end of 1999
FUND MANAGER
Richard T. Crawford
- -----------------
Vice President of subadviser
Joined subadviser in 1994
Began career in 1991
Manager draws upon the other members of the High Yield team, including:
Earl E. McEvoy
- -----------------
Partner of subadviser
Joined subadviser in 1978
Began career in 1972
Catherine A. Smith
- -----------------
Partner of subadviser
Joined subadviser in 1985
Began career in 1983
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar year
[GRAPH]
1999 5.13%
Best quarter: up 4.55%, fourth quarter 1998 Worst quarter: down 7.46%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 5.13% 2.39%
Life of fund 1.19% 0.31%
</TABLE>
Index:Lehman Brothers High-yield Bond Index
(1)Began operations on May 1, 1998.
Note:See the Appendix to this prospectus for further performance information
relevant to this Fund.
48
<PAGE>
MAIN RISKS
Primary
High Yield Bond Risk: High yield or junk bonds, defined as bond securities
rated below BBB-/Baa3, may be subject to more volatile or erratic price move-
ments due to investor sentiment. In a down market, these high yield securities
may become harder to value or to sell at a fair price.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Fund would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic, polit-
ical and social instability. Factors such as lack of liquidity, foreign owner-
ship limits and restrictions on removing currency also pose special risks. All
foreign securities have some degree of foreign risk. However, to the extent the
Fund invests in emerging market countries, it will have a significantly higher
degree of foreign risk than if it invested exclusively in developed or newly-
industrialized countries.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
Prepayment/Call Risk: The Fund's share price or yield could be hurt if interest
rate movements cause the Fund's mortgage-related and callable securities to be
paid off substantially earlier than expected.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $ 10.00 $ 9.23
Income from investment operations:
Net investment income (loss) 0.46 0.72
Net realized and unrealized gain (loss) on investments* (0.76) (0.26)
Total from investment operations (0.30) 0.46
Less distributions:
Distributions from net investment income and capital paid
in (0.46) (0.70)
Distributions from net realized gain on investments sold (0.01) --
Distributions in excess of income, capital paid in & gains -- --
Total distributions (0.47) (0.70)
Net asset value, end of period $ 9.23 $ 8.99
Total investment return (2.98)% 5.13%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $14,789 $19,921
Ratio of expenses to average net assets (%)*** 0.90% 0.80%
Ratio of net investment income (loss) to average net assets
(%) 7.43% 7.94%
Turnover rate (%) 17.67% 38.62%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.03% and 1.04% for the years
ended December 31, 1998, and 1999, respectively.
49
<PAGE>
Money Market Fund
GOAL AND STRATEGY
This is a money market fund that seeks current income consistent with maintain-
ing liquidity and preserving capital. The Fund intends to maintain a stable net
asset value of $10 per share.
The Fund only invests in U.S. dollar denominated money market instruments rated
within the two highest short-term credit rating categories, primarily includ-
ing:
. commercial paper;
. asset-backed commercial paper;
. bank notes and certificates of deposit;
. short-term bonds;
. U.S. Treasury and agency notes and bills; and
. repurchase and reverse repurchase agreements.
These securities have a maximum remaining maturity of 397 days (13 months) and
may be issued by:
. U.S. and foreign banks and other lending institutions;
. U.S. and foreign corporations;
. the U.S. Treasury and U.S. government agencies and instrumentalities;
. entities whose obligations are guaranteed as to principal or interest by the
U.S. Government;
. municipalities;
. foreign governments; and
. supranational organizations (such as the World Bank).
The weighted average time to maturity of the Fund's investments is 90 days or
less.
The manager may invest:
. up to 5% of assets in securities rated in the second-highest short-term cate-
gory (or unrated equivalents); and
. up to 1% of assets or $1 million (whichever is greater) in securities of a
single issuer rated in the second-highest short-term category (or unrated
equivalents).
The manager selects securities with the highest yield available among securi-
ties of comparable credit quality and maturity using proprietary research.
- --------------------------------------------------------------------------------
MANAGER
Managed By John Hancock Life Insurance Company
FUND MANAGER
Peter S. Mitsopoulos
- -----------------
Financial Officer at manager
Joined manager in 1981
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time. This information may also help provide
an indication of the fund's risks and potential rewards. All figures assume
dividend reinvestment. Past performance does not indicate future results. The
performance figures below do not reflect the deduction of fees and charges
payable under the variable contracts. Such fees and charges would cause the
investment returns under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1990 8.00%
1991 6.00%
1992 3.60%
1993 3.41%
1994 4.03%
1995 5.78%
1996 5.32%
1997 5.38%
1998 5.40%
1999 5.05%
Best quarter: up 2.38%, second quarter 1989 Worst quarter: up 0.74%, second
quarter 1993
Average annual total return -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund
<S> <C> <C>
1 year 5.05%
5 years 5.40%
10 years 5.18%
Life of fund 5.81%
</TABLE>
50
<PAGE>
MAIN RISKS
Primary
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, yields on the Fund's investments
will generally rise and prices on the Fund's investments will generally fall.
When interest rates fall, the reverse will generally occur. The longer the
average remaining maturity of instruments held by the Fund, the more sensitive
the Fund is to interest rate risk. This Fund has less interest rate risk than
an intermediate-term or long-term bond fund.
Credit Risk: An issuer of an instrument held by the Fund may default on its
obligation to pay interest and repay principal. Also, the credit rating of an
instrument held by the Fund may be downgraded. In either case, the value of the
instrument held by the Fund would fall. All money market instruments have some
credit risk, but in general lower-rated instruments have higher credit risk.
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic, polit-
ical and social instability. Factors such as lack of liquidity, foreign owner-
ship limits and restrictions on removing currency also pose special risks. All
foreign securities have some degree of foreign risk. However, to the extent the
Fund invests in emerging market countries, it will have a significantly higher
degree of foreign risk than if it invested exclusively in developed or newly-
industrialized countries.
Secondary
None
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning
of period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Income from investment
operations:
Net investment income
(loss) 0.57 0.52 0.53 0.53 0.45
Net realized and
unrealized gain (loss) on
investments* -- -- -- -- --
Total from investment
operations 0.57 0.52 0.53 0.53 0.45
Less distributions:
Distributions from net
investment income and
capital paid in (0.57) (0.52) (0.53) (0.53) (0.45)
Distributions from net
realized gain on
investments sold -- -- -- -- --
Distributions in excess of
income, capital paid in &
gains -- -- -- -- --
Total distributions $ (0.57) $ (0.52) $ (0.53) $ (0.53) (0.45)
Net asset value, end of
period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Total investment return 5.78% 5.32% 5.38% 5.40% 5.05%
Ratios and supplemental
data
Net assets, end of period
(000s omitted)($) $185,909 $213,235 $229,443 $395,195 $451,235
Ratio of expenses to
average net assets (%) 0.35% 0.30% 0.33% 0.31% 0.31%
Ratio of net investment
income (loss) to average
net assets (%) 5.62% 5.20% 5.32% 5.29% 4.95%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
51
<PAGE>
Your Account
Investments in shares of the funds
Each fund sells its shares directly to separate accounts of John Hancock,
JHVLICO and IPL to fund variable contracts. Each fund also buys back its shares
on redemption by the separate accounts.
Under the variable contracts, a separate account buys or redeems a fund's
shares based on:
. instructions by you and other contractowners to invest or receive back monies
under a contract (such as making a premium payment or surrendering a con-
tract), and
. the operation of a contract (such as deduction of fees and charges).
The Trust, as law permits, may:
. refuse a buy order if the adviser believes it would disrupt management
. suspend a fund's offer of shares, or
. suspend a fund's redemption obligation or postpone a fund's payment of
redemption proceeds for more than seven days.
Share price
Each fund sells and buys back its shares at the net asset value per share
("NAV") next computed after receipt by a separate account of a contractowner's
instructions.
Each fund calculates its NAV:
. by dividing its net assets by the number of its outstanding shares,
. once daily as of the close of regular trading on the New York Stock Exchange
(generally at 4 p.m. New York time) on each day the Exchange is open.
Certain funds may hold securities primarily listed on foreign exchanges that
trade on weekends or other days when the Trust does not calculate NAV. Conse-
quently, NAV may change on days when contractowners will not be able to
instruct a separate account to buy or redeem fund shares.
Valuation
The Money Market Fund values its securities at amortized cost. Each of the
other funds values securities based on:
. market quotations,
. amortized cost,
. valuations of independent pricing services, or
. fair value determined in accordance with procedures approved by the Trust's
trustees.
A fund may value securities at fair value where, for example:
.market quotations are not readily available, or
. the value of securities has been materially affected after the closing of a
foreign market.
Conflicts
The Trust's trustees monitor for possible material irreconcilable conflicts
among separate accounts buying shares of the funds. The Trust's net asset value
could decrease, if the Trust had to sell investment securities to pay redemp-
tion proceeds to a separate account withdrawing because of a conflict.
52
<PAGE>
Funds' Expenses
The advisory fee paid by each fund to the adviser last year was:
<TABLE>
<CAPTION>
Funds % of net assets
<S> <C>
Managed 0.32%
Growth & Income 0.25%
Equity Index 0.14%
Large Cap Value 0.74%
Large Cap Growth 0.36%
Mid Cap Value 0.80%
Mid Cap Growth 0.83%
Real Estate Equity 0.60%
Small/Mid Cap CORE 0.80%
Small/Mid Cap Growth 0.75%
Small Cap Value 0.80%
Small Cap Growth 0.75%
Global Equity 0.90%
Global Balanced* 0.85%
International Equity Index 0.16%
International Opportunities 0.87%
Emerging Markets Equity 1.27%
Short-Term Bond 0.30%
Bond Index 0.15%
Active Bond** 0.25%
Global Bond 0.69%
High Yield Bond 0.65%
Money Market 0.25%
</TABLE>
* Formerly International Balanced
**Formerly Sovereign Bond
The adviser pays subadvisory fees out of its own assets. No fund pays a fee to
its subadviser.
The adviser has agreed to limit each fund's annual expenses (excluding advisory
fees and certain other expenses such as brokerage and taxes) to not more than
.10 percent of the fund's average daily net assets.
Dividends and Taxes
Dividends
Each fund automatically reinvests its dividends and distributions in additional
shares of the fund at NAV.
Each fund declares and pays dividends monthly, except that the Money Market
Fund does so daily.
Funds generally declare capital gains distributions annually.
Taxes
Each fund must meet investment diversification and other requirements under the
Internal Revenue Code, in order to:
. avoid federal income tax and excise tax, and
. assure the tax-deferred treatment of variable contracts under the Code.
You should read the prospectus for your variable contract for the federal
income tax consequences for contractowners, including the consequences of a
fund's failure to meet Code requirements.
53
<PAGE>
Trust Business Structure
The diagram below shows the basic business structure of the Trust. The Trust's
trustees oversee the Trust's investment and business activities and hire vari-
ous service providers to carry out the Trust's operations.
Variable
Contractowners
John Hancock,
JHVLICO and IPL
Separate Accounts
The Trust
Trustees oversee the
Trust's investment and
business activities.
Investment Adviser Custodian
John Hancock Life State Street Bank and Trust
Insurance Company Company
Manages the Trust's Holds the Trust's assets,
investment and business settles all Trust
activities. trades and collects most of
the valuation
data required for calculat-
ing the Trust's
NAV.
Subadvisers
Brinson Partners, Inc. Mellon Bond Associates, LLP
Goldman Sachs Asset Management. Morgan Stanley Dean Witter In-
vestment Management Inc.
Independence International Associates, Inc.
Independence Investment Associates, Inc.Neuberger Berman, LLC
INVESCO, Inc. Rowe Price-Fleming Internation-
J.P. Morgan Investment Management Inc. al, Inc.
Janus Capital Corporation Scudder Kemper Investments, Inc.
John Hancock Advisers, Inc. State Street Bank and Trust Com-
pany
T. Rowe Price Associates, Inc.
Wellington Management Company,
LLP
Provide management to various funds.
54
<PAGE>
APPENDIX
Additional Performance Information
The "Past Performance" information shown earlier in this prospectus for certain
of the Funds may not be sufficient for you to make a complete assessment of the
risks and potential rewards of investing in those Funds. The Small/Mid Cap CORE
Fund, the Emerging Markets Equity Fund, the Bond Index Fund, and the High Yield
Bond Fund only began operations on May 1, 1998. The Small/Mid Cap Growth Fund
and the Global Bond Fund each implemented a significant change in strategy as
of May 1, 1999. Finally, the Global Balanced Fund implemented a significant
change in strategy as of May 1, 2000.
Since each of these Funds has at best a very limited period of relevant perfor-
mance history, we have set forth below information for certain similar accounts
that are managed by the Funds' respective subadvisers. Each grouping of such
accounts is referred to as a "composite." In the case of each account included
in a composite, the total management fees and other operating expenses of the
Fund (based upon management fee schedules and allocation rules currently in
effect) have been substituted for the actual fees and expenses (other than bro-
kerage and other transaction expenses) of the account. Also, except as specifi-
cally noted below, each composite includes all of the investment company and
other accounts of the subadviser that satisfy the following requirements:
. they have been managed with investment objectives, policies, and strategies
substantially similar to those used in managing the Fund, and
. they are of sufficient size that their performance would be considered rele-
vant to the owner of a variable contract investing in that Fund.
Some of the accounts in the composites were not registered investment companies
and, therefore, were not subject to federal income tax and other legal require-
ments applicable to such companies. Had such accounts been subject to such
requirements, their performance could have been adversely affected. The perfor-
mance figures in this Appendix do not reflect the deduction of fees and charges
payable under the variable contracts. Such fees and charges would cause the
investment returns under the contacts to be less than that shown below.
The graphs below show how the composite's total return has varied from year to
year, while the tables show performance over time (along with a broad-based
index for reference). All figures assume dividend reinvestment. Past perfor-
mance does not indicate future results.
Small/Mid Cap CORE Composite (Corresponding to Small/Mid Cap CORE Fund)
The Small/Mid Cap CORE Composite is an asset-weighted composite of all fully
discretionary accounts managed using a substantially similar investment strate-
gy. As of December 31, 1999, the composite included 4 accounts with total
assets of $158 million.
Year-by-year total returns -- calendar years
[GRAPH]
1996 19.55%
1997 29.42%
1998 -0.52%
1999 21.54%
* Composite inception April 1, 1996. 1996 total
return is not annualized.
Best quarter: up 17.87%, fourth quarter 1999 Worst
quarter: down 20.71%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 21.54% 24.15%
3 years 16.10% 15.72%
Since inception 18.18% 15.96%
</TABLE>
Index:Russell 2500TM Index
55
<PAGE>
Small/Mid Cap Growth Composite (Corresponding to Small/Mid Cap Growth Fund)
The Small/Mid Cap Growth Composite is an asset-weighted composite of all fully
discretionary accounts managed using a substantially similar investment strate-
gy. As of December 31, 1999, the composite included 31 accounts with total
assets of $1.9 billion.
Year-by-year total returns -- calendar years
[GRAPH]
1995 30.68%
1996 19.23%
1997 26.82%
1998 13.97%
1999 -1.65%
Best quarter: up 22.51%, fourth quarter 1998 Worst
quarter: down 15.81%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year -1.65% 55.48%
3 years 12.44% 22.53%
5 years 17.24% 23.10%
</TABLE>
Index:Russell 2500TM Growth Index
Global Balanced Composite (Corresponding to Global Balanced Fund)
The Global Balanced Composite is an asset-weighted composite of all fully dis-
cretionary accounts managed using a substantially similar investment strategy.
As of December 31, 1999, the composite included 4 accounts with total assets of
$1.8 billion.
Year-by-year total returns -- calendar years
[GRAPH]
1995 24.85%
1996 14.15%
1997 10.75%
1998 8.71%
1999 1.60%
Best quarter: up 8.34%, second quarter 1997 Worst
quarter: down 5.13%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 1.60% 14.32%
3 years 6.95% 15.57%
5 years 11.76% 15.48%
</TABLE>
Index:65% MSCI World Index/35% Salomon Brothers
World Government Bond Index, Unhedged.
56
<PAGE>
Emerging Markets Equity Composite (Corresponding to Emerging Markets Equity
Fund)
The Emerging Markets Equity Composite is an asset-weighted composite of all
fully discretionary mutual fund accounts managed using a substantially similar
investment strategy (excluding all separately managed accounts and the Emerging
Markets Equity Fund). As of December 31, 1999, the composite included 12
accounts with total assets of $5.2 billion.
Year-by-year total returns -- calendar years
[GRAPH]
1995 -13.42
1996 11.84%
1997 -2.41%
1998 -24.33%
1999 102.74%
Best quarter: up 51.98%, fourth quarter 1999 Worst
quarter: down 23.57%, second quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 102.74% 66.41%
3 years 14.40% 3.18%
5 years 7.71% 2.00%
</TABLE>
Index:MSCI Emerging Markets Free Index
Government/Corporate Bond Index Composite (Corresponding to Bond Index Fund)
The Government/Corporate Bond Index Composite is an asset-weighted composite of
all fully discretionary accounts (excluding mutual funds) managed using a sub-
stantially similar investment strategy. As of December 31, 1999, the composite
included 5 accounts with total assets of $1.3 billion.
Year-by-year total returns -- calendar years
[GRAPH]
1995 18.87%
1996 2.54%
1997 9.70%
1998 9.41%
1999 -2.42%
Best quarter: up 6.43%, second quarter 1995 Worst
quarter: down 2.44%, first quarter 1996
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year -2.42% -2.15%
3 years 5.41% 5.54%
5 years 7.38% 7.60%
</TABLE>
Index:Lehman Brothers Government/Corporate Bond
Index
57
<PAGE>
Global Fixed Hedged Composite (Corresponding to Global Bond Fund)
The Global Fixed Hedged Composite is an asset-weighted composite of all fully
discretionary accounts managed using a substantially similar investment strat-
egy. As of December 31, 1999, the composite included 2 accounts with total
assets of $734 million.
Year-by-year total returns -- calendar years
[GRAPH]
1995 17.67%
1996 8.55%
1997 9.72%
1998 11.72%
1999 -1.36%
Best quarter: up 5.92%, third quarter 1998 Worst
quarter: down 1.59%, second quarter 1999
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year -1.36% 0.72%
3 years 6.54% 7.55%
5 years 9.08% 9.76%
</TABLE>
Index:J. P. Morgan Global Government Bond Index,
U.S. Dollar Hedged.
High Yield Bond Composite (Corresponding to High Yield Bond Fund)
The High Yield Bond Composite is an asset-weighted composite of all fully dis-
cretionary accounts managed using a substantially similar investment strategy.
As of December 31, 1999, the composite included 13 accounts with total assets
of $850 million.
Year-by-year total returns -- calendar years
[GRAPH]
1995 20.48%
1996 12.77%
1997 11.85%
1998 -0.17%
1999 4.13%
Best quarter: up 6.18%, second quarter 1995 Worst
quarter: down 7.91%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 4.13% 2.39%
3 years 5.15% 5.56%
5 years 9.58% 9.31%
</TABLE>
Index:Lehman Brothers High Yield Bond Index.
58
<PAGE>
For more information
This prospectus Two documents are To request a free
should be used available that offer copy of the current
only with a vari- further information annual/semiannual
able contract on John Hancock report or the SAI,
prospectus. Variable Series please contact:
Trust I:
By mail:
Annual/Semiannual
Report to shareholders John Hancock Variable
Series Trust I
Includes financial John Hancock Place
statements, a dis- Boston, MA 02117
cussion of the mar-
ket conditions and By phone: 1-800-732-
investment strate- 5543
gies that signifi-
cantly affected per- Or you may view or
formance, and the obtain these docu-
auditors' report (in ments from the SEC:
the annual report
only). In person: at the
SEC's Public Refer-
Statement of ence Room in Wash-
Additional ington, DC
Information (SAI)
By phone: 1-800-SEC-
The SAI contains 0330
more detailed infor-
mation on all By mail: Public Refer-
aspects of the ence Section Securi-
funds. ties and Exchange Com-
mission
A current SAI has
been filed with the Washington, DC
Securities and 20549-6009
Exchange Commission (duplicating fee
John Hancock and is incorporated required)
Variable by reference into
Series Trust I (i.e., is legally a On the
John Hancock part of) this pro- Internet: www.sec.gov
Place spectus.
Boston, Massachu- SEC File Num-
setts 02117 ber: 811-4490
VSTPRO--LA1
<PAGE>
As with all mutual funds, the Securities and Exchange Commission has not judged
whether these funds are good investments or whether the information in this
prospectus is adequate and accurate. Anyone who tells you otherwise is
committing a federal crime.
JOHN HANCOCK
VARIABLE SERIES TRUST I
PROSPECTUS
MAY 1, 2000
Managed Fund
Growth & Income Fund
Equity Index Fund
Large Cap Value Fund
Large Cap Growth Fund
Large Cap Aggressive Growth
Mid Cap Value Fund
Mid Cap Growth Fund
Fundamental Mid Cap Growth
Real Estate Equity Fund
Small/Mid Cap CORE Fund
Small/Mid Cap Growth Fund
Small Cap Value Fund
Small Cap Growth Fund
Global Equity Fund
Global Balanced Fund
International Equity Index Fund
International Opportunities Fund
Emerging Markets Equity Fund
Short-Term Bond Fund
Bond Index Fund
Active Bond Fund
Global Bond Fund
High Yield Bond Fund
Money Market Fund
Managed by John Hancock Life Insurance Company
John Hancock Place
Boston, MA 02117
<PAGE>
Contents
- --------------------------------------------------------------------------------
John Hancock Variable Series Trust I ("Trust")
Overview 2
A fund-by-fund summary of goals, strategies and risks.
Your Investment Choices 3
Managed Fund 6
Growth & Income Fund 8
Equity Index Fund 10
Large Cap Value Fund 12
Large Cap Growth Fund 14
Large Cap Aggressive Growth Fund 16
Mid Cap Value Fund 18
Mid Cap Growth Fund 20
Fundamental Mid Cap Growth Fund 22
Real Estate Equity Fund 24
Small/Mid Cap CORE Fund 26
Small/Mid Cap Growth Fund 28
Small Cap Value Fund 30
Small Cap Growth Fund 32
Global Equity Fund 34
Global Balanced Fund 36
International Equity Index Fund 38
International Opportunities Fund 40
Emerging Markets Equity Fund 42
Short-Term Bond Fund 44
Bond Index Fund 46
Active Bond Fund 48
Global Bond Fund 50
High Yield Bond Fund 52
Money Market Fund 54
Policies and instructions for opening, maintaining and closing an account in
any fund
Your Account 56
Investments in shares of the funds 56
Share price 56
Valuation 56
Conflicts 56
Further information on the funds
Funds' Expenses 57
Dividends and Taxes 57
Dividends 57
Taxes 57
Further information on the Trust
Trust Business Structure 58
Additional performance information
Appendix 59
For more information back cover
<PAGE>
Overview
- --------------------------------------------------------------------------------
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on page 6. Each description provides
the following information:
Goal and Strategy The fund's particular investment goals and the principal
strategies it intends to use in pursuing those goals.
Subadviser/Manager The firm and individual(s) providing investment management
services to the fund.
Past Performance The fund's total return, measured year-by-year and over time.
Main Risks The significant risk factors associated with the fund. The risks are
categorized as "Primary" or "Secondary". The Primary Risks are considered major
factors in the fund's performance and are described first. The Secondary Risks
are not considered major factors in the fund's performance because the fund
would not normally commit a large portion of its assets to the investments
involved. However, the Secondary Risks are of such a nature that they could
significantly affect the fund's performance, even if the investments are held
in relatively small amounts.
Financial Highlights The fund's operating performance per share, measured year-
by-year.
THE FUNDS
The Trust offers investment choices, or funds, for the variable annuity and
variable life insurance contracts ("variable contracts") of:
. John Hancock Life Insurance Company ("John Hancock"),
. John Hancock Variable Life Insurance Company ("JHVLICO"), and
. Investors Partner Life Insurance Company and its subsidiaries ("IPL").
In some variable contract forms, the Trust is referred to as the "Fund" or "Se-
ries Fund" and the investment choices are referred to as "Portfolios."
RISKS OF FUNDS
These funds, like all mutual funds, are not bank deposits. They are not insured
or guaranteed by the FDIC or any other government agency. You could lose money
by investing in these funds. So, be sure to read all risk disclosure carefully
before investing.
MANAGEMENT
John Hancock is the investment adviser of each fund. John Hancock is a Massa-
chusetts stock life insurance company. On February 1, 2000, John Hancock
changed its form of organization and its name. Prior to that date, it was John
Hancock Mutual Life Insurance Company, a mutual life insurance company that was
chartered in 1862. At the end of 1999, John Hancock managed approximately $127
billion, of which it owned over
$71 billion. Most of the funds have subadvisers.
2
<PAGE>
Your Investment Choices
- -------------------------------------------------------------------------------
The Trust offers a number of investment choices, or funds, to suit a variety
of objectives under variable contracts. There are 23 funds available under
your variable contract. Each fund has its own strategy and its own risk/reward
profile.The funds can be broadly categorized as equity funds, balanced funds,
bond funds, and international/global funds. Within these broad categories, the
funds can be further categorized as follows:
Equity Funds
Equity funds can be categorized in two ways--by capitalization and by invest-
ment style.
Capitalization Equity funds can be categorized by market capital-
ization, which is defined as the market value of
all shares of a company's stock. The following def-
initions for large, mid and small cap are based
upon statistics at year-end 1999, but are adjusted
periodically with broad equity market movements as
represented by the Russell 3000 Index(R) or other
widely-recognized source of market capitalization
data. Adjustments are typically made on a quarterly
basis, but in extraordinary circumstances may be
made as frequently as monthly.
Large Cap Funds:
. Growth & Income Fund These funds invest in large, well-established com-
panies that typically are very actively traded and
. Equity Index Fund provide more stable investment returns over time.
Large cap companies represent the 300 largest
. Large Cap Value Fund stocks in the Russell 3000 Index. Each of those
companies has a market capitalization greater than
. Large Cap Growth Fund $7.9 billion as of the end of 1999. Large cap funds
are appropriate for investors who want the least
. Large Cap Aggressive volatile investment returns within the overall
Growth equity markets.
Mid Cap Funds:
. Mid Cap Value Fund These funds invest in medium-sized, less estab-
lished companies that are less actively traded and
. Mid Cap Growth Fund provide more share price volatility over time than
large cap stocks. Mid cap companies represent the
. Fundamental Mid Cap 250th to 1000th largest stocks in the Russell 3000
Growth Index. Each of those companies has a market capi-
talization between $1.4 billion and $9.7 billion as
. Small/Mid Cap CORE Fund of the end of 1999. Mid cap funds are appropriate
for investors who are willing to accept more vola-
. Small Mid/Cap Growth tile investment returns within the overall equity
Fund markets with the potential reward of higher long-
term returns.
. Real Estate Equity Fund
Small Cap Funds:
. Small Cap Value Fund These funds invest in small newly established com-
panies that are less actively traded and have a
. Small Cap Growth Fund high level of share price volatility over time.
Small cap companies represent the 2000 smallest
stocks in the Russell 3000 Index. Each of those
companies has a market capitalization of less than
$1.4 billion as of the end of 1999. Small cap funds
are appropriate for investors who are willing to
accept the most volatile investment returns within
the overall equity markets for the potential reward
of higher long-term returns.
Investment Style
Value Funds:
. Large Cap Value Fund Value funds invest in companies that are attrac-
tively priced, considering their asset and earnings
. Mid Cap Value Fund history. These stocks typically pay above average
dividends and have low stock prices relative to
. Small Cap Value Fund measures of earnings and book value. Value funds
are appropriate for investors who want some divi-
. Real Estate Equity Fund dend income and the potential for capital gains,
but are less tolerant of share-price fluctuations.
3
<PAGE>
Growth Funds:
. Large Cap Growth Fund Growth funds invest in companies believed to have
above-average prospects for capital growth due to
. Large Cap Agressive their strong earnings and revenue potential. Growth
Growth stocks typically have high stock prices relative to
measures of earnings and book value. Growth funds
. Mid Cap Growth Fund are appropriate for investors who are willing to
accept more share-price volatility for the poten-
. Fundamental Mid/Cap tial reward of higher long-term returns.
Growth Fund
. Small Mid/Cap Growth Blend Funds:
Fund Blend funds invest in both value and growth compa-
nies. Blend funds are appropriate for investors who
. Small Cap Growth Fund seek both dividend and capital appreciation charac-
teristics.
. Growth & Income Fund
. Equity Index Fund
. Small/Mid Cap CORE
Fund
Balanced Funds
. Managed Fund Balanced funds invest in a combination of stocks
and bonds and actively manage the mix of stock and
. Global Balanced bonds within a target range. Domestic balanced
Fund funds invest in U.S. stocks and bonds. Interna-
tional balanced funds invest in foreign stocks and
bonds.
Bond Funds
Bond funds can be categorized in two ways--by average maturity and by credit
quality:
Average Maturity Bond maturity is a key measure of interest rate
risk. A bond's maturity measures the time remaining
until the bond matures, or until the repayment of
the bond's principal comes due. The longer a bond's
maturity, the more sensitive the bond's price is to
changes in interest rates.
Short:
. Money Market Fund These funds invest primarily in bonds with short
maturities, typically less than four years. These
. Short Term Bond funds have less interest risk than intermediate-
Fund term bond funds.
Intermediate:
. Bond Index Fund These funds invest in bonds of all maturities and
maintain an average maturity which is typically
. Active Bond Fund between four and ten years. These funds have more
interest rate risk than short-term bond funds.
. Global Bond Fund
. High Yield Bond Fund
Credit Quality Credit quality is a measure of the ability of a
bond issuer to meet its financial obligations and
repay principal and interest. High quality bonds
have less credit risk than lower quality bonds.
Investment grade bonds typically have "high" or
"medium" credit quality ratings (as defined below),
while high-yield bonds have "low" credit quality
ratings.
High:
. Money Market Fund These funds focus on the highest-rated, most
creditworthy bonds and typically maintain an aver-
. Bond Index Fund age credit quality rating of AAA/Aaa or AA/Aa.
. Global Bond Fund
4
<PAGE>
Medium:
. Short Term Bond Fund These funds invest in bonds of all credit quality
levels with a focus on high-rated investment grade
. Active Bond Fund bonds. These funds typically maintain an average
credit quality rating of A or BBB/Baa.
Low:
. High Yield Bond Fund These funds invest primarily in lower rated bonds--
known as high yield or "junk" bonds. These funds
typically maintain a below investment-grade average
credit quality rating of BB/Ba or B.
International/Global Funds
International funds invest primarily in securities markets outside the United
States. Global funds invest both in the United States and abroad. These funds
can be categorized by the types of markets they invest in.
Developed Markets:
. Global Equity Fund These funds invest primarily in the larger, well-
established developed or industralized markets
. International around the world. These funds have less foreign
Equity Index Fund securities risk than emerging market funds.
. International
Opportunities Fund
Emerging Markets:
. Emerging Markets These funds invest primarily in developing or
Equity Fund emerging markets and have more foreign securities
risk than funds that invest primarily in well-
established, developed markets.
--------------
In the following pages, any fund investment strategy that is stated as a per-
centage of a fund's assets applies at all times, not just at the time the fund
buys or sells an investment security. The trustees of the Trust can change the
investment goals and stragtegy of any fund without shareholder (i.e.,
contractowner) approval.
The financial highlights tables on the following pages detail the historical
performance of each fund, including total return information showing the
increase or decrease of an investment in the fund each year (assuming rein-
vestment of all dividends and distributions). The "total investment return"
shown for each fund does not reflect the expenses and charges of the applica-
ble separate accounts and variable contracts. Those expenses and charges vary
considerably from contract to contract and are described in the variable con-
tract prospectus to which this prospectus is attached. If the earliest period
shown in the financial highlights table is less than a full calendar year, the
two "Ratios" shown for that period have been annualized (i.e., projected as if
the fund had been in effect for a full year). However, the "total investment
return" and "turnover rate" for that period have not been annualized.
In this prospectus, the term "stock"' is used as a shorthand reference for
equity investments generally and the term "bond" is used as a shorthand refer-
ence for debt obligations generally.
5
<PAGE>
Managed Fund
GOAL AND STRATEGY
This is a balanced stock and bond fund that seeks long-term growth in income
and capital.
The Fund invests primarily in a diversified mix of:
. common stocks of large established U.S. companies;
. bonds with maturities generally greater than 12 months; and
. money market and other short-term debt securities with maturities generally
not greater than 12 months.
The manager makes ongoing decisions about the mix between stocks and bonds. The
Manager has a target mix of 60% in equities and 40% in bonds, but actively man-
ages the mix within (+/-) 10 percentage points of the target mix.
The manager selects stocks and bonds using a combination of proprietary
research and quantitative tools. Stocks are purchased that are undervalued rel-
ative to the stock's history and have improving earnings growth prospects.
Bonds are purchased that are attractively priced and have cheap, predictable
cash flows. The Fund is managed using risk control techniques that maintain
risk and industry characteristics similar to the overall market.
The Fund normally invests its equity portion in 80 to 150 stocks, with at least
65% (usually higher) of its equity assets in large cap companies. The Fund may
invest up to 20% of its bond assets in foreign debt securities of developed
countries (denominated in foreign currencies) and up to 15% of its bond assets
in high yield bonds. The Fund normally has 5% or less of its assets in cash and
cash equivalents.
The Fund may purchase other types of securities, for example: American
Depository Receipts (ADRs), and certain derivatives (investments whose value is
based on indices or other securities). The manager actively uses derivatives,
such as futures and forwards, to adjust the Fund's average maturity relative to
the Lehman Brothers Aggregate Bond Index and to implement currency strategies.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
John C. Forelli
(equity)
- -----------------
Senior Vice President of subadviser
Joined team in 1996
Joined subadviser in 1990
Jeffrey B. Saef
(fixed income)
- -----------------
Senior Vice President of subadviser
Joined team in 1994
Joined subadviser in 1994
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may also help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1990 3.80%
1991 22.00%
1992 7.70%
1993 11.60%
1994 -2.23%
1995 27.09%
1996 10.72%
1997 18.72%
1998 20.42%
1999 9.10%
Best quarter: up 14.77%, fourth quarter 1998 Worst quarter: down 7.22%, third
quarter 1998
Average annual total return -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 9.10% 12.00%
5 years 17.02% 18.85%
10 years 12.60% 13.48%
Life of fund 12.45% 13.06%
</TABLE>
Index:50% S&P 500 Index/50% Lehman Brothers Government/Corporate Bond Index
(for
periods through December 31, 1997)
60% S&P 500 Index/40% Lehman Brothers Government/Corporate Bond Index (for
periods from January 1, 1998 through April 30, 1998)
60% S&P 500/40% Lehman Brothers Aggregate Bond Index (for periods after
April 30, 1998)
6
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "large cap" approach carries the risk that in certain markets large cap
stocks will underperform mid cap and small cap stocks.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest
rates fall, the reverse will generally occur. The longer the average remaining
maturity of bonds held by the Fund, the more sensitive the Fund is to interest
rate risk. This Fund has more interest rate risk than a short-term bond fund,
but less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obliga-
tion to pay interest and repay principal. Also, the credit rating of a bond
held by the fund may be downgraded. In either case, the value of the bond held
by the Trust would fall. All bonds have some credit risk, but in general low-
er-rated bonds have higher credit risk.
Market Allocation Risk: The allocation of the Fund's assets among major asset
classes (i.e., stocks, bonds, and short-term debt securities) may (1) reduce
the Fund's holdings in a class whose value then increases unexpectedly, or (2)
increase the Fund's holdings in a class just prior to its experiencing a loss
of value.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become
harder to value or to sell at a fair price.
Prepayment/Call Risk: The Fund's share price or yield could be hurt if inter-
est rate movements cause the Fund's mortgage-related and callable securities
to be paid off substantially earlier than expected.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December
31: 1995 1996 1997 1998 1999
Net asset value,
beginning of period $11.96 $13.73 $13.35 $14.35 $15.64
Income from investment
operations:
Net investment income
(loss) 0.62 0.61 0.59 0.46 0.44
Net realized and
unrealized gain (loss)
on investments* 2.56 0.81 1.86 2.43 0.94
Total from investment
operations 3.18 1.42 2.45 2.89 1.38
Less distributions:
Distributions from net
investment income and
capital paid in (0.62) (0.61) (0.67) (0.51) (0.43)
Distributions from net
realized gain on
investments sold (0.79) (1.19) (0.78) (1.09) (1.14)
Distributions in excess
of income, capital
paid in & gains -- -- -- -- --
Total distributions (1.41) (1.80) (1.45) (1.60) (1.57)
Net asset value, end of
period $13.73 $13.35 $14.35 $15.64 $15.45
Total investment return 27.09% 10.72% 18.72% 20.42% 9.10%
Ratios and supplemental
data
Net assets, end of
period (000s
omitted)($) $2,093,964 $2,386,660 $2,800,127 $3,301,910 $3,430,919
Ratio of expenses to
average net assets (%) 0.38% 0.36% 0.37% 0.36% 0.36%
Ratio of net investment
income (loss) to
average net assets (%) 4.66% 4.41% 4.18% 2.99% 2.75%
Turnover rate (%) 187.67% 113.61% 200.41% 160.57% 203.86%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
7
<PAGE>
Growth & Income Fund
GOAL AND STRATEGY
This is a large cap stock fund that seeks long-term growth in income and capi-
tal.
The Fund invests primarily in a diversified mix of common stocks of large
established U.S. companies that are believed to offer:
. favorable prospects for increasing dividends and growth in capital (i.e.,
"value" companies); or
. above-average potential for growth in revenues and earnings (i.e., "growth"
companies).
The manager selects stocks using a combination of proprietary equity research
and quantitative tools. Stocks are purchased that are undervalued relative to
the stock's history and have improving earnings growth prospects. The Fund is
managed using risk control techniques that maintain risk and industry charac-
teristics similar to the S&P 500 Index.
The Fund normally invests in 80 to 150 stocks, with at least 65% (usually high-
er) of its assets in large cap companies. The Fund normally has 5% or less of
its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
Note: "S&P 500 Index" means the Standard & Poor's 500 Composite Stock Price
Index. "Standard & Poor's", "S&P" and "S&P 500" are trademarks of McGraw Hill,
Inc. and have been licensed for use by the Trust.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at end of 1999
FUND MANAGER
Management by investment team overseen by:
Paul F. McManus
- -----------------
Senior Vice President of subadviser
Joined team in 1996
Joined subadviser in 1982
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may also help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1990 4.10%
1991 26.00%
1992 8.90%
1993 13.33%
1994 -0.56%
1995 34.21%
1996 20.10%
1997 29.79%
1998 30.25%
1999 16.23%
Best quarter: up 24.07%, fourth quarter 1998 Worst quarter: down 12.05%, third
quarter 1998
Average annual total return -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 16.23% 21.04%
5 years 25.93% 28.55%
10 years 17.70% 18.20%
Life of fund 16.46% 17.27%
</TABLE>
Index:S & P 500 Index
8
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value
more than bonds. If the Fund's investments are concentrated in certain sectors,
the Fund's performance could be worse than the overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "large cap" approach carries the risk that in certain markets large cap
stocks will underperform mid cap and small cap stocks.
Secondary
None
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Period ended December
31: 1995 1996 1997 1998 1999
Net asset value,
beginning of period $ 11.50 $ 13.94 $ 14.65 $ 16.61 $ 19.49
Income from investment
operations:
Net investment income
(loss) 0.36 0.34 0.27 0.23 0.20
Net realized and
unrealized gain (loss)
on investments* 3.53 2.43 4.07 4.75 2.88
Total from investment
operations 3.89 2.77 4.34 4.98 3.08
Less distributions:
Distributions from net
investment income and
capital paid in (0.36) (0.34) (0.27) (0.23) (0.20)
Distributions from net
realized gain on
investments sold (1.09) (1.72) (2.11) (1.87) (2.36)
Distributions in excess
of income, capital
paid in & gains -- -- -- -- --
Total distributions $ (1.45) $ (2.06) $ (2.38) $ (2.10) $ (2.56)
Net asset value, end of
period $ 13.94 $ 14.65 $ 16.61 $ 19.49 $ 20.01
Total investment return 34.21% 20.10% 29.79% 30.25% 16.23%
Ratios and supplemental
data
Net assets, end of
period (000s
omitted)($) $1,598,585 $2,047,927 $2,785,964 $3,670,785 $4,218,841
Ratio of expenses to
average net assets (%) 0.28% 0.27% 0.28% 0.27% 0.28%
Ratio of net investment
income (loss) to
average net assets (%) 2.70% 2.24% 1.61% 1.24% 0.98%
Turnover rate (%) 73.54% 81.02% 74.56% 48.45% 70.16%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
9
<PAGE>
Equity Index Fund
GOAL AND STRATEGY
This is a stock fund that seeks to track the performance of the S&P 500 Index,
which emphasizes the stocks of large U.S. companies.
The manager employs a passive management strategy by normally investing in all
500 stocks included in the Index. The manager invests in each stock in roughly
the same proportion as represented in the Index.
The manager seeks to replicate as closely as possible the aggregate risk char-
acteristics and industry diversification of the Index.
The Fund normally invests in all 500 stocks in the Index, but has no predeter-
mined number of stocks that it must hold. S&P may change the composition of the
Index from time to time. The manager will reflect those changes as soon as
practical.
The Fund is normally fully invested. The manager may invest in stock index
futures to maintain market exposure and manage cash flow.
The Fund may purchase other types of securities, for example: Standard & Poor's
Depository Receipts (SPDRs), American Depository Receipts (ADRs), cash equiva-
lents, and certain derivatives (investments whose value is based on indices or
other securities).
Note: "S&P 500 Index" means the Standard & Poor's 500 Composite Stock Price
Index. "Standard & Poor's", "S&P" and "S&P 500" are trademarks of McGraw Hill,
Inc. and have been licensed for use by the Trust.
- --------------------------------------------------------------------------------
SUBADVISER
State Street Bank and Trust Company
State Street Global Advisors Division
Two International Place
Boston, Massachusetts 02110
Managing since 1978
Managed approximately $667 billion in assets at the end of 1999
FUND MANAGERS
John A. Tucker
- -----------------
Principal of subadviser
Joined subadviser in 1988
James B. May
- -----------------
Principal of subadviser
Joined subadviser in 1989
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may also help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1997 32.79%
1998 28.45%
1999 21.08%
Best quarter: up 21.27%, fourth quarter 1998 Worst quarter: down 9.99%, third
quarter 1998
Average annual total return -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 21.08% 21.04%
Life of fund 26.36% 26.79%
</TABLE>
Index:S&P 500 Index
(1)Began operations on May 1, 1996.
10
<PAGE>
MAIN RISKS
Primary
Index Management Risk: Certain factors such as the following may cause the
Fund to track the Index less closely:
. The securities selected by the manager may not be fully representative of
the Index.
. Transaction expenses of the Fund may result in the Fund's performance being
different than that of the Index.
. The size and timing of the Fund's cash flows may result in the Fund's per-
formance being different than that of the Index.
Also, index funds like this one will have more difficulty in taking defensive
positions in abnormal market conditions.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
invest-ment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "large cap" approach carries the risk that in certain markets large cap
stocks will underperform mid cap and small cap stocks.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $10.00 $11.10 $14.21 $17.70
Income from investment operations:
Net investment income (loss) 0.15 0.24 0.25 0.27
Net realized and unrealized gain
(loss) on investments* 1.26 3.41 3.76 3.41
Total from investment operations 1.41 3.65 4.01 3.68
Less distributions:
Distributions from net investment
income and capital paid in (0.21) (0.29) (0.24) (0.26)
Distributions from net realized gain
on investments sold (0.10) (0.25) (0.28) (0.66)
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions ($0.31) ($0.54) ($0.52) (0.92)
Net asset value, end of period $11.10 $14.21 $17.70 $20.46
Total investment return*** 14.23% 32.79% 28.45% 21.08%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $14,650 $101,390 $232,578 $451,296
Ratio of expenses to average net
assets (%)**** 0.00% 0.00% 0.00% 0.00%
Ratio of net investment income (loss)
to average net assets (%) 2.74% 1.97% 1.59% 1.42%
Turnover rate (%) 15.72% 64.56% 43.31% 55.24%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains
and losses in the fund securities for the period because of the timing
of purchases and withdrawals of shares in relation to the fluctuation
in market values of the fund.
** Fund began operations on May 1, 1996.
*** Includes the effect of a voluntary capital contribution from John Han-
cock of $0.06 per share for the period 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.
**** Expense ratio is net of expense reimbursement. Had such reimbursement
not been made the expense ratio would have been 1.61%, 0.65%, 0.34% and
0.22% for the years ended December 31, 1996, 1997, 1998 and 1999,
respectively.
11
<PAGE>
Large Cap Value Fund
GOAL AND STRATEGY
This is a large cap stock fund with a value emphasis that seeks long-term
growth in capital and substantial dividend income.
The Fund invests primarily in a diversified mix of common stocks of large
established U.S. companies that are believed to offer favorable prospects for
increasing dividends and growth in capital.
The manager employs a value approach in selecting stocks using proprietary
equity research. Stocks are purchased that are undervalued by various measures
such as the stock's current price relative to its earnings potential.
The manager looks for companies with:
. established operating history;
. above-average dividend yield relative to the S&P 500 Index;
. low price/earnings ratio relative to the S&P 500 Index;
. sound balance sheet and other positive financial characteristics; and
. low stock price relative to the company's underlying value.
The Fund normally invests in 100 to 175 stocks, with at least 65% (usually
higher) of its assets in large cap companies. The Fund normally has 5% or less
of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), foreign equity securities of developed countries, high
quality intermediate and short-term debt securities, and certain derivatives
(investments whose value is based on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
Note: "S&P 500 Index" means the Standard & Poor's 500 Composite Stock Price
Index. "Standard & Poor's", "S&P" and "S&P 500" are trademarks of McGraw Hill,
Inc. and have been licensed for use by the Trust.
- --------------------------------------------------------------------------------
SUBADVISER
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Managing since 1937
Managed approximately $180 billionin assets at the end of 1999
FUND MANAGERS
Management by Investment Advisory Committee
Brian C. Rogers
- -----------------
Committee Chairman
Director of subadviser
Managed fund since 1996 (its inception)
Joined subadviser in 1982
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may also help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1997 28.56%
1998 9.26%
1999 3.28%
Best quarter: up 12.86%, fourth quarter 1999 Worst quarter: down 8.58%, third
quarter 1999
Average annual total return -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 3.28% 7.35%
Life of fund 14.67% 19.54%
</TABLE>
Index:Russell 1000(R) Value Index
(1)Began operations on May 1, 1996.
12
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "large cap" approach car-
ries the risk that in certain markets large cap stocks will underperform small
cap and mid cap stocks.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 11.09 $ 13.57 $ 14.02
Income from investment operations:
Net investment income (loss) 0.16 0.29 0.28 0.27
Net realized and unrealized gain (loss)
on investments* 1.22 2.84 0.96 0.18
Total from investment operations 1.38 3.13 1.24 0.45
Less distributions:
Distributions from net investment
income and capital paid in (0.16) (0.29) (0.28) (0.27)
Distributions from net realized gain on
investments sold (0.13) (0.36) (0.51) (0.71)
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions ($0.29) ($0.65) ($0.79) (0.98)
Net asset value, end of period $ 11.09 $ 13.57 $ 14.02 $ 13.49
Total investment return 13.90% 28.56% 9.26% 3.28%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $19,781 $73,269 $123,365 $155,849
Ratio of expenses to average net assets
(%)*** 1.00% 1.00% 0.92% 0.85%
Ratio of net investment income (loss) to
average net assets (%) 2.74% 2.42% 2.08% 1.88%
Turnover rate (%) 19.95% 19.21% 18.46% 32.62%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.89% and 1.06% for the years
ended December 31, 1996 and 1997, respectively.
13
<PAGE>
Large Cap Growth Fund
GOAL AND STRATEGY
This is a large cap stock fund with a growth emphasis that seeks growth in
capital.
The Fund invests primarily in a diversified mix of common stocks of large
established U.S. companies that are believed to offer above-average potential
for growth in revenues and earnings.
The manager selects stocks using a combination of proprietary equity research
and quantitative tools. Stocks are purchased that are undervalued relative to
the stock's history and have improving earnings growth prospects. The Fund is
managed using risk control techniques that maintain risk and industry charac-
teristics similar to the Russell 1000(R) Growth Index.
The Fund normally invests in 80 to 150 stocks, with at least 65% (usually high-
er) of its assets in large cap companies. The Fund normally has 5% or less of
its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Mark C. Lapman
- -----------------
Executive Vice President of subadviser
Joined team in 1996
Joined subadviser in 1982
Began career in 1979
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1990 6.60%
1991 25.50%
1992 9.90%
1993 13.80%
1994 -0.98%
1995 31.64%
1996 18.27%
1997 30.89%
1998 39.51%
1999 24.07%
Best quarter: up 27.79%, fourth quarter 1998 Worst quarter: down 11.16%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 24.07% 33.16%
5 years 28.67% 32.18%
10 years 19.34% 19.86%
Life of fund 17.72% 18.46%
</TABLE>
Index:S&P 500 Index (for periods through April 30, 1996)
Russell 1000(R) Growth Index (for periods after April 30, 1996)
14
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "large cap" approach
carries the risk that in certain markets large cap stocks will underperform
small cap and mid cap stocks.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December
31: 1995 1996 1997 1998 1999
Net asset value,
beginning of period $ 14.41 $ 17.37 $ 17.49 $ 20.82 $ 26.19
Income from investment
operations:
Net investment income
(loss) 0.44 0.25 0.17 0.14 0.09
Net realized and
unrealized gain (loss)
on investments* 4.06 2.89 5.21 8.05 6.03
Total from investment
operations 4.50 3.14 5.38 8.19 6.12
Less distributions:
Distributions from net
investment income and
capital paid in (0.70) (0.25) (0.17) (0.14) (0.09)
Distributions from net
realized gain on
investments sold (0.84) (2.77) (1.88) (2.68) (4.89)
Distributions in excess
of income, capital
paid in & gains -- -- -- -- --
Total distributions ($1.54) ($3.02) ($2.05) ($2.82) (4.98)
Net asset value, end of
period $ 17.37 $ 17.49 $ 20.82 $ 26.19 $ 27.33
Total investment return 31.64% 18.27% 30.89% 39.51% 24.07%
Ratios and supplemental
data
Net assets, end of
period (000s
omitted)($) $380,276 $524,145 $754,398 $1,126,764 $1,382,473
Ratio of expenses to
average net assets (%) 0.47% 0.44% 0.44% 0.41% 0.39%
Ratio of net investment
income (loss) to
average net assets (%) 2.70% 1.35% 0.86% 0.59% 0.33%
Turnover rate (%) 90.18% 135.98% 83.82% 56.41% 37.42%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
15
<PAGE>
Large Cap Aggressive Growth Fund
GOAL AND STRATEGY
This is a non-diversified large cap stock fund with a growth emphasis that
seeks long-term growth in capital.
The Fund invests primarily in the common stocks of large established U.S. com-
panies that are believed to offer above-average potential for long-term growth
in revenues and earnings.
The manager selects stocks using proprietary company-specific research that
focuses on firms:
. offering superior earnings growth that is not fully reflected in current mar-
ket valuations,
. having prospective earnings growth rates substantially above that of the S&P
500, and
. exhibiting strong management, superior industry positions and excellent bal-
ance sheets.
The Fund employs aggressive investment strategies and invests most of its asset
in a relatively small number of companies, with the 25 most highly regarded
stocks representing at least 65% of the Fund's assets. The manager selects
stocks without regard to any predefined industry or sector selection criteria.
The manager actively trades and adjusts the Fund's holdings to capitalize on
market fluctuations. The manager typically:
. increases investment in favored securities and reduces the number of holdings
in declining markets, and
. decreases investment in favored securities and increases the number of hold-
ings in rising markets.
The Fund is a non-diversified fund, which means it can take larger positions in
a smaller number of issuers. The Fund normally invests in 35 to 55 stocks, with
at least 65% (usually higher) of its assets in large cap companies. The Fund
normally has 5% or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York, NY 10105
Managing, with predecessors, since 1971
Managed approximately $358 billion
in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
John H. Fogarty
- -----------------
Vice president of subadviser
Joined subadviser in 1988
Began career in 1988
Alfred Harrison
- -----------------
Vice chairman and Director of subadviser
Joined subadviser in 1978
Began career in 1962
PAST PERFORMANCE
Because this Fund did not have a full year of operations as of December 31,
1999, no year-by-year total returns or average annual total returns can be
shown for this Fund. However, the Appendix to this prospectus contains certain
performance information that is relevant to this Fund. The Appendix starts on
page 59.
16
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Non-Diversified Fund Risk: The Fund's larger position in individual issuers and
in a smaller number of issuers could produce more volatile performance relative
to more diversified funds. The less diversified a fund's holdings are, the more
likely it is that a specific security's poor performance will hurt the fund
significantly.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "large cap" approach
carries the risk that large cap stocks will underperform small cap and mid cap
stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C>
Period ended December 31: 1999**
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment income (loss) (0.01)
Net realized and unrealized gain (loss) on investments* 2.03
Total from investment operations 2.02
Less distributions:
Distributions from net investment income and capital paid in --
Distributions from net realized gain on investments sold (0.08)
Distributions in excess of income, capital paid in & gains --
Total distributions (0.08)
Net asset value, end of period $11.94
Total investment return 20.18%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $1,263
Ratio of expenses to average net assets (%)*** 1.08%
Ratio of net investment income (loss) to average net assets (%) (0.39)%
Turnover rate (%) 18.97%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on August 31, 1999.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.17% for the years ended
December 31.
17
<PAGE>
Mid Cap Value Fund
GOAL AND STRATEGY
This is a mid cap stock fund with a value emphasis that seeks long-term growth
in capital.
The Fund invests primarily in the common stocks of mid-sized U.S. companies
that are believed to sell at a discount to their intrinsic value.
The manager selects stocks using proprietary equity research. Stocks are pur-
chased that are undervalued by various measures such as the stock's current
price relative to its earnings potential.
The manager looks for undervalued companies with:
. sound balance sheet and other financial characteristics;
. consistent cash flow;
. strong position relative to the competition; and
. high level of stock ownership among management.
The Fund normally invests in 50 to 75 stocks, with at least 65% (usually high-
er) of its assets in mid cap companies. The Fund normally has 5% or less of its
assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Neuberger Berman, LLC
605 Third Avenue
New York, New York 10158
Managing since 1939
Managed approximately $54 billion
in assets at the end of 1999
FUND MANAGERS
Robert I. Gendelman
- -----------------
Managing Director of subadviser
Managed fund since 1996 (its inception)
Joined subadviser in 1993
Began career in 1984
S. Basu Mullick
- -----------------
Managing Director of subadvisor
Joined subadvisor in 1998
Began career in 1982
Portfolio Manager, Ark Asset
Management (1993-1998)
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1997 32.17%
1998 -11.33%
1999 5.52%
Best quarter: up 17.06%, third quarter 1997 Worst quarter: down 21.29%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 5.52% -0.11%
Life of fund 10.38% 13.54%
</TABLE>
Index:Russell Mid Cap(TM) Value Index
(1)Began operations on May 1, 1996.
18
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "mid cap" approach carries
the risk that in certain markets mid cap stocks will underperform small cap and
large cap stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $10.00 $11.35 $13.87 $12.19
Income from investment operations:
Net investment income (loss) 0.04 0.05 0.11 0.08
Net realized and unrealized gain (loss)
on investments* 1.57 3.59 (1.68) 0.59
Total from investment operations 1.61 3.64 (1.57) 0.67
Less distributions:
Distributions from net investment income
and capital paid in (0.04) (0.05) (0.11) (0.08)
Distributions from net realized gain on
investments sold (0.22) (1.07) -- --
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions $(0.26) $(1.12) $(0.11) (0.08)
Net asset value, end of period $11.35 $13.87 $12.19 $12.78
Total investment return 16.18% 32.17% (11.33)% 5.52%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $10,926 $64,973 $94,820 $92,150
Ratio of expenses to average net assets
(%)*** 1.05% 1.05% 0.96% 0.92%
Ratio of net investment income (loss) to
average net assets (%) 0.69% 0.53% 0.93% 0.64%
Turnover rate (%) 62.99% 93.78% 173.33% 137.06%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.15% and 1.14% for the years
ended December 31, 1996, and 1997, respectively.
19
<PAGE>
Mid Cap Growth Fund
GOAL AND STRATEGY
This is a non-diversified mid cap stock fund with a growth emphasis that seeks
long-term growth in capital.
The Fund invests primarily in the common stocks of mid-sized U.S. companies
that are believed to offer above-average potential for growth in revenues and
earnings.
The manager selects stocks using proprietary equity research. Stocks are pur-
chased that are expected to have earnings growth potential that may not be rec-
ognized by the investment community. The manager selects stocks without regard
to any pre- defined industry or sector selection criteria.
The manager looks for companies experiencing:
. above-average growth relative to their peers or the general economy; and
. positive change due to new product developments, improved regulatory environ-
ment or a new management team.
The Fund is non-diversified, which means it can take larger positions in a
smaller number of issuers. Based upon its current size and strategy, the Fund
invests in 35 to 75 stocks, with at least 65% of its assets in mid cap compa-
nies. The Fund normally has 15% or less of its assets in cash and cash equiva-
lents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), foreign equity securities of developed countries, and
certain derivatives (investments whose value is based on indices or other
securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Janus Capital Corporation
100 Fillmore Street
Denver, Colorado 80206
Managing since 1970
Managed approximately $248 billionin assets at the end of 1999
FUND MANAGER
James P. Goff
- -----------------
Executive Vice President of subadviser
Managed fund since 1996 (its inception)
Joined subadviser in 1988
Began career in 1985
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1997 16.66%
1998 39.07%
1999 118.31%
Best quarter: up 59.33%, fourth quarter 1999 Worst quarter: down 12.96%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 118.31% 51.29%
Life of fund 42.19% 25.51%
</TABLE>
Index:Russell Mid Cap(TM) Growth Index
(1)Began operations on May 1, 1996.
20
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Non-Diversified Fund Risk: The Fund's larger position in individual issuers and
in a smaller number of issuers could produce more volatile performance relative
to more diversified funds. The less diversified a fund's holdings are, the more
likely it is that a specific security's poor performance will hurt the fund
significantly.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "mid cap" approach
carries the risk that in certain markets mid cap stocks will underperform small
cap and large cap stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could be- come harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share Interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.22 $ 11.93 $ 15.12
Income from investment operations:
Net investment income (loss) 0.05 (0.02) (0.09) (0.19)
Net realized and unrealized gain
(loss) on investments* 0.22 1.73 4.75 17.70
Total from investment operations 0.27 1.71 4.66 17.51
Less distributions:
Distributions from net investment
income and capital paid in (0.05) -- (0.15) --
Distributions from net realized gain
on investments sold -- -- (1.32) (3.41)
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions (0.05) -- (1.47) (3.41)
Net asset value, end of period $ 10.22 $ 11.93 $ 15.12 $ 29.22
Total investment return 2.69% 16.66% 39.07% 118.31%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $16,492 $40,235 $94,085 $452,937
Ratio of expenses to average net
assets (%)*** 1.10% 1.10% 1.10% 0.93%
Ratio of net investment income (loss)
to average net assets (%) 0.92% (0.26)% (0.64)% (0.68)%
Turnover rate (%) 71.25% 124.04% 137.01% 106.06%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.34%, 1.42% and 1.13% for the
years ended December 31, 1996, 1997, and 1998, respectively.
21
<PAGE>
Fundamental Mid Cap Growth Fund
GOAL AND STRATEGY
This is a mid cap stock fund with a growth emphasis that seeks long-term growth
in capital.
The Fund invests primarily in the common stocks of mid-sized U.S. companies
that are believed to offer above-average potential for growth in revenues and
earnings.
The manager selects stocks using both proprietary equity research and external
consensus earnings forecasts. Stocks are purchased that are believed to offer:
. High rate of sustainable earnings growth of 15% plus,
. revenue growth generated by operating results (unit volume); and
.sustainable revenue growth of 10% plus.
The manager looks for companies with:
. innovative management and strong leadership positions in unique market
niches;
. undiscovered and undervalued emerging growth opportunities; and,
. new products and services.
The Fund's industry exposures are a result of stock selection as opposed to
predetermined allocations.
The Fund normally invests in 60 to 80 stocks, with at least 65% (usually high-
er) of its assets in mid cap companies. The Fund normally has 5% or less of its
assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
OppenheimerFunds, Inc.
Two World Trade Center
New York, New York, 10048
Managing since 1959
Managed approximately $120 billion
in assets at the end of 1999
FUND MANAGERS
Bruce Bartlett
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1995
Vice President of First of America
Investment Corp. (1986-1995)
James Fullerton Turner II
- -----------------
Assistant Vice President of subadviser
Joined subadviser in 1996
Equity Analyst at First of America
Investment Corp. (1994-1996)
PAST PERFORMANCE
Because this Fund did not have a full year of operations as of December 31,
1999, no year-by-year total returns or average annual total returns can be
shown for this Fund.
22
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "mid cap" approach
carries the risk that mid cap stocks will underperform large cap and small cap
stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C>
Period ended December 31: 1999**
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment income (loss) (0.02)
Net realized and unrealized gain (loss) on investments* 5.34
Total from investment operations 5.32
Less distributions:
Distributions from net investment income and capital paid in --
Distributions from net realized gain on investments sold (0.90)
Distributions in excess of income, capital paid in & gains --
Total distributions (0.90)
Net asset value, end of period $14.42
Total investment return 54.57%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $9,175
Ratio of expenses to average net assets (%)*** 0.95%
Ratio of net investment income (loss) to average net assets (%) (0.55)%
Turnover rate (%) 61.66%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations August 31, 1999.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.09% for the year ended Decem-
ber 31.
23
<PAGE>
Real Estate Equity Fund
GOAL AND STRATEGY
This is a real estate stock fund that seeks above-average income and long-term
growth in capital.
The Fund invests primarily in:
. equity securities of real estate investment trusts (REITs) that own commer-
cial and multi-family residential real estate; and
. equity securities of real estate operating companies (i.e., companies with at
least 75% of revenue, income or fair asset value derived from real estate).
The manager selects real estate stocks using a combination of proprietary,
equity research and quantitative tools. Real estate stocks are purchased that
are undervalued relative to the stock's history and the market and have improv-
ing earnings growth prospects.
The manager looks for real estate stocks with:
. proven track records,
. strong management whose interests are aligned with shareholders,
. attractive real estate holdings, and
. a flexible financial structure.
The manager employs risk control techniques to maintain risk, style and indus-
try characteristics similar to the public equity real estate market. The Fund
normally invests in 30 to 60 securities. The Fund normally has 5% or less of
its assets in cash and cash equivalents.
The Fund also may purchase other types of securities, for example: American
Depository Receipts (ADRs), convertible securities, and equity securities of
non-real estate businesses whose real estate holdings are significant in rela-
tion to their market capitalization.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
Fund Managers
John F. DeSantis
- -----------------
Executive Vice President of subadviser
Managed fund since 1999
Joined subadviser in 1982
Thomas D. Spicer
- -----------------
Vice President of subadviser
Managed fund since 1999
Joined team in 1996
Joined subadviser in 1991
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1990 -21%
1991 33.50%
1992 16.00%
1993 17.29%
1994 2.86%
1995 12.31%
1996 33.07%
1997 17.22%
1998 -16.71%
1999 -1.69%
Best quarter: up 25.82%, first quarter 1991 Worst quarter: down 17.37%, third
quarter 1990
Average annual total returns -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -1.69% -3.19%
5 years 7.48% 8.30%
10 years 7.73% 4.11%
Life of fund 7.71% 4.52%
</TABLE>
Index: Wilshire Real Estate Securities Index
24
<PAGE>
MAIN RISKS
Primary
Real Estate Securities Risk: Real estate investment trusts (REITs) or other
real estate-related equity securities may be affected by changes in the value
of the underlying property owned by the trust. Mortgage REITs may be affected
by the quality of any credit extended. Other potential risks include the possi-
bility of failing to qualify for tax-free pass-through of income under the
Internal Revenue Code or failing to maintain exemption under the Investment
Company Act of 1940.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Secondary
None
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated):
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning of
period $11.16 $ 11.70 $ 14.64 $ 15.91 $ 12.46
Income from investment
operations:
Net investment income (loss) 0.77 0.76 0.77 0.77 0.78
Net realized and unrealized
gain (loss) on investments* 0.54 2.97 1.68 (3.38) (0.99)
Total from investment
operations 1.31 3.73 2.45 (2.61) (0.21)
Less distributions:
Distributions from net
investment income and capital
paid in (0.77) (0.76) (0.77) (0.70) (0.78)
Distributions from net realized
gain on investments sold (0.00) (0.03) (0.41) (0.14) --
Distributions in excess of
income, capital paid in &
gains -- -- -- -- --
Total distributions $(0.77) $ (0.79) $ (1.18) $ (0.84) (0.78)
Net asset value, end of period $11.70 $14.64 $ 15.91 $ 12.46 $ 11.47
Total investment return 12.31% 33.07% 17.22% (16.71)% (1.69)%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $9,301 $10,325 $12,830 $12,263 $11,000
Ratio of expenses to average net
assets (%) 0.73% 0.69% 0.69% 0.69 % 0.70%
Ratio of net investment income
(loss) to average net assets
(%) 6.85% 6.14% 5.12% 5.48 % 6.38%
Turnover rate (%) 19.81% 18.37% 20.04% 22.69 % 12.95%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chase and withdrawals of shares in relation to the fluctuation in market val-
ues of the fund.
25
<PAGE>
Small/Mid Cap CORE Fund
GOAL AND STRATEGY
This is a small/mid cap stock fund that seeks long-term growth in capital.
The Fund invests primarily in a diversified mix of the common stocks of small
and mid-sized U.S. companies that are believed to offer:
. favorable prospects for increasing dividends and capital appreciation (i.e.,
"value" companies); and
. above-average potential for growth in revenues and earnings (i.e. "growth"
companies).
The manager selects stocks using a combination of quantitative techniques and
equity research. The manager employs an investment process known as CORE, "Com-
puter Optimized, Research-Enhanced," that employs a proprietary quantitative
model. Stocks are purchased that have strong expected earnings growth and
momentum and better valuation and risk characteristics than the Russell
2500(TM) Index. The Fund is managed using risk control techniques to maintain
risk, style, capitalization and industry characteristics similar to the Russell
2500(TM) Index.
The Fund normally invests in 200 to 600 stocks, with at least 65% (usually
higher) of the Fund's assets in small cap and mid cap companies. The Fund nor-
mally has 10% or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Standard & Poor's Depository Receipts (SPDRs), and cer-
tain derivatives (investments whose value is based on indices or other securi-
ties).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Goldman Sachs Asset Management,
A unit of the Investment Management Division of Goldman Sachs and Co.
32 Old Slip
New York, New York 10005
Managing since 1988
Managed approximately $259 billion in assets at the end of 1999
FUND MANAGERS
Kent A. Clark
- -----------------
Managing Director of subadviser
Joined subadviser in 1992
Robert C. Jones
- -----------------
Managing Director of subadviser
Joined subadviser in 1989
Victor H. Pinter
- -----------------
Vice President of subadviser
Joined subadviser in 1990
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1999 20.54%
Best quarter: up 17.85%, second quarter 1999 Worst quarter: down 20.01%, fourth
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 20.54% 24.15%
Life of fund 5.13% 7.38%
</TABLE>
Index: Russell 2500(TM) Index
(1) Began operations on May 1, 1998.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
26
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "small/mid cap" approach carries the risk that in certain markets
small/mid cap stocks will underperform large cap stocks.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. The
Fund had unusually high turnover in 1999 and is expected to experience similar
turnover in 2000. This higher than expected turnover is due to (i) the rela-
tively small size of the Fund, which magnifies the effect of contributions and
redemptions, and (ii) the high volatility of the market, which in 1999 resulted
in the subadviser implementing procedures to reduce the Fund's tracking risk.
Normally, the Fund's turnover rate will be less than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $10.00 $ 9.02
Income from investment operations:
Net investment income (loss) -- 0.02
Net realized and unrealized gain (loss) on investments* (0.98) 1.77
Total from investment operations (0.98) 1.79
Less distributions:
Distributions from net investment income and capital paid
in -- (0.03)
Distributions from net realized gain on investments sold -- (0.96)
Distributions in excess of income, capital paid in & gains -- --
Total distributions -- (0.99)
Net asset value, end of period $ 9.02 $ 9.82
Total investment return (9.81)% 20.54%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $ 556 $ 840
Ratio of expenses to average net assets (%)*** 1.05 % 0.94 %
Ratio of net investment income (loss) to average net assets
(%) (0.01)% 0.30 %
Turnover rate (%) 60.51 % 109.12 %
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 4.55% and 2.24% for the years
ended December 31, 1998, and 1999, respectively.
27
<PAGE>
Small/Mid Cap Growth Fund
GOAL AND STRATEGY
This is a small/mid cap stock fund with a growth emphasis that seeks long-term
growth in capital.
The Fund invests primarily in the common stocks of small and mid-sized U.S.
companies that are believed to offer above-average potential for growth in rev-
enues and earnings.
The manager selects stocks using a combination of proprietary quantitative and
qualitative equity research. Quantitative screening seeks to identify a group
of high-quality companies with above-average growth characteristics relative to
industry peers. Equity research seeks to identify individual companies from
that group with a higher potential for long term earnings growth and capital
appreciation.
The manager buys companies that seem attractive based on a combination of cri-
teria, among others:
. Superior historical earnings growth,
. Prospects for above-average growth,
. Attractive valuations,
. Strong market positions,
. Favorable new products, and
. Superior management.
The Fund is broadly diversified by industry sector. The Fund normally invests
in 60 to 100 stocks, with at least 65% (usually higher) of its assets in small
and mid cap companies. The Fund normally has 5% or less of its assets in cash
and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109
Managing, with predecessors, since 1928
Managed approximately $236 billion in assets at the end of 1999
Managing Fund since May 1, 1999
FUND MANAGER
Frank V. Wisneski
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1968
Managing Fund since May 1, 1999
ASSOCIATE FUND MANAGER
John J. Harrington, CFA
- -----------------
Vice President of subadviser
Joined subadviser in 1995
Portfolio Manager at Munder Capital Management (1991-1994)
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1995 35.96%
1996 30.33%
1997 3.44%
1998 5.61%
1999 5.15%
Best quarter: up 21.59%, fourth quarter 1998 Worst quarter: down 21.48%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 5.15% 57.36%
5 Years 15.27% 29.03%
Life of fund 13.50% 25.49%
</TABLE>
Index:Russell Mid Cap(TM) Growth Index (for periods through April 30, 1999)
Russell 2500(TM) Growth Index (for periods after April 30, 1999)
(1)Began operations on May 1, 1994.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
28
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its 29 peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "small/mid cap"
approach carries the risk that in certain markets small/mid cap stocks will
underperform large cap stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. The
Fund had a high turnover rate in 1999 because of a change in management and a
change in the Fund's investment strategy. These changes required a restructur-
ing of the Fund's investments. In future years, the Fund's turnover rate will
normally be less than 100%.
Secondary
None
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Small/Mid Cap Growth Fund
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning of
period $ 9.94 $ 13.18 $ 16.52 $ 15.39 $15.94
Income from investment
operations:
Net investment income (loss) (0.01) 0.02 0.01 (0.02) (0.07)
Net realized and unrealized
gain (loss) on investments* 3.58 3.99 0.56 0.88 0.74
Total from investment
operations 3.57 4.01 0.57 0.86 0.67
Less distributions:
Distributions from net
investment income and capital
paid in (0.01) (0.02) (0.01) -- (0.17)
Distributions from net realized
gain on investments sold (0.32) (0.65) (1.69) (0.31) (2.41)
Distributions in excess of
income, capital paid in & gains -- -- -- -- --
Total distributions $(0.33) $ (0.67) $ (1.70) $ (0.31) (2.58)
Net asset value, end of period $13.18 $ 16.52 $ 15.39 $ 15.94 $ 14.03
Total investment return 35.96% 30.33% 3.44% 5.61% 5.15%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $4,133 $11,749 $13,884 $12,129 $12,963
Ratio of expenses to average net
assets (%)** 1.00% 0.84% 0.85% 0.89% 0.85%
Ratio of net investment income
(loss) to average net assets
(%) (0.11)% 0.18% 0.09% (0.11)% (0.27)%
Turnover rate (%) 139.31% 217.84% 331.19% 162.21% 172.58%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made, the expense ratio would have been 1.91% for the year ended Decem-
ber 31, 1995.
<PAGE>
Small Cap Value Fund
GOAL AND STRATEGY
This is a small cap stock fund with a value emphasis that seeks long-term
growth in capital.
The Fund invests primarily in a diversified mix of the common stocks of small
U.S. companies that are believed to offer favorable prospects for increasing
dividends and capital appreciation.
The manager applies a combination of quantitative techniques and equity
research to identify the best values among small company stocks.
Stocks are evaluated based on multiple factors, including:
. earnings-to-price ratios;
. earnings estimate revisions;
. relative price strength; and
. share issuance/buyback.
The Fund is managed using risk control techniques to maintain risk, style, cap-
italization and industry characteristics similar to the Russell 2000(R) Value
Index. The Fund normally invests in 150 to 250 stocks, with at least 65% (usu-
ally higher) of its assets in small cap companies. The Fund normally has 5% or
less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
INVESCO, Inc.
101 Federal Street
Boston, Massachusetts 02110
Managing since 1957
Managed approximately $92 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Jeremy S. Lefkowitz
- -----------------
Managing Director of subadviser
Joined subadviser in 1998
Portfolio Manager, Chancellor
Capital Management and its predecessor (1982-1998)
Began career in 1974
Daniel A. Kostyk, CFA
- -----------------
Vice President of subadviser
Joined subadviser in 1995
Began career in 1991
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1997 25.57%
1998 -5.96%
1999 -3.43%
Best quarter: up 18.11%, second quarter 1997 Worst quarter: down 21.06%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/98(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -3.43% 1.23%
Life of fund 6.46% 8.34%
</TABLE>
Index: 50% Russell 2000(R) Index / 50% Russell 2000(R) Value Index (For periods
through September 30, 1999
Russell 2000(R) Value Index (for periods after September 30, 1999)
(1)Began operations on May 1, 1996.
30
<PAGE>
MAIN RISKS
Primary
Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "small cap" approach car-
ries the risk that in certain markets small cap stocks will underperform mid
cap and large cap stocks.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.73 $ 12.40 $ 11.59
Income from investment operations:
Net investment income (loss) 0.07 0.08 0.07 0.09
Net realized and unrealized gain (loss)
on investments* 0.96 2.66 (0.81) (0.50)
Total from investment operations 1.03 2.74 (0.74) (0.41)
Less distributions:
Distributions from net investment
income and capital paid in (0.07) (0.08) (0.07) (0.07)
Distributions from net realized gain on
investments sold (0.23) (0.99) -- (0.01)
Distributions in excess of income,
capital paid in & gains -- -- -- (0.18)
Total distributions (0.30) (1.07) (0.07) (0.26)
Net asset value, end of period $ 10.73 $ 12.40 $ 11.59 $ 10.92
Total investment return 10.33% 25.57% (5.96)% (3.43)%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $10,541 $43,261 $64,095 $68,900
Ratio of expenses to average net assets
(%)*** 1.05% 1.05% 1.05% 0.95%
Ratio of net investment income (loss) to
average net assets (%) 1.15% 0.68% 0.63% 0.78%
Turnover rate (%) 66.31% 126.10% 100.83% 117.33%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.06%, 1.30%, 1.08% and 0.96%
for the years ended December 31, 1996, 1997, 1998, and 1999, respectively.
31
<PAGE>
Small Cap Growth Fund
GOAL AND STRATEGY
This is a small cap stock fund with a growth emphasis that seeks long-term
growth in capital.
The Fund invests primarily in a diversified mix of the common stocks of small
U.S. companies that are believed to offerabove-average potential for growth in
revenues and earnings.
The manager selects stocks using proprietary equity research. Stocks are pur-
chased that are expected to have rapid earnings growth that is not yet widely
recognized by the investment community.
The manager looks for companies with:
. demonstrated annual 20% earnings growth over 3 years and/or similar future
growth expectations;
. dominant market niche or poised to become market leaders; and
. high quality senior management with coherent business strategies.
The Fund is highly diversified by sector and number of individual stocks. The
Fund's sector weightings are broadly diversified and managed relative to those
of the Russell 2000(R) Growth Index. The Fund normally invests in 150 to 220
stocks, with at least 65% (usually higher) of its assets in small cap compa-
nies. The Fund normally has 5% or less of its assets in cash and cash equiva-
lents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
Owned by John Hancock
Managing since 1968
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Bernice S. Behar, CFA
- -----------------
Senior Vice President of subadviser
Managed fund since 1996 (its inception)
Joined subadviser in 1991
Began career in 1986
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1997 14.26%
1998 14.49%
1999 70.38%
Best quarter: up 45.57%, fourth quarter 1999 Worst quarter: down 21.55%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 70.38% 43.09%
Life of fund 24.25% 13.65%
</TABLE>
Index: Russell 2000(R) Growth Index
(1)Began operations on May 1, 1996.
32
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results.
The Fund could underperform its peers or lose money if the manager's investment
strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "small cap" approach
carries the risk that in certain markets small cap stocks will underperform mid
cap and large cap stocks.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 9.93 $11.34 $ 12.99
Income from investment operations:
Net investment income (loss) 0.01 (0.02) (0.05) (0.21)
Net realized and unrealized gain (loss)
on investments* (0.06) 1.44 1.70 9.06
Total from investment operations (0.05) 1.42 1.65 8.85
Less distributions:
Distributions from net investment income
and capital paid in (0.02) (0.01) -- --
Distributions from net realized gain on
investments sold -- -- -- (2.72)
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions $ (0.02) $ (0.01) -- (2.72)
Net asset value, end of period $ 9.93 $ 11.34 $ 12.99 $19.12
Total investment return (0.50)% 14.26% 14.49% 70.38%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $20,633 $48,761 $74,849 $179,570
Ratio of expenses to average net assets
(%)*** 1.00% 1.00% 1.00% 0.89%
Ratio of net investment income (loss) to
average net assets (%) 0.12% (0.28)% (0.65)% (0.70)
Turnover rate (%) 50.93% 86.23% 101.16% 113.11%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuations in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made, the expense ratio would have been 1.55%, 1.12% and 1.05% for the
years ended December 31, 1996, 1997, and 1998, respectively.
33
<PAGE>
Global Equity Fund
GOAL AND STRATEGY
This is a global stock fund that seeks long-term growth in capital.
The Fund primarily invests in a diversified mix of common stocks of:
. large established U.S. companies; and
. large established foreign companies located in countries throughout the
world, including developed, newly industrialized, and emerging countries.
The manager makes ongoing decisions about the mix between U.S. and foreign
stocks. The manager has a target mix of 40% in U.S. stocks and 60% in foreign
stocks, but actively manages the mix within (+/-) 20 percentage points of the
target mix.
The manager uses global economic and industry analysis to identify global eco-
nomic and industry themes. The manager looks for companies that will benefit
from:
. global economic trends;
. promising technologies or products; and
. specific country opportunities resulting from changing geopolitical, currency
or economic relationships.
The manager purchases stocks of companies that are:
. in growth industries;
. efficient producers; and
. undervalued relative to long-term growth potential.
The Fund invests:
. in at least 3 different countries (including the U.S.), but normally in more
than 15 countries; and
. no more than 10% of its assets in emerging markets stocks.
Although the Fund may employ foreign currency hedging techniques, the Fund nor-
mally maintains the currency exposure of the underlying equity investments.
The Fund normally invests in 90 to 120 stocks, with at least 65% (usually high-
er) of its assets in large cap companies. The Fund normally has 5% or less of
its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Global Depository Receipts (GDRs), European Depository
Receipts (EDRs), and certain derivatives (investments whose value is based on
indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents or invest-
ing 100% of its assets in U.S. companies--that are inconsistent with the Fund's
primary investment strategy. In taking those measures, the Fund may not achieve
its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Managing since 1919
Managed approximately $290 billion in assets at the end of 1999
FUND MANAGERS
William E. Holzer
- -----------------
Lead Portfolio Manager of subadviser
Joined subadviser in 1980
Diego Espinosa
- -----------------
Vice President of subadvisor
Joined team in 1997
Joined subadviser in 1996
Research Analyst at Morgan
Stanley & Company (1994-1996)
Nicholas Bratt
- -----------------
Portfolio Manager of subadviser
Joined team in 1993
Joined subadviser in 1976
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1999 24.19%
Best quarter: up 15.94%, fourth quarter 1999 Worst quarter: down 12.39%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 24.19% 25.34%
Life of fund 13.48% 19.92%
</TABLE>
Index:MSCI World Index
(1)Began operations on May 1, 1998.
34
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than if it
invested exclusively in developed or newly-industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Market Allocation Risk: The allocation of the Fund's assets among domestic and
international equity regions may (1) reduce the Fund's holdings in a region
whose value then increases unexpectedly, or (2) increase the Fund's holdings
in a region just prior to its experiencing a loss of value.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31; 1998** 1999
Net asset value, beginning of period $ 10.00 $ 9.87
Income from investment operations:
Net investment income (loss) 0.07 0.10
Net realized and unrealized gain (loss) on investments* (0.13) 2.27
Total from investment operations (0.06) 2.37
Less distributions:
Distributions from net investment income and capital paid
in (0.07) (0.07)
Distributions from net realized gain on investments sold -- --
Distributions in excess of income, capital paid in & gains -- (0.04)
Total distributions (0.07) (0.11)
Net asset value, end of period $ 9.87 $ 12.13
Total investment return (0.55)% 24.19%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $15,281 $22,311
Ratio of expenses to average net assets (%)*** 1.15% 1.04%
Ratio of net investment income (loss) to average net assets
(%) 1.11% 0.96%
Turnover rate (%) 33.17% 49.51%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains
and losses in the fund securities for the period because of the timing of
purchases and withdrawals of shares in relation to the fluctuation in
market values of the fund.
** Fund began operations May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.47% and 1.26% for the years
ended December 31, 1998, and 1999, respectively.
35
<PAGE>
Global Balanced Fund
(Formerly International Balanced Fund)
GOAL AND STRATEGY
This is a non-diversified global balanced stock and bond fund that seeks long-
term growth in income and capital.
The Fund invests primarily in a mix of:
. U.S. and foreign common stocks of large companies within developed markets;
and
. U.S. and foreign investment grade bonds of issuers within developed markets
with maturities generally greater than 12 months.
The manager makes ongoing decisions about the mix between stocks and bonds. The
manager has a target mix of 65% stocks and 35% bonds, but actively manages the
mix within (+/-) 10 percentage points of the target mix.
The Fund invests:
. in at least 3 different countries, but normally invests in 10 to 20 coun-
tries; and
. no more than 10% of its assets in emerging market stocks and bonds.
The manager selects stocks and bonds using fundamental value analysis to iden-
tify fairly priced investments with long-term sustainable cash flows. The man-
ager determines fundamental value by focusing on:
. current market prices relative to fundamental values;
. broad-based indices for stocks, bonds, and markets; and
. economic variables such as productivity, inflation and global competitive-
ness.
The Fund is non-diversified, which means that it can take larger positions in a
smaller number of issuers. However, the Fund normally invests in 125 to 250
stocks within the stock portion. The Fund normally has 10% or less of its
assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Global Depository Receipts (GDRs), European Depository
Receipts (EDRs), high yield bonds, and certain derivatives (investments whose
value is based on indices or other securities).
The manager actively uses derivatives, such as futures and forwards, to manage
the Fund's average maturity relative to the Salomon Brothers World Government
Bond Index Unhedged and to implement foreign currency strategies. Currency man-
agement strategies are primarily used for hedging purposes and to protect
against anticipated changes in foreign currency exchange rates.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Brinson Partners, Inc.
209 South LaSalle Street
Chicago, Illinois 60604
Managing since 1974
Managed approximately $161 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Jeffrey Diermeier, CFA
- -----------------
Managing Director, Global Equities, of subadviser
Joined subadviser in 1989
Began career in 1977
Denis S. Karnosky, Ph.D.
- -----------------
Managing Director, Asset Allocation/Currency, of subadviser
Joined subadviser in 1989
Began career in 1967
Norman D. Cumming
- -----------------
Managing Director, Global Fixed Income, of subadviser's affiliate UBS Brinson,
Limited
Joined subadviser in 1989
Began career in 1977
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[GRAPH]
1997 2.65%
1998 17.99%
1999 5.11%
Best quarter: up 13.06%, fourth quarter 1998 Worst quarter: down 4.49%, fourth
quarter 1997
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 5.11% 15.42%
Life of fund 8.71% 9.88%
</TABLE>
Index: 65% MSCI World Index (Ex US) (Net of Withholding Taxes from a U.S. Tax
Perspective)/35% Salomon Brothers Non-US Government Bond Index Unhedged
(for periods through April 30, 2000)
65% MSCI World Index (Net of Withholding Taxes From a U.S. Tax
Perspective)/35% Salomon Brothers World Government Bond Index Unhedged
(for periods after April 30, 2000)
(1)Began operations on May 1, 1996.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
36
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than if it
invested exclusively in developed or newly-industrialized countries.
Non-Diversified Fund Risk: The Fund's larger position in foreign government
securities could produce more volatile performance relative to funds with
smaller positions. The less diversified a fund's holdings are, the more likely
it is that a specific security's poor performance will hurt the fund signifi-
cantly.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "large/mid cap" approach
carries the risk that large/mid cap stocks will underperform small cap stocks.
Market Allocation Risk: The allocation of the Fund's assets between the major
asset classes (i.e., stocks and bonds) may (1) reduce the Fund's holdings in a
class whose value then increases unexpectedly, or (2) increase the Fund's hold-
ings in a class just prior to its experiencing a loss of value.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Trust would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Turnover Risk. In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
High Yield Bond Risk. Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become harder
to value or to sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Global Balanced Fund (formerly
International Balanced Fund)--Period
ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.39 $ 10.11 $ 11.12
Income from investment operations:
Net investment income (loss) 0.24 0.33 0.34 0.29
Net realized and unrealized gain (loss)
on investments* 0.41 (0.05) 1.44 0.25
Total from investment operations 0.65 0.28 1.78 0.54
Less distributions:
Distributions from net investment income
and capital paid in (0.24) (0.34) (0.35) (0.35)
Distributions from net realized gain on
investments sold (0.02) (0.22) (0.42) (0.44)
Distributions in excess of income,
capital paid in & gain -- -- -- (0.16)
Total distributions $ (0.26) $ (0.56) $ (0.77) $ (0.95)
Net asset value, end of period $ 10.39 $ 10.11 $ 11.12 $ 10.71
Total investment return 6.73% 2.65% 17.99% 5.11%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $24,098 $25,420 $30,416 $31,577
Ratio of expenses to average net assets
(%)*** 1.10% 1.10% 1.10% 1.00%
Ratio of net investment income (loss) to
average net assets (%) 3.59% 3.18% 3.20% 2.73%
Turnover rate (%) 22.21% 81.04% 103.55% 131.21%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.44%, 1.56%, 1.82%, and 1.31%
for the years ended December 31, 1996, 1997, 1998, and 1999, respectively.
37
<PAGE>
International Equity Index Fund
GOAL AND STRATEGY
This is an international stock fund that seeks to track the performance of
broad-based equity indices of foreign companies in developed and emerging mar-
kets.
The Fund is managed relative to a target mix of 90% in the MSCI EAFE GDP Index
and 10% in the MSCI EMF Index. The EAFE GDP Index, known as the Europe Austral-
asia and Far East Index, includes foreign companies in developed markets, with
country index weights based upon a country's Gross Domestic Product (GDP). The
EMF Index, known as the Emerging Markets Free Index, includes foreign companies
in emerging markets, with country index weights based upon a country's market
capitalization.
The manager employs a passive management strategy using quantitative techniques
to invest in a representative sample of stocks in the Index. The manager
selects stocks in an attempt to track, as closely as possible, the characteris-
tics of the Index, including country and sector weights. The Fund normally
invests in 400 to 1,200 stocks.
The Index composition changes from time to time. The manager will reflect those
changes as soon as practical.
The Fund is normally fully invested. The manager may invest in stock index
futures to maintain market exposure and manage cash flow. Although the Fund may
employ foreign currency hedging techniques, the Fund normally maintains the
currency exposure of the underlying equity investments.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Global Depository Receipts (GDRs), European Depository
Receipts (EDRs), cash equivalents, and certain derivatives (investments whose
value is based on indices or other securities).
Note: "MSCI EAFE GDP Index" and "MSCI EMF Index" are the exclusive property of
Morgan Stanley & Co., Incorporated and are registered service marks of Morgan
Stanley Capital International.
- --------------------------------------------------------------------------------
SUBADVISER
Independence International Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1986
Managed approximately $2.2 billion in assets at the end of 1999
FUND MANAGERS
Bradford S. Greenleaf, CFA
- -----------------
Senior Vice President, Managing Director,
of subadviser
Joined team in 2000
Joined subadviser in 1994
Vice President, Franklin Portfolio Associates, Inc. (1986-1994)
David P. Nolan, CFA
- -----------------
Vice President of subadviser
Joined subadviser in 1996
Portfolio manager Boston
International Advisors, Inc. (1989-1996)
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1990 -7.80%
1991 23.40%
1992 -1.80%
1993 32.10%
1994 -6.25%
1995 8.01%
1996 9.19%
1997 -5.03%
1998 20.82%
1999 30.87%
Best quarter: up 20.91%, fourth quarter 1998 Worst quarter: down 14.75%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 30.87% 30.87%
5 years 12.11% 14.36%
10 years 9.39% 7.90%
Life of fund 9.72% 8.55%
</TABLE>
Index: MSCI EAFE Index (for periods through April 30, 1998)
MSCI EAFE GDP Index (for periods from May 1, 1998 through June 30, 1999)
90% MSCI EAFE GDP Index/10% MSCI EMF Index (for periods after June 30,
1999)
38
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than if it
invested exclusively in developed or newly-industrialized countries.
Index Management Risk: Certain factors such as the following may cause the
Fund to track the Index less closely:
. The securities selected by the manager may not be fully representative of
the Index.
. Transaction expenses of the Fund may result in the Fund's performance being
different than that of the Index.
. The size and timing of the Fund's cash flows may result in the Fund's per-
formance being different than that of the Index.
Also, index funds like this one will have more difficulty in taking defensive
positions in abnormal market conditions.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices.
Stocks tend to go up and down in value more than bonds. If the Fund's invest-
ments are concentrated in certain sectors, the Fund's performance could be
worse than the overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures
and swaps) can produce disproportionate gains or losses. They are generally
considered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning
of period $ 14.62 $ 15.61 $ 16.83 $ 15.20 $ 15.56
Income from investment
operations:
Net investment income
(loss) 0.17 0.21 0.13 0.23 0.21
Net realized and
unrealized gain (loss) on
investments* 0.99 1.22 (0.97) 2.91 4.51
Total from investment
operations 1.16 1.43 (0.84) 3.14 4.72
Less distributions:
Distributions from net
investment income and
capital paid-in (0.17) (0.21) (0.13) (0.23) (0.21)
Distributions from net
realized gain on
investments sold -- -- (0.66) (2.55) (0.38)
Distributions in excess of
income, capital paid in &
gains -- -- -- -- (0.05)
Total distributions (0.17) (0.21) (0.79) (2.78) (0.64)
Net asset value, end of
period $ 15.61 $ 16.83 $ 15.20 $ 15.56 $19.64
Total investment return 8.01% 9.19% (5.03)% 20.82% 30.87%
Ratios and supplemental
data
Net assets, end of period
(000s omitted) $126,803 $155,753 $152,359 $173,137 $244,017
Ratio of expenses to
average net assets (%)** 0.84% 0.76% 0.79% 0.56% 0.31%
Ratio of net investment
income (loss) to average
net assets (%) 1.34% 1.30% 0.78% 1.45% 1.26%
Turnover rate (%) 65.82% 92.03% 83.13% 158.63% 19.01%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains
and losses in the fund securities for the period because of the timing of
purchases and withdrawals of shares in relation to the fluctuation in
market values of the fund.
** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 0.87%, 0.63% and, 0.38% for
the years ended December 31, 1995, 1998, and 1999, respectively.
39
<PAGE>
International Opportunities Fund
GOAL AND STRATEGY
This is an international stock fund that seeks long-term growth in capital.
The Fund primarily invests in a diversified mix of common stocks of large
established and medium-sized foreign companies located throughout the world,
including developed, newly industrialized, and emerging countries.
The manager determines the distribution among countries and regions by using a
combination of fundamental research and economic analysis, emphasizing:
. prospects for relative economic growth between foreign countries;
. expected levels of inflation;
. government policies influencing business conditions; and
. outlook for currency relationships.
The manager selects stocks that have growth characteristics such as:
. leading market position or technological leadership;
. high return on invested capital;
. healthy balance sheets with relatively low debt;
. strong competitive advantage;
. strength of management; and
. earnings growth and cash flow sufficient to support growing dividends.
The Fund invests:
. in at least 3 different countries; and
. no more than 20% of its assets in emerging market stocks.
Although the Fund may employ foreign currency hedging techniques, the Fund nor-
mally maintains the currency exposure of the underlying equity investments.
The Fund normally invests in 200 to 300 stocks in 15 to 20 countries. The Fund
normally has 10% or less of its assets in cash and cash equivalents.
The Fund also may purchase other types of securities, for example: American
Depository Receipts (ADRs), Global Depository Receipts (GDRs), European Deposi-
tory Receipts (EDRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Rowe Price-Fleming International, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Managing since 1979
Managed approximately $42 billion in assets at the end of 1999
FUND MANAGERS
Management by Investment Advisory Group overseen by:
David J. L. Warren
- -----------------
Portfolio Manager of subadviser
Joined subadvisor in 1983
Began career in 1981
John R. Ford
- -----------------
Portfolio Manager of subadviser
Joined subadvisor in 1982
Began career in 1980
James B. M. Seddon
- -----------------
Portfolio Manager of subadvisor
Joined subadvisor in 1987
Began career in 1987
Mark Bickford-Smith
- -----------------
Portfolio Manager of subadvisor
Joined subadvisor in 1995
Began career in 1985
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1997 1.95%
1998 15.92%
1999 34.01%
Best quarter: up 24.44%, fourth quarter 1999 Worst quarter: down 13.70%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 34.01% 31.79%
Life of fund 15.38% 14.14%
</TABLE>
Index: MSCI Europe, Australia, Far East (EAFE) Index (for periods through
December 31, 1998)
MSCI All Country World Index, Excluding U.S. (for periods after December
31, 1998)
(1)Began operations on May 1, 1996.
40
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries,
it will have a significantly higher degree of foreign risk than if it invested
exclusively in developed or newly-industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.60 $ 10.63 $ 12.21
Income from investment operations:
Net investment income (loss) 0.07 0.10 0.11 0.10
Net realized and unrealized gain (loss)
on investments* 0.60 0.11 1.57 3.95
Total from investment operations 0.67 0.21 1.68 4.05
Less distributions:
Distributions from net investment income
and capital paid in (0.07) (0.10) (0.10) (0.11)
Distributions from net realized gain on
investments sold -- (0.08) -- (0.94)
Distributions in excess of income,
capital paid in & gains -- -- -- (0.04)
Total distributions (0.07) (0.18) (0.10) (1.09)
Net asset value, end of period $ 10.60 $ 10.63 $ 12.21 $ 15.17
Total investment return 6.72% 1.95% 15.92% 34.01%
Ratios and supplemental data
Net assets, end of period (000s omitted) $17,898 $30,631 $64,250 $79,794
Ratio of expenses to average net assets
(%)*** 1.25% 1.22% 1.16% 1.02%
Ratio of net investment income (loss) to
average net assets (%) 0.87% 0.65% 0.89% 0.77%
Turnover rate (%) 5.46% 21.09% 18.67% 34.02%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.76%, 1.57%, 1.46%, and 1.15%
for the years ended December 31, 1996, 1997, 1998, and 1999, respectively.
41
<PAGE>
Emerging Markets Equity Fund
GOAL AND STRATEGY
This is an emerging markets stock fund that seeks long-term growth in capital.
The Fund invests primarily in the stocks of companies in countries having econ-
omies or markets generally considered by the World Bank or United Nations to be
emerging or developing.
In making country allocation decisions, the manager analyzes the global envi-
ronment and selects countries with:
. Improving macroeconomic, political and social trends, and
. attractive valuation levels.
The manager selects stocks using fundamental proprietary research to identify
companies:
. having strong earnings growth potential,
. selling below their intrinsic value, and
. having shareholder-focused management, dominant products, and well estab-
lished distribution channels.
The Fund normally invests:
. in at least 15 emerging market countries, and
. no more than 30% of its assets in any single country.
The Fund normally invests in 100 to 250 stocks in 20 to 25 countries. The Fund
normally has 10% or less of its assets in cash and cash equivalents.
Although the Fund may employ foreign currency hedging techniques, the Fund
normally maintains the currency exposure of the underlying equity investments.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Global Depository Receipts (GDRs), European Depository
Receipts (EDRs), and certain derivatives (investments whose value is based on
indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Morgan Stanley Dean Witter Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Managing since 1975
Managed approximately $184 billion in assets at the end of 1999
Managing Fund since August 1, 1999
FUND MANAGERS
Robert L. Meyer, CFA
- -----------------
Managing Director of subadvisor
Joined subadviser in 1989
Andy Skov
- -----------------
Managing Director of subadviser
Joined subadviser in 1994
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1999 81.37%
Best quarter: up 50.45%, fourth quarter 1999 Worst quarter: down 20.40%, second
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 81.37% 66.41%
Life of fund 16.49% 10.60%
</TABLE>
Index:MSCI Emerging Markets Free Index
(1)Began operations on May 1, 1998.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
42
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, since the Fund invests primarily in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than funds
that invest primarily in developed or newly- industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the funds perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. The
Fund's turnover rate could be greater than 100% due to the relatively high vol-
atility associated with investing in emerging markets.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $10.00 $ 7.09
Income from investment operations:
Net investment income (loss) 0.03 0.03
Net realized and unrealized gain (loss) on investments* (2.91) 5.67
Total from investment operations (2.88) 5.70
Less distributions:
Distributions from net investment income and capital paid
in (0.03) (0.01)
Distributions from net realized gain on investments sold -- (0.10)
Distributions in excess of income, capital paid in & gains -- (0.42)
Total distributions (0.03) (0.53)
Net asset value, end of period $ 7.09 $ 12.26
Total investment return*** (28.87)% 81.37%
Ratios and supplemental data
Net assets, end of period (000s omitted) $7,310 $32,596
Ratio of expenses to average net assets (%)**** 1.55% 1.39%
Ratio of net investment income (loss) to average net assets
(%) 0.51% 0.19%
Turnover rate (%) 53.95% 196.32%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1998.
*** Includes the effect of a voluntary capital contribution from John Hancock
of $32 per share for the year ended 1999. The Total Investment Return
without the capital contribution would have been 79.02% for the year ended
1999.
**** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 3.69% and 3.44% for the years
ended December 31, 1998, and 1999, respectively.
43
<PAGE>
Short-Term Bond Fund
GOAL AND STRATEGY
This is a short-term bond fund that seeks high income consistent with low share
price fluctuation.
The Fund primarily invests in a diversified mix of short-term and intermediate-
term investment grade debt securities including:
. U.S. Treasury and Agency securities;
. U.S. corporate bonds;
. foreign corporate bonds of companies in developed countries (if dollar-
denominated);
. foreign government and agency securities of developed countries (if dollar
denominated); and
. mortgage-and asset-backed securities.
The manager selects bonds using a combination of proprietary research and quan-
titative tools. Bonds are purchased that are attractively priced and that pro-
vide cheap, predictable cash flows.
The Fund normally invests:
. mostly in corporate bonds;
. no more than 15% of its assets in high yield bonds; and
. no more than 25% of its assets in foreign debt securities.
The Fund normally has:
. an average maturity between one and three and a half years;
. an average credit quality rating of "A" or higher; and
. 10% or less of its assets in cash and cash equivalents.
The Fund only invests in securities that are rated at least BB- or Ba3 at time
of purchase.
The Fund may purchase other types of securities, for example: certain deriva-
tives (investments whose value is based on indexes or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGER
Jeffrey B. Saef
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1994
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1995 11.49%
1996 3.61%
1997 6.41%
1998 5.82%
1999 2.96%
Best quarter: up 3.87%, second quarter 1995 Worst quarter: down 0.42%, first
quarter 1999
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 2.96% 3.62%
5 year 6.02% 6.95%
Life of fund 5.35% 6.30%
</TABLE>
Index:Merrill Lynch 1-5 Year U.S. Government Bond Index (for periods through
April 30,
1998)
65% Lehman Brothers 1-3 Year Corporate Bond Index/35% Lehman Brothers 1-3
Year Government Bond Index (for periods after April 30, 1998)
(1)Began operations on May 1, 1994.
44
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest
rates fall, the reverse will generally occur. The longer the average remaining
maturity of bonds held by the Fund, the more sensitive the Fund is to interest
rate risk. This Fund has less interest rate risk than an intermediate-term or
long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obliga-
tion to pay interest and repay principal. Also, the credit rating of a bond
held by the fund may be downgraded. In either case, the value of the bond held
by the Trust would fall. All bonds have some credit risk, but in general low-
er-rated bonds have higher credit risk.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are,
the more likely it is a specific security's poor performance will hurt the
fund significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic,
political and social instability. Factors such as lack of liquidity, foreign
ownership limits and restrictions on removing currency also pose special
risks.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become
harder to value or to sell at a fair price.
Prepayment / Call Risk: The Fund's share price or yield could be hurt if
interest rate movements cause the Fund's mortgage-related and callable securi-
ties to be paid off substantially earlier than expected.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning of
period $ 9.66 $ 10.23 $ 10.05 $ 10.08 $ 10.05
Income from investment
operations:
Net investment income (loss) 0.50 0.54 0.59 0.61 0.61
Net realized and unrealized gain
(loss) on investments* 0.59 (0.18) 0.03 (0.03) (0.33)
Total from investment operations 1.09 0.36 0.62 (0.58) 0.28
Less distributions:
Distributions from net
investment income and capital
paid in (0.50) (0.54) (0.59) (0.61) (0.61)
Distributions from net realized
gain on investments sold (0.02) -- -- -- --
Distributions in excess of
income, capital paid in & gains -- -- -- -- --
Total distributions $ (0.52) $ (0.54) $ (0.59) $ (0.61) (0.61)
Net asset value, end of period $ 10.23 $ 10.05 $ 10.08 $ 10.05 $ 9.72
Total investment return 11.49% 3.61% 6.41% 5.82% 2.96%
Ratios and supplemental data
Net assets, end of period (000s
omitted) $17,911 $58,676 $51,120 $77,194 $68,844
Ratio of expenses to average net
assets (%)** 0.75% 0.75% 0.57% 0.53% 0.43%
Ratio of net investment income
(loss) to average net assets (%) 5.52% 5.66% 5.67% 6.17% 6.25%
Turnover rate (%) 109.77% 20.68% 108.29% 184.50% 100.04%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made, the expense ratio would have been 1.83% and 0.79% for the years
ended December 31, 1995 and 1996, respectively.
45
<PAGE>
Bond Index Fund
GOAL AND STRATEGY
This is a bond fund that seeks to track the performance of the Lehman Brothers
Government / Corporate Bond Index.
The manager employs a passive management strategy using quantitative techniques
to select individual securities that provide a representative sample of the
securities in the Index.
If the Fund reaches approximately $50 million in total assets, the manager will
seek to match the performance of the Lehman Brothers Aggregate Bond Index, a
broader market index that also includes mortgage-backed and asset-backed secu-
rities.
Both of these Indexes consist of dollar-denominated investment grade securities
with maturities greater than one year and outstanding par values of at least
$150 million issued primarily by:
. the U.S. Treasury and U.S. government agencies and instrumentalities;
. foreign governments and agencies; and
. U.S. and foreign corporations.
The manager selects securities to match, as closely as practical, the Index's
duration, cash flow, sector, credit quality, callability, and other key perfor-
mance characteristics. The Fund may hold some cash and cash equivalents, but is
normally fully invested.
The Index composition may change from time to time. The manager may keep secu-
rities that no longer meet the Index criteria as long as:
. such "ineligible" securities plus cash and money market instruments are less
than 20% of the Fund's assets; and
. high yield securities are less than 5% of the Fund's assets.
- --------------------------------------------------------------------------------
SUBADVISER
Mellon Bond Associates, LLP
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Managing since 1986
Managed approximately $50 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Gregory D. Curran, CFA
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1995
Began career in 1986
Vice President of Salomon Brothers (1986-1995)
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1999 -2.57%
Best quarter: up 5.35%, Fourth quarter 1998 Worst quarter: down 1.27%, first
quarter 1999
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -2.57% -2.15%
Life of fund 2.64% 2.96%
</TABLE>
Index:Lehman Brothers Government/Corporate Bond Index
(1)Began operations on May 1, 1998.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
46
<PAGE>
MAIN RISKS
Primary
Index Management Risk: Certain factors such as the following may cause the
Fund to track the Index less closely:
. The securities selected by the manager may not be fully representative of the
Index.
. Transaction expenses of the Fund may result in the Fund's performance being
different than that of the Index.
. The size and timing of the Fund's cash flows may result in the Fund's perfor-
mance being different than that of the Index.
Also, index funds like this one will have more difficulty in taking defensive
positions in abnormal market conditions.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Trust would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic, polit-
ical and social instability. Factors such as lack of liquidity, foreign owner-
ship limits and restrictions on removing currency also pose special risks. All
foreign securities have some degree of foreign risk. However, to the extent the
Fund invests in emerging market countries, it will have a significantly higher
degree of foreign risk than if it invested exclusively in developed or newly-
industrialized countries.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $10.00 $10.19
Income from investment operations:
Net investment income (loss) 0.42 0.63
Net realized and unrealized gain (loss) on investments* 0.29 (0.89)
Total from investment operations 0.71 (0.26)
Less distributions:
Distributions from net investment income and capital paid in (0.42) (0.61)
Distributions from net realized gain on investments sold (0.10) --
Distributions in excess of income, capital paid in & gains -- --
Total distributions (0.52) (0.61)
Net asset value, end of period $10.19 $ 9.32
Total investment return 7.20% (2.57)%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $2,748 $4,125
Ratio of expenses to average net assets (%)*** 0.40% 0.29%
Ratio of net investment income (loss) to average net assets
(%) 6.17% 6.56%
Turnover rate (%) 21.09% 17.06%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 0.71% and 0.35% for the years
ended December 31, 1998, and 1999, respectively.
47
<PAGE>
Active Bond Fund
(Formerly Sovereign Bond Fund)
GOAL AND STRATEGY
This is a bond fund that seeks income and growth in capital.
The Fund primarily invests in a diversified mix of debt securities including:
. U.S. Treasury and agency securities;
. foreign government and agency securities (if dollar-denominated);
. corporate bonds, both U.S. and foreign (if dollar-denominated); and
. mortgage-backed and asset-backed securities.
The manager normally invests:
. mostly in investment grade debt securities;
. no more than 25% of the Fund's assets in high yield bonds; and
. no more than 25% of the Fund's assets in foreign securities, excluding Cana-
dian securities.
The manager seeks to identify specific bond sectors, industries and specific
bonds that are attractively priced. The manager tries to anticipate shifts in
the business cycle, using economic and industry analysis to determine which
sectors and industries might benefit over the next 12 months. The manager uses
proprietary research to identify securities that are undervalued.
The manager evaluates bonds of all quality levels and maturities from many dif-
ferent issuers. The Fund normally has an average credit rating A or higher.
The Fund normally has 10% or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: emerging market
debt securities, and certain derivatives (investments whose value is based on
indices or other securities). The manager actively uses derivatives, such as
futures, to adjust the Fund's average maturity relative to the
Lehman Brothers Aggregate Bond Index and seeks to keep the Fund's interest rate
sensitivity in line with the overall market.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
Owned by John Hancock
Managing since 1968
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGER
James K. Ho, CFA
- -----------------
Executive Vice President of subadviser
Managed fund since 1995
Associated with subadviser since 1985
Began career in 1977
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1990 6.90%
1991 16.70%
1992 7.70%
1993 10.80%
1994 -2.57%
1995 19.55%
1996 4.10%
1997 10.11%
1998 8.23%
1999 -0.94%
Best quarter: up 7.14%, second quarter 1989 Worst quarter: down 2.51%, first
quarter 1994
Average annual total returns -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -0.94% -1.87%
5 years 8.00% 7.66%
10 years 7.90% 7.69%
Life of fund 7.86% 7.80%
</TABLE>
Index:Lehman Brothers Government/Corporate Bond Index (For periods through Sep-
tember 30, 1999)
Lehman Brothers Aggregate Bond Index (For periods after September 30, 1999)
48
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest
rates fall, the reverse will generally occur. The longer the average remaining
maturity of bonds held by the Fund, the more sensitive the Fund is to interest
rate risk. This Fund has more interest rate risk than a short-term bond fund,
but less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obliga-
tion to pay interest and repay principal. Also, the credit rating of a bond
held by the fund may be downgraded. In either case, the value of the bond held
by the Fund would fall. All bonds have some credit risk, but in general lower-
rated bonds have higher credit risk.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic,
political and social instability. Factors such as lack of liquidity, foreign
ownership limits and restrictions on removing currency also pose special
risks. All foreign securities have some degree of foreign risk. However, to
the extent the Fund invests in emerging market countries, it will have a sig-
nificantly higher degree of foreign risk than if it invested exclusively in
developed or newly-industrialized countries.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become
harder to value or to sell at a fair price.
Prepayment/Call Risk: The Fund's share price or yield could be hurt if inter-
est rate movements cause the Fund's mortgage-related and callable securities
to be paid off substantially earlier than expected.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Active Bond Fund (Formerly
Sovereign Bond Fund)
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning
of period $ 9.19 $ 10.13 $ 9.77 $ 9.95 $9.92
Income from investment
operations:
Net investment income
(loss) 0.71 0.69 0.71 0.69 0.67
Net realized and
unrealized gain (loss) on
investments* 1.03 (0.31) 0.24 0.11 (0.76)
Total from investment
operations 1.74 0.38 0.95 0.80 (0.09)
Less distributions:
Distributions from net
investment income and
capital paid in (0.71) (0.69) (0.71) (0.69) (0.71)
Distributions from net
realized gain on
investments sold (0.09) (0.05) (0.06) (0.14) --
Distributions in excess of
income, capital paid in &
gains -- -- -- -- --
Total distributions $ (0.80) $ (0.74) $ (0.77) $ (0.83) (0.71)
Net asset value, end of
period $ 10.13 $ 9.77 $ 9.95 $ 9.92 $ 9.12
Total investment return 19.55% 4.10% 10.11% 8.23% (0.94)%
Ratios and supplemental
data
Net assets, end of period
(000s omitted)($) $700,309 $726,111 $803,770 $907,121 $850,286
Ratio of expenses to
average net assets (%) 0.30% 0.29% 0.31% 0.29% 0.28%
Ratio of net investment
income (loss) to average
net assets (%) 7.20% 7.07% 7.18% 6.84% 6.97%
Turnover rate (%) 63.31% 119.12% 138.29% 228.74% 182.90%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
49
<PAGE>
Global Bond Fund
GOAL AND STRATEGY
This is a global bond fund that seeks income and growth in capital.
The Fund primarily invests in a mix of debt securities of developed countries
throughout the world including:
. U.S. Treasury and agency securities;
. foreign government and agency securities;
. supranational securities (such as the World Bank);
. corporate bonds, both U.S. and foreign; and
. mortgage-backed and asset-backed securities.
The manager makes ongoing decisions regarding the Fund's mix of U.S. bonds and
non-U.S. bonds (denominated in foreign currencies). The manager has a target
mix of 35% U.S. bonds and 65% non-U.S. bonds, but actively manages the mix
within (+/-) 50 percentage points of the target mix.
The Fund invests in at least 3 countries, but normally in 5 to 15 countries.
The Fund normally has an average credit quality rating of "AA" or higher.
The manager makes ongoing decisions regarding the Fund's average maturity,
country and sector allocations and foreign currency exposures. The manager uses
proprietary research and economic analysis to try to anticipate market condi-
tions and interest rate movements and to purchase securities that appear com-
paratively undervalued.
The manager actively uses derivatives (investments whose value is based on
indices or other securities) such as futures, forwards, options and swaps to
adjust the Fund's average maturity and to implement currency strategies. The
Fund is typically 75% to 100% hedged to the U.S. dollar.
The manager actively uses cash and cash equivalents to manage the Fund's aver-
age maturity. However, the Fund normally invests 20% or less of its assets in
cash and cash equivalents.
The Fund may purchase other types of securities, for example: high yield debt
securities and emerging market debt securities.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
J.P. Morgan Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
Managing, with predecessors, since 1861
Managed approximately $349 billion in assets at the end of 1999
FUND MANAGERS
David Gibbon
- -----------------
Vice President of subadviser
Joined subadviser in 1992
Began career in 1992
Hubert Penot
- -----------------
Managing Director of subadviser
Joined subadviser in 1978
Began career in 1978
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1997 9.05%
1998 9.15%
1999 -2.16%
Best quarter: up 4.32%, third quarter 1998 Worst quarter: down 1.75%, second
quarter 1999
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -2.16% -0.17%
Life of fund 6.10% 7.16%
</TABLE>
Index:75% Lehman Brothers Aggregate Bond Index / 25% JP Morgan Non-US Govern-
ment Bond Index, Hedged (for periods through April 30, 1999)
JP Morgan Global Government Bond Index, US Dollar Hedged (for periods after
April 30, 1999)
(1)Began operations on May 1, 1996.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
50
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, the Fund's investments in emerging market countries have a
significantly higher degree of foreign risk than investments in developed or
newly-industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Trust would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific securities poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Global Bond Fund (formerly Strategic Bond
Portfolio)-Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.16 $ 10.24 $ 10.60
Income from investment operations:
Net investment income (loss) 0.38 0.59 0.54 0.48
Net realized and unrealized gain (loss)
on investments* 0.28 0.30 0.38 (0.70)
Total from investment operations 0.66 0.89 0.92 (0.22)
Less distributions:
Distributions from net investment income
and capital paid in (0.38) (0.66) (0.47) (0.56)
Distributions from net realized gain on
investments sold (0.12) (0.15) (0.09) --
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions $ (0.50) $ (0.81) $ (0.56) (0.56)
Net asset value, end of period $ 10.16 $ 10.24 $ 10.60 $ 9.82
Total investment return 6.71% 9.05% 9.15% (2.16)%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $12,907 $28,647 $66,791 $70,991
Ratio of expenses to average net assets
(%)*** 1.00% 1.00% 0.95% 0.83%
Ratio of net investment income (loss) to
average net assets (%) 6.05% 5.80% 5.27% 4.70%
Turnover rate (%) 171.39% 69.38% 186.70% 332.06%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.57%, 1.32%, 1.02%, and 0.84%
for the years ended December 31, 1996, 1997, 1998, and 1999, respectively.
51
<PAGE>
High Yield Bond Fund
GOAL AND STRATEGY
This is a high yield bond fund that seeks high income and growth in capital.
The Fund invests primarily in a diversified mix of high yield debt securities,
commonly referred to as "junk bonds" (rated BB+/Ba1 or lower and their unrated
equivalents), including:
. corporate bonds, both U.S. and foreign (if dollar-denominated);
. foreign government and agency securities (if dollar-denominated);
. preferred stocks; and
. convertible securities (convertible into common stocks or other equity inter-
ests).
The manager will invest no more than 15% of the Fund's assets in emerging mar-
ket countries (with below investment-grade sovereign debt). The Fund normally
has 10% or less of its assets in cash and cash equivalents.
The manager seeks to purchase bonds with stable or improving credit quality
before the market widely perceives the improvement. Purchase and sale decisions
are primarily based upon the investment merits of the particular security.
The manager selects bonds using proprietary research, including:
. quantitative analysis of historical financial data;
. qualitative analysis of a company's future prospects; and
. economic and industry analysis.
The Fund's average maturity depends on security selection decisions rather than
interest rate decisions.
The Fund may purchase other types of securities, for example: equity securi-
ties, high quality debt securities (short-term and otherwise), certain deriva-
tives (investments whose value is based on indices or other securities), and
debt securities denominated in foreign currencies.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109
Managing, with predecessors, since 1928
Managed approximately $236 billion in assets at the end of 1999
FUND MANAGER
Richard T. Crawford
- -----------------
Vice President of subadviser
Joined subadviser in 1994
Began career in 1991
Manager draws upon the other members of the High Yield team, including:
Earl E. McEvoy
- -----------------
Partner of subadviser
Joined subadviser in 1978
Began career in 1972
Catherine A. Smith
- -----------------
Partner of subadviser
Joined subadviser in 1985
Began career in 1983
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar year
[CHART]
[GRAPH]
1999 5.13%
Best quarter: up 4.55%, fourth quarter 1998 Worst quarter: down 7.46%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 5.13% 2.39%
Life of fund 1.19% 0.31%
</TABLE>
Index:Lehman Brothers High-yield Bond Index
(1)Began operations on May 1, 1998.
Note:See the Appendix to this prospectus for further performance information
relevant to this Fund.
52
<PAGE>
MAIN RISKS
Primary
High Yield Bond Risk: High yield or junk bonds, defined as bond securities
rated below BBB-/Baa3, may be subject to more volatile or erratic price move-
ments due to investor sentiment. In a down market, these high yield securities
may become harder to value or to sell at a fair price.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Fund would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic, polit-
ical and social instability. Factors such as lack of liquidity, foreign owner-
ship limits and restrictions on removing currency also pose special risks. All
foreign securities have some degree of foreign risk. However, to the extent the
Fund invests in emerging market countries, it will have a significantly higher
degree of foreign risk than if it invested exclusively in developed or newly-
industrialized countries.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
Prepayment/Call Risk: The Fund's share price or yield could be hurt if interest
rate movements cause the Fund's mortgage-related and callable securities to be
paid off substantially earlier than expected.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $ 10.00 $ 9.23
Income from investment operations:
Net investment income (loss) 0.46 0.72
Net realized and unrealized gain (loss) on investments* (0.76) (0.26)
Total from investment operations (0.30) 0.46
Less distributions:
Distributions from net investment income and capital paid
in (0.46) (0.70)
Distributions from net realized gain on investments sold (0.01) --
Distributions in excess of income, capital paid in & gains -- --
Total distributions (0.47) (0.70)
Net asset value, end of period $ 9.23 $ 8.99
Total investment return (2.98)% 5.13%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $14,789 $19,921
Ratio of expenses to average net assets (%)*** 0.90% 0.80%
Ratio of net investment income (loss) to average net assets
(%) 7.43% 7.94%
Turnover rate (%) 17.67% 38.62%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.03% and 1.04% for the years
ended December 31, 1998, and 1999, respectively.
53
<PAGE>
Money Market Fund
GOAL AND STRATEGY
This is a money market fund that seeks current income consistent with maintain-
ing liquidity and preserving capital. The Fund intends to maintain a stable net
asset value of $10 per share.
The Fund only invests in U.S. dollar denominated money market instruments rated
within the two highest short-term credit rating categories, primarily includ-
ing:
. commercial paper;
. asset-backed commercial paper;
. bank notes and certificates of deposit;
. short-term bonds;
. U.S. Treasury and agency notes and bills; and
. repurchase and reverse repurchase agreements.
These securities have a maximum remaining maturity of 397 days (13 months) and
may be issued by:
. U.S. and foreign banks and other lending institutions;
. U.S. and foreign corporations;
. the U.S. Treasury and U.S. government agencies and instrumentalities;
. entities whose obligations are guaranteed as to principal or interest by the
U.S. Government;
. municipalities;
. foreign governments; and
. supranational organizations (such as the World Bank).
The weighted average time to maturity of the Fund's investments is 90 days or
less.
The manager may invest:
. up to 5% of assets in securities rated in the second-highest short-term cate-
gory (or unrated equivalents); and
. up to 1% of assets or $1 million (whichever is greater) in securities of a
single issuer rated in the second-highest short-term category (or unrated
equivalents).
The manager selects securities with the highest yield available among securi-
ties of comparable credit quality and maturity using proprietary research.
- --------------------------------------------------------------------------------
MANAGER
Managed By John Hancock Life Insurance Company
FUND MANAGER
Peter S. Mitsopoulos
- -----------------
Financial Officer at manager
Joined manager in 1981
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time. This information may also help provide
an indication of the fund's risks and potential rewards. All figures assume
dividend reinvestment. Past performance does not indicate future results. The
performance figures below do not reflect the deduction of fees and charges
payable under the variable contracts. Such fees and charges would cause the
investment returns under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1990 8.00%
1991 6.00%
1992 3.60%
1993 3.41%
1994 4.03%
1995 5.78%
1996 5.32%
1997 5.38%
1998 5.40%
1999 5.05%
Best quarter: up 2.38%, second quarter 1989 Worst quarter: up 0.74%, second
quarter 1993
Average annual total return -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund
<S> <C> <C>
1 year 5.05%
5 years 5.40%
10 years 5.18%
Life of fund 5.81%
</TABLE>
54
<PAGE>
MAIN RISKS
Primary
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, yields on the Fund's investments
will generally rise and prices on the Fund's investments will generally fall.
When interest rates fall, the reverse will generally occur. The longer the
average remaining maturity of instruments held by the Fund, the more sensitive
the Fund is to interest rate risk. This Fund has less interest rate risk than
an intermediate-term or long-term bond fund.
Credit Risk: An issuer of an instrument held by the Fund may default on its
obligation to pay interest and repay principal. Also, the credit rating of an
instrument held by the Fund may be downgraded. In either case, the value of the
instrument held by the Fund would fall. All money market instruments have some
credit risk, but in general lower-rated instruments have higher credit risk.
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic, polit-
ical and social instability. Factors such as lack of liquidity, foreign owner-
ship limits and restrictions on removing currency also pose special risks. All
foreign securities have some degree of foreign risk. However, to the extent the
Fund invests in emerging market countries, it will have a significantly higher
degree of foreign risk than if it invested exclusively in developed or newly-
industrialized countries.
Secondary
None
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning
of period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Income from investment
operations:
Net investment income
(loss) 0.57 0.52 0.53 0.53 0.45
Net realized and
unrealized gain (loss) on
investments* -- -- -- -- --
Total from investment
operations 0.57 0.52 0.53 0.53 0.45
Less distributions:
Distributions from net
investment income and
capital paid in (0.57) (0.52) (0.53) (0.53) (0.45)
Distributions from net
realized gain on
investments sold -- -- -- -- --
Distributions in excess of
income, capital paid in &
gains -- -- -- -- --
Total distributions $ (0.57) $ (0.52) $ (0.53) $ (0.53) (0.45)
Net asset value, end of
period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Total investment return 5.78% 5.32% 5.38% 5.40% 5.05%
Ratios and supplemental
data
Net assets, end of period
(000s omitted)($) $185,909 $213,235 $229,443 $395,195 $451,235
Ratio of expenses to
average net assets (%) 0.35% 0.30% 0.33% 0.31% 0.31%
Ratio of net investment
income (loss) to average
net assets (%) 5.62% 5.20% 5.32% 5.29% 4.95%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
55
<PAGE>
Your Account
Investments in shares of the funds
Each fund sells its shares directly to separate accounts of John Hancock,
JHVLICO and IPL to fund variable contracts. Each fund also buys back its shares
on redemption by the separate accounts.
Under the variable contracts, a separate account buys or redeems a fund's
shares based on:
. instructions by you and other contractowners to invest or receive back monies
under a contract (such as making a premium payment or surrendering a con-
tract), and
. the operation of a contract (such as deduction of fees and charges).
The Trust, as law permits, may:
. refuse a buy order if the adviser believes it would disrupt management
. suspend a fund's offer of shares, or
. suspend a fund's redemption obligation or postpone a fund's payment of
redemption proceeds for more than seven days.
Share price
Each fund sells and buys back its shares at the net asset value per share
("NAV") next computed after receipt by a separate account of a contractowner's
instructions.
Each fund calculates its NAV:
. by dividing its net assets by the number of its outstanding shares,
. once daily as of the close of regular trading on the New York Stock Exchange
(generally at 4 p.m. New York time) on each day the Exchange is open.
Certain funds may hold securities primarily listed on foreign exchanges that
trade on weekends or other days when the Trust does not calculate NAV. Conse-
quently, NAV may change on days when contractowners will not be able to
instruct a separate account to buy or redeem fund shares.
Valuation
The Money Market Fund values its securities at amortized cost. Each of the
other funds values securities based on:
. market quotations,
. amortized cost,
. valuations of independent pricing services, or
. fair value determined in accordance with procedures approved by the Trust's
trustees.
A fund may value securities at fair value where, for example:
.market quotations are not readily available, or
. the value of securities has been materially affected after the closing of a
foreign market.
Conflicts
The Trust's trustees monitor for possible material irreconcilable conflicts
among separate accounts buying shares of the funds. The Trust's net asset value
could decrease, if the Trust had to sell investment securities to pay redemp-
tion proceeds to a separate account withdrawing because of a conflict.
56
<PAGE>
Funds' Expenses
The advisory fee paid by each fund to the adviser last year was:
<TABLE>
<CAPTION>
Funds % of net assets
<S> <C>
Managed 0.32%
Growth & Income 0.25%
Equity Index 0.14%
Large Cap Value 0.74%
Large Cap Growth 0.36%
Large Cap Aggressive Growth 0.98%
Mid Cap Value 0.80%
Mid Cap Growth 0.83%
Fundamental MidCap Growth 0.85%
Real Estate Equity 0.60%
Small/Mid Cap CORE 0.80%
Small/Mid Cap Growth 0.75%
Small Cap Value 0.80%
Small Cap Growth 0.75%
Global Equity 0.90%
Global Balanced* 0.85%
International Equity Index 0.16%
International Opportunities 0.87%
Emerging Markets Equity 1.27%
Short-Term Bond 0.30%
Bond Index 0.15%
Active Bond** 0.25%
Global Bond 0.69%
High Yield Bond 0.65%
Money Market 0.25%
</TABLE>
* Formerly International Balanced
**Formerly Sovereign Bond
The adviser pays subadvisory fees out of its own assets. No fund pays a fee to
its subadviser.
The adviser has agreed to limit each fund's annual expenses (excluding advisory
fees and certain other expenses such as brokerage and taxes) to not more than
.10 percent of the fund's average daily net assets.
Dividends and Taxes
Dividends
Each fund automatically reinvests its dividends and distributions in additional
shares of the fund at NAV.
Each fund declares and pays dividends monthly, except that the Money Market
Fund does so daily.
Funds generally declare capital gains distributions annually.
Taxes
Each fund must meet investment diversification and other requirements under the
Internal Revenue Code, in order to:
. avoid federal income tax and excise tax, and
. assure the tax-deferred treatment of variable contracts under the Code.
You should read the prospectus for your variable contract for the federal
income tax consequences for contractowners, including the consequences of a
fund's failure to meet Code requirements.
57
<PAGE>
Trust Business Structure
The diagram below shows the basic business structure of the Trust. The Trust's
trustees oversee the Trust's investment and business activities and hire vari-
ous service providers to carry out the Trust's operations.
Variable
Contractowners
John Hancock,
JHVLICO and IPL
Separate Accounts
The Trust
Trustees oversee the
Trust's investment and
business activities.
Investment Adviser Custodian
John Hancock Life State Street Bank and Trust
Insurance Company Company
Manages the Trust's Holds the Trust's assets,
investment and business settles all Trust
activities. trades and collects most of
the valuation
data required for calculat-
ing the Trust's
NAV.
Subadvisers
Alliance Capital Management L.P. Mellon Bond Associates, LLP
Brinson Partners, Inc. Morgan Stanley Dean Witter In-
Goldman Sachs Asset Management. vestment Management Inc.
Independence International Associates, Inc.
Neuberger Berman, LLC
Independence Investment Associates, Inc.OppenheimerFunds, Inc.
INVESCO, Inc. Rowe Price-Fleming Internation-
J.P. Morgan Investment Management Inc. al, Inc.
Janus Capital Corporation Scudder Kemper Investments, Inc.
John Hancock Advisers, Inc. State Street Bank and Trust Com-
pany
T. Rowe Price Associates, Inc.
Wellington Management Company,
LLP
Provide management to various funds.
58
<PAGE>
APPENDIX
Additional Performance Information
The "Past Performance" information shown earlier in this prospectus for certain
of the Funds may not be sufficient for you to make a complete assessment of the
risks and potential rewards of investing in those Funds. The Large Cap Aggres-
sive Growth Fund only began operations on August 31, 1999. The Small/Mid Cap
CORE Fund, the Emerging Markets Equity Fund, the Bond Index Fund, and the High
Yield Bond Fund only began operations on May 1, 1998. The Small/Mid Cap Growth
Fund and the Global Bond Fund each implemented a significant change in strategy
as of May 1, 1999. Finally, the Global Balanced Fund implemented a significant
change in strategy as of May 1, 2000.
Since each of these Funds has at best a very limited period of relevant perfor-
mance history, we have set forth below information for certain similar accounts
that are managed by the Funds' respective subadvisers. Each grouping of such
accounts is referred to as a "composite." In the case of each account included
in a composite, the total management fees and other operating expenses of the
Fund (based upon management fee schedules and allocation rules currently in
effect) have been substituted for the actual fees and expenses (other than bro-
kerage and other transaction expenses) of the account. Also, except as specifi-
cally noted below, each composite includes all of the investment company and
other accounts of the subadviser that satisfy the following requirements:
. they have been managed with investment objectives, policies, and strategies
substantially similar to those used in managing the Fund, and
. they are of sufficient size that their performance would be considered rele-
vant to the owner of a variable contract investing in that Fund.
Some of the accounts in the composites were not registered investment companies
and, therefore, were not subject to federal income tax and other legal require-
ments applicable to such companies. Had such accounts been subject to such
requirements, their performance could have been adversely affected. The perfor-
mance figures in this Appendix do not reflect the deduction of fees and charges
payable under the variable contracts. Such fees and charges would cause the
investment returns under the contacts to be less than that shown below.
The graphs below show how the composite's total return has varied from year to
year, while the tables show performance over time (along with a broad-based
index for reference). All figures assume dividend reinvestment. Past perfor-
mance does not indicate future results.
Large Cap Aggressive Growth Composite (Corresponding to Large Cap Aggressive
Growth Fund)
The Large Cap Aggressive Growth Composite is an asset-weighted composite of all
fully discretionary accounts (excluding mutual funds) managed using a substan-
tially similar investment strategy. As of December 31, 1999, the composite
included 245 accounts with total assets of $47.8 billion.
Year-by-year total returns -- calendar years
[GRAPH]
1995 38.60%
1996 22.37%
1997 36.27%
1998 50.75%
1999 31.82%
Best quarter: up 30.82%, fourth quarter 1998 Worst
quarter: down 11.51%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 31.82% 33.16%
3 years 39.38% 34.07%
5 years 35.65% 32.41%
</TABLE>
Index:Russell 1000(R) Growth Index
59
<PAGE>
Small/Mid Cap CORE Composite (Corresponding to Small/Mid Cap CORE Fund)
The Small/Mid Cap CORE Composite is an asset-weighted composite of all fully
discretionary accounts managed using a substantially similar investment strate-
gy. As of December 31, 1999, the composite included 4 accounts with total
assets of $158 million.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1996* 19.55%
1997 29.42%
1998 -0.52%
1999 21.54%
* Composite inception April 1, 1996. 1996 total
return is not annualized.
Best quarter: up 17.87%, fourth quarter 1999 Worst
quarter: down 20.71%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 21.54% 24.15%
3 years 16.10% 15.72%
Since inception 18.18% 15.96%
</TABLE>
Index:Russell 2500TM Index
Small/Mid Cap Growth Composite (Corresponding to Small/Mid Cap Growth Fund)
The Small/Mid Cap Growth Composite is an asset-weighted composite of all fully
discretionary accounts managed using a substantially similar investment strate-
gy. As of December 31, 1999, the composite included 31 accounts with total
assets of $1.9 billion.
Year-by-year total returns -- calendar years
[CHART]
[GRAPH]
1995 30.68%
1996 19.23%
1997 26.82%
1998 13.97%
1999 -1.65%
Best quarter: up 22.51%, fourth quarter 1998 Worst
quarter: down 15.81%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year -1.65% 55.48%
3 years 12.44% 22.53%
5 years 17.24% 23.10%
</TABLE>
Index:Russell 2500TM Growth Index
60
<PAGE>
Global Balanced Composite (Corresponding to Global Balanced Fund)
The Global Balanced Composite is an asset-weighted composite of all fully dis-
cretionary accounts managed using a substantially similar investment strategy.
As of December 31, 1999, the composite included 4 accounts with total assets of
$1.8 billion.
Year-by-year total returns -- calendar years
[CHART]
1995 24.85%
1996 14.15%
1997 10.75%
1998 8.71%
1999 1.60%
Best quarter: up 8.34%, second quarter 1997 Worst
quarter: down 5.13%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 1.60% 14.32%
3 years 6.95% 15.57%
5 years 11.76% 15.48%
</TABLE>
Index:65% MSCI World Index/35% Salomon Brothers
World Government Bond Index, Unhedged.
Emerging Markets Equity Composite (Corresponding to Emerging Markets Equity
Fund)
The Emerging Markets Equity Composite is an asset-weighted composite of all
fully discretionary mutual fund accounts managed using a substantially similar
investment strategy (excluding all separately managed accounts and the Emerging
Markets Equity Fund). As of December 31, 1999, the composite included 12
accounts with total assets of $5.2 billion.
Year-by-year total returns -- calendar years
[CHART]
1995 -13.42%
1996 11.84%
1997 -2.41%
1998 -24.33%
1999 102.74%
Best quarter: up 51.98%, fourth quarter 1999 Worst
quarter: down 23.57%, second quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 102.74% 66.41%
3 years 14.40% 3.18%
5 years 7.71% 2.00%
</TABLE>
Index:MSCI Emerging Markets Free Index
61
<PAGE>
Government/Corporate Bond Index Composite (Corresponding to Bond Index Fund)
The Government/Corporate Bond Index Composite is an asset-weighted composite of
all fully discretionary accounts (excluding mutual funds) managed using a sub-
stantially similar investment strategy. As of December 31, 1999, the composite
included 5 accounts with total assets of $1.3 billion.
Year-by-year total returns -- calendar years
[CHART]
1995 18.87%
1996 2.54%
1997 9.70%
1998 9.41%
Best quarter: up 6.43%, second quarter 1995 Worst
quarter: down 2.44%, first quarter 1996
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year -2.42% -2.15%
3 years 5.41% 5.54%
5 years 7.38% 7.60%
</TABLE>
Index:Lehman Brothers Government/Corporate Bond
Index
Global Fixed Hedged Composite (Corresponding to Global Bond Fund)
The Global Fixed Hedged Composite is an asset-weighted composite of all fully
discretionary accounts managed using a substantially similar investment strat-
egy. As of December 31, 1999, the composite included 2 accounts with total
assets of $734 million.
Year-by-year total returns -- calendar years
[CHART]
1995 17.67%
1996 8.55%
1997 9.72%
1998 11.72%
1999 -1.36%
Best quarter: up 5.92%, third quarter 1998 Worst
quarter: down 4.80%, first quarter 1994
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -1.36% 0.72%
3 years 6.54% 7.55%
5 years 9.08% 9.76%
</TABLE>
Index:J. P. Morgan Global Government Bond Index,
U.S. Dollar Hedged.
62
<PAGE>
High Yield Bond Composite (Corresponding to High Yield Bond Fund)
The High Yield Bond Composite is an asset-weighted composite of all fully dis-
cretionary accounts managed using a substantially similar investment strategy.
As of December 31, 1999, the composite included 13 accounts with total assets
of $850 million.
Year-by-year total returns -- calendar years
[CHART]
1995 20.48%
1996 12.77%
1997 11.85%
1998 -0.17%
1999 4.13%
Best quarter: up 6.19%, second quarter 1995 Worst
quarter: down -7.90%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 4.13% 2.39%
3 years 5.15% 5.56%
5 years 9.58% 9.31%
</TABLE>
Index:Lehman Brothers High Yield Bond Index.
63
<PAGE>
For more information
This prospectus Two documents are To request a free
should be used available that offer copy of the current
only with a vari- further information annual/semiannual
able contract on John Hancock report or the SAI,
prospectus. Variable Series please contact:
Trust I:
By mail:
Annual/Semiannual
Report to shareholders John Hancock Variable
Series Trust I
Includes financial John Hancock Place
statements, a dis- Boston, MA 02117
cussion of the mar-
ket conditions and By phone: 1-800-732-
investment strate- 5543
gies that signifi-
cantly affected per- Or you may view or
formance, and the obtain these docu-
auditors' report (in ments from the SEC:
the annual report
only). In person: at the
SEC's Public Refer-
Statement of ence Room in Wash-
Additional ington, DC
Information (SAI)
By phone: 1-800-SEC-
The SAI contains 0330
more detailed infor-
mation on all By mail: Public Refer-
aspects of the ence Section Securi-
funds. ties and Exchange Com-
mission
A current SAI has
been filed with the Washington, DC
Securities and 20549-6009
Exchange Commission (duplicating fee
John Hancock and is incorporated required)
Variable by reference into
Series Trust I (i.e., is legally a On the
John Hancock part of) this pro- Internet: www.sec.gov
Place spectus.
Boston, Massachu- SEC File Num-
setts 02117 ber: 811-4490
VSTPRO--L2
<PAGE>
As with all mutual funds, the Securities and Exchange Commission has not judged
whether these funds are good investments or whether the information in this
prospectus is adequate and accurate. Anyone who tells you otherwise is
committing a federal crime.
JOHN HANCOCK
VARIABLE SERIES TRUST I
PROSPECTUS
MAY 1, 2000
Managed Fund
Aggressive Balanced Fund
Growth & Income Fund
Equity Index Fund
Large Cap Value Fund
Large Cap Value CORE Fund
Large Cap Growth Fund
Large Cap Aggressive Growth Fund
Large/Mid Cap Value Fund
Mid Cap Blend Fund
Mid Cap Value Fund
Mid Cap Growth Fund
Fundamental Mid Cap Growth Fund
Real Estate Equity Fund
Small/Mid Cap CORE Fund
Small/Mid Cap Value Fund
Small/Mid Cap Growth Fund
Small Cap Value Fund
Small Cap Growth Fund
Global Equity Fund
Global Balanced Fund
International Equity Index Fund
International Equity Fund
International Opportunities Fund
Emerging Markets Equity Fund
Short-Term Bond Fund
Bond Index Fund
Active Bond Fund
Global Bond Fund
High Yield Bond Fund
Money Market Fund
Managed by John Hancock Life Insurance Company
John Hancock Place
Boston, MA 02117
<PAGE>
Contents
- --------------------------------------------------------------------------------
John Hancock Variable Series Trust I ("Trust")
A fund-by-fund summary of goals, strategies and risks.
<TABLE>
<S> <C>
Overview 1
Your Investment Choices 2
Managed Fund 6
Aggressive Balanced Fund 8
Growth & Income Fund 10
Equity Index Fund 12
Large Cap Value Fund 14
Large Cap Value CORE Fund 16
Large Cap Growth Fund 18
Large Cap Aggressive Growth Fund 20
Large/Mid Cap Value Fund 22
Mid Cap Blend Fund 24
Mid Cap Value Fund 26
Mid Cap Growth Fund 28
Fundamental Mid Cap Growth Fund 30
Real Estate Equity Fund 32
Small/Mid Cap CORE Fund 34
Small/Mid Cap Value Fund 36
Small/Mid Cap Growth Fund 38
Small Cap Value Fund 40
Small Cap Growth Fund 42
Global Equity Fund 44
Global Balanced Fund 46
International Equity Index Fund 48
International Equity Fund 50
International Opportunities Fund 52
Emerging Markets Equity Fund 54
Short-Term Bond Fund 56
Bond Index Fund 58
Active Bond Fund 60
Global Bond Fund 62
High Yield Bond Fund 64
Money Market Fund 66
</TABLE>
Policies and instructions for opening, maintaining and closing an account in
any fund
<TABLE>
<S> <C>
Your Account 68
Investments in shares of the funds 68
Share price 68
Valuation 68
Conflicts 68
</TABLE>
Further information on the funds
<TABLE>
<S> <C>
Funds' Expenses 69
Dividends and Taxes 69
Dividends 69
Taxes 69
</TABLE>
Further information on the Trust
<TABLE>
<S> <C>
Trust Business Structure 70
</TABLE>
Additional performance information
<TABLE>
<S> <C>
Appendix 71
For more information back cover
</TABLE>
<PAGE>
Overview
- --------------------------------------------------------------------------------
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on page 6. Each description provides
the following information:
Goal and Strategy The fund's particular investment goals and the principal
strategies it intends to use in pursuing those goals.
Subadviser/Manager The firm and individual(s) providing investment management
services to the fund.
Past Performance The fund's total return, measured year-by-year and over time.
Main Risks The significant risk factors associated with the fund. The risks are
categorized as "Primary" or "Secondary". The Primary Risks are considered major
factors in the fund's performance and are described first. The Secondary Risks
are not considered major factors in the fund's performance because the fund
would not normally commit a large portion of its assets to the investments
involved. However, the Secondary Risks are of such a nature that they could
significantly affect the fund's performance, even if the investments are held
in relatively small amounts.
Financial Highlights The fund's operating performance per share, measured year-
by-year.
THE FUNDS
The Trust offers investment choices, or funds, for the variable annuity and
variable life insurance contracts ("variable contracts") of:
. John Hancock Life Insurance Company ("John Hancock"),
. John Hancock Variable Life Insurance Company ("JHVLICO"), and
. Investors Partner Life Insurance Company and its subsidiaries ("IPL").
In some variable contract forms, the Trust is referred to as the "Fund" or "Se-
ries Fund" and the investment choices are referred to as "Portfolios."
RISKS OF FUNDS
These funds, like all mutual funds, are not bank deposits. They are not insured
or guaranteed by the FDIC or any other government agency. You could lose money
by investing in these funds. So, be sure to read all risk disclosure carefully
before investing.
MANAGEMENT
John Hancock is the investment adviser of each fund. John Hancock is a Massa-
chusetts stock life insurance company. On February 1, 2000, John Hancock
changed its form of organization and its name. Prior to that date, it was John
Hancock Mutual Life Insurance Company, a mutual life insurance company that was
chartered in 1862. At the end of 1999, John Hancock managed approximately $127
billion, of which it owned over
$71 billion. Most of the funds have subadvisers.
1
<PAGE>
Your Investment Choices
- --------------------------------------------------------------------------------
The Trust offers a number of investment choices, or funds, to suit a variety of
objectives under variable contracts. There are 31 funds available under your
variable contract. Each fund has its own strategy and its own risk/reward
profile.The funds can be broadly categorized as equity funds, balanced funds,
bond funds, and international/global funds. Within these broad categories, the
funds can be further categorized as follows:
Equity Funds
Equity funds can be categorized in two ways--by capitalization and by invest-
ment style.
Capitalization Equity funds can be categorized by market capital-
ization, which is defined as the market value of
all shares of a company's stock. The following def-
initions for large, mid and small cap are based
upon statistics at year-end 1999, but are adjusted
periodically with broad equity market movements as
represented by the Russell 3000(R) Index or other
widely- recognized source of market capitalization
data. Adjustments are typically made on a quarterly
basis, but in extraordinary circumstances may be
made as frequently as monthly.
Large Cap Funds:
. Growth & Income Fund These funds invest in large, well-established com-
panies that typically are very actively traded and
. Equity Index Fund provide more stable investment returns over time.
Large cap companies represent the 300 largest
. Large Cap Value Fund stocks in the Russell 3000(R) Index. Each of those
companies has a market capitalization greater than
. Large Cap Value CORE $7.9 billion as of the end of 1999. Large cap funds
are appropriate for investors who want the least
. Large Cap Growth Fund volatile investment returns within the overall
equity markets.
. Large Cap Aggressive
Growth
Large/Mid Cap Funds:
. Large/Mid Cap Value Fund These funds invest in large cap and mid cap compa-
nies. The capitalization of these funds can shift
over time from primarily large cap to primarily mid
cap or vice versa depending on where the manager
identifies investment opportunities. These funds
are generally more volatile than pure large cap
funds, but generally less volatile than pure mid
cap funds.
Mid Cap Funds:
. Mid Cap Blend These funds invest in medium-sized, less estab-
lished companies that are less actively traded and
. Mid Cap Value Fund provide more share price volatility over time than
large cap stocks. Mid cap companies represent the
. Mid Cap Growth Fund 250th to 1000th largest stocks in the Russell
3000(R) Index. Each of those companies has a market
. Fundamental Mid Cap capitalization between $1.4 billion and $9.7 bil-
Growth lion as of the end of 1999. Mid cap funds are
appropriate for investors who are willing to accept
. Real Estate Equity Fund more volatile investment returns within the overall
equity markets with the potential reward of higher
long-term returns.
Small/Mid Cap Funds:
. Small/Mid Cap CORE Fund These funds invest in mid cap and small cap compa-
nies. The capitalization of these funds can shift
. Small/Mid Cap Value Fund over time from primarily mid cap to primarily small
cap or vice versa depending on where the manager
. Small/Mid Cap Growth identifies investment opportunities. These funds
Fund are generally more volatile than pure mid cap
funds, but generally less volatile than pure small
cap funds.
2
<PAGE>
Small Cap Funds:
. Small Cap Value Fund These funds invest in small newly established com-
panies that are less actively traded and have a
. Small Cap Growth Fund high level of share price volatility over time.
Small cap companies represent the 2000 smallest
stocks in the Russell 3000(R) Index. Each of these
companies has a market capitalization of less than
$1.4 billion as of the end of 1999. Small cap funds
are appropriately for investors who are willing to
accept the most volatile investment returns within
the overall equity markets for the potential reward
of higher long-term returns.
Investment Style
Value Funds:
. Large Cap Value Fund Value funds invest in companies that are attrac-
tively priced, considering their asset and earnings
. Large Cap Value CORE history. These stocks typically pay above average
dividends and have low stock prices relative to
. Large/Mid Cap Value measures of earnings and book value. Value funds
are appropriate for investors who want some divi-
. Mid Cap Value Fund dend income and the potential for capital gains,
but are less tolerant of share-price fluctuations.
. Small Mid/Cap Value
. Small Cap Value Fund
. Real Estate Equity Fund
Growth Funds:
. Large Cap Growth Fund Growth funds invest in companies believed to have
above-average prospects for capital growth due to
. Large Cap Aggressive their strong earnings and revenue potential. Growth
Growth stocks typically have high stock prices relative to
measures of earnings and book value. Growth funds
. Mid Cap Growth Fund are appropriate for investors who are willing to
accept more share-price volatility for the poten-
. Fundamental Mid Cap tial reward of higher long-term returns.
Growth
. Small Mid/Cap Growth
Fund
. Small Cap Growth Fund
Blend Funds:
. Growth & Income Fund Blend funds invest in both value and growth compa-
nies. Blend funds are appropriate for investors who
. Equity Index Fund seek both dividend and capital appreciation charac-
teristics.
. Mid Cap Blend
. Small/Mid Cap CORE
Fund
Balanced Funds
. Managed Fund Balanced funds invest in a combination of stocks
and bonds and actively manage the mix of stock and
. Aggressive Bal- bonds within a target range. Domestic balanced
anced funds invest in U.S. stocks and bonds. Global bal-
anced funds invest in foreign and U.S. stocks and
. Global Balanced bonds.
Fund
Bond Funds
Bond funds can be categorized in two ways--by average maturity and by credit
quality:
Average Maturity Bond maturity is a key measure of interest rate
risk. A bond's maturity measures the time remaining
until the bond matures, or until the repayment of
the bond's principal comes due. The longer a bond's
maturity, the more sensitive the bond's price is to
changes in interest rates.
3
<PAGE>
Short:
. Money Market Fund These funds invest primarily in bonds with short
maturities, typically less than four years. These
. Short Term Bond funds have less interest rate risk than intermedi-
Fund ate-term bond funds.
Intermediate:
. Bond Index Fund These funds invest in bonds of all maturities and
maintain an average maturity which is typically
. Active Bond Fund between four and ten years. These funds have more
interest rate risk than short-term bond funds.
. Global Bond Fund
. High Yield Bond
Fund
Credit Quality Credit quality is a measure of the ability of a
bond issuer to meet its financial obligations and
repay principal and interest. High quality bonds
have less credit risk than lower quality bonds.
Investment grade bonds typically have "high" or
"medium" credit quality ratings (as defined below),
while high-yield bonds have "low" credit quality
ratings.
High:
. Money Market Fund These funds focus on the highest-rated, most
creditworthy bonds and typically maintain an aver-
. Bond Index Fund age credit quality rating of AAA/Aaa or AA/Aa.
. Global Bond Fund
Medium:
. Short Term Bond These funds invest in bonds of all credit quality
Fund levels with a focus on high-rated investment grade
bonds. These funds typically maintain an average
. Active Bond Fund credit quality rating of A or BBB/Baa.
Low:
. High Yield Bond These funds invest primarily in lower rated bonds--
Fund known as high yield or "junk" bonds. These funds
typically maintain a below investment-grade average
credit quality rating of BB/Ba or B.
International/Global Equity Funds
International funds invest primarily in securities markets outside the United
States. Global funds invest both in the United States and abroad. These funds
can be categorized by the types of markets they invest in.
Developed Markets:
. Global Equity Fund These funds invest primarily in the larger, well-
established developed or industralized markets
. International around the world. These funds have less foreign
Equity Index Fund securities risk than emerging market funds.
. International
Equity
. International
Opportunities
Emerging Markets:
. Emerging Markets These funds invest primarily in developing or
Equity Fund emerging markets and have more foreign securities
risk than funds that invest primarily in well-
established, developed markets.
4
<PAGE>
--------------
In the following pages, any fund investment strategy that is stated as a per-
centage of a fund's assets applies at all times, not just at the time the fund
buys or sells an investment security. The trustees of the Trust can change the
investment goals and stragtegy of any fund without shareholder (i.e.,
contractowner) approval.
The financial highlights tables on the following pages detail the historical
performance of each fund, including total return information showing the
increase or decrease of an investment in the fund each year (assuming reinvest-
ment of all dividends and distributions). The "total investment return" shown
for each fund does not reflect the expenses and charges of the applicable sepa-
rate accounts and variable contracts. Those expenses and charges vary consider-
ably from contract to contract and are described in the variable contract pro-
spectus to which this prospectus is attached. If the earliest period shown in
the financial highlights table is less than a full calendar year, the two "Ra-
tios" shown for that period have been annualized (i.e., projected as if the
fund had been in effect for a full year). However, the "total investment
return" and "turnover rate" for that period have not been annualized.
In this prospectus, the term "stock"' is used as a shorthand reference for
equity investments generally and the term "bond" is used as a shorthand refer-
ence for debt obligations generally.
5
<PAGE>
Managed Fund
GOAL AND STRATEGY
This is a balanced stock and bond fund that seeks long-term growth in income
and capital.
The Fund invests primarily in a diversified mix of:
. common stocks of large established U.S. companies;
. bonds with maturities generally greater than 12 months; and
. money market and other short-term debt securities with maturities generally
not greater than 12 months.
The manager makes ongoing decisions about the mix between stocks and bonds. The
Manager has a target mix of 60% in equities and 40% in bonds, but actively man-
ages the mix within (+/-) 10 percentage points of the target mix.
The manager selects stocks and bonds using a combination of proprietary
research and quantitative tools. Stocks are purchased that are undervalued rel-
ative to the stock's history and have improving earnings growth prospects.
Bonds are purchased that are attractively priced and have cheap, predictable
cash flows. The Fund is managed using risk control techniques that maintain
risk and industry characteristics similar to the overall market.
The Fund normally invests its equity portion in 80 to 150 stocks, with at least
65% (usually higher) of its equity assets in large cap companies. The Fund may
invest up to 20% of its bond assets in foreign debt securities of developed
countries (denominated in foreign currencies) and up to 15% of its bond assets
in high yield bonds. The Fund normally has 5% or less of its assets in cash and
cash equivalents.
The Fund may purchase other types of securities, for example: American
Depository Receipts (ADRs), and certain derivatives (investments whose value is
based on indices or other securities). The manager actively uses derivatives,
such as futures and forwards, to adjust the Fund's average maturity relative to
the Lehman Brothers Aggregate Bond Index and to implement currency strategies.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
John C. Forelli
(equity)
- -----------------
Senior Vice President of subadviser
Joined team in 1996
Joined subadviser in 1990
Jeffrey B. Saef
(fixed income)
- -----------------
Senior Vice President of subadviser
Joined team in 1994
Joined subadviser in 1994
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may also help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
3.80% 22.00% 7.70% 11.60% -2.23% 27.09% 10.72% 18.72% 20.42% 9.10%
Best quarter: up 14.77%, fourth quarter 1998 Worst quarter: down 7.22%, third
quarter 1998
Average annual total return -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 9.10% 12.00%
5 years 17.02% 18.85%
10 years 12.60% 13.48%
Life of fund 12.45% 13.06%
</TABLE>
Index:50% S&P 500 Index/50% Lehman Brothers Government/Corporate Bond Index
(for
periods through December 31, 1997)
60% S&P 500 Index/40% Lehman Brothers Government/Corporate Bond Index (for
periods from January 1, 1998 through April 30, 1998)
60% S&P 500 Index/40% Lehman Brothers Aggregate Bond Index (for periods
after
April 30, 1998)
6
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "large cap" approach carries the risk that in certain markets large cap
stocks will underperform mid cap and small cap stocks.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest
rates fall, the reverse will generally occur. The longer the average remaining
maturity of bonds held by the Fund, the more sensitive the Fund is to interest
rate risk. This Fund has more interest rate risk than a short-term bond fund,
but less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obliga-
tion to pay interest and repay principal. Also, the credit rating of a bond
held by the fund may be downgraded. In either case, the value of the bond held
by the Trust would fall. All bonds have some credit risk, but in general low-
er-rated bonds have higher credit risk.
Market Allocation Risk: The allocation of the Fund's assets among major asset
classes (i.e., stocks, bonds, and short-term debt securities) may (1) reduce
the Fund's holdings in a class whose value then increases unexpectedly, or (2)
increase the Fund's holdings in a class just prior to its experiencing a loss
of value.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become
harder to value or to sell at a fair price.
Prepayment/Call Risk: The Fund's share price or yield could be hurt if inter-
est rate movements cause the Fund's mortgage-related and callable securities
to be paid off substantially earlier than expected.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December
31: 1995 1996 1997 1998 1999
Net asset value,
beginning of period $11.96 $13.73 $13.35 $14.35 $15.64
Income from investment
operations:
Net investment income
(loss) 0.62 0.61 0.59 0.46 0.44
Net realized and
unrealized gain (loss)
on investments* 2.56 0.81 1.86 2.43 0.94
Total from investment
operations 3.18 1.42 2.45 2.89 1.38
Less distributions:
Distributions from net
investment income and
capital paid in (0.62) (0.61) (0.67) (0.51) (0.43)
Distributions from net
realized gain on
investments sold (0.79) (1.19) (0.78) (1.09) (1.14)
Distributions in excess
of income, capital
paid in & gains -- -- -- -- --
Total distributions (1.41) (1.80) (1.45) (1.60) (1.57)
Net asset value, end of
period $13.73 $13.35 $14.35 $15.64 $15.45
Total investment return 27.09% 10.72% 18.72% 20.42% 9.10%
Ratios and supplemental
data
Net assets, end of
period (000s
omitted)($) $2,093,964 $2,386,660 $2,800,127 $3,301,910 $3,430,919
Ratio of expenses to
average net assets (%) 0.38% 0.36% 0.37% 0.36% 0.36%
Ratio of net investment
income (loss) to
average net assets (%) 4.66% 4.41% 4.18% 2.99% 2.75%
Turnover rate (%) 187.67% 113.61% 200.41% 160.57% 203.86%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
7
<PAGE>
Aggressive Balanced Fund
GOAL AND STRATEGY
This is a balanced stock and bond fund that seeks long-term growth in income
and capital.
The Fund invests primarily in a diversified mix of:
. common stocks of large established U.S. companies, and
. bonds with maturities generally greater than 12 months.
The manager makes ongoing decisions about the mix among stocks and bonds. The
manager has a target mix of 75% in equities and 25% in bonds, but actively man-
ages the mix within +/-10 percentage points of the target mix.
The manager selects stocks and bonds using a combination of proprietary
research and quantitative tools. Stocks are purchased that are undervalued rel-
ative to the stock's history and have improving earnings growth prospects.
Bonds are purchased that are attractively priced and have cheap, predictable
cash flows. The Fund is managed using risk control techniques that maintain
risk and industry characteristics similar to the overall market.
The Fund normally invests its equity portion in 80 to 150 stocks, with at least
65% (usually higher) of its equity assets in large cap companies. The Fund may
invest up to 20% of its bond assets in developed foreign countries (denominated
in foreign currencies) and up to 15% of its bond assets in high yield bonds.
The Fund normally has 5% or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities). The manager actively uses derivatives, such as
futures and forwards, to adjust the Fund's average maturity relative to the
Lehman Brothers Aggregate Bond Index and to implement currency strategies.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
John C. Forelli
(equity)
- -----------------
Senior Vice President of subadviser
Joined team in 1996
Joined subadviser in 1990
Jeffrey B. Saef
(fixed income)
- -----------------
Senior Vice President of subadviser
Joined team in 1994
Joined subadviser in 1994
PAST PERFORMANCE
Because this Fund did not have a full year of operations as of December 31,
1999, no year-by-year total returns or average annual total returns can be
shown for this Fund. However, the Appendix to this prospectus contains certain
performance information that is relevant to this Fund. The Appendix starts on
page 71.
8
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "large cap" approach carries the risk that in certain markets large cap
stocks will underperform mid cap and small cap stocks.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest
rates fall, the reverse will generally occur. The longer the average remaining
maturity of bonds held by the Fund, the more sensitive the Fund is to interest
rate risk. This Fund has more interest rate risk than a short-term bond fund,
but less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obliga-
tion to pay interest and repay principal. Also, the credit rating of a bond
held by the fund may be downgraded. In either case, the value of the bond held
by the Trust would fall. All bonds have some credit risk, but in general low-
er-rated bonds have higher credit risk.
Market Allocation Risk: The allocation of the Fund's assets among major asset
classes (i.e., stocks, bonds, and short-term debt securities) may (1) reduce
the Fund's holdings in a class whose value then increases unexpectedly, or (2)
increase the Fund's holdings in a class just prior to its experiencing a loss
of value.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become
harder to value or to sell at a fair price.
Prepayment/Call Risk: The Fund's share price or yield could be hurt if inter-
est rate movements cause the Fund's mortgage-related and callable securities
to be paid off substantially earlier than expected.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C>
Period ended December 31: 1999**
Net asset value, beginning of period $ 10.00
Income from investment operations:
Net investment income (loss) 0.06
Net realized and unrealized gain (loss) on investments* 0.64
Total from investment operations 0.70
Less distributions:
Distributions from net investment income and capital paid in (0.05)
Distributions from net realized gain on investments sold (0.03)
Distributions in excess of income, capital paid in & gains --
Total distributions (0.08)
Net asset value, end of period $ 10.62
Total investment return 7.09%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $11,883
Ratio of expenses to average net assets (%)*** 0.78%
Ratio of net investment income (loss) to average net assets (%) 1.68%
Turnover rate (%) 70.28%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on August 31, 1999.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 0.96% for the year ended
December 31.
9
<PAGE>
Growth & Income Fund
GOAL AND STRATEGY
This is a large cap stock fund that seeks long-term growth in income and capi-
tal.
The Fund invests primarily in a diversified mix of common stocks of large
established U.S. companies that are believed to offer:
. favorable prospects for increasing dividends and growth in capital (i.e.,
"value" companies); or
. above-average potential for growth in revenues and earnings (i.e., "growth"
companies).
The manager selects stocks using a combination of proprietary equity research
and quantitative tools. Stocks are purchased that are undervalued relative to
the stock's history and have improving earnings growth prospects. The Fund is
managed using risk control techniques that maintain risk and industry charac-
teristics similar to the S&P 500 Index.
The Fund normally invests in 80 to 150 stocks, with at least 65% (usually high-
er) of its assets in large cap companies. The Fund normally has 5% or less of
its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
Note: "S&P 500 Index" means the Standard & Poor's 500 Composite Stock Price
Index. "Standard & Poor's", "S&P" and "S&P 500" are trademarks of McGraw Hill,
Inc. and have been licensed for use by the Trust.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at end of 1999
FUND MANAGER
Management by investment team overseen by:
Paul F. McManus
- -----------------
Senior Vice President of subadviser
Joined team in 1996
Joined subadviser in 1982
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may also help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
4.10% 26.00% 8.90% 13.33% -0.56% 34.21% 20.10% 29.79% 30.25% 16.23%
Best quarter: up 24.07%, fourth quarter 1998 Worst quarter: down 12.05%, third
quarter 1998
Average annual total return -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 16.23% 21.04%
5 years 25.93% 28.55%
10 years 17.70% 18.20%
Life of fund 16.46% 17.27%
</TABLE>
Index:S & P 500 Index
10
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value
more than bonds. If the Fund's investments are concentrated in certain sectors,
the Fund's performance could be worse than the overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "large cap" approach carries the risk that in certain markets large cap
stocks will underperform mid cap and small cap stocks.
Secondary
None
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December
31: 1995 1996 1997 1998 1999
Net asset value,
beginning of period $ 11.50 $ 13.94 $ 14.65 $ 16.61 $ 19.49
Income from investment
operations:
Net investment income
(loss) 0.36 0.34 0.27 0.23 0.20
Net realized and
unrealized gain (loss)
on investments* 3.53 2.43 4.07 4.75 2.88
Total from investment
operations 3.89 2.77 4.34 4.98 3.08
Less distributions:
Distributions from net
investment income and
capital paid in (0.36) (0.34) (0.27) (0.23) (0.20)
Distributions from net
realized gain on
investments sold (1.09) (1.72) (2.11) (1.87) (2.36)
Distributions in excess
of income, capital
paid in & gains -- -- -- -- --
Total distributions $ (1.45) $ (2.06) $ (2.38) $ (2.10) $ (2.56)
Net asset value, end of
period $ 13.94 $ 14.65 $ 16.61 $ 19.49 $ 20.01
Total investment return 34.21% 20.10% 29.79% 30.25% 16.23%
Ratios and supplemental
data
Net assets, end of
period (000s
omitted)($) $1,598,585 $2,047,927 $2,785,964 $3,670,785 $4,218,841
Ratio of expenses to
average net assets (%) 0.28% 0.27% 0.28% 0.27% 0.28%
Ratio of net investment
income (loss) to
average net assets (%) 2.70% 2.24% 1.61% 1.24% 0.98%
Turnover rate (%) 73.54% 81.02% 74.56% 48.45% 70.16%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
11
<PAGE>
Equity Index Fund
GOAL AND STRATEGY
This is a stock fund that seeks to track the performance of the S&P 500 Index,
which emphasizes the stocks of large U.S. companies.
The manager employs a passive management strategy by normally investing in all
500 stocks included in the Index. The manager invests in each stock in roughly
the same proportion as represented in the Index.
The manager seeks to replicate as closely as possible the aggregate risk char-
acteristics and industry diversification of the Index.
The Fund normally invests in all 500 stocks in the Index, but has no predeter-
mined number of stocks that it must hold. S&P may change the composition of the
Index from time to time. The manager will reflect those changes as soon as
practical.
The Fund is normally fully invested. The manager may invest in stock index
futures to maintain market exposure and manage cash flow.
The Fund may purchase other types of securities, for example: Standard & Poor's
Depository Receipts (SPDRs), American Depository Receipts (ADRs), cash equiva-
lents, and certain derivatives (investments whose value is based on indices or
other securities).
Note: "S&P 500 Index" means the Standard & Poor's 500 Composite Stock Price
Index. "Standard & Poor's", "S&P" and "S&P 500" are trademarks of McGraw Hill,
Inc. and have been licensed for use by the Trust.
- --------------------------------------------------------------------------------
SUBADVISER
State Street Bank and Trust Company
State Street Global Advisors Division
Two International Place
Boston, Massachusetts 02110
Managing since 1978
Managed approximately $667 billion in assets at the end of 1999
FUND MANAGERS
John A. Tucker
- -----------------
Principal of subadviser
Joined subadviser in 1988
James B. May
- -----------------
Principal of subadviser
Joined subadviser in 1989
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may also help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 1998 1999
32.79% 28.45% 21.08%
Best quarter: up 21.27%, fourth quarter 1998 Worst quarter: down 9.99%, third
quarter 1998
Average annual total return -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 21.08% 21.04%
Life of fund 26.36% 26.79%
</TABLE>
Index:S&P 500 Index
(1)Began operations on May 1, 1996.
12
<PAGE>
MAIN RISKS
Primary
Index Management Risk: Certain factors such as the following may cause the
Fund to track the Index less closely:
. The securities selected by the manager may not be fully representative of
the Index.
. Transaction expenses of the Fund may result in the Fund's performance being
different than that of the Index.
. The size and timing of the Fund's cash flows may result in the Fund's per-
formance being different than that of the Index.
Also, index funds like this one will have more difficulty in taking defensive
positions in abnormal market conditions.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
invest-ment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "large cap" approach carries the risk that in certain markets large cap
stocks will underperform mid cap and small cap stocks.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $10.00 $11.10 $14.21 $17.70
Income from investment operations:
Net investment income (loss) 0.15 0.24 0.25 0.27
Net realized and unrealized gain
(loss) on investments* 1.26 3.41 3.76 3.41
Total from investment operations 1.41 3.65 4.01 3.68
Less distributions:
Distributions from net investment
income and capital paid in (0.21) (0.29) (0.24) (0.26)
Distributions from net realized gain
on investments sold (0.10) (0.25) (0.28) (0.66)
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions ($0.31) ($0.54) ($0.52) (0.92)
Net asset value, end of period $11.10 $14.21 $17.70 $20.46
Total investment return*** 14.23% 32.79% 28.45% 21.08%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $14,650 $101,390 $232,578 $451,296
Ratio of expenses to average net
assets (%)**** 0.00% 0.00% 0.00% 0.00%
Ratio of net investment income (loss)
to average net assets (%) 2.74% 1.97% 1.59% 1.42%
Turnover rate (%) 15.72% 64.56% 43.31% 55.24%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains
and losses in the fund securities for the period because of the timing
of purchases and withdrawals of shares in relation to the fluctuation in
market values of the fund.
** Fund began operations on May 1, 1996.
*** Includes the effect of a voluntary capital contribution from John Han-
cock of $0.06 per share for the period 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.
**** Expense ratio is net of expense reimbursement. Had such reimbursement
not been made the expense ratio would have been 1.61%, 0.65%, 0.34% and
0.22% for the years ended December 31, 1996, 1997, 1998 and 1999,
respectively.
13
<PAGE>
Large Cap Value Fund
GOAL AND STRATEGY
This is a large cap stock fund with a value emphasis that seeks long-term
growth in capital and substantial dividend income.
The Fund invests primarily in a diversified mix of common stocks of large
established U.S. companies that are believed to offer favorable prospects for
increasing dividends and growth in capital.
The manager employs a value approach in selecting stocks using proprietary
equity research. Stocks are purchased that are undervalued by various measures
such as the stock's current price relative to its earnings potential.
The manager looks for companies with:
. established operating history;
. above-average dividend yield relative to the S&P 500 Index;
. low price/earnings ratio relative to the S&P 500 Index;
. sound balance sheet and other positive financial characteristics; and
. low stock price relative to the company's underlying value.
The Fund normally invests in 100 to 175 stocks, with at least 65% (usually
higher) of its assets in large cap companies. The Fund normally has 5% or less
of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), foreign equity securities of developed countries, high
quality intermediate and short-term debt securities, and certain derivatives
(investments whose value is based on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
Note: "S&P 500 Index" means the Standard & Poor's 500 Composite Stock Price
Index. "Standard & Poor's", "S&P" and "S&P 500" are trademarks of McGraw Hill,
Inc. and have been licensed for use by the Trust.
- --------------------------------------------------------------------------------
SUBADVISER
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Managing since 1937
Managed approximately $180 billionin assets at the end of 1999
FUND MANAGERS
Management by Investment Advisory Committee
Brian C. Rogers
- -----------------
Committee Chairman
Director of subadviser
Managed fund since 1996 (its inception)
Joined subadviser in 1982
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may also help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 28.56%
1998 9.26%
1999 3.28%
Best quarter: up 12.86%, fourth quarter 1999 Worst quarter: down 8.58%, third
quarter 1999
Average annual total return -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 3.28% 7.35%
Life of fund 14.67% 19.54%
</TABLE>
Index:Russell 1000(R) Value Index
(1)Began operations on May 1, 1996.
14
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "large cap" approach car-
ries the risk that in certain markets large cap stocks will underperform small
cap and mid cap stocks.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 11.09 $ 13.57 $ 14.02
Income from investment operations:
Net investment income (loss) 0.16 0.29 0.28 0.27
Net realized and unrealized gain (loss)
on investments* 1.22 2.84 0.96 0.18
Total from investment operations 1.38 3.13 1.24 0.45
Less distributions:
Distributions from net investment
income and capital paid in (0.16) (0.29) (0.28) (0.27)
Distributions from net realized gain on
investments sold (0.13) (0.36) (0.51) (0.71)
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions ($0.29) ($0.65) ($0.79) (0.98)
Net asset value, end of period $ 11.09 $ 13.57 $ 14.02 $ 13.49
Total investment return 13.90% 28.56% 9.26% 3.28%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $19,781 $73,269 $123,365 $155,849
Ratio of expenses to average net assets
(%)*** 1.00% 1.00% 0.92% 0.85%
Ratio of net investment income (loss) to
average net assets (%) 2.74% 2.42% 2.08% 1.88%
Turnover rate (%) 19.95% 19.21% 18.46% 32.62%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.89% and 1.06% for the years
ended December 31, 1996 and 1997, respectively.
15
<PAGE>
Large Cap Value CORE Fund
GOAL AND STRATEGY
This is a large cap stock fund with a value emphasis that seeks long-term
growth in capital and dividend income.
The Fund invests primarily in a diversified mix of common stocks of large
established U.S. companies that are believed to offer favorable prospects for
increasing dividends and growth in capital.
The manager selects stocks using a combination of quantitative techniques and
fundamental equity research. The manager employs an investment process known as
CORE, "Computer Optimized, Research-Enhanced," that employs a proprietary quan-
titative model. The manager identifies stocks that have strong expected earn-
ings growth and momentum and better valuation and risk characteristics than the
Russell 1000 Value Index.
Stocks are purchased that have:
. Low to modest valuation characteristics relative to general market measures,
such as price/earnings ratio, book value and other fundamental accounting
measures, and
. favorable prospects for capital appreciation and/or dividend paying ability.
The Fund is managed using risk control techniques to maintain risk, style, cap-
italization and industry characteristics similar to the Russell 1000(R) Value
Index. The Fund is broadly diversified by industry.
The Fund normally invests in 100 to 250 stocks, with at least 65% (usually
higher) of the Fund's assets in large cap companies. The Fund normally has 10%
or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Standard & Poor's Depository Receipts (SPDRs), and cer-
tain derivatives (investments whose value is based on indices or other securi-
ties).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Goldman Sachs Asset Management,
A unit of the Investment Management
Division of Goldman, Sachs & Co.
32 Old Slip
New York, New York 10005
Managing since 1988
Managed approximately $259 billion
in assets at the end of 1999
FUND MANAGERS
Kent A. Clark
- -----------------
Managing Director of subadviser
Joined subadviser in 1992
Robert C. Jones
- -----------------
Managing Director of subadviser
Joined subadviser in 1989
Victor H. Pinter
- -----------------
Vice President of subadviser
Joined subadviser in 1990
PAST PERFORMANCE
Because this Fund did not have a full year of operations as of December 31,
1999, no year-by-year total returns or average annual total returns can be
shown for this Fund. However, the Appendix to this prospectus contains certain
performance information that is relevant to this Fund. The Appendix starts on
page 71.
16
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "large cap" approach car-
ries the risk that in certain markets large cap stocks will underperform small
and mid cap stocks.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C>
Period ended December 31: 1999**
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment income (loss) 0.04
Net realized and unrealized gain (loss) on investments* 0.31
Total from investment operations 0.35
Less distributions:
Distributions from net investment income and capital paid in (0.04)
Distributions from net realized gain on investments sold (0.14)
Distributions in excess of income, capital paid in & gains (0.01)
Total distributions (0.19)
Net asset value, end of period $10.16
Total investment return 3.58%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $6,371
Ratio of expenses to average net assets (%)*** 0.85%
Ratio of net investment income (loss) to average net assets (%) 1.13%
Turnover rate (%) 30.90%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on August 31, 1999.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.17% for the years ended
December 31.
17
<PAGE>
Large Cap Growth Fund
GOAL AND STRATEGY
This is a large cap stock fund with a growth emphasis that seeks growth in
capital.
The Fund invests primarily in a diversified mix of common stocks of large
established U.S. companies that are believed to offer above-average potential
for growth in revenues and earnings.
The manager selects stocks using a combination of proprietary equity research
and quantitative tools. Stocks are purchased that are undervalued relative to
the stock's history and have improving earnings growth prospects. The Fund is
managed using risk control techniques that maintain risk and industry charac-
teristics similar to the Russell 1000(R) Growth Index.
The Fund normally invests in 80 to 150 stocks, with at least 65% (usually high-
er) of its assets in large cap companies. The Fund normally has 5% or less of
its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Mark C. Lapman
- -----------------
Executive Vice President of subadviser
Joined team in 1996
Joined subadviser in 1982
Began career in 1979
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
6.60% 25.50% 9.90% 13.80% -0.98% 31.64% 18.27% 30.89% 39.51% 24.07%
Best quarter: up 27.79%, fourth quarter 1998 Worst quarter: down 11.16%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 24.07% 33.16%
5 years 28.67% 32.18%
10 years 19.34% 19.86%
Life of fund 17.72% 18.46%
</TABLE>
Index:S&P 500 Index (for periods through April 30, 1996)
Russell 1000(R) Growth Index (for periods after April 30, 1996)
18
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "large cap" approach
carries the risk that in certain markets large cap stocks will underperform
small cap and mid cap stocks.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December
31: 1995 1996 1997 1998 1999
Net asset value,
beginning of period $ 14.41 $ 17.37 $ 17.49 $ 20.82 $ 26.19
Income from investment
operations:
Net investment income
(loss) 0.44 0.25 0.17 0.14 0.09
Net realized and
unrealized gain (loss)
on investments* 4.06 2.89 5.21 8.05 6.03
Total from investment
operations 4.50 3.14 5.38 8.19 6.12
Less distributions:
Distributions from net
investment income and
capital paid in (0.70) (0.25) (0.17) (0.14) (0.09)
Distributions from net
realized gain on
investments sold (0.84) (2.77) (1.88) (2.68) (4.89)
Distributions in excess
of income, capital
paid in & gains -- -- -- -- --
Total distributions ($1.54) ($3.02) ($2.05) ($2.82) (4.98)
Net asset value, end of
period $ 17.37 $ 17.49 $ 20.82 $ 26.19 $ 27.33
Total investment return 31.64% 18.27% 30.89% 39.51% 24.07%
Ratios and supplemental
data
Net assets, end of
period (000s
omitted)($) $380,276 $524,145 $754,398 $1,126,764 $1,382,473
Ratio of expenses to
average net assets (%) 0.47% 0.44% 0.44% 0.41% 0.39%
Ratio of net investment
income (loss) to
average net assets (%) 2.70% 1.35% 0.86% 0.59% 0.33%
Turnover rate (%) 90.18% 135.98% 83.82% 56.41% 37.42%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
19
<PAGE>
Large Cap Aggressive Growth Fund
GOAL AND STRATEGY
This is a non-diversified large cap stock fund with a growth emphasis that
seeks long-term growth in capital.
The Fund invests primarily in the common stocks of large established U.S. com-
panies that are believed to offer above-average potential for long-term growth
in revenues and earnings.
The manager selects stocks using proprietary company-specific research that
focuses on firms:
. offering superior earnings growth that is not fully reflected in current mar-
ket valuations,
. having prospective earnings growth rates substantially above that of the S&P
500, and
. exhibiting strong management, superior industry positions and excellent bal-
ance sheets.
The Fund employs aggressive investment strategies and invests most of its asset
in a relatively small number of companies, with the 25 most highly regarded
stocks representing at least 65% of the Fund's assets. The manager selects
stocks without regard to any predefined industry or sector selection criteria.
The manager actively trades and adjusts the Fund's holdings to capitalize on
market fluctuations. The manager typically:
. increases investment in favored securities and reduces the number of holdings
in declining markets, and
. decreases investment in favored securities and increases the number of hold-
ings in rising markets.
The Fund is a non-diversified fund, which means it can take larger positions in
a smaller number of issuers. The Fund normally invests in 35 to 55 stocks, with
at least 65% (usually higher) of its assets in large cap companies. The Fund
normally has 5% or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York, NY 10105
Managing, with predecessors, since 1971
Managed approximately $358 billion
in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
John H. Fogarty
- -----------------
Vice president of subadviser
Joined subadviser in 1988
Began career in 1988
Alfred Harrison
- -----------------
Vice chairman and Director of subadviser
Joined subadviser in 1978
Began career in 1962
PAST PERFORMANCE
Because this Fund did not have a full year of operations as of December 31,
1999, no year-by-year total returns or average annual total returns can be
shown for this Fund. However, the Appendix to this prospectus contains certain
performance information that is relevant to this Fund. The Appendix starts on
page 71.
20
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Non-Diversified Fund Risk: The Fund's larger position in individual issuers and
in a smaller number of issuers could produce more volatile performance relative
to more diversified funds. The less diversified a fund's holdings are, the more
likely it is that a specific security's poor performance will hurt the fund
significantly.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "large cap" approach
carries the risk that large cap stocks will underperform small cap and mid cap
stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C>
Period ended December 31: 1999**
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment income (loss) (0.01)
Net realized and unrealized gain (loss) on investments* 2.03
Total from investment operations 2.02
Less distributions:
Distributions from net investment income and capital paid in --
Distributions from net realized gain on investments sold (0.08)
Distributions in excess of income, capital paid in & gains --
Total distributions (0.08)
Net asset value, end of period $11.94
Total investment return 20.18%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $1,263
Ratio of expenses to average net assets (%)*** 1.08%
Ratio of net investment income (loss) to average net assets (%) (0.39)%
Turnover rate (%) 18.97%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on August 31, 1999.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.17% for the years ended
December 31.
21
<PAGE>
Large/Mid Cap Value Fund
GOAL AND STRATEGY
This is a large/mid cap stock fund with a value emphasis that seeks long-term
growth in capital.
The Fund invests primarily in a diversified mix of common stocks of large- and
mid-sized U.S. companies that are believed to offer favorable prospects for
increasing dividends and growth in capital.
The manager employs a value approach in selecting stocks, using proprietary
equity research to identify stocks having distinct value characteristics based
on industry- specific valuation criteria.
The manager screens the investable universe for stocks with:
. dividend yields greater than the Russell 1000(R) Value Index, and
. price/book ratios lower than the Russell 1000(R) Value Index.
The Fund's assets are allocated to industry-specific sub-portfolios that are
managed by each industry analyst. The manager oversees the Fund to maintain
capitalization and industry weights similar to the Russell 1000(R) Value Index.
The Fund normally invests in 100 to 130 stocks, with at least 65% (usually
higher) of its assets in large and mid cap companies. The Fund normally has 5%
or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109
Managing, with predecessors, since 1928
Managed approximately $236 billion
in assets at the end of 1999
FUND MANAGERS
Management by Global Research Team overseen by:
Doris Dwyer Chu
- -----------------
Vice President of subadviser
Joined subadviser in 1998
Partner and portfolio manager at Grantham,
Mayo, Van Otterloo & Co. (1985-1998)
Laurie A. Gabriel
- -----------------
Managing Partner of subadviser
Joined subadviser in 1976
PAST PERFORMANCE
Because this Fund did not have a full year of operations as of December 31,
1999, no year-by-year total returns or average annual total returns can be
shown for this Fund. However, the Appendix to this prospectus contains certain
performance information that is relevant to this Fund. The Appendix starts on
page 71.
22
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "large /mid cap" approach
carries the risk that large /mid cap stocks will underperform small cap stocks.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C>
Period ended December 31: 1999**
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment income (loss) 0.03
Net realized and unrealized gain (loss) on investments* 0.45
Total from investment operations 0.48
Less distributions:
Distributions from net investment income and capital paid in (0.03)
Distributions from net realized gain on investments sold (0.02)
Distributions in excess of income, capital paid in & gains (0.01)
Total distributions (0.06)
Net asset value, end of period $10.42
Total investment return 4.72%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $6,101
Ratio of expenses to average net assets (%)*** 1.05%
Ratio of net investment income (loss) to average net assets (%) 0.94%
Turnover rate (%) 23.03%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations August 31, 1999.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.42% for the year ended Decem-
ber 31.
23
<PAGE>
Mid Cap Blend Fund
GOAL AND STRATEGY
This is a mid cap stock fund that seeks long-term growth in capital.
The Fund invests primarily in a diversified mix of common stocks of mid-sized
U.S. companies that are believed to offer:
. favorable prospects for increasing dividends and capital appreciation
(i.e., "value" companies), and
. above-average potential for growth in revenues and earnings (i.e. "growth"
companies).
The manager selects stocks using a combination of proprietary equity research
and quantitative tools. Stocks are purchased that are undervalued relative to
the stock's history and have improving earnings growth prospects. The Fund is
managed using risk control techniques that maintain risk and industry charac-
teristics similar to the Russell Mid Cap(TM) Index.
The Fund normally invests in 100 to 150 stocks, with at least 65% (usually
higher) of its assets in mid cap companies. The Fund normally has 5% or less of
its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion
in assets at the end of 1999
FUND MANAGERS
Management by investment team
overseen by:
Coreen S. Kraysler, CFA
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1986
PAST PERFORMANCE
Because this Fund did not have a full year of operations as of December 31,
1999, no year-by-year total returns or average annual total returns can be
shown for this Fund. However, the Appendix to this prospectus contains certain
performance information that is relevant to this Fund. The Appendix starts on
page 71.
24
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "mid cap" approach carries the risk that in certain markets "mid cap"
stocks will underperform "large cap" and "small cap" stocks. Also, the Fund's
"blend" style carries the risk that in certain markets, "blend" styles will
underperform "growth" and "value" styles.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C>
Period ended December 31: 1999
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment income (loss) 0.03
Net realized and unrealized gain (loss) on investments* 1.10
Total from investment operations 1.13
Less distributions:
Distributions from net investment income and capital paid in (0.03)
Distributions from net realized gain on investments sold (0.40)
Distributions in excess of income, capital paid in & gains --
Total distributions (0.43)
Net asset value, end of period $10.70
Total investment return 11.53%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $5,810
Ratio of expenses to average net assets (%)*** 0.85%
Ratio of net investment income (loss) to average net assets (%) 0.82%
Turnover rate (%) 55.68%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on August 31, 1999.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.20% for the years ended
December 31.
25
<PAGE>
Mid Cap Value Fund
GOAL AND STRATEGY
This is a mid cap stock fund with a value emphasis that seeks long-term growth
in capital.
The Fund invests primarily in the common stocks of mid-sized U.S. companies
that are believed to sell at a discount to their intrinsic value.
The manager selects stocks using proprietary equity research. Stocks are pur-
chased that are undervalued by various measures such as the stock's current
price relative to its earnings potential.
The manager looks for undervalued companies with:
. sound balance sheet and other financial characteristics;
. consistent cash flow;
. strong position relative to the competition; and
. high level of stock ownership among management.
The Fund normally invests in 50 to 75 stocks, with at least 65% (usually high-
er) of its assets in mid cap companies. The Fund normally has 5% or less of its
assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Neuberger Berman, LLC
605 Third Avenue
New York, New York 10158
Managing since 1939
Managed approximately $54 billion
in assets at the end of 1999
FUND MANAGERS
Robert I. Gendelman
- -----------------
Managing Director of subadviser
Managed fund since 1996 (its inception)
Joined subadviser in 1993
Began career in 1984
S. Basu Mullick
- -----------------
Managing Director of subadvisor
Joined subadvisor in 1998
Began career in 1982
Portfolio Manager, Ark Asset
Management (1993-1998)
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 32.17%
1998 -11.33%
1999 5.52%
Best quarter: up 17.06%, third quarter 1997 Worst quarter: down 21.29%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 5.52% -0.11%
Life of fund 10.38% 13.54%
</TABLE>
Index:Russell Mid Cap(TM) Value Index
(1)Began operations on May 1, 1996.
26
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "mid cap" approach carries
the risk that in certain markets mid cap stocks will underperform small cap and
large cap stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $10.00 $11.35 $13.87 $12.19
Income from investment operations:
Net investment income (loss) 0.04 0.05 0.11 0.08
Net realized and unrealized gain (loss)
on investments* 1.57 3.59 (1.68) 0.59
Total from investment operations 1.61 3.64 (1.57) 0.67
Less distributions:
Distributions from net investment income
and capital paid in (0.04) (0.05) (0.11) (0.08)
Distributions from net realized gain on
investments sold (0.22) (1.07) -- --
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions $(0.26) $(1.12) $(0.11) (0.08)
Net asset value, end of period $11.35 $13.87 $12.19 $12.78
Total investment return 16.18% 32.17% (11.33)% 5.52%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $10,926 $64,973 $94,820 $92,150
Ratio of expenses to average net assets
(%)*** 1.05% 1.05% 0.96% 0.92%
Ratio of net investment income (loss) to
average net assets (%) 0.69% 0.53% 0.93% 0.64%
Turnover rate (%) 62.99% 93.78% 173.33% 137.06%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.15% and 1.14% for the years
ended December 31, 1996, and 1997, respectively.
27
<PAGE>
Mid Cap Growth Fund
GOAL AND STRATEGY
This is a non-diversified mid cap stock fund with a growth emphasis that seeks
long-term growth in capital.
The Fund invests primarily in the common stocks of mid-sized U.S. companies
that are believed to offer above-average potential for growth in revenues and
earnings.
The manager selects stocks using proprietary equity research. Stocks are pur-
chased that are expected to have earnings growth potential that may not be rec-
ognized by the investment community. The manager selects stocks without regard
to any pre- defined industry or sector selection criteria.
The manager looks for companies experiencing:
. above-average growth relative to their peers or the general economy; and
. positive change due to new product developments, improved regulatory environ-
ment or a new management team.
The Fund is non-diversified, which means it can take larger positions in a
smaller number of issuers. Based upon its current size and strategy, the Fund
invests in 35 to 75 stocks, with at least 65% of its assets in mid cap compa-
nies. The Fund normally has 15% or less of its assets in cash and cash equiva-
lents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), foreign equity securities of developed countries, and
certain derivatives (investments whose value is based on indices or other
securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Janus Capital Corporation
100 Fillmore Street
Denver, Colorado 80206
Managing since 1970
Managed approximately $248 billionin assets at the end of 1999
FUND MANAGER
James P. Goff
- -----------------
Executive Vice President of subadviser
Managed fund since 1996 (its inception)
Joined subadviser in 1988
Began career in 1985
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 16.66%
1998 39.07%
1999 118.31%
Best quarter: up 59.33%, fourth quarter 1999 Worst quarter: down 12.96%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 118.31% 51.29%
Life of fund 42.19% 25.51%
</TABLE>
Index:Russell Mid Cap(TM) Growth Index
(1)Began operations on May 1, 1996.
28
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Non-Diversified Fund Risk: The Fund's larger position in individual issuers and
in a smaller number of issuers could produce more volatile performance relative
to more diversified funds. The less diversified a fund's holdings are, the more
likely it is that a specific security's poor performance will hurt the fund
significantly.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "mid cap" approach
carries the risk that in certain markets mid cap stocks will underperform small
cap and large cap stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could be- come harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share Interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.22 $ 11.93 $ 15.12
Income from investment operations:
Net investment income (loss) 0.05 (0.02) (0.09) (0.19)
Net realized and unrealized gain
(loss) on investments* 0.22 1.73 4.75 17.70
Total from investment operations 0.27 1.71 4.66 17.51
Less distributions:
Distributions from net investment
income and capital paid in (0.05) -- (0.15) --
Distributions from net realized gain
on investments sold -- -- (1.32) (3.41)
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions (0.05) -- (1.47) (3.41)
Net asset value, end of period $ 10.22 $ 11.93 $ 15.12 $ 29.22
Total investment return 2.69% 16.66% 39.07% 118.31%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $16,492 $40,235 $94,085 $452,937
Ratio of expenses to average net
assets (%)*** 1.10% 1.10% 1.10% 0.93%
Ratio of net investment income (loss)
to average net assets (%) 0.92% (0.26)% (0.64)% (0.68)%
Turnover rate (%) 71.25% 124.04% 137.01% 106.06%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.34%, 1.42% and 1.13% for the
years ended December 31, 1996, 1997, and 1998, respectively.
29
<PAGE>
Fundamental Mid Cap Growth Fund
GOAL AND STRATEGY
This is a mid cap stock fund with a growth emphasis that seeks long-term growth
in capital.
The Fund invests primarily in the common stocks of mid-sized U.S. companies
that are believed to offer above-average potential for growth in revenues and
earnings.
The manager selects stocks using both proprietary equity research and external
consensus earnings forecasts. Stocks are purchased that are believed to offer:
. High rate of sustainable earnings growth of 15% plus,
. revenue growth generated by operating results (unit volume); and
.sustainable revenue growth of 10% plus.
The manager looks for companies with:
. innovative management and strong leadership positions in unique market
niches;
. undiscovered and undervalued emerging growth opportunities; and,
. new products and services.
The Fund's industry exposures are a result of stock selection as opposed to
predetermined allocations.
The Fund normally invests in 60 to 80 stocks, with at least 65% (usually high-
er) of its assets in mid cap companies. The Fund normally has 5% or less of its
assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
OppenheimerFunds, Inc.
Two World Trade Center
New York, New York, 10048
Managing since 1959
Managed approximately $120 billion
in assets at the end of 1999
FUND MANAGERS
Bruce Bartlett
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1995
Vice President of First of America
Investment Corp. (1986-1995)
James Fullerton Turner II
- -----------------
Assistant Vice President of subadviser
Joined subadviser in 1996
Equity Analyst at First of America
Investment Corp. (1994-1996)
PAST PERFORMANCE
Because this Fund did not have a full year of operations as of December 31,
1999, no year-by-year total returns or average annual total returns can be
shown for this Fund.
30
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "mid cap" approach
carries the risk that mid cap stocks will underperform large cap and small cap
stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C>
Period ended December 31: 1999**
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment income (loss) (0.02)
Net realized and unrealized gain (loss) on investments* 5.34
Total from investment operations 5.32
Less distributions:
Distributions from net investment income and capital paid in --
Distributions from net realized gain on investments sold (0.90)
Distributions in excess of income, capital paid in & gains --
Total distributions (0.90)
Net asset value, end of period $14.42
Total investment return 54.57%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $9,175
Ratio of expenses to average net assets (%)*** 0.95%
Ratio of net investment income (loss) to average net assets (%) (0.55)%
Turnover rate (%) 61.66%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations August 31, 1999.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.09% for the year ended Decem-
ber 31.
31
<PAGE>
Real Estate Equity Fund
GOAL AND STRATEGY
This is a real estate stock fund that seeks above-average income and long-term
growth in capital.
The Fund invests primarily in:
. equity securities of real estate investment trusts (REITs) that own commer-
cial and multi-family residential real estate; and
. equity securities of real estate operating companies (i.e., companies with at
least 75% of revenue, income or fair asset value derived from real estate).
The manager selects real estate stocks using a combination of proprietary,
equity research and quantitative tools. Real estate stocks are purchased that
are undervalued relative to the stock's history and the market and have improv-
ing earnings growth prospects.
The manager looks for real estate stocks with:
. proven track records,
. strong management whose interests are aligned with shareholders,
. attractive real estate holdings, and
. a flexible financial structure.
The manager employs risk control techniques to maintain risk, style and indus-
try characteristics similar to the public equity real estate market. The Fund
normally invests in 30 to 60 securities. The Fund normally has 5% or less of
its assets in cash and cash equivalents.
The Fund also may purchase other types of securities, for example: American
Depository Receipts (ADRs), convertible securities, and equity securities of
non-real estate businesses whose real estate holdings are significant in rela-
tion to their market capitalization.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
Fund Managers
John F. DeSantis
- -----------------
Executive Vice President of subadviser
Managed fund since 1999
Joined subadviser in 1982
Thomas D. Spicer
- -----------------
Vice President of subadviser
Managed fund since 1999
Joined team in 1996
Joined subadviser in 1991
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1990 -21%
1991 33.50%
1992 16.00%
1993 17.29%
1994 2.86%
1995 12.31%
1996 33.07%
1997 17.22%
1998 -16.71%
1999 -1.69%
Best quarter: up 25.82%, first quarter 1991 Worst quarter: down 17.37%, third
quarter 1990
Average annual total returns -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -1.69% -3.19%
5 years 7.48% 8.30%
10 years 7.73% 4.11%
Life of fund 7.71% 4.52%
</TABLE>
Index: Wilshire Real Estate Securities Index
32
<PAGE>
MAIN RISKS
Primary
Real Estate Securities Risk: Real estate investment trusts (REITs) or other
real estate-related equity securities may be affected by changes in the value
of the underlying property owned by the trust. Mortgage REITs may be affected
by the quality of any credit extended. Other potential risks include the possi-
bility of failing to qualify for tax-free pass-through of income under the
Internal Revenue Code or failing to maintain exemption under the Investment
Company Act of 1940.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Secondary
None
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated):
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning of
period $11.16 $ 11.70 $ 14.64 $ 15.91 $ 12.46
Income from investment
operations:
Net investment income (loss) 0.77 0.76 0.77 0.77 0.78
Net realized and unrealized
gain (loss) on investments* 0.54 2.97 1.68 (3.38) (0.99)
Total from investment
operations 1.31 3.73 2.45 (2.61) (0.21)
Less distributions:
Distributions from net
investment income and capital
paid in (0.77) (0.76) (0.77) (0.70) (0.78)
Distributions from net realized
gain on investments sold (0.00) (0.03) (0.41) (0.14) --
Distributions in excess of
income, capital paid in &
gains -- -- -- -- --
Total distributions $(0.77) $ (0.79) $ (1.18) $ (0.84) (0.78)
Net asset value, end of period $11.70 $14.64 $ 15.91 $ 12.46 $ 11.47
Total investment return 12.31% 33.07% 17.22% (16.71)% (1.69)%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $9,301 $10,325 $12,830 $12,263 $11,000
Ratio of expenses to average net
assets (%) 0.73% 0.69% 0.69% 0.69 % 0.70%
Ratio of net investment income
(loss) to average net assets
(%) 6.85% 6.14% 5.12% 5.48 % 6.38%
Turnover rate (%) 19.81% 18.37% 20.04% 22.69 % 12.95%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chase and withdrawals of shares in relation to the fluctuation in market val-
ues of the fund.
33
<PAGE>
Small/Mid Cap CORE Fund
GOAL AND STRATEGY
This is a small/mid cap stock fund that seeks long-term growth in capital.
The Fund invests primarily in a diversified mix of the common stocks of small
and mid-sized U.S. companies that are believed to offer:
. favorable prospects for increasing dividends and capital appreciation (i.e.,
"value" companies); and
. above-average potential for growth in revenues and earnings (i.e. "growth"
companies).
The manager selects stocks using a combination of quantitative techniques and
equity research. The manager employs an investment process known as CORE, "Com-
puter Optimized, Research-Enhanced," that employs a proprietary quantitative
model. Stocks are purchased that have strong expected earnings growth and
momentum and better valuation and risk characteristics than the Russell
2500(TM) Index. The Fund is managed using risk control techniques to maintain
risk, style, capitalization and industry characteristics similar to the Russell
2500(TM) Index.
The Fund normally invests in 200 to 600 stocks, with at least 65% (usually
higher) of the Fund's assets in small cap and mid cap companies. The Fund nor-
mally has 10% or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Standard & Poor's Depository Receipts (SPDRs), and cer-
tain derivatives (investments whose value is based on indices or other securi-
ties).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Goldman Sachs Asset Management,
A unit of the Investment Management Division of Goldman Sachs and Co.
32 Old Slip
New York, New York 10005
Managing since 1988
Managed approximately $259 billion in assets at the end of 1999
FUND MANAGERS
Kent A. Clark
- -----------------
Managing Director of subadviser
Joined subadviser in 1992
Robert C. Jones
- -----------------
Managing Director of subadviser
Joined subadviser in 1989
Victor H. Pinter
- -----------------
Vice President of subadviser
Joined subadviser in 1990
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1999 20.54%
Best quarter: up 17.85%, second quarter 1999 Worst quarter: down 20.01%, fourth
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 20.54% 24.15%
Life of fund 5.13% 7.38%
</TABLE>
Index: Russell 2500(TM) Index
(1) Began operations on May 1, 1998.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
34
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "small/mid cap" approach carries the risk that in certain markets
small/mid cap stocks will underperform large cap stocks.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. The
Fund had unusually high turnover in 1999 and is expected to experience similar
turnover in 2000. This higher than expected turnover is due to (i) the rela-
tively small size of the Fund, which magnifies the effect of contributions and
redemptions, and (ii) the high volatility of the market, which in 1999 resulted
in the subadviser implementing procedures to reduce the Fund's tracking risk.
Normally, the Fund's turnover rate will be less than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $10.00 $ 9.02
Income from investment operations:
Net investment income (loss) -- 0.02
Net realized and unrealized gain (loss) on investments* (0.98) 1.77
Total from investment operations (0.98) 1.79
Less distributions:
Distributions from net investment income and capital paid
in -- (0.03)
Distributions from net realized gain on investments sold -- (0.96)
Distributions in excess of income, capital paid in & gains -- --
Total distributions -- (0.99)
Net asset value, end of period $ 9.02 $ 9.82
Total investment return (9.81)% 20.54%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $ 556 $ 840
Ratio of expenses to average net assets (%)*** 1.05 % 0.94 %
Ratio of net investment income (loss) to average net assets
(%) (0.01)% 0.30 %
Turnover rate (%) 60.51 % 109.12 %
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 4.55% and 2.24% for the years
ended December 31, 1998, and 1999, respectively.
35
<PAGE>
Small/Mid Cap Value Fund
GOAL AND STRATEGY
This is a small/mid cap stock fund with a value emphasis that seeks long-term
growth in capital.
The Fund invests primarily in a diversified mix of the common stocks of small
and mid-sized U.S. companies that are believed to offer favorable prospects for
capital appreciation.
The manager selects stocks using a combination of proprietary quantitative
screening tools and fundamental equity research. The manager selects stocks
that have:
. attractive valuation characteristics, using measures such as low price-
/earnings and price/book ratios;
. strong business health, as measured by overall efficiency and profitability
(return on assets and/or equity); and
. business momentum, defined as a catalyst that the manager believes will
trigger a near-term price increase.
The Fund is broadly diversified by sector. The Fund normally invests in 70 to
150 stocks, with at least 65% (usually higher) of its assets in small and mid
cap companies. The Fund normally has 5% or less of its assets in cash and cash
equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
The Boston Company Asset
Management, LLC
One Boston Place
Boston, Massachusetts 02108
Managing since 1970
Managed approximately $24 billion
in assets at the end of 1999
FUND MANAGERS
Management by investment team
overseen by:
Peter I. Higgins, CFA
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1988
PAST PERFORMANCE
Because this Fund did not have a full year of operations as of December 31,
1999, no year-by-year total returns or average annual total returns can be
shown for this Fund. However, the Appendix to this prospectus contains perfor-
mance information that is relevant to this Fund. The Appendix starts on page
71.
36
<PAGE>
MAIN RISKS
Primary
Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "small/mid cap" approach
carries the risk that in certain markets small/mid cap stocks will underperform
large cap stocks.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C>
Period ended December 31: 1999**
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment income (loss) --
Net realized and unrealized gain (loss) on investments* 0.49
Total from investment operations 0.49
Less distributions:
Distributions from net investment income and capital paid in --
Distributions from net realized gain on investments sold (0.36)
Distributions in excess of income, capital paid in & gains --
Total distributions (0.36)
Net asset value, end of period $10.13
Total investment return 5.08%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $ 550
Ratio of expenses to average net assets (%)*** 1.05%
Ratio of net investment income (loss) to average net assets (%) (0.12)%
Turnover rate (%) 51.97%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on August 31, 1999.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.61% for the year ended Decem-
ber 31.
37
<PAGE>
Small/Mid Cap Growth Fund
GOAL AND STRATEGY
This is a small/mid cap stock fund with a growth emphasis that seeks long-term
growth in capital.
The Fund invests primarily in the common stocks of small and mid-sized U.S.
companies that are believed to offer above-average potential for growth in rev-
enues and earnings.
The manager selects stocks using a combination of proprietary quantitative and
qualitative equity research. Quantitative screening seeks to identify a group
of high-quality companies with above-average growth characteristics relative to
industry peers. Equity research seeks to identify individual companies from
that group with a higher potential for long term earnings growth and capital
appreciation.
The manager buys companies that seem attractive based on a combination of cri-
teria, among others:
. Superior historical earnings growth,
. Prospects for above-average growth,
. Attractive valuations,
. Strong market positions,
. Favorable new products, and
. Superior management.
The Fund is broadly diversified by industry sector. The Fund normally invests
in 60 to 100 stocks, with at least 65% (usually higher) of its assets in small
and mid cap companies. The Fund normally has 5% or less of its assets in cash
and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109
Managing, with predecessors, since 1928
Managed approximately $236 billion in assets at the end of 1999
Managing Fund since May 1, 1999
FUND MANAGER
Frank V. Wisneski
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1968
ASSOCIATE FUND MANAGER
John J. Harrington, CFA
- -----------------
Vice President of subadviser
Joined subadviser in 1995
Portfolio Manager at Munder Capital Management (1991-1994)
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1995 1996 1997 1998 1999
35.96% 30.33% 3.44% 5.61% 5.15%
Best quarter: up 21.59%, fourth quarter 1998 Worst quarter: down 21.48%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 5.15% 57.36%
5 Years 15.27% 29.03%
Life of fund 13.50% 25.49%
</TABLE>
Index:Russell Mid Cap(TM) Growth Index (for periods through April 30, 1999)
Russell 2500(TM) Growth Index (for periods after April 30, 1999)
(1)Began operations on May 1, 1994.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
38
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its 39 peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "small/mid cap"
approach carries the risk that in certain markets small/mid cap stocks will
underperform large cap stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. The
Fund had a high turnover rate in 1999 because of a change in management and a
change in the Fund's investment strategy. These changes required a restructur-
ing of the Fund's investments. In future years, the Fund's turnover rate will
normally be less than 100%.
Secondary
None
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Small/Mid Cap Growth Fund
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning of
period $ 9.94 $ 13.18 $ 16.52 $ 15.39 $15.94
Income from investment
operations:
Net investment income (loss) (0.01) 0.02 0.01 (0.02) (0.07)
Net realized and unrealized
gain (loss) on investments* 3.58 3.99 0.56 0.88 0.74
Total from investment
operations 3.57 4.01 0.57 0.86 0.67
Less distributions:
Distributions from net
investment income and capital
paid in (0.01) (0.02) (0.01) -- (0.17)
Distributions from net realized
gain on investments sold (0.32) (0.65) (1.69) (0.31) (2.41)
Distributions in excess of
income, capital paid in & gains -- -- -- -- --
Total distributions $(0.33) $ (0.67) $ (1.70) $ (0.31) (2.58)
Net asset value, end of period $13.18 $ 16.52 $ 15.39 $ 15.94 $ 14.03
Total investment return 35.96% 30.33% 3.44% 5.61% 5.15%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $4,133 $11,749 $13,884 $12,129 $12,963
Ratio of expenses to average net
assets (%)** 1.00% 0.84% 0.85% 0.89% 0.85%
Ratio of net investment income
(loss) to average net assets
(%) (0.11)% 0.18% 0.09% (0.11)% (0.27)%
Turnover rate (%) 139.31% 217.84% 331.19% 162.21% 172.58%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made, the expense ratio would have been 1.91% for the year ended Decem-
ber 31, 1995.
<PAGE>
Small Cap Value Fund
GOAL AND STRATEGY
This is a small cap stock fund with a value emphasis that seeks long-term
growth in capital.
The Fund invests primarily in a diversified mix of the common stocks of small
U.S. companies that are believed to offer favorable prospects for increasing
dividends and capital appreciation.
The manager applies a combination of quantitative techniques and equity
research to identify the best values among small company stocks.
Stocks are evaluated based on multiple factors, including:
. earnings-to-price ratios;
. earnings estimate revisions;
. relative price strength; and
. share issuance/buyback.
The Fund is managed using risk control techniques to maintain risk, style, cap-
italization and industry characteristics similar to the Russell 2000(R) Value
Index. The Fund normally invests in 150 to 250 stocks, with at least 65% (usu-
ally higher) of its assets in small cap companies. The Fund normally has 5% or
less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
INVESCO, Inc.
101 Federal Street
Boston, Massachusetts 02110
Managing since 1957
Managed approximately $92 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Jeremy S. Lefkowitz
- -----------------
Managing Director of subadviser
Joined subadviser in 1998
Portfolio Manager, Chancellor
Capital Management and its predecessor (1982-1998)
Began career in 1974
Daniel A. Kostyk, CFA
- -----------------
Vice President of subadviser
Joined subadviser in 1995
Began career in 1991
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 25.57%
1998 -5.96%
1999 -3.43%
Best quarter: up 18.11%, second quarter 1997 Worst quarter: down 21.06%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/98(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -3.43% 1.23%
Life of fund 6.46% 8.34%
</TABLE>
Index:50% Russell 2000(R) Index/50% Russell 2000(R) Value Index (for periods
through
September 30, 1999)
Russell 2000(R) Value Index (for periods after September 30, 1999)
(1)Began operations on May 1, 1996.
40
<PAGE>
MAIN RISKS
Primary
Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "small cap" approach car-
ries the risk that in certain markets small cap stocks will underperform mid
cap and large cap stocks.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.73 $ 12.40 $ 11.59
Income from investment operations:
Net investment income (loss) 0.07 0.08 0.07 0.09
Net realized and unrealized gain (loss)
on investments* 0.96 2.66 (0.81) (0.50)
Total from investment operations 1.03 2.74 (0.74) (0.41)
Less distributions:
Distributions from net investment
income and capital paid in (0.07) (0.08) (0.07) (0.07)
Distributions from net realized gain on
investments sold (0.23) (0.99) -- (0.01)
Distributions in excess of income,
capital paid in & gains -- -- -- (0.18)
Total distributions (0.30) (1.07) (0.07) (0.26)
Net asset value, end of period $ 10.73 $ 12.40 $ 11.59 $ 10.92
Total investment return 10.33% 25.57% (5.96)% (3.43)%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $10,541 $43,261 $64,095 $68,900
Ratio of expenses to average net assets
(%)*** 1.05% 1.05% 1.05% 0.95%
Ratio of net investment income (loss) to
average net assets (%) 1.15% 0.68% 0.63% 0.78%
Turnover rate (%) 66.31% 126.10% 100.83% 117.33%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.06%, 1.30%, 1.08% and 0.96%
for the years ended December 31, 1996, 1997, 1998, and 1999, respectively.
41
<PAGE>
Small Cap Growth Fund
GOAL AND STRATEGY
This is a small cap stock fund with a growth emphasis that seeks long-term
growth in capital.
The Fund invests primarily in a diversified mix of the common stocks of small
U.S. companies that are believed to offerabove-average potential for growth in
revenues and earnings.
The manager selects stocks using proprietary equity research. Stocks are pur-
chased that are expected to have rapid earnings growth that is not yet widely
recognized by the investment community.
The manager looks for companies with:
. demonstrated annual 20% earnings growth over 3 years and/or similar future
growth expectations;
. dominant market niche or poised to become market leaders; and
. high quality senior management with coherent business strategies.
The Fund is highly diversified by sector and number of individual stocks. The
Fund's sector weightings are broadly diversified and managed relative to those
of the Russell 2000(R) Growth Index. The Fund normally invests in 150 to 220
stocks, with at least 65% (usually higher) of its assets in small cap compa-
nies. The Fund normally has 5% or less of its assets in cash and cash equiva-
lents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
Owned by John Hancock
Managing since 1968
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Bernice S. Behar, CFA
- -----------------
Senior Vice President of subadviser
Managed fund since 1996 (its inception)
Joined subadviser in 1991
Began career in 1986
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 1998 1999
14.26% 14.49% 70.38%
Best quarter: up 45.57%, fourth quarter 1999 Worst quarter: down 21.55%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 70.38% 43.09%
Life of fund 24.25% 13.65%
</TABLE>
Index: Russell 2000(R) Growth Index
(1)Began operations on May 1, 1996.
42
<PAGE>
MAIN RISKS
Primary
Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa-
nies may be subject to more erratic price movements than investment in large
established companies.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results.
The Fund could underperform its peers or lose money if the manager's investment
strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "small cap" approach
carries the risk that in certain markets small cap stocks will underperform mid
cap and large cap stocks.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 9.93 $11.34 $ 12.99
Income from investment operations:
Net investment income (loss) 0.01 (0.02) (0.05) (0.21)
Net realized and unrealized gain (loss)
on investments* (0.06) 1.44 1.70 9.06
Total from investment operations (0.05) 1.42 1.65 8.85
Less distributions:
Distributions from net investment income
and capital paid in (0.02) (0.01) -- --
Distributions from net realized gain on
investments sold -- -- -- (2.72)
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions $ (0.02) $ (0.01) -- (2.72)
Net asset value, end of period $ 9.93 $ 11.34 $ 12.99 $19.12
Total investment return (0.50)% 14.26% 14.49% 70.38%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $20,633 $48,761 $74,849 $179,570
Ratio of expenses to average net assets
(%)*** 1.00% 1.00% 1.00% 0.89%
Ratio of net investment income (loss) to
average net assets (%) 0.12% (0.28)% (0.65)% (0.70)
Turnover rate (%) 50.93% 86.23% 101.16% 113.11%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuations in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made, the expense ratio would have been 1.55%, 1.12% and 1.05% for the
years ended December 31, 1996, 1997, and 1998, respectively.
43
<PAGE>
Global Equity Fund
GOAL AND STRATEGY
This is a global stock fund that seeks long-term growth in capital.
The Fund primarily invests in a diversified mix of common stocks of:
. large established U.S. companies; and
. large established foreign companies located in countries throughout the
world, including developed, newly industrialized, and emerging countries.
The manager makes ongoing decisions about the mix between U.S. and foreign
stocks. The manager has a target mix of 40% in U.S. stocks and 60% in foreign
stocks, but actively manages the mix within (+/-) 20 percentage points of the
target mix.
The manager uses global economic and industry analysis to identify global eco-
nomic and industry themes. The manager looks for companies that will benefit
from:
. global economic trends;
. promising technologies or products; and
. specific country opportunities resulting from changing geopolitical, currency
or economic relationships.
The manager purchases stocks of companies that are:
. in growth industries;
. efficient producers; and
. undervalued relative to long-term growth potential.
The Fund invests:
. in at least 3 different countries (including the U.S.), but normally in more
than 15 countries; and
. no more than 10% of its assets in emerging markets stocks.
Although the Fund may employ foreign currency hedging techniques, the Fund nor-
mally maintains the currency exposure of the underlying equity investments.
The Fund normally invests in 90 to 120 stocks, with at least 65% (usually high-
er) of its assets in large cap companies. The Fund normally has 5% or less of
its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Global Depository Receipts (GDRs), European Depository
Receipts (EDRs), and certain derivatives (investments whose value is based on
indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents or invest-
ing 100% of its assets in U.S. companies--that are inconsistent with the Fund's
primary investment strategy. In taking those measures, the Fund may not achieve
its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Managing since 1919
Managed approximately $290 billion in assets at the end of 1999
FUND MANAGERS
William E. Holzer
- -----------------
Lead Portfolio Manager of subadviser
Joined subadviser in 1980
Diego Espinosa
- -----------------
Vice President of subadvisor
Joined team in 1997
Joined subadviser in 1996
Research Analyst at Morgan
Stanley & Company (1994-1996)
Nicholas Bratt
- -----------------
Portfolio Manager of subadviser
Joined team in 1993
Joined subadviser in 1976
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1999 24.19%
Best quarter: up 15.94%, fourth quarter 1999 Worst quarter: down 12.39%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 24.19% 25.34%
Life of fund 13.48% 19.92%
</TABLE>
Index:MSCI World Index
(1)Began operations on May 1, 1998.
44
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than if it
invested exclusively in developed or newly-industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Market Allocation Risk: The allocation of the Fund's assets among domestic and
international equity regions may (1) reduce the Fund's holdings in a region
whose value then increases unexpectedly, or (2) increase the Fund's holdings
in a region just prior to its experiencing a loss of value.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31; 1998** 1999
Net asset value, beginning of period $ 10.00 $ 9.87
Income from investment operations:
Net investment income (loss) 0.07 0.10
Net realized and unrealized gain (loss) on investments* (0.13) 2.27
Total from investment operations (0.06) 2.37
Less distributions:
Distributions from net investment income and capital paid
in (0.07) (0.07)
Distributions from net realized gain on investments sold -- --
Distributions in excess of income, capital paid in & gains -- (0.04)
Total distributions (0.07) (0.11)
Net asset value, end of period $ 9.87 $ 12.13
Total investment return (0.55)% 24.19%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $15,281 $22,311
Ratio of expenses to average net assets (%)*** 1.15% 1.04%
Ratio of net investment income (loss) to average net assets
(%) 1.11% 0.96%
Turnover rate (%) 33.17% 49.51%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains
and losses in the fund securities for the period because of the timing of
purchases and withdrawals of shares in relation to the fluctuation in
market values of the fund.
** Fund began operations May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.47% and 1.26% for the years
ended December 31, 1998, and 1999, respectively.
45
<PAGE>
Global Balanced Fund
(Formerly International Balanced Fund)
GOAL AND STRATEGY
This is a non-diversified global balanced stock and bond fund that seeks long-
term growth in income and capital.
The Fund invests primarily in a mix of:
. U.S. and foreign common stocks of large companies within developed markets;
and
. U.S. and foreign investment grade bonds of issuers within developed markets
with maturities generally greater than 12 months.
The manager makes ongoing decisions about the mix between stocks and bonds. The
manager has a target mix of 65% stocks and 35% bonds, but actively manages the
mix within (+/-) 10 percentage points of the target mix.
The Fund invests:
. in at least 3 different countries, but normally invests in 10 to 20 coun-
tries; and
. no more than 10% of its assets in emerging market stocks and bonds.
The manager selects stocks and bonds using fundamental value analysis to iden-
tify fairly priced investments with long-term sustainable cash flows. The man-
ager determines fundamental value by focusing on:
. current market prices relative to fundamental values;
. broad-based indices for stocks, bonds, and markets; and
. economic variables such as productivity, inflation and global competitive-
ness.
The Fund is non-diversified, which means that it can take larger positions in a
smaller number of issuers. However, the Fund normally invests in 125 to 250
stocks within the stock portion. The Fund normally has 10% or less of its
assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Global Depository Receipts (GDRs), European Depository
Receipts (EDRs), high yield bonds, and certain derivatives (investments whose
value is based on indices or other securities).
The manager actively uses derivatives, such as futures and forwards, to manage
the Fund's average maturity relative to the Salomon Brothers World Government
Bond Index Unhedged and to implement foreign currency strategies. Currency man-
agement strategies are primarily used for hedging purposes and to protect
against anticipated changes in foreign currency exchange rates.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Brinson Partners, Inc.
209 South LaSalle Street
Chicago, Illinois 60604
Managing since 1974
Managed approximately $161 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Jeffrey Diermeier, CFA
- -----------------
Managing Director, Global Equities, of subadviser
Joined subadviser in 1989
Began career in 1977
Denis S. Karnosky, Ph.D.
- -----------------
Managing Director, Asset Allocation/Currency, of subadviser
Joined subadviser in 1989
Began career in 1967
Norman D. Cumming
- -----------------
Managing Director, Global Fixed Income, of subadviser's affiliate UBS Brinson,
Limited
Joined subadviser in 1989
Began career in 1977
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 2.65%
1998 17.99%
1999 5.11%
Best quarter: up 13.06%, fourth quarter 1998 Worst quarter: down 4.49%, fourth
quarter 1997
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 5.11% 15.42%
Life of fund 8.71% 9.88%
</TABLE>
Index: 65% MSCI World Index (Ex US) (Net of Withholding Taxes from a U.S. Tax
Perspective)/35% Salomon Brothers Non-US Government Bond Index Unhedged
(for periods through April 30, 2000)
65% MSCI World Index (Net of Withholding Taxes From a U.S. Tax
Perspective)/35% Salomon Brothers World Government Bond Index Unhedged
(for periods after April 30, 2000)
(1)Began operations on May 1, 1996.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
46
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than if it
invested exclusively in developed or newly-industrialized countries.
Non-Diversified Fund Risk: The Fund's larger position in foreign government
securities could produce more volatile performance relative to funds with
smaller positions. The less diversified a fund's holdings are, the more likely
it is that a specific security's poor performance will hurt the fund signifi-
cantly.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "large/mid cap" approach
carries the risk that large/mid cap stocks will underperform small cap stocks.
Market Allocation Risk: The allocation of the Fund's assets between the major
asset classes (i.e., stocks and bonds) may (1) reduce the Fund's holdings in a
class whose value then increases unexpectedly, or (2) increase the Fund's hold-
ings in a class just prior to its experiencing a loss of value.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Trust would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Turnover Risk. In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
High Yield Bond Risk. Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become harder
to value or to sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Global Balanced Fund (formerly
International Balanced Fund)--Period
ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.39 $ 10.11 $ 11.12
Income from investment operations:
Net investment income (loss) 0.24 0.33 0.34 0.29
Net realized and unrealized gain (loss)
on investments* 0.41 (0.05) 1.44 0.25
Total from investment operations 0.65 0.28 1.78 0.54
Less distributions:
Distributions from net investment income
and capital paid in (0.24) (0.34) (0.35) (0.35)
Distributions from net realized gain on
investments sold (0.02) (0.22) (0.42) (0.44)
Distributions in excess of income,
capital paid in & gain -- -- -- (0.16)
Total distributions $ (0.26) $ (0.56) $ (0.77) $ (0.95)
Net asset value, end of period $ 10.39 $ 10.11 $ 11.12 $ 10.71
Total investment return 6.73% 2.65% 17.99% 5.11%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $24,098 $25,420 $30,416 $31,577
Ratio of expenses to average net assets
(%)*** 1.10% 1.10% 1.10% 1.00%
Ratio of net investment income (loss) to
average net assets (%) 3.59% 3.18% 3.20% 2.73%
Turnover rate (%) 22.21% 81.04% 103.55% 131.21%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.44%, 1.56%, 1.82%, and 1.31%
for the years ended December 31, 1996, 1997, 1998, and 1999, respectively.
47
<PAGE>
International Equity Index Fund
GOAL AND STRATEGY
This is an international stock fund that seeks to track the performance of
broad-based equity indices of foreign companies in developed and emerging mar-
kets.
The Fund is managed relative to a target mix of 90% in the MSCI EAFE GDP Index
and 10% in the MSCI EMF Index. The EAFE GDP Index, known as the Europe Austral-
asia and Far East Index, includes foreign companies in developed markets, with
country index weights based upon a country's Gross Domestic Product (GDP). The
EMF Index, known as the Emerging Markets Free Index, includes foreign companies
in emerging markets, with country index weights based upon a country's market
capitalization.
The manager employs a passive management strategy using quantitative techniques
to invest in a representative sample of stocks in the Index. The manager
selects stocks in an attempt to track, as closely as possible, the characteris-
tics of the Index, including country and sector weights. The Fund normally
invests in 400 to 1,200 stocks.
The Index composition changes from time to time. The manager will reflect those
changes as soon as practical.
The Fund is normally fully invested. The manager may invest in stock index
futures to maintain market exposure and manage cash flow. Although the Fund may
employ foreign currency hedging techniques, the Fund normally maintains the
currency exposure of the underlying equity investments.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Global Depository Receipts (GDRs), European Depository
Receipts (EDRs), cash equivalents, and certain derivatives (investments whose
value is based on indices or other securities).
Note: "MSCI EAFE GDP Index" and "MSCI EMF Index" are the exclusive property of
Morgan Stanley & Co., Incorporated and are registered service marks of Morgan
Stanley Capital International.
- --------------------------------------------------------------------------------
SUBADVISER
Independence International Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1986
Managed approximately $2.2 billion in assets at the end of 1999
FUND MANAGERS
Bradford S. Greenleaf, CFA
- -----------------
Senior Vice President, Managing Director,
of subadviser
Joined team in 2000
Joined subadviser in 1994
Vice President, Franklin Portfolio Associates, Inc. (1986-1994)
David P. Nolan, CFA
- -----------------
Vice President of subadviser
Joined subadviser in 1996
Portfolio manager Boston
International Advisors, Inc. (1989-1996)
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1990 -7.80%
1991 23.40%
1992 -1.80%
1993 32.10%
1994 -6.25%
1995 8.01%
1996 9.19%
1997 -5.03%
1998 20.82%
1999 30.87%
Best quarter: up 20.91%, fourth quarter 1998 Worst quarter: down 14.75%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 30.87% 30.87%
5 years 12.11% 14.36%
10 years 9.39% 7.90%
Life of fund 9.72% 8.55%
</TABLE>
Index: MSCI EAFE Index (for periods through April 30, 1998)
MSCI EAFE GDP Index (for periods from May 1, 1998 through June 30, 1999)
90% MSCI EAFE GDP Index/10% MSCI EMF Index (for periods after June 30,
1999)
48
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than if it
invested exclusively in developed or newly-industrialized countries.
Index Management Risk: Certain factors such as the following may cause the
Fund to track the Index less closely:
. The securities selected by the manager may not be fully representative of
the Index.
. Transaction expenses of the Fund may result in the Fund's performance being
different than that of the Index.
. The size and timing of the Fund's cash flows may result in the Fund's per-
formance being different than that of the Index.
Also, index funds like this one will have more difficulty in taking defensive
positions in abnormal market conditions.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices.
Stocks tend to go up and down in value more than bonds. If the Fund's invest-
ments are concentrated in certain sectors, the Fund's performance could be
worse than the overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures
and swaps) can produce disproportionate gains or losses. They are generally
considered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning
of period $ 14.62 $ 15.61 $ 16.83 $ 15.20 $ 15.56
Income from investment
operations:
Net investment income
(loss) 0.17 0.21 0.13 0.23 0.21
Net realized and
unrealized gain (loss) on
investments* 0.99 1.22 (0.97) 2.91 4.51
Total from investment
operations 1.16 1.43 (0.84) 3.14 4.72
Less distributions:
Distributions from net
investment income and
capital paid-in (0.17) (0.21) (0.13) (0.23) (0.21)
Distributions from net
realized gain on
investments sold -- -- (0.66) (2.55) (0.38)
Distributions in excess of
income, capital paid in &
gains -- -- -- -- (0.05)
Total distributions (0.17) (0.21) (0.79) (2.78) (0.64)
Net asset value, end of
period $ 15.61 $ 16.83 $ 15.20 $ 15.56 $19.64
Total investment return 8.01% 9.19% (5.03)% 20.82% 30.87%
Ratios and supplemental
data
Net assets, end of period
(000s omitted) $126,803 $155,753 $152,359 $173,137 $244,017
Ratio of expenses to
average net assets (%)** 0.84% 0.76% 0.79% 0.56% 0.31%
Ratio of net investment
income (loss) to average
net assets (%) 1.34% 1.30% 0.78% 1.45% 1.26%
Turnover rate (%) 65.82% 92.03% 83.13% 158.63% 19.01%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains
and losses in the fund securities for the period because of the timing of
purchases and withdrawals of shares in relation to the fluctuation in
market values of the fund.
** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 0.87%, 0.63% and, 0.38% for
the years ended December 31, 1995, 1998, and 1999, respectively.
49
<PAGE>
International Equity Fund
GOAL AND STRATEGY
This is an international stock fund that seeks long-term growth in capital.
The Fund primarily invests in a diversified mix of common stocks of large
established and medium-sized foreign companies located primarily in developed
countries outside of the U.S.
The manager selects stocks using proprietary equity research that identifies
companies having:
. strong market positions within their industry,
. management with a history of excellence focusing on core businesses,
. above average return on capital within their industry, and
. demonstrated ability to create long-term shareholder value.
The manager determines the allocation among regions and countries using a com-
bination of qualitative and quantitative inputs, including:
. quantitative models to rank the relative attractiveness of each
country/region based on valuation, credit risk and momentum, and
. qualitative assessment of regional portfolio managers to adjust model
results.
The Fund's industry exposures are largely the result of stock selection,
although the Fund maintains broad industry representation. The Fund is managed
using risk control techniques that maintain overall regional diversification.
The Fund may either (i) employ foreign currency hedging techniques in order to
maintain a neutral currency position to the benchmark or (ii) maintain the cur-
rency exposure of the underlying equity investments.
The Fund invests in at least 3 different countries, but normally invests in 10
to 20 countries.
The Fund will invest no more than 10% of its assets in emerging market stocks.
The Fund normally invests in 120 to 180 stocks and normally has 10% or less of
its assets in cash and cash equivalents.
The Fund also may purchase other types of securities, for example: American
Depository Receipts (ADRs), Global Depository Receipts (GDRs), European Deposi-
tory Receipts (EDRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Goldman Sachs Asset Management,
A unit of the Investment Management Division of Goldman, Sachs & Co.
32 Old Slip
New York, New York 10005
Managing since 1988
Managed approximately $259 billion
in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Shogo Maeda
- -----------------
Managing Director of subadviser
Joined subadviser in 1994
Senior Portfolio Manager at Nomura Investment Management, Inc. (1987-1994)
Susan Noble
- -----------------
Managing Director of subadviser
Joined subadviser in 1997
Portfolio Management Director at Fleming Investment Management (1986-1997)
Andrew Orchard
- -----------------
Executive Director of subadviser
Joined subadviser in 1999
Portfolio Manager at Morgan Grenfell
Asset Management (1994-1999)
PAST PERFORMANCE
Because this Fund did not have a full year of operations as of December 31,
1999, no year-by-year total returns or average annual total returns can be
shown for this Fund.
50
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than if it
invested exclusively in developed or newly-industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
Period ended December 31: 1999**
<S> <C>
Net asset value, beginning of period $ 10.00
Income from investment operations
Net investment income (loss) 0.01
Net realized and unrealized gain (loss) on investments* 2.12
Total from investment operations 2.13
Less distributions:
Distributions from net investment income and capital paid in (0.01)
Distributions from net realized gain on investment (0.17)
Distributions in excess of income, capital paid in & gains --
Total distributions (0.18)
Net asset value, end of period $ 11.95
Total investment return 21.49%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $12,430
Ratio of expenses to average net assets (%)*** 1.10%
Ratio of net investment income (loss) to average net assets (%) 0.21%
Turnover rate (%) 26.76%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations August 31, 1999.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.71% for the year ended
December 31.
51
<PAGE>
International Opportunities Fund
GOAL AND STRATEGY
This is an international stock fund that seeks long-term growth in capital.
The Fund primarily invests in a diversified mix of common stocks of large
established and medium-sized foreign companies located throughout the world,
including developed, newly industrialized, and emerging countries.
The manager determines the distribution among countries and regions by using a
combination of fundamental research and economic analysis, emphasizing:
. prospects for relative economic growth between foreign countries;
. expected levels of inflation;
. government policies influencing business conditions; and
. outlook for currency relationships.
The manager selects stocks that have growth characteristics such as:
. leading market position or technological leadership;
. high return on invested capital;
. healthy balance sheets with relatively low debt;
. strong competitive advantage;
. strength of management; and
. earnings growth and cash flow sufficient to support growing dividends.
The Fund invests:
. in at least 3 different countries; and
. no more than 20% of its assets in emerging market stocks.
Although the Fund may employ foreign currency hedging techniques, the Fund nor-
mally maintains the currency exposure of the underlying equity investments.
The Fund normally invests in 200 to 300 stocks in 15 to 20 countries. The Fund
normally has 10% or less of its assets in cash and cash equivalents.
The Fund also may purchase other types of securities, for example: American
Depository Receipts (ADRs), Global Depository Receipts (GDRs), European Deposi-
tory Receipts (EDRs), and certain derivatives (investments whose value is based
on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Rowe Price-Fleming International, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Managing since 1979
Managed approximately $42 billion in assets at the end of 1999
FUND MANAGERS
Management by Investment Advisory Group overseen by:
David J. L. Warren
- -----------------
Portfolio Manager of subadviser
Joined subadvisor in 1983
Began career in 1981
John R. Ford
- -----------------
Portfolio Manager of subadviser
Joined subadvisor in 1982
Began career in 1980
James B. M. Seddon
- -----------------
Portfolio Manager of subadvisor
Joined subadvisor in 1987
Began career in 1987
Mark Bickford-Smith
- -----------------
Portfolio Manager of subadvisor
Joined subadvisor in 1995
Began career in 1985
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 1.95%
1998 15.92%
1999 34.01%
Best quarter: up 24.44%, fourth quarter 1999 Worst quarter: down 13.70%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 34.01% 31.79%
Life of fund 15.38% 14.14%
</TABLE>
Index:MSCI Europe, Australia, Far East (EAFE) Index (for periods through Decem-
ber 31, 1998) MSCI All Country World Index, Excluding U.S. (for periods after
December 31, 1998)
(1)Began operations on May 1, 1996.
52
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, to the extent the Fund invests in emerging market coun-
tries,
it will have a significantly higher degree of foreign risk than if it invested
exclusively in developed or newly-industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.60 $ 10.63 $ 12.21
Income from investment operations:
Net investment income (loss) 0.07 0.10 0.11 0.10
Net realized and unrealized gain (loss)
on investments* 0.60 0.11 1.57 3.95
Total from investment operations 0.67 0.21 1.68 4.05
Less distributions:
Distributions from net investment income
and capital paid in (0.07) (0.10) (0.10) (0.11)
Distributions from net realized gain on
investments sold -- (0.08) -- (0.94)
Distributions in excess of income,
capital paid in & gains -- -- -- (0.04)
Total distributions (0.07) (0.18) (0.10) (1.09)
Net asset value, end of period $ 10.60 $ 10.63 $ 12.21 $ 15.17
Total investment return 6.72% 1.95% 15.92% 34.01%
Ratios and supplemental data
Net assets, end of period (000s omitted) $17,898 $30,631 $64,250 $79,794
Ratio of expenses to average net assets
(%)*** 1.25% 1.22% 1.16% 1.02%
Ratio of net investment income (loss) to
average net assets (%) 0.87% 0.65% 0.89% 0.77%
Turnover rate (%) 5.46% 21.09% 18.67% 34.02%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.76%, 1.57%, 1.46%, and 1.15%
for the years ended December 31, 1996, 1997, 1998, and 1999, respectively.
53
<PAGE>
Emerging Markets Equity Fund
GOAL AND STRATEGY
This is an emerging markets stock fund that seeks long-term growth in capital.
The Fund invests primarily in the stocks of companies in countries having econ-
omies or markets generally considered by the World Bank or United Nations to be
emerging or developing.
In making country allocation decisions, the manager analyzes the global envi-
ronment and selects countries with:
. Improving macroeconomic, political and social trends, and
. attractive valuation levels.
The manager selects stocks using fundamental proprietary research to identify
companies:
. having strong earnings growth potential,
. selling below their intrinsic value, and
. having shareholder-focused management, dominant products, and well estab-
lished distribution channels.
The Fund normally invests:
. in at least 15 emerging market countries, and
. no more than 30% of its assets in any single country.
The Fund normally invests in 100 to 250 stocks in 20 to 25 countries. The Fund
normally has 10% or less of its assets in cash and cash equivalents.
Although the Fund may employ foreign currency hedging techniques, the Fund
normally maintains the currency exposure of the underlying equity investments.
The Fund may purchase other types of securities, for example: American Deposi-
tory Receipts (ADRs), Global Depository Receipts (GDRs), European Depository
Receipts (EDRs), and certain derivatives (investments whose value is based on
indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Morgan Stanley Dean Witter Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Managing since 1975
Managed approximately $184 billion in assets at the end of 1999
Managing Fund since August 1, 1999
FUND MANAGERS
Robert L. Meyer, CFA
- -----------------
Managing Director of subadvisor
Joined subadviser in 1989
Andy Skov
- -----------------
Managing Director of subadviser
Joined subadviser in 1994
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1999
81.37%
Best quarter: up 50.45%, fourth quarter 1999 Worst quarter: down 20.40%, second
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 81.37% 66.41%
Life of fund 16.49% 10.60%
</TABLE>
Index:MSCI Emerging Markets Free Index
(1)Began operations on May 1, 1998.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
54
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, since the Fund invests primarily in emerging market coun-
tries, it will have a significantly higher degree of foreign risk than funds
that invest primarily in developed or newly- industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the funds perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. The
Fund's turnover rate could be greater than 100% due to the relatively high vol-
atility associated with investing in emerging markets.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $10.00 $ 7.09
Income from investment operations:
Net investment income (loss) 0.03 0.03
Net realized and unrealized gain (loss) on investments* (2.91) 5.67
Total from investment operations (2.88) 5.70
Less distributions:
Distributions from net investment income and capital paid
in (0.03) (0.01)
Distributions from net realized gain on investments sold -- (0.10)
Distributions in excess of income, capital paid in & gains -- (0.42)
Total distributions (0.03) (0.53)
Net asset value, end of period $ 7.09 $ 12.26
Total investment return*** (28.87)% 81.37%
Ratios and supplemental data
Net assets, end of period (000s omitted) $7,310 $32,596
Ratio of expenses to average net assets (%)**** 1.55% 1.39%
Ratio of net investment income (loss) to average net assets
(%) 0.51% 0.19%
Turnover rate (%) 53.95% 196.32%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1998.
*** Includes the effect of a voluntary capital contribution from John Hancock
of $32 per share for the year ended 1999. The Total Investment Return
without the capital contribution would have been 79.02% for the year ended
1999.
**** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 3.69% and 3.44% for the years
ended December 31, 1998, and 1999, respectively.
55
<PAGE>
Short-Term Bond Fund
GOAL AND STRATEGY
This is a short-term bond fund that seeks high income consistent with low share
price fluctuation.
The Fund primarily invests in a diversified mix of short-term and intermediate-
term investment grade debt securities including:
. U.S. Treasury and Agency securities;
. U.S. corporate bonds;
. foreign corporate bonds of companies in developed countries (if dollar-
denominated);
. foreign government and agency securities of developed countries (if dollar
denominated); and
. mortgage-and asset-backed securities.
The manager selects bonds using a combination of proprietary research and quan-
titative tools. Bonds are purchased that are attractively priced and that pro-
vide cheap, predictable cash flows.
The Fund normally invests:
. mostly in corporate bonds;
. no more than 15% of its assets in high yield bonds; and
. no more than 25% of its assets in foreign debt securities.
The Fund normally has:
. an average maturity between one and three and a half years;
. an average credit quality rating of "A" or higher; and
. 10% or less of its assets in cash and cash equivalents.
The Fund only invests in securities that are rated at least BB- or Ba3 at time
of purchase.
The Fund may purchase other types of securities, for example: certain deriva-
tives (investments whose value is based on indexes or other securities).
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGER
Jeffrey B. Saef
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1994
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1995 11.49%
1996 3.61%
1997 6.41%
1998 5.82%
1999 2.96%
Best quarter: up 3.87%, second quarter 1995 Worst quarter: down 0.42%, first
quarter 1999
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 2.96% 3.62%
5 year 6.02% 6.95%
Life of fund 5.35% 6.30%
</TABLE>
Index:Merrill Lynch 1-5 Year U.S. Government Bond Index (for periods through
April 30,
1998)
65% Lehman Brothers 1-3 Year Corporate Bond Index/35% Lehman Brothers 1-3
Year Government Bond Index (for periods after April 30, 1998)
(1)Began operations on May 1, 1994.
56
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest
rates fall, the reverse will generally occur. The longer the average remaining
maturity of bonds held by the Fund, the more sensitive the Fund is to interest
rate risk. This Fund has less interest rate risk than an intermediate-term or
long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obliga-
tion to pay interest and repay principal. Also, the credit rating of a bond
held by the fund may be downgraded. In either case, the value of the bond held
by the Trust would fall. All bonds have some credit risk, but in general low-
er-rated bonds have higher credit risk.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are,
the more likely it is a specific security's poor performance will hurt the
fund significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic,
political and social instability. Factors such as lack of liquidity, foreign
ownership limits and restrictions on removing currency also pose special
risks.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become
harder to value or to sell at a fair price.
Prepayment / Call Risk: The Fund's share price or yield could be hurt if
interest rate movements cause the Fund's mortgage-related and callable securi-
ties to be paid off substantially earlier than expected.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning of
period $ 9.66 $ 10.23 $ 10.05 $ 10.08 $ 10.05
Income from investment
operations:
Net investment income (loss) 0.50 0.54 0.59 0.61 0.61
Net realized and unrealized gain
(loss) on investments* 0.59 (0.18) 0.03 (0.03) (0.33)
Total from investment operations 1.09 0.36 0.62 (0.58) 0.28
Less distributions:
Distributions from net
investment income and capital
paid in (0.50) (0.54) (0.59) (0.61) (0.61)
Distributions from net realized
gain on investments sold (0.02) -- -- -- --
Distributions in excess of
income, capital paid in & gains -- -- -- -- --
Total distributions $ (0.52) $ (0.54) $ (0.59) $ (0.61) (0.61)
Net asset value, end of period $ 10.23 $ 10.05 $ 10.08 $ 10.05 $ 9.72
Total investment return 11.49% 3.61% 6.41% 5.82% 2.96%
Ratios and supplemental data
Net assets, end of period (000s
omitted) $17,911 $58,676 $51,120 $77,194 $68,844
Ratio of expenses to average net
assets (%)** 0.75% 0.75% 0.57% 0.53% 0.43%
Ratio of net investment income
(loss) to average net assets (%) 5.52% 5.66% 5.67% 6.17% 6.25%
Turnover rate (%) 109.77% 20.68% 108.29% 184.50% 100.04%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made, the expense ratio would have been 1.83% and 0.79% for the years
ended December 31, 1995 and 1996, respectively.
57
<PAGE>
Bond Index Fund
GOAL AND STRATEGY
This is a bond fund that seeks to track the performance of the Lehman Brothers
Government / Corporate Bond Index.
The manager employs a passive management strategy using quantitative techniques
to select individual securities that provide a representative sample of the
securities in the Index.
If the Fund reaches approximately $50 million in total assets, the manager will
seek to match the performance of the Lehman Brothers Aggregate Bond Index, a
broader market index that also includes mortgage-backed and asset-backed secu-
rities.
Both of these Indexes consist of dollar-denominated investment grade securities
with maturities greater than one year and outstanding par values of at least
$150 million issued primarily by:
. the U.S. Treasury and U.S. government agencies and instrumentalities;
. foreign governments and agencies; and
. U.S. and foreign corporations.
The manager selects securities to match, as closely as practical, the Index's
duration, cash flow, sector, credit quality, callability, and other key perfor-
mance characteristics. The Fund may hold some cash and cash equivalents, but is
normally fully invested.
The Index composition may change from time to time. The manager may keep secu-
rities that no longer meet the Index criteria as long as:
. such "ineligible" securities plus cash and money market instruments are less
than 20% of the Fund's assets; and
. high yield securities are less than 5% of the Fund's assets.
- --------------------------------------------------------------------------------
SUBADVISER
Mellon Bond Associates, LLP
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Managing since 1986
Managed approximately $50 billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Gregory D. Curran, CFA
- -----------------
Senior Vice President of subadviser
Joined subadviser in 1995
Began career in 1986
Vice President of Salomon Brothers (1986-1995)
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1999
-2.57%
Best quarter: up 5.35%, Fourth quarter 1998 Worst quarter: down 1.27%, first
quarter 1999
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -2.57% -2.15%
Life of fund 2.64% 2.96%
</TABLE>
Index:Lehman Brothers Government/Corporate Bond Index
(1)Began operations on May 1, 1998.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
58
<PAGE>
MAIN RISKS
Primary
Index Management Risk: Certain factors such as the following may cause the
Fund to track the Index less closely:
. The securities selected by the manager may not be fully representative of the
Index.
. Transaction expenses of the Fund may result in the Fund's performance being
different than that of the Index.
. The size and timing of the Fund's cash flows may result in the Fund's perfor-
mance being different than that of the Index.
Also, index funds like this one will have more difficulty in taking defensive
positions in abnormal market conditions.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Trust would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic, polit-
ical and social instability. Factors such as lack of liquidity, foreign owner-
ship limits and restrictions on removing currency also pose special risks. All
foreign securities have some degree of foreign risk. However, to the extent the
Fund invests in emerging market countries, it will have a significantly higher
degree of foreign risk than if it invested exclusively in developed or newly-
industrialized countries.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $10.00 $10.19
Income from investment operations:
Net investment income (loss) 0.42 0.63
Net realized and unrealized gain (loss) on investments* 0.29 (0.89)
Total from investment operations 0.71 (0.26)
Less distributions:
Distributions from net investment income and capital paid in (0.42) (0.61)
Distributions from net realized gain on investments sold (0.10) --
Distributions in excess of income, capital paid in & gains -- --
Total distributions (0.52) (0.61)
Net asset value, end of period $10.19 $ 9.32
Total investment return 7.20% (2.57)%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $2,748 $4,125
Ratio of expenses to average net assets (%)*** 0.40% 0.29%
Ratio of net investment income (loss) to average net assets
(%) 6.17% 6.56%
Turnover rate (%) 21.09% 17.06%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 0.71% and 0.35% for the years
ended December 31, 1998, and 1999, respectively.
59
<PAGE>
Active Bond Fund
(Formerly Sovereign Bond Fund)
GOAL AND STRATEGY
This is a bond fund that seeks income and growth in capital.
The Fund primarily invests in a diversified mix of debt securities including:
. U.S. Treasury and agency securities;
. foreign government and agency securities (if dollar-denominated);
. corporate bonds, both U.S. and foreign (if dollar-denominated); and
. mortgage-backed and asset-backed securities.
The manager normally invests:
. mostly in investment grade debt securities;
. no more than 25% of the Fund's assets in high yield bonds; and
. no more than 25% of the Fund's assets in foreign securities, excluding Cana-
dian securities.
The manager seeks to identify specific bond sectors, industries and specific
bonds that are attractively priced. The manager tries to anticipate shifts in
the business cycle, using economic and industry analysis to determine which
sectors and industries might benefit over the next 12 months. The manager uses
proprietary research to identify securities that are undervalued.
The manager evaluates bonds of all quality levels and maturities from many dif-
ferent issuers. The Fund normally has an average credit rating A or higher.
The Fund normally has 10% or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities, for example: emerging market
debt securities, and certain derivatives (investments whose value is based on
indices or other securities). The manager actively uses derivatives, such as
futures, to adjust the Fund's average maturity relative to the
Lehman Brothers Aggregate Bond Index and seeks to keep the Fund's interest rate
sensitivity in line with the overall market.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
Owned by John Hancock
Managing since 1968
Managed approximately $33 billion in assets at the end of 1999
FUND MANAGER
James K. Ho, CFA
- -----------------
Executive Vice President of subadviser
Managed fund since 1995
Associated with subadviser since 1985
Began career in 1977
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
6.90% 16.70% 7.70% 10.80% -2.57% 19.55% 4.10% 10.11% 8.23% -0.94%
Best quarter: up 7.14%, second quarter 1989 Worst quarter: down 2.51%, first
quarter 1994
Average annual total returns -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -0.94% -1.87%
5 years 8.00% 7.66%
10 years 7.90% 7.69%
Life of fund 7.86% 7.80%
</TABLE>
Index:Lehman Brothers Government/Corporate Bond Index (For periods through Sep-
tember 30, 1999)
Lehman Brothers Aggregate Bond Index (For periods after September 30, 1999)
60
<PAGE>
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles,
with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the Fund's investments are concen-
trated in certain sectors, the Fund's performance could be worse than the
overall market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest
rates fall, the reverse will generally occur. The longer the average remaining
maturity of bonds held by the Fund, the more sensitive the Fund is to interest
rate risk. This Fund has more interest rate risk than a short-term bond fund,
but less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obliga-
tion to pay interest and repay principal. Also, the credit rating of a bond
held by the fund may be downgraded. In either case, the value of the bond held
by the Fund would fall. All bonds have some credit risk, but in general lower-
rated bonds have higher credit risk.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic,
political and social instability. Factors such as lack of liquidity, foreign
ownership limits and restrictions on removing currency also pose special
risks. All foreign securities have some degree of foreign risk. However, to
the extent the Fund invests in emerging market countries, it will have a sig-
nificantly higher degree of foreign risk than if it invested exclusively in
developed or newly-industrialized countries.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally con-
sidered more risky than direct equity investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB-
/Baa3, may be subject to more volatile or erratic price movements due to
investor sentiment. In a down market, these high yield securities become
harder to value or to sell at a fair price.
Prepayment/Call Risk: The Fund's share price or yield could be hurt if inter-
est rate movements cause the Fund's mortgage-related and callable securities
to be paid off substantially earlier than expected.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Active Bond Fund (Formerly
Sovereign Bond Fund)
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning
of period $ 9.19 $ 10.13 $ 9.77 $ 9.95 $9.92
Income from investment
operations:
Net investment income
(loss) 0.71 0.69 0.71 0.69 0.67
Net realized and
unrealized gain (loss) on
investments* 1.03 (0.31) 0.24 0.11 (0.76)
Total from investment
operations 1.74 0.38 0.95 0.80 (0.09)
Less distributions:
Distributions from net
investment income and
capital paid in (0.71) (0.69) (0.71) (0.69) (0.71)
Distributions from net
realized gain on
investments sold (0.09) (0.05) (0.06) (0.14) --
Distributions in excess of
income, capital paid in &
gains -- -- -- -- --
Total distributions $ (0.80) $ (0.74) $ (0.77) $ (0.83) (0.71)
Net asset value, end of
period $ 10.13 $ 9.77 $ 9.95 $ 9.92 $ 9.12
Total investment return 19.55% 4.10% 10.11% 8.23% (0.94)%
Ratios and supplemental
data
Net assets, end of period
(000s omitted)($) $700,309 $726,111 $803,770 $907,121 $850,286
Ratio of expenses to
average net assets (%) 0.30% 0.29% 0.31% 0.29% 0.28%
Ratio of net investment
income (loss) to average
net assets (%) 7.20% 7.07% 7.18% 6.84% 6.97%
Turnover rate (%) 63.31% 119.12% 138.29% 228.74% 182.90%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
61
<PAGE>
Global Bond Fund
GOAL AND STRATEGY
This is a global bond fund that seeks income and growth in capital.
The Fund primarily invests in a mix of debt securities of developed countries
throughout the world including:
. U.S. Treasury and agency securities;
. foreign government and agency securities;
. supranational securities (such as the World Bank);
. corporate bonds, both U.S. and foreign; and
. mortgage-backed and asset-backed securities.
The manager makes ongoing decisions regarding the Fund's mix of U.S. bonds and
non-U.S. bonds (denominated in foreign currencies). The manager has a target
mix of 35% U.S. bonds and 65% non-U.S. bonds, but actively manages the mix
within (+/-) 50 percentage points of the target mix.
The Fund invests in at least 3 countries, but normally in 5 to 15 countries.
The Fund normally has an average credit quality rating of "AA" or higher.
The manager makes ongoing decisions regarding the Fund's average maturity,
country and sector allocations and foreign currency exposures. The manager uses
proprietary research and economic analysis to try to anticipate market condi-
tions and interest rate movements and to purchase securities that appear com-
paratively undervalued.
The manager actively uses derivatives (investments whose value is based on
indices or other securities) such as futures, forwards, options and swaps to
adjust the Fund's average maturity and to implement currency strategies. The
Fund is typically 75% to 100% hedged to the U.S. dollar.
The manager actively uses cash and cash equivalents to manage the Fund's aver-
age maturity. However, the Fund normally invests 20% or less of its assets in
cash and cash equivalents.
The Fund may purchase other types of securities, for example: high yield debt
securities and emerging market debt securities.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
J.P. Morgan Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
Managing, with predecessors, since 1861
Managed approximately $349 billion in assets at the end of 1999
FUND MANAGERS
David Gibbon
- -----------------
Vice President of subadviser
Joined subadviser in 1992
Began career in 1992
Hubert Penot
- -----------------
Managing Director of subadviser
Joined subadviser in 1978
Began career in 1978
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time (along with a broad-based market index
for reference). This information may help provide an indication of the fund's
risks and potential rewards. All figures assume dividend reinvestment. Past
performance does not indicate future results. The performance figures below do
not reflect the deduction of fees and charges payable under the variable
contracts. Such fees and charges would cause the investment returns under the
contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 9.05%
1998 9.15%
1999 -2.16%
Best quarter: up 4.32%, third quarter 1998 Worst quarter: down 1.75%, second
quarter 1999
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year -2.16% -0.17%
Life of fund 6.10% 7.16%
</TABLE>
Index:75% Lehman Brothers Aggregate Bond Index / 25% JP Morgan Non-US Govern-
ment Bond Index, Hedged (for periods through April 30, 1999)
JP Morgan Global Government Bond Index, US Dollar Hedged (for periods after
April 30, 1999)
(1)Began operations on May 1, 1996.
Note: See the Appendix to this prospectus for further performance information
relevant to this Fund.
62
<PAGE>
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing cur-
rency also pose special risks. All foreign securities have some degree of for-
eign risk. However, the Fund's investments in emerging market countries have a
significantly higher degree of foreign risk than investments in developed or
newly-industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Trust would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific securities poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that bro-
kerage commissions and other transaction costs will have on the fund's perfor-
mance. Any turnover rate in excess of 100% is considered relatively high. Nor-
mally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C>
Global Bond Fund (formerly Strategic Bond
Portfolio)-Period ended December 31: 1996** 1997 1998 1999
Net asset value, beginning of period $ 10.00 $ 10.16 $ 10.24 $ 10.60
Income from investment operations:
Net investment income (loss) 0.38 0.59 0.54 0.48
Net realized and unrealized gain (loss)
on investments* 0.28 0.30 0.38 (0.70)
Total from investment operations 0.66 0.89 0.92 (0.22)
Less distributions:
Distributions from net investment income
and capital paid in (0.38) (0.66) (0.47) (0.56)
Distributions from net realized gain on
investments sold (0.12) (0.15) (0.09) --
Distributions in excess of income,
capital paid in & gains -- -- -- --
Total distributions $ (0.50) $ (0.81) $ (0.56) (0.56)
Net asset value, end of period $ 10.16 $ 10.24 $ 10.60 $ 9.82
Total investment return 6.71% 9.05% 9.15% (2.16)%
Ratios and supplemental data
Net assets, end of period (000s
omitted)($) $12,907 $28,647 $66,791 $70,991
Ratio of expenses to average net assets
(%)*** 1.00% 1.00% 0.95% 0.83%
Ratio of net investment income (loss) to
average net assets (%) 6.05% 5.80% 5.27% 4.70%
Turnover rate (%) 171.39% 69.38% 186.70% 332.06%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1996.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 1.57%, 1.32%, 1.02%, and 0.84%
for the years ended December 31, 1996, 1997, 1998, and 1999, respectively.
63
<PAGE>
High Yield Bond Fund
GOAL AND STRATEGY
This is a high yield bond fund that seeks high income and growth in capital.
The Fund invests primarily in a diversified mix of high yield debt securities,
commonly referred to as "junk bonds" (rated BB+/Ba1 or lower and their unrated
equivalents), including:
. corporate bonds, both U.S. and foreign (if dollar-denominated);
. foreign government and agency securities (if dollar-denominated);
. preferred stocks; and
. convertible securities (convertible into common stocks or other equity inter-
ests).
The manager will invest no more than 15% of the Fund's assets in emerging mar-
ket countries (with below investment-grade sovereign debt). The Fund normally
has 10% or less of its assets in cash and cash equivalents.
The manager seeks to purchase bonds with stable or improving credit quality
before the market widely perceives the improvement. Purchase and sale decisions
are primarily based upon the investment merits of the particular security.
The manager selects bonds using proprietary research, including:
. quantitative analysis of historical financial data;
. qualitative analysis of a company's future prospects; and
. economic and industry analysis.
The Fund's average maturity depends on security selection decisions rather than
interest rate decisions.
The Fund may purchase other types of securities, for example: equity securi-
ties, high quality debt securities (short-term and otherwise), certain deriva-
tives (investments whose value is based on indices or other securities), and
debt securities denominated in foreign currencies.
In abnormal market conditions, the Fund may take temporary defensive measures--
such as holding unusually large amounts of cash and cash equivalents--that are
inconsistent with the Fund's primary investment strategy. In taking those mea-
sures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109
Managing, with predecessors, since 1928
Managed approximately $236 billion in assets at the end of 1999
FUND MANAGER
Richard T. Crawford
- -----------------
Vice President of subadviser
Joined subadviser in 1994
Began career in 1991
Manager draws upon the other members of the High Yield team, including:
Earl E. McEvoy
- -----------------
Partner of subadviser
Joined subadviser in 1978
Began career in 1972
Catherine A. Smith
- -----------------
Partner of subadviser
Joined subadviser in 1985
Began career in 1983
PAST PERFORMANCE
The graph will show how the fund's total return varies from year to year, while
the table will show performance over time (along with a broad-based market
index for reference). This information may help provide an indication of the
fund's risks and potential rewards. All figures assume dividend reinvestment.
Past performance does not indicate future results. The performance figures
below do not reflect the deduction of fees and charges payable under the
variable contracts. Such fees and charges would cause the investment returns
under the contracts to be less than that shown below.
Year-by-year total returns -- calendar year
[CHART]
1999
5.13%
Best quarter: up 4.55%, fourth quarter 1998 Worst quarter: down 7.46%, third
quarter 1998
Average annual total returns -- for periods ending 12/31/99(/1/)
<TABLE>
<CAPTION>
Fund Index
<S> <C> <C>
1 year 5.13% 2.39%
Life of fund 1.19% 0.31%
</TABLE>
Index:Lehman Brothers High-yield Bond Index
(1)Began operations on May 1, 1998.
Note:See the Appendix to this prospectus for further performance information
relevant to this Fund.
64
<PAGE>
MAIN RISKS
Primary
High Yield Bond Risk: High yield or junk bonds, defined as bond securities
rated below BBB-/Baa3, may be subject to more volatile or erratic price move-
ments due to investor sentiment. In a down market, these high yield securities
may become harder to value or to sell at a fair price.
Market Risk: The value of the securities in the Fund may go down in response to
overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall mar-
ket.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen-
erally rise and the Fund's bond prices will generally fall. When interest rates
fall, the reverse will generally occur. The longer the average remaining matu-
rity of bonds held by the Fund, the more sensitive the Fund is to interest rate
risk. This Fund has more interest rate risk than a short-term bond fund, but
less interest rate risk than a long-term bond fund.
Credit Risk: An issuer of a bond held by the Fund may default on its obligation
to pay interest and repay principal. Also, the credit rating of a bond held by
the fund may be downgraded. In either case, the value of the bond held by the
Fund would fall. All bonds have some credit risk, but in general lower-rated
bonds have higher credit risk.
Secondary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic, polit-
ical and social instability. Factors such as lack of liquidity, foreign owner-
ship limits and restrictions on removing currency also pose special risks. All
foreign securities have some degree of foreign risk. However, to the extent the
Fund invests in emerging market countries, it will have a significantly higher
degree of foreign risk than if it invested exclusively in developed or newly-
industrialized countries.
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally consid-
ered more risky than direct equity investments. Also, in a down market, deriva-
tives could become harder to value or sell at a fair price.
Prepayment/Call Risk: The Fund's share price or yield could be hurt if interest
rate movements cause the Fund's mortgage-related and callable securities to be
paid off substantially earlier than expected.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C>
Period ended December 31: 1998** 1999
Net asset value, beginning of period $ 10.00 $ 9.23
Income from investment operations:
Net investment income (loss) 0.46 0.72
Net realized and unrealized gain (loss) on investments* (0.76) (0.26)
Total from investment operations (0.30) 0.46
Less distributions:
Distributions from net investment income and capital paid
in (0.46) (0.70)
Distributions from net realized gain on investments sold (0.01) --
Distributions in excess of income, capital paid in & gains -- --
Total distributions (0.47) (0.70)
Net asset value, end of period $ 9.23 $ 8.99
Total investment return (2.98)% 5.13%
Ratios and supplemental data
Net assets, end of period (000s omitted)($) $14,789 $19,921
Ratio of expenses to average net assets (%)*** 0.90% 0.80%
Ratio of net investment income (loss) to average net assets
(%) 7.43% 7.94%
Turnover rate (%) 17.67% 38.62%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
** Fund began operations on May 1, 1998.
*** Expense ratio is net of expense reimbursement. Had such reimbursement not
been made the expense ratio would have been 2.03% and 1.04% for the years
ended December 31, 1998, and 1999, respectively.
65
<PAGE>
Money Market Fund
GOAL AND STRATEGY
This is a money market fund that seeks current income consistent with maintain-
ing liquidity and preserving capital. The Fund intends to maintain a stable net
asset value of $10 per share.
The Fund only invests in U.S. dollar denominated money market instruments rated
within the two highest short-term credit rating categories, primarily includ-
ing:
. commercial paper;
. asset-backed commercial paper;
. bank notes and certificates of deposit;
. short-term bonds;
. U.S. Treasury and agency notes and bills; and
. repurchase and reverse repurchase agreements.
These securities have a maximum remaining maturity of 397 days (13 months) and
may be issued by:
. U.S. and foreign banks and other lending institutions;
. U.S. and foreign corporations;
. the U.S. Treasury and U.S. government agencies and instrumentalities;
. entities whose obligations are guaranteed as to principal or interest by the
U.S. Government;
. municipalities;
. foreign governments; and
. supranational organizations (such as the World Bank).
The weighted average time to maturity of the Fund's investments is 90 days or
less.
The manager may invest:
. up to 5% of assets in securities rated in the second-highest short-term cate-
gory (or unrated equivalents); and
. up to 1% of assets or $1 million (whichever is greater) in securities of a
single issuer rated in the second-highest short-term category (or unrated
equivalents).
The manager selects securities with the highest yield available among securi-
ties of comparable credit quality and maturity using proprietary research.
- --------------------------------------------------------------------------------
MANAGER
Managed By John Hancock Life Insurance Company
FUND MANAGER
Peter S. Mitsopoulos
- -----------------
Financial Officer at manager
Joined manager in 1981
PAST PERFORMANCE
The graph shows how the fund's total return has varied from year to year, while
the table shows performance over time. This information may also help provide
an indication of the fund's risks and potential rewards. All figures assume
dividend reinvestment. Past performance does not indicate future results. The
performance figures below do not reflect the deduction of fees and charges
payable under the variable contracts. Such fees and charges would cause the
investment returns under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
8.00% 6.00% 3.60% 3.41% 4.03% 5.78% 5.32% 5.38% 5.40% 5.05%
Best quarter: up 2.38%, second quarter 1989 Worst quarter: up 0.74%, second
quarter 1993
Average annual total return -- for periods ending 12/31/99
<TABLE>
<CAPTION>
Fund
<S> <C> <C>
1 year 5.05%
5 years 5.40%
10 years 5.18%
Life of fund 5.81%
</TABLE>
66
<PAGE>
MAIN RISKS
Primary
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Interest Rate Risk: When interest rates rise, yields on the Fund's investments
will generally rise and prices on the Fund's investments will generally fall.
When interest rates fall, the reverse will generally occur. The longer the
average remaining maturity of instruments held by the Fund, the more sensitive
the Fund is to interest rate risk. This Fund has less interest rate risk than
an intermediate-term or long-term bond fund.
Credit Risk: An issuer of an instrument held by the Fund may default on its
obligation to pay interest and repay principal. Also, the credit rating of an
instrument held by the Fund may be downgraded. In either case, the value of the
instrument held by the Fund would fall. All money market instruments have some
credit risk, but in general lower-rated instruments have higher credit risk.
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, and economic, polit-
ical and social instability. Factors such as lack of liquidity, foreign owner-
ship limits and restrictions on removing currency also pose special risks. All
foreign securities have some degree of foreign risk. However, to the extent the
Fund invests in emerging market countries, it will have a significantly higher
degree of foreign risk than if it invested exclusively in developed or newly-
industrialized countries.
Secondary
None
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding
throughout the period indicated)
The following financial highlights have been audited by Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C> <C> <C>
Period ended December 31: 1995 1996 1997 1998 1999
Net asset value, beginning
of period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Income from investment
operations:
Net investment income
(loss) 0.57 0.52 0.53 0.53 0.45
Net realized and
unrealized gain (loss) on
investments* -- -- -- -- --
Total from investment
operations 0.57 0.52 0.53 0.53 0.45
Less distributions:
Distributions from net
investment income and
capital paid in (0.57) (0.52) (0.53) (0.53) (0.45)
Distributions from net
realized gain on
investments sold -- -- -- -- --
Distributions in excess of
income, capital paid in &
gains -- -- -- -- --
Total distributions $ (0.57) $ (0.52) $ (0.53) $ (0.53) (0.45)
Net asset value, end of
period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Total investment return 5.78% 5.32% 5.38% 5.40% 5.05%
Ratios and supplemental
data
Net assets, end of period
(000s omitted)($) $185,909 $213,235 $229,443 $395,195 $451,235
Ratio of expenses to
average net assets (%) 0.35% 0.30% 0.33% 0.31% 0.31%
Ratio of net investment
income (loss) to average
net assets (%) 5.62% 5.20% 5.32% 5.29% 4.95%
</TABLE>
* The amount shown may not accord with the change in the aggregate gains and
losses in the fund securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuation in market
values of the fund.
67
<PAGE>
Your Account
Investments in shares of the funds
Each fund sells its shares directly to separate accounts of John Hancock,
JHVLICO and IPL to fund variable contracts. Each fund also buys back its shares
on redemption by the separate accounts.
Under the variable contracts, a separate account buys or redeems a fund's
shares based on:
. instructions by you and other contractowners to invest or receive back monies
under a contract (such as making a premium payment or surrendering a con-
tract), and
. the operation of a contract (such as deduction of fees and charges).
The Trust, as law permits, may:
. refuse a buy order if the adviser believes it would disrupt management
. suspend a fund's offer of shares, or
. suspend a fund's redemption obligation or postpone a fund's payment of
redemption proceeds for more than seven days.
Share price
Each fund sells and buys back its shares at the net asset value per share
("NAV") next computed after receipt by a separate account of a contractowner's
instructions.
Each fund calculates its NAV:
. by dividing its net assets by the number of its outstanding shares,
. once daily as of the close of regular trading on the New York Stock Exchange
(generally at 4 p.m. New York time) on each day the Exchange is open.
Certain funds may hold securities primarily listed on foreign exchanges that
trade on weekends or other days when the Trust does not calculate NAV. Conse-
quently, NAV may change on days when contractowners will not be able to
instruct a separate account to buy or redeem fund shares.
Valuation
The Money Market Fund values its securities at amortized cost. Each of the
other funds values securities based on:
. market quotations,
. amortized cost,
. valuations of independent pricing services, or
. fair value determined in accordance with procedures approved by the Trust's
trustees.
A fund may value securities at fair value where, for example:
.market quotations are not readily available, or
. the value of securities has been materially affected after the closing of a
foreign market.
Conflicts
The Trust's trustees monitor for possible material irreconcilable conflicts
among separate accounts buying shares of the funds. The Trust's net asset value
could decrease, if the Trust had to sell investment securities to pay redemp-
tion proceeds to a separate account withdrawing because of a conflict.
68
<PAGE>
Funds' Expenses
The advisory fee paid by each fund to the adviser last year was:
<TABLE>
<CAPTION>
Funds % of net assets
<S> <C>
Managed 0.32%
Aggressive Balanced 0.68%
Growth & Income 0.25%
Equity Index 0.14%
Large Cap Value 0.74%
Large Cap Value CORE 0.75%
Large Cap Growth 0.36%
Large Cap Aggressive Growth 0.98%
Large/Mid Cap Value 0.95%
Mid Cap Blend 0.75%
Mid Cap Value 0.80%
Mid Cap Growth 0.83%
Fundamental Mid Cap Growth 0.85%
Real Estate Equity 0.60%
Small/Mid Cap CORE 0.80%
Small/Mid Cap Value 0.95%
Small/Mid Cap Growth 0.75%
Small Cap Value 0.80%
Small Cap Growth 0.75%
Global Equity 0.90%
Global Balanced* 0.85%
International Equity Index 0.16%
International Equity 1.00%
International Opportunitites 0.87%
Emerging Markets Equity 1.27%
Short-Term Bond 0.30%
Bond Index 0.15%
Active Bond** 0.25%
Global Bond 0.69%
High Yield Bond 0.65%
Money Market 0.25%
</TABLE>
* Formerly International Balanced
**Formerly Sovereign Bond
The adviser pays subadvisory fees out of its own assets. No fund pays a fee to
its subadviser.
The adviser has agreed to limit each fund's annual expenses (excluding advisory
fees and certain other expenses such as brokerage and taxes) to not more than
.10 percent of the fund's average daily net assets.
Dividends and Taxes
Dividends
Each fund automatically reinvests its dividends and distributions in additional
shares of the fund at NAV.
Each fund declares and pays dividends monthly, except that the Money Market
Fund does so daily.
Funds generally declare capital gains distributions annually.
Taxes
Each fund must meet investment diversification and other requirements under the
Internal Revenue Code, in order to:
. avoid federal income tax and excise tax, and
. assure the tax-deferred treatment of variable contracts under the Code.
You should read the prospectus for your variable contract for the federal
income tax consequences for contractowners, including the consequences of a
fund's failure to meet Code requirements.
69
<PAGE>
Trust Business Structure
The diagram below shows the basic business structure of the Trust. The Trust's
trustees oversee the Trust's investment and business activities and hire vari-
ous service providers to carry out the Trust's operations.
Variable
Contractowners
John Hancock,
JHVLICO and IPL
Separate Accounts
The Trust
Trustees oversee the
Trust's investment and
business activities.
Investment Adviser Custodian
John Hancock Life State Street Bank and Trust
Insurance Company Company
Manages the Trust's Holds the Trust's assets,
investment and business settles all Trust
activities. trades and collects most of
the valuation
data required for calculat-
ing the Trust's
NAV.
Subadvisers
Alliance Capital Management L.P. Mellon Bond Associates, LLP
The Boston Company Asset Management, LLCMorgan Stanley Dean Witter In-
Brinson Partners, Inc. vestment Management Inc.
Goldman Sachs Asset Management. Neuberger Berman, LLC
Independence International Associates, Inc.
OppenheimerFunds, Inc.
Independence Investment Associates, Inc.Rowe Price-Fleming Internation-
INVESCO, Inc. al, Inc.
J.P. Morgan Investment Management Inc. Scudder Kemper Investments, Inc.
Janus Capital Corporation State Street Bank and Trust Com-
John Hancock Advisers, Inc. pany
T. Rowe Price Associates, Inc.
Wellington Management Company,
LLP
Provide management to various funds.
70
<PAGE>
APPENDIX
Additional Performance Information
The "Past Performance" information shown earlier in this prospectus for certain
of the Funds may not be sufficient for you to make a complete assessment of the
risks and potential rewards of investing in those Funds. The Aggressive Bal-
anced Fund, the Large Cap Value Fund, the Large Cap Aggressive Growth Fund, the
Large/Mid Cap Value Fund, the Mid Cap Blend Fund, and the Small/Mid Cap Value
Fund only began operations on August 31, 1999. The Small/Mid Cap CORE Fund, the
Emerging Markets Equity Fund, the Bond Index Fund, and the High Yield Bond Fund
only began operations on May 1, 1998. The Small/Mid Cap Growth Fund and the
Global Bond Fund each implemented a significant change in strategy as of May 1,
1999. Finally, the Global Balanced Fund implemented a significant change in
strategy as of May 1, 2000.
Since each of these Funds has at best a very limited period of relevant perfor-
mance history, we have set forth below information for certain similar accounts
that are managed by the Funds' respective subadvisers. Each grouping of such
accounts is referred to as a "composite." In the case of each account included
in a composite, the total management fees and other operating expenses of the
Fund (based upon management fee schedules and allocation rules currently in
effect) have been substituted for the actual fees and expenses (other than bro-
kerage and other transaction expenses) of the account. Also, except as specifi-
cally noted below, each composite includes all of the investment company and
other accounts of the subadviser that satisfy the following requirements:
. they have been managed with investment objectives, policies, and strategies
substantially similar to those used in managing the Fund, and
. they are of sufficient size that their performance would be considered rele-
vant to the owner of a variable contract investing in that Fund.
Some of the accounts in the composites were not registered investment companies
and, therefore, were not subject to federal income tax and other legal require-
ments applicable to such companies. Had such accounts been subject to such
requirements, their performance could have been adversely affected. The perfor-
mance figures in this Appendix do not reflect the deduction of fees and charges
payable under the variable contracts. Such fees and charges would cause the
investment returns under the contacts to be less than that shown below.
The graphs below show how the composite's total return has varied from year to
year, while the tables show performance over time (along with a broad-based
index for reference). All figures assume dividend reinvestment. Past perfor-
mance does not indicate future results.
Aggresive Balanced Composite (Corresponding to Aggressive Balanced Fund)
The Aggressive Balanced Composite represents the following blend of two other
composites: 75% Diversified Core Equity Composite and 25% Active Core Bond Com-
posite. Each composite is asset-weighted and contains all fully discretionary
accounts managed using a substantially similar investment strategy. As of
December 31, 1999, the Diversified Core Equity Composite included 97 accounts
with total assets of $8.9 billion, and the Active Core Bond Composite included
9 accounts with total assets of $1.1 billion.
Year-by-year total returns -- calendar years
[CHART]
1996* 1997 1998 1999
15.43% 25.08% 24.84% 10.06%
* Composite inception January 1, 1996.
Best quarter: up 18.04%, fourth quarter 1998 Worst
quarter: down 8.43%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 Year 10.06% 15.34%
3 Years 19.78% 22.06%
Since inception 18.68% 21.03%
</TABLE>
Index:75% S&P 500/25% Lehman Brothers Aggregate Bond
71
<PAGE>
Large Cap Value CORE Composite (Corresponding to Large Cap Value CORE Fund)
The Large Cap Value CORE Composite is an asset-weighted composite of all fully
discretionary accounts managed using a substantially similar investment strate-
gy. As of December 31, 1999, the composite included 6 accounts with total
assets of $668 million.
Year-by-year total returns -- calendar years
[CHART]
1995 1996 1997 1998 1999
37.08% 26.03% 32.21% 11.01% 7.29%
Best quarter: up 16.09%, fourth quarter 1998 Worst
quarter: down 15.92%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 7.29% 7.35%
3 years 16.34% 18.83%
5 years 22.16% 23.07%
</TABLE>
Index:Russell 1000(R) Value Index
Large Cap Aggressive Growth Composite (Corresponding to Large Cap Aggressive
Growth Fund)
The Large Cap Aggressive Growth Composite is an asset-weighted composite of all
fully discretionary accounts (excluding mutual funds) managed using a substan-
tially similar investment strategy. As of December 31, 1999, the composite
included 245 accounts with total assets of $47.8 billion.
Year-by-year total returns -- calendar years
[CHART]
1995 1996 1997 1998 1999
38.60% 22.37% 36.27% 50.75% 31.82%
Best quarter: up 30.82%, fourth quarter 1998 Worst
quarter: down 11.51%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 31.82% 33.16%
3 years 39.38% 34.07%
5 years 35.65% 32.41%
</TABLE>
Index:Russell 1000(R) Growth Index
72
<PAGE>
Large/Mid Cap Value Composite (Corresponding to Large/Mid Cap Value Fund)
The Large/Mid Cap Value Composite is an asset-weighted composite of all fully
discretionary accounts managed using a substantially similar investment strate-
gy. As of December 31, 1999, the composite included 3 accounts with total
assets of $869 million.
Year-by-year total returns -- calendar years
[CHART]
1995* 1996 1997 1998 1999
7.14% 15.17% 28.29% 4.76% 10.03%
* Composite inception October 1, 1995. 1995 total
return is not annualized.
Best quarter: up 19.41%, fourth quarter 1998 Worst
quarter: down 11.35%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 10.03% 7.35%
3 years 13.93% 18.83%
5 years 15.20% 20.08%
</TABLE>
Index:Russell 1000(R) Value Index
Mid Cap Diversified Equity Composite (Corresponding to Mid Cap Blend Fund)
The Mid Cap Diversified Equity Composite is an asset-weighted composite of all
fully discretionary accounts managed using a substantally similar investment
strategy. As of December 31, 1999, the composite included 8 accounts with total
assets of $407 million.
Year-by-year total returns -- calendar years
[CHART]
1995 1996 1997 1998 1999
35.39% 16.07% 33.92% 14.35% 8.40%
Best quarter: up 18.82%, fourth quarter 1998 Worst
quarter: down 16.30%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 8.40% 18.23%
3 years 18.40% 18.86%
5 years 21.14% 21.86%
</TABLE>
Index:Russell Mid Cap(TM) Index
73
<PAGE>
Small/Mid Cap CORE Composite (Corresponding to Small/Mid Cap CORE Fund)
The Small/Mid Cap CORE Composite is an asset-weighted composite of all fully
discretionary accounts managed using a substantially similar investment strate-
gy. As of December 31, 1999, the composite included 4 accounts with total
assets of $158 million.
Year-by-year total returns -- calendar years
[CHART]
1996 1997 1998 1999
19.55% 29.42% -0.52% 21.54%
* Composite inception April 1, 1996. 1996 total
return is not annualized.
Best quarter: up 17.87%, fourth quarter 1999 Worst
quarter: down 20.71%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 21.54% 24.15%
3 years 16.10% 15.72%
Since inception 18.18% 15.96%
</TABLE>
Index:Russell 2500TM Index
Premier Value Composite (Corresponding to Small/Mid Cap Value Fund)
The Premier Value Composite is an asset-weighted composite of all fully discre-
tionary accounts managed using a substantially similar investment strategy. As
of December 31, 1999, the composite included 21 accounts with total assets of
$1.27 billion.
Year-by-year total returns -- calendar years
[CHART]
1995 1996 1997 1998 1999
39.47% 32.77% 28.53% -2.82% 27.61%
Best quarter: up 28.32%, second quarter 1999 Worst
quarter: down 27.05%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 27.61% 1.49%
3 years 16.81% 9.83%
5 years 24.17% 16.01%
</TABLE>
Index:Russell 2500TM Index
74
<PAGE>
Small/Mid Cap Growth Composite (Corresponding to Small/Mid Cap Growth Fund)
The Small/Mid Cap Growth Composite is an asset-weighted composite of all fully
discretionary accounts managed using a substantially similar investment strate-
gy. As of December 31, 1999, the composite included 31 accounts with total
assets of $1.9 billion.
Year-by-year total returns -- calendar years
[CHART]
1995 1996 1997 1998 1999
30.68% 19.23% 26.82% 13.97% -1.65%
Best quarter: up 22.51%, fourth quarter 1998 Worst
quarter: down 15.81%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year -1.65% 55.48%
3 years 12.44% 22.53%
5 years 17.24% 23.10%
</TABLE>
Index:Russell 2500TM Growth Index
Global Balanced Composite (Corresponding to Global Balanced Fund)
The Global Balanced Composite is an asset-weighted composite of all fully dis-
cretionary accounts managed using a substantially similar investment strategy.
As of December 31, 1999, the composite included 4 accounts with total assets of
$1.8 billion.
Year-by-year total returns -- calendar years
[CHART]
1995 1996 1997 1998 1999
24.85% 14.15% 10.75% 8.71% 1.60%
Best quarter: up 8.34%, second quarter 1997 Worst
quarter: down 5.13%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 1.60% 14.32%
3 years 6.95% 15.57%
5 years 11.76% 15.48%
</TABLE>
Index:65% MSCI World Index/35% Salomon Brothers
World Government Bond Index, Unhedged.
75
<PAGE>
Emerging Markets Equity Composite (Corresponding to Emerging Markets Equity
Fund)
The Emerging Markets Equity Composite is an asset-weighted composite of all
fully discretionary mutual fund accounts managed using a substantially similar
investment strategy (excluding all separately managed accounts and the Emerging
Markets Equity Fund). As of December 31, 1999, the composite included 12
accounts with total assets of $5.2 billion.
Year-by-year total returns -- calendar years
[CHART]
1995 1996 1997 1998 1999
-13.42% 11.84% -2.41% -24.33% 102.74%
Best quarter: up 51.98%, fourth quarter 1999 Worst
quarter: down 23.57%, second quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 102.74% 66.41%
3 years 14.40% 3.18%
5 years 7.71% 2.00%
</TABLE>
Index:MSCI Emerging Markets Free Index
Government/Corporate Bond Index Composite (Corresponding to Bond Index Fund)
The Government/Corporate Bond Index Composite is an asset-weighted composite of
all fully discretionary accounts (excluding mutual funds) managed using a sub-
stantially similar investment strategy. As of December 31, 1999, the composite
included 5 accounts with total assets of $1.3 billion.
Year-by-year total returns -- calendar years
[CHART]
1995 1996 1997 1998 1999
18.87% 2.54% 9.70% 9.41% -2.42%
Best quarter: up 6.43%, second quarter 1995 Worst
quarter: down 2.44%, first quarter 1996
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year -2.42% -2.15%
3 years 5.41% 5.54%
5 years 7.38% 7.60%
</TABLE>
Index:Lehman Brothers Government/Corporate Bond
Index
76
<PAGE>
Global Fixed Hedged Composite (Corresponding to Global Bond Fund)
The Global Fixed Hedged Composite is an asset-weighted composite of all fully
discretionary accounts managed using a substantially similar investment strat-
egy. As of December 31, 1999, the composite included 2 accounts with total
assets of $734 million.
Year-by-year total returns -- calendar years
[CHART]
1995 1996 1997 1998 1999
17.67% 8.55% 9.72% 11.72% -1.36%
Best quarter: up 5.92%, third quarter 1998 Worst
quarter: down 1.59%, second quarter 1999
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year -1.36% 0.72%
3 years 6.54% 7.55%
5 years 9.08% 9.76%
</TABLE>
Index:J. P. Morgan Global Government Bond Index,
U.S. Dollar Hedged.
High Yield Bond Composite (Corresponding to High Yield Bond Fund)
The High Yield Bond Composite is an asset-weighted composite of all fully dis-
cretionary accounts managed using a substantially similar investment strategy.
As of December 31, 1999, the composite included 13 accounts with total assets
of $850 million.
Year-by-year total returns -- calendar years
[CHART]
1995 1996 1997 1998 1999
20.48% 12.77% 11.85% -0.17% 4.13%
Best quarter: up 6.18%, second quarter 1995 Worst
quarter: down 7.91%, third quarter 1998
Average annual total returns -- for periods ending
12/31/99
<TABLE>
<CAPTION>
Composite Index
<S> <C> <C>
1 year 4.13% 2.39%
3 years 5.15% 5.56%
5 years 9.58% 9.31%
</TABLE>
Index:Lehman Brothers High Yield Bond Index.
77
<PAGE>
For more information
This prospectus Two documents are To request a free
should be used available that offer copy of the current
only with a vari- further information annual/semiannual
able contract on John Hancock report or the SAI,
prospectus. Variable Series please contact:
Trust I:
Annual/Semiannual By mail:
Report to shareholders
John Hancock Variable
Series Trust I
Includes financial John Hancock Place
statements, a dis- Boston, MA 02117
cussion of the mar-
ket conditions and By phone: 1-800-732-
investment strate- 5543
gies that signifi-
cantly affected per- Or you may view or
formance, and the obtain these docu-
auditors' report (in ments from the SEC:
the annual report
only). In person: at the
SEC's Public Refer-
Statement of ence Room in Wash-
Additional ington, DC
Information (SAI)
By phone: 1-800-SEC-
The SAI contains 0330
more detailed infor-
mation on all By mail: Public Refer-
aspects of the ence Section Securi-
funds. ties and Exchange Com-
mission
John Hancock
Variable A current SAI has Washington, DC
Series Trust I been filed with the 20549-6009
John Hancock Securities and (duplicating fee
Place Exchange Commission required)
Boston, Massachu- and is incorporated
setts 02117 by reference into On the
(i.e., is legally a Internet: www.sec.gov
part of) this pro-
spectus. SEC File Num-
ber: 811-4490
VSTPRO--A2
<PAGE>
JOHN HANCOCK
VARIABLE SERIES TRUST I
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
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, 2000.
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 relates to all thirty-one of the
Trust's current "Funds."
The Trust's Financial Statements and Investment Performance Information
The Trust's financial statements appearing in its Annual Report to contract
holders and the report of Ernst & Young, LLP, independent auditors of the Trust,
which appears therein, are incorporated by reference into this Statement of
Additional Information. The information about the total investment returns
achieved by the Trust's various Funds, is also incorporated herein by reference.
No other portions of the Annual Report are incorporated by reference. A free
copy of the Annual Report to contract holders may be obtained by writing to the
address or calling the number above.
<PAGE>
TABLE OF CONTENTS
Page in this
Statement of
Additional
Information
-----------
The Trust's Financial Statements and Performance Information 1
What Is the Trust? 4
The Trust's Business History 4
The Funds' Investment Activities and Their Risks 5
1. Investing in Money Market Instruments 5
2. Investing in Other Fixed Income Obligations 5
3. Investing in Equity Securities 7
4. Investing in Real Estate Securities 9
5. Investing in Foreign Securities 9
6. Using Forward Exchange Contracts to Manage Currency
Exposure 11
7. Using Options on Currencies to Manage Currency Exposure 12
8. Using Currency Futures Contracts and Options Thereon to
Manage Currency Exposure 12
9. Using Certain Other Derivative Instruments to Manage
Currency Exposure 12
10. Using Foreign Currency Exposure Management Strategies
(General Considerations and Risks) 13
11. Reallocating a Fund's Assets Among Asset Classes 13
12. Adopting a Temporary Defensive Strategy 13
13. Investing With an Index-Based Objective 14
14. Investing on a Non-Diversified Basis 16
15. Using Options (Generally) 16
16. Using Options on Securities in Certain Conservative
Investment Strategies 18
17. Using Financial Futures Contracts, Options on Such
Contracts and Options on Stock Indexes (General
Considerations) 18
18. Using Financial Futures, Options Thereon, and Stock
Index Options for Certain Hedging - Type Strategies 20
19. Using Options and Futures in Potentially More Aggressive
Strategies 21
20. Limiting the Funds' Exposure to Certain Futures and
Option Transactions 23
21. Using Other Types of Derivative Instruments 23
22. Investing In Other Investment Companies 25
23. Purchasing "When Issued" Securities and Forward
Commitments 25
24. Short-Term Trading 26
25. Entering Into Repurchase Agreements 26
26. Participating in Joint Trading Accounts 26
27. Lending of Fund Securities 27
28. Using Reverse Repurchase Agreements and Mortgages
"Dollar Rolls" 27
29. Investing in Rule 144A and Illiquid Securities 28
The Funds' Fundamental Investment Restrictions 28
Board of Trustees and Officers of the Trust 31
2
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TABLE OF CONTENTS - continued
Page in this
Statement of
Additional
Information
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Investment Advisory Arrangements 33
The Trust's Investment Advisory Arrangements With
John Hancock 33
The Trust's Arrangements With Subadvisers 35
Dollar Amounts of Advisory Fees, Subadvisory Fees, and
Expense Reimbursements 39
Arrangements With Other Service Providers 40
Underwriting and Indemnity Agreement 40
Custody of the Trust's Assets 40
Subadministration Agreement With State Street Bank 41
Independent Auditors 41
Portfolio Transactions and Brokerage Allocation 42
Codes of Personal Conduct 45
Features of the Trust's Shares 45
Shareholder Meetings and Voting Rights 45
Sales and Redemptions of Fund Shares 46
Computing the Funds' Net Asset Value 47
Taxes 47
Information About Fund Performance 48
Legal Matters 50
Reports to Contractholders 50
Appendix A - Corporate Bond Ratings 51
3
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WHAT IS THE TRUST?
John Hancock Variable Series Trust I, (the "Trust") is an open-end
management investment company. With the exception of the Large Cap Aggressive
Growth, Mid Cap Growth, Global Balanced and Global Bond Funds, each of the Funds
is a "diversified" Fund within the meaning of the Investment Company Act of 1940
(the "Investment Company Act").
Shares of the Trust are currently sold to John Hancock Variable Life
Accounts U, V, and S to support variable life insurance policies issued by John
Hancock Variable Life Insurance Company ("JHVLICO"); John Hancock Variable
Annuity Accounts U and V to support variable annuity contracts issued by John
Hancock Life Insurance Company ("John Hancock"); John Hancock Variable Annuity
Account I to support variable annuity contracts issued by JHVLICO; John Hancock
Variable Life Insurance Account UV to support variable life insurance policies
issued by John Hancock; and Investors Partner Life Account IPL-1 to support
variable life insurance policies issued by Investors Partner Life Insurance
Company ("IPL"). It is anticipated that, in the future, Trust shares may be sold
to other separate investment accounts of JHVLICO, John Hancock and IPL. Each of
these separate accounts is hereinafter referred to as a "Separate Account."
Because the Separate Accounts currently own all of the Trust's shares,
those Separate Accounts (or John Hancock, JHVLICO, and IPL) may be deemed to
control the Trust. John Hancock, JHVLICO and IPL, in turn, are all directly or
indirectly controlled by John Hancock Financial Services, Inc., a publicly-
traded holding company.
The Trust issues a separate series of shares of beneficial interest for
each Fund. Each share issued with respect to a Fund has a pro rata interest in
the net assets of that Fund. The assets of each Fund are charged with the
liabilities of that Fund and a proportionate share of the general liabilities of
the Trust.
THE TRUST'S BUSINESS HISTORY
The Trust is, in part, a successor to three Separate 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 what are now the
Growth & Income, Active Bond and Money Market Funds of the Trust, respectively,
in exchange for shares of those Funds.
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 what are now the Growth & Income, Active Bond and Money Market Funds of the
Trust, respectively, in exchange for shares of these Funds.
The Trust itself 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.
Over the years, several Funds have been re-named as follows:
Current Fund Name Prior Name(s) Year of Change
----------------- ------------- --------------
Active Bond Sovereign Bond 2000
Bond 1996
Global Balanced International Balanced 2000
Global Bond Strategic Bond 1999
Growth & Income Stock 1996
International Equity Index International Equities 1998
International 1995
Global 1994
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Current Fund Name Prior Name(s) - continued Year of Change
----------------- ------------------------- --------------
Large Cap Growth Select Stock 1995
Short-Term Bond Short-Term U.S. Government 1998
Small/Mid Cap Growth Diversified Mid Cap Growth 1999
Special Opportunities 1998
THE FUNDS' INVESTMENT ACTIVITIES
AND THEIR RISKS
The different investment activities of the several Funds will affect both
their investment returns and the nature and degree of risks to which they are
exposed. Sections 1. - 29. below describe many (but not all) of these investment
activities and risks.
1. Investing in Money Market Instruments
The Money Market Fund invests exclusively in "money market" instruments;
all the other Funds may invest in these instruments to some extent. These are
high quality, short-term fixed income obligations. Because of their nature,
money market instruments generally do not carry significant risks of loss. The
principal risk is that a Fund's return on money market instruments will be less
than it would have earned on a riskier investment.
2. Investing in Other Fixed Income Obligations
The following Funds invested primarily in non-money market fixed income
(i.e., "debt") securities: the Short-Term Bond, Bond Index, Active Bond, Global
Bond, and High Yield Bond Funds. The Managed, Aggressive Balanced and Global
Balanced Funds can vary their holdings of these securities within a broad range.
All the other Funds (except the Money Market Fund)may from time to time invest
in non-money market debt to some extent.
Various types of risk associated with these securities are discussed in the
balance of this Section 2.
Interest rate risk: In general, debt securities with 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 Fund that invests in such
securities. When prevailing interest rates go up, the market value of debt
securities tends to go down and vice versa. 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. For example, the interest rate risk of the Short-Term Bond
Fund, 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 credit risk: i.e., 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 Funds that invest in non-
money market debt securities may have some exposure to credit risk.
Even some U.S. Government obligations have a degree of credit risk. "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 and established under the authority
granted by Congress. Some obligations of U.S. Government
5
<PAGE>
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. These latter types of obligations,
therefore, do have a degree of credit risk. U.S. Government obligations are used
most in the Bond Index, Active Bond and Global Bond Funds. All of the other
Funds may also invest in U.S. Government obligations to some extent.
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 subadviser, are referred to as
"investment grade." The meanings of such ratings are set forth in Appendix A to
this Statement of Additional Information. Lower-rated bonds have more credit
risk than higher rated bonds.
Risk of lower-quality instruments: High-yield bonds (or "junk" bonds) are
debt securities rated below "investment grade" as defined above. The value of
these 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 market perceptions regarding their credit risk.
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.
Issuers of high yield 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.
High yield 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.
Judgment plays a greater role in valuing higher yield 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 a Fund to value its
portfolio securities, and the ability of the Fund to dispose of its lower-rated
bonds.
The market prices of high yield 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 risking
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. In that case, a Fund may find it necessary, 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 Fund investors. The 1980s saw a
dramatic increase in the use of high yield securities to finance highly
leveraged corporate acquisitions and restructurings. Past experience may not
provide an accurate indication of future performance of high yield securities,
especially during periods of economic recession. In fact, from 1989 to 1991, the
percentage of high yield securities that defaulted rose significantly above
prior levels.
All Funds (other than the Money Market Fund) that invest in debt securities
may at times have some exposure to high yield securities. The High Yield Bond
Fund intends to invest primarily in these securities. The other Funds most
likely to invest a significant portion of their assets in high yield securities
are the Short-Term Bond, and Active Bond Funds. The Managed, Aggressive
Balanced, Global Bond and Global Balanced Funds may also invest in high yield
securities to some extent. In contrast, the Bond Index Fund will not invest in
debt securities that are not at least investment grade at the time of purchase.
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.
6
<PAGE>
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.
Prepayment/Call risk: Prepayment risk is the risk that the obligor on a
debt security may repay or "call" the debt before it is due. Most mortgage
backed, asset backed, other public bond debt securities and 144A securities that
a Fund might own are exposed to this risk. U.S. Government securities have
minimal exposure to this risk. Prepayment/call is most likely to occur when
interest rates have declined and a borrower can refinance the debt at a lower
interest rate level. Generally, a Fund reinvests the proceeds resulting from
prepayments in a lower yielding instrument. This results in a decrease in the
Fund's current yield. The values of securities that are subject to
prepayment/call 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 or
"call" features.
All Funds that invest in debt securities (other than the Money Market Fund)
may at times have some exposure to prepayment/call risk. The Funds most likely
to invest a significant portion of their assets in debt securities with
prepayment/call features are the Short-Term Bond, Bond Index, Active Bond,
Global Bond and High Yield Bond Funds. The Managed, Aggressive Balanced, and
Global Balanced, Short-Term Bond, Bond Index, Active Bond, Global Bond, and High
Yield Bond Funds may also invest in these securities.
Risks of "zero coupon" instruments: All of the Funds may, in varying
degrees, invest in debt instruments that provide for payment of interest at the
maturity date of the instrument (or payment of interest in the form of
additional securities), rather than payment of interest in cash periodically
over the life of the instrument. The values of such instruments tend to respond
more to changes in interest rates than do otherwise comparable debt obligations
that provide for periodic interest payments. The Funds most likely to invest a
significant amount of their assets in instruments that are subject to this
volatility risk are the Managed, Aggressive Balanced, Real Estate Equity, Global
Balanced, Short-Term Bond, Bond Index, Active Bond, Global Bond, and High Yield
Bond Funds. However, all Funds that invest in debt securities may at times have
some exposure to this risk.
3. Investing in Equity Securities
All of the Funds intend to invest to some degree in common stock or other
equity securities, except for the Short-Term Bond, Bond Index, Active Bond,
Global Bond, and Money Market Funds. All of the Funds that invest in equity
securities expect to make such securities their primary investment (except for
the Managed, High Yield Bond and Global Balanced Funds, which may nevertheless
do so in the discretion of their subadvisers). Though investing in equity
securities, the Managed, Aggressive Balanced, and Global Balanced Funds also
expect, under normal conditions, to invest a substantial amount of their assets
in debt obligations.
General risks of investing in equity securities are discussed in the
balance of this Section 3.
Equity risk: Investments in common stock or other equity securities
historically have offered a higher rate of return than money market instruments
or longer term debt securities. However, the risks associated with equity
securities also tends to be higher, because the investment performance of equity
securities depends upon factors which are difficult to predict. 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, interest rate, and/or economic conditions.
Market capitalization risk: Another indication of the relative risk of a
common stock investment is the size of the company, which is typically defined
by reference to 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.
7
<PAGE>
Investing in larger capitalization companies generally involves a lesser
degree of risk than investing in smaller capitalization companies. Conversely,
investing in the equity securities of smaller companies involves greater risks
and potential rewards than investing in larger, more established companies.
Small capitalization companies, in particular, 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.
Three capitalization levels are currently used by the Trust: large, medium
("mid"), and small. Each of these capitalization levels will be defined by
reference to the Russell 3000(R) Index. The Russell 3000(R) Index Index is a
broad market index and is representative of the U.S. stock markets with a total
capitalization of $13.4 trillion at the end of 1999.1
. Large cap: Companies having a capitalization within the range of the
300 largest companies in the Russell 3000(R) Index will be considered
to be large capitalization ("large cap") companies. At the end of
1999, each of the largest 300 companies in the Russell 3000(R) Index
had a capitalization greater than $ 7.9 billion.
. Mid cap: Companies having a capitalization within the range of the 250
to 1000 largest companies in the Russell 3000(R) Index will be
considered to be "mid cap." At the end of 1999, such mid cap companies
had capitalizations ranging from $1.4 billion to $9.7 billion.
. Small cap: Companies having a capitalization within the range of the
remaining companies in the Russell 3000(R) Index will be considered to
be small capitalization ("small cap") companies. At the end of 1999,
none of these smallest companies in the Russell 3000(R) Index had a
market capitalization of more than $1.4 billion.
The above parameters for large cap, mid cap and small cap are adjusted at the
end of each calendar quarter to reflect changes in the market capitalization of
the Russell 3000(R) Index.
The equity securities of the Managed, Aggressive Balanced, Growth & Income,
Equity Index, Large Cap Value, Large Cap Value CORE, Large Cap Growth, Large Cap
Aggressive Growth, Global Equity, Global Balanced and International Equity Index
Funds are generally expected to represent primarily companies that qualify as
large cap issuers. These Funds also may invest in the equity securities of
companies that qualify as small and mid cap issuers.
The equity securities of the Large/Mid Cap Value, International Equity and
International Opportunities Funds are generally expected to represent primarily
large and mid cap issuers. These Funds also may invest in the equity securities
of companies that qualify as small cap issuers.
The equity securities of the Mid Cap Value, Mid Cap Growth, Fundamental Mid
Cap Growth, and Mid Cap Blend Funds are generally expected to represent
primarily companies that qualify as mid cap issuers. These Funds 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 Value, Small/Mid Cap Growth, and
Small/Mid Cap CORE Funds are generally expected to represent companies that are
small cap and mid cap issuers. These Funds also may invest in the equity
securities of companies that qualify as large cap issuers.
- -------------------
1 The Russell 3000(R) Index is a service mark of Frank Russell Company, which
does not sponsor and is not in any way affiliated with the Trust. Inclusion in
the index in no way implies an opinion as to its attractiveness or
appropriateness as an investment.
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<PAGE>
The Small Cap Value and Small Cap Growth Funds are generally expected to
invest primarily in equity securities of companies that qualify as small cap
issuers. Although these Funds also may invest significant amounts in the equity
securities of companies that qualify as mid cap issuers, it is expected that
they would rarely invest in the equity securities of companies that qualify only
as large cap issuers.
The Emerging Markets Equity Fund has broad latitude to invest in companies
of any size.
The Real Estate Equity Fund invests in real estate equity securities that
have historically been primarily mid cap, but it may also invest in small cap or
large cap equity securities.
4. Investing in Real Estate Securities
The Real Estate Equity Fund invests primarily in companies with activities
related to the real estate industry, such as real estate investment trusts
("REITs") that own commercial and multifamily residential real estate, real
estate operating companies ("REOCs") that derive the majority of their revenue,
income or asset value from real estate 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 stock (and securities
convertible into or with rights to purchase common stock) but a portion of the
Fund may be invested in preferred stock. The Fund may also invest in commercial
mortgage securities (debt obligations secured by commercial property),
collateralized mortgage obligations (mortgage pass through securities secured by
commercial mortgage pools) and master limited partnerships from time to time,
but does not do so on the date of this Statement of Additional Information.
In addition to the Real Estate Equity Fund, all of the other Funds (except
for the Money Market Fund) 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 real estate securities: Generally speaking, real estate securities
may be affected by risks similar to those resulting from 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 equity 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.
5. Investing in Foreign Securities
Investments in foreign securities may be made in a foreign-denominated
security, or in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") or other securities representing underlying shares
of foreign securities. ADRs, EDRs and other securities representing underlying
shares of foreign 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 are designed for use in U.S. securities markets;
while EDRs are designed for use in European securities markets.
Investments in debt securities issued by foreign issuers may be made directly in
foreign-denominated debt instruments or in the form of U.S. dollar denominated
debt securities issued by foreign issuers and publicly traded in the United
States ("Yankees") or in Europe ("Eurobonds").
The International Equity Index, International Equity, International
Opportunities, Global Equity, Emerging Markets Equity, Global Bond and Global
Balanced Funds invest primarily in foreign securities, including foreign-
denominated securities. To a lesser extent, the Managed, Aggressive Balanced
High Yield Bond, Large Cap Value
9
<PAGE>
and Mid Cap Growth Funds may also invest in foreign securities, including
foreign-denominated securities. The Large Cap Growth, Small Cap Growth, Mid Cap
Blend, Large Cap Value CORE, Large/Mid Cap Value, Mid Cap Value, Small/Mid Cap
Growth, Large Cap Aggressive Growth, Small/Mid Cap CORE, Small/Mid Cap Value,
Real Estate Equity, Growth & Income, Small Cap Value, and Equity Index Funds may
invest in ADRs to a limited extent. The Short-Term Bond, Bond Index and Active
Bond Funds may invest in foreign debt securities only if denominated in U.S.
dollars (i.e., Yankees and Eurobonds).
The Emerging Markets Equity Fund invests primarily in developing countries
commonly known as "emerging markets." To a lesser extent, the Global Equity,
Global Balanced, International Equity Index, International Equity, International
Opportunities, Bond Index, Global Bond, Active Bond, and High Yield Bond Funds
may also invest in emerging markets.
Risks of investing in foreign securities are discussed in the paragraphs
that follow:
Currency risks: When a Fund buys foreign-issued securities, it usually must
pay for those securities in the local currency. Therefore, the Fund must convert
funds into the local currency to the extent necessary for this purpose.
Similarly, when a Fund sells a foreign security, it may receive payment in the
local currency. Therefore, if the Fund does not wish to continue to hold that
currency, it must enter into a transaction disposing of it.
In these ways, therefore, a Fund may temporarily hold foreign currency in
order to facilitate the purchase and sale of foreign securities. This exposes
the fund to the risk that the foreign currency's value could, while the Fund was
temporarily holding that currency, decline relative to the U.S. dollar. This
could result in a loss to the Fund, because the Fund's assets and shares are
valued in U.S. dollars. On the other hand, the Fund could experience gains if
the foreign currency's value, relative to the U.S. dollar, increases during the
period when the Fund holds that currency.
More fundamentally, however, because the Fund values its assets and shares
in U.S. dollars, the Fund's gains and/or losses on investments that are
denominated or traded in foreign currencies will depend in part on changes in
the value of that currency relative to the U.S. dollar. This exposes the Fund to
the risk of loss if that foreign currency loses value, as well as the
possibility of gains if that currency gains value, relative to the U.S. dollar.
The Funds may (but are not required to) employ certain strategies to limit
their risks or otherwise manage their exposure to foreign currencies. Such
currency management techniques, as well as the risks that those techniques
themselves present, are discussed in Sections 6. - 10. below.
Also, a risk exists that a foreign country may have or implement
restrictions on transactions in its currency that prevent a Fund from
effectively managing or reducing its exposure to that currency, even after the
Fund has disposed of any securities denominated or traded in that currency.
The risks associated with foreign currency conversions are not present in
investments in Yankees and Eurobonds because these debt securities are U. S.
dollar denominated.
Political and economic risk: Foreign securities often are subject to
heightened political and economic risks, particularly in emerging markets or
other 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 Fund's assets from that
country. However, investments in foreign securities also offer the opportunity
to diversify 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 or other
underdeveloped or developing countries.
10
<PAGE>
Market risk: Foreign securities markets, particularly those of emerging
markets or other underdeveloped or developing countries, may be less liquid and
more volatile than domestic markets. Certain markets may require payment for
securities a Fund purchases before delivery of these securities to the Fund, and
delays may be encountered in settling securities transactions. In some foreign
markets, there may be limited protection against failures by other parties to
complete their transactions with a Fund. There may be limited legal recourse
against an issuer in the event of a default on a debt instrument held by a Fund.
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. This is particularly true for
investments in emerging markets, or other underdeveloped or developing
countries.
6. Using Forward Exchange Contracts to Manage Currency Exposure
Transaction hedging and portfolio hedging: When a Fund anticipates having
to purchase or sell a foreign currency to facilitate a foreign securities
transaction, it may wish to "lock in" the current exchange rate for that
currency (vis-a-vis the U.S. dollar) and thus avoid (in whole or in part)
exposure to further changes in that rate that could occur prior to when the
purchase or sale proceeds are actually paid. This is called "transaction
hedging."
A Fund can do transaction hedging by purchasing or selling foreign
currencies in the "spot" (i.e., cash) market. Alternatively, the following Funds
may use "forward" currency foreign exchange purchase or sale contracts for
transaction hedging: the Managed, Aggressive Balanced, Large Cap Value, Mid Cap
Growth, Global Equity, Global Balanced, International Equity Index,
International Equity, International Opportunities, Emerging Markets Equity,
Global Bond, and High Yield Bond Funds. In a forward exchange contract, the Fund
purchases or sells a specific amount of foreign currency, at a price set and
time set in the contract, which may be any fixed number of days in the future.
These same Funds may also use forward foreign exchange contracts to reduce
their exposure to changes (relative to the U.S. dollar) in the value of a
foreign currency during a period of time when the Fund owns securities that are
denominated, exposed to or traded in that currency. This is called "portfolio
hedging." Except as described in the paragraph immediately below for certain
funds, the Funds 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 establishing the hedge) of securities held by that Fund
which are denominated, exposed to or traded in that particular foreign currency.
The Funds may or may not attempt to hedge some or all of their foreign portfolio
positions. Rather, they will enter into such transactions only to the extent, if
any, deemed appropriate by their subadvisers. Furthermore, no Fund will use
forward foreign currency exchange contracts for the purpose of leveraging the
Fund's currency exposure.
For purposes of transaction hedging or portfolio hedging, the Managed,
Aggressive Balanced, Mid Cap Growth, Global Equity, Global Balanced, Global
Bond, International Equity Index, International Equity, Emerging Markets Equity,
and International Opportunities Funds may use forward exchange contracts on a
"proxy" currency, instead of the currency being hedged. A proxy currency is one
that the subadviser believes will bear a close relationship to the currency
being hedged and believes will approximately equal the performance of such
currency relative to the U.S. dollar. 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 Fund than the subadviser had expected.
Other techniques for managing currency exposure: The Managed, Aggressive
Balanced, Mid Cap Growth, Global Equity, Global Balanced, International Equity
Index, International Equity, International Opportunities, Emerging Markets
Equity, and Global Bond Funds may use additional techniques when their
subadvisers believe that the currency of a particular country may suffer a
significant decline against the U.S. dollar or against another currency. In that
case, these Funds may enter into a forward 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 Fund's securities
denominated in, traded in, or exposed to such foreign currency. The currency
contract may call for the Fund 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 Fund's overall exposure to various currencies into a more
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desirable balance. For similar purposes, the Managed, Aggressive Balanced,
Global Balanced, Emerging Markets Equity, International Opportunities,
International Equity, Mid Cap Growth and Global Bond Funds 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 Fund's securities.
Asset segregation requirements for forward exchange contracts: A Fund may
"cover" its obligations under outstanding forward currency sale contracts by
maintaining portfolio securities denominated, exposed to or traded in the
currency of such contracts or of an appropriate proxy currency. To the extent a
Fund 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, the Funds' custodian will segregate cash or liquid assets in a
separate account of the Fund in an amount at all times at least equal to the
value of the Fund's net obligation with respect to forward contracts in a
particular currency or, in the case of the Global Balanced Fund only, the value
of that Fund's net "out of the money" obligation (If any) with respect to all of
the Fund'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 segregated
account declines, the Fund will find additional "cover" or additional cash or
liquid assets will be placed in the account so that the value of the account
will at least equal the required amount described in the preceding sentence.
7. Using Options on Currencies to Manage Currency Exposure
The Managed, Aggressive Balanced, Mid Cap Growth, Global Equity, Global
Balanced, International Equity Index, International Equity, International
Opportunities, Emerging Markets Equity, Global Bond, and High Yield Bond Funds
may also purchase and write put and call options on foreign currencies for the
same purposes as those Funds could use forward foreign exchange contracts (as
discussed in Section 6. above). This could include options traded on U.S. and
foreign exchanges, as well as those traded in "over-the-counter" markets.
The characteristics and risks of these currency option transactions are
similar to those discussed in Sections 15. - 16. below with respect to put and
call options on securities.
Call options on foreign currencies written by a Fund will be "covered,"
which means that the Fund will own at all times at least an equal amount of, or
an offsetting position in, the underlying foreign currency.
Asset segregation requirement for currency put options written by a Fund:
With respect to put options on foreign currencies written by a Fund, the Fund
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 Fund would be required to deliver
upon exercise of the put.
8. Using Currency Futures Contracts and Options Thereon to Manage Currency
Exposure.
Any Fund may use currency futures contracts and options thereon for the
same purposes and to the same extent as that Fund could use forward foreign
exchange contracts (as discussed in Section 6. above). The characteristics and
risks of such futures and options transactions are similar to those discussed in
Sections 16. - 19. below for other transactions in futures contracts and options
thereon. All transactions in currency futures and options thereon also would be
subject to the applicable limitations in Section 20. below.
9. Using Certain Other Derivative Instruments to Manage Currency Exposure
As discussed in Section 21. below, several of the Funds may use currency
"swaps," "caps," "floors," and "collars" for the same purposes as those Funds
could use forward foreign exchange contracts (as discussed in Section 6. above).
The characteristics and risks of such "derivative" transactions, as discussed in
Section 21., are generally also applicable when such instruments are used for
currency management purposes.
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10. Using Foreign Currency Exposure Management Strategies (General
Considerations and Risks)
The foreign currency management techniques discussed in Sections 6. - 9.
above do not eliminate fluctuations in the prices of portfolio securities or
prevent losses if the prices of such securities decline. The Funds are not
obligated to try to hedge against any change in the value of any currency. Even
if a Fund wished to do so, there is no assurance that market conditions would be
such as to make such hedging possible.
Moreover, even where a Fund establishes positions designed to manage its
foreign currency exposure, there is no assurance that this will be beneficial to
the Fund. Such positions may cause a Fund to forego gains that it otherwise
could have achieved or incur costs and losses that it would not otherwise have
incurred. (In general the cost to the Funds of engaging in foreign currency
management transactions varies with such factors as the currency involved, the
type and duration of the instrument being used for this purpose, and the market
conditions then prevailing.) It is entirely possible, therefore, that any effort
to manage a Fund's currency exposure could have a negative effect on the Fund's
investment performance.
In general, the more foreign securities a given Fund invests in, the
greater its currency management activities are likely to be. Also, the Managed,
Aggressive Balanced, Mid Cap Growth, Global Equity, Global Balanced,
International Equity Index, International Equity, International Opportunities,
Emerging Markets Equity and Global Bond Funds may use certain of these same
types of instruments in currency management strategies that expose those Funds
to currencies other than the U.S. dollar. Although this would not be done for
the purpose of "leveraging" the Fund's overall exposure to fluctuations in
currency values, such strategies could expose those Funds to greater risks of
loss and greater volatility than they otherwise would experience.
11. Reallocating a Fund's Assets Among Asset Classes
The continual reallocation of assets among the major asset classes (e.g.,
stocks, bonds, and cash) involves the risk that the subadviser may reduce the
Fund's holdings in an asset class whose value increases unexpectedly, or may
increase the Fund's holdings in an asset class just prior to that asset class
experiencing a loss of value. The Managed, Aggressive Balanced, and Global
Balanced Funds tend to exercise broad discretion in reallocating assets across
asset classes. The Global Bond and Global Equity Funds intend to exercise
discretion to reallocate assets across domestic and international asset classes.
All of the other Funds, with the exception of the Money Market Fund,
generally allow the subadviser 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, Aggressive Balanced, and Global Balanced Funds.
12. Adopting a Temporary Defensive Strategy
All of the Funds, except the Money Market Fund, may (but are not required
to) adopt a defensive investment posture if the subadviser believes the
investment environment for the Fund is negative. Such a defensive posture would
involve reallocating some or all of a Fund's assets in a manner different from
that contemplated by its primary investment objective and strategies.
Most of the Funds are not limited as to the types of investments they could
use temporarily for defensive purposes. Thus, for example, a small cap equity
Fund might temporarily invest in stocks of larger cap companies or in high
quality, short term debt securities. A bond Fund might shorten maturities or
tighten its investment quality parameters. An international Fund might, for
example, limit the countries it would invest in or temporarily invest only in
high quality, short-term debt securities in the United States.
There can be no assurance that the transaction costs and lost investment
opportunities will not outweigh any benefits to a Fund that attempts to adopt a
defensive strategy.
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13. Investing With an Index-Based Objective
The Equity Index, International Equity Index, and Bond Index Funds expect
to invest substantially all of their assets in equity or debt securities within
their investment objectives and policies at all times. Accordingly, these Funds
may carry more risk in times of declining markets than Funds 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 strategies.
Investments in the Equity Index, International Equity Index, and Bond Index
Funds each involve the risk that the Fund will be unable to match the
performance of its corresponding target index. Each Fund's ability to do so is
affected by (a) the size and timing of cash flows into and out of that Fund, (b)
the level of the Fund's expenses, including commissions and "spreads," on its
portfolio transactions, other portfolio management expenses, and other operating
expenses, and (c) the degree of success of the techniques employed by the Fund's
subadviser. Further, if the size of a Fund limits the number of issues that the
Fund can purchase, or that size is relatively small in relation to cash flows,
there is a greater possibility that the Fund may be unable to match the
performance of the corresponding target index.
The S&P 500 Index: 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 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 Trust and the insurance products supported by the Trust 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 Trust or to any member of the public
regarding the advisability of investing in the Trust or such insurance products.
Standard & Poor's only relationship to the Trust 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 Fund or the Trust.
"Standard & Poor's," "S&P ," "S&P 500," "Standard & Poor's 500," and "500" are
trademarks of McGraw-Hill, Inc. and have been licensed for use by the Trust. In
determining, composing, or calculating the S&P 500 Index, S&P has no obligation
to take into consideration the needs of the Trust or those of the owners of the
insurance products supported by the Trust. 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 Trust or the timing of the issuance or sale of such
products or in the determination or calculation of the equations 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 TRUST, OWNERS OF THE PRODUCTS
SUPPORTED BY THE TRUST, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P
500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P
HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
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
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issues, such as GNMA certificates) and (2) all publicly issued, fixed-rate,
non-convertible, investment grade, U.S. dollar-denominated, SEC-registered
obligations of domestic corporations, foreign governments and supranational
organizations. Securities in the index generally have at least $150 million par
amount outstanding and at least 1 year remaining to maturity.
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 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, the Federal Home Loan
Mortgage Association, and the Federal National Mortgage Association. 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-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").
All securities in the Government/Corporate Index and the Aggregate Bond
Index issued by non-U.S. entities are denominated in U.S. dollars.
Lehman Brothers, Inc. is neither a sponsor of nor in any other way
affiliated with the Trust or the insurance products supported by the Trust.
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 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 Trust and the insurance products supported by the Trust are not
sponsored, endorsed, sold or promoted by Morgan Stanley Capital International
("MSCI"). MSCI makes no representation or warranty, express or implied, to the
owners of the Trust, or any member of the public regarding the advisability of
investing in funds generally or in the Trust or any Fund 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 Trust. "Morgan Stanley Capital
International" is a service mark of Morgan Stanley & Co., Incorporated, that has
been licensed for use by the Trust.
MSCI has no obligation to take the needs of the Trust or the owners of
insurance products supported by the Trust 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 the Trust or the timing of the issuance and sale
of such products, or in the determination or calculation of the equations by
which such products are convertible into cash. MSCI has no obligation or
liability to owners of the Trust or of the insurance products supported by the
Trust in connection with the administration, marketing or trading of any Fund of
the Trust.
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
TRUST, 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
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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.
14. Investing on a Non-Diversified Basis
The Large Cap Aggressive Growth, Mid Cap Growth and Global Balanced Funds
are "non-diversified Funds." Non-diversified Funds 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 Fund's assets may be invested in
the obligations of a limited number of issuers, the value of that Fund's shares
may be more volatile and more susceptible to any single economic, political, or
regulatory event, or to credit and market risks associated with a single issuer,
than would the shares of a diversified Fund.
15. Using Options (Generally)
Most of the Funds may, in varying degrees, use options on the following
(which, for simplicity, may be referred to as the "subject" of an option):
currencies, securities, equity indexes, interest rate indexes, and financial
futures contracts. This Section 15. discusses certain characteristics and risks
that are generally common to all of these types of options. The Funds' use of
specific types is discussed in Sections [7. - 8. above and 16. - 20. below],
including characteristics and risks peculiar to those types of options or the
Funds' use of them.
Purchasing "call" options: If a Fund (or anyone else) "purchases" a "call"
option, it pays a purchase price (often called a "premium") plus, in most cases,
a commission to the broker through whom the purchase was made. In return the
Fund (or other purchaser) has the right (but not the obligation), at or before a
specified future time (called the "expiration date"), to acquire a specified
amount of the option's subject (or the economic equivalent thereof) at a
specified price (called the "strike price" or "exercise price"). If the
purchaser of an option decides to exercise this right, we say the option has
been "exercised." If an option is never exercised before its expiration date, it
expires unexercised.
A Fund (or other purchasers of a call option) may profit in one of two
ways. First, the Fund may be able to exercise the call option at a date when
the value of the option's subject exceeds the purchase price of the option
(including any brokerage commission) plus the exercise price. Whether the Fund
will be able to do this depends on how favorable those prices were and how the
value of the option's subject has changed since the option was purchased.
Secondly, a Fund may profit from purchasing an option if the Fund is able
to sell the option (unexercised) at a profit sometime before its expiration
date. (As a practical matter, such a sale would generally be accomplished by
having the Fund sell (e.g., "write") an option identical to the option it owns,
thereby "netting out" the Fund's exposure to the position.) Whether such a
profit will be possible, of course depends on whether the then market price for
the option (less any commission payable on the sale) exceeds the option's
purchase price (including any related commission). In this regard, one of the
general risks of purchasing options is that, for a variety of reasons, the
market price of an option usually does not vary in the same way or to the same
extent as the value of the option's subject varies. Therefore, a Fund can lose
money purchasing a call option, even if the value of the option's subject
increases.
The basic risk in purchasing an option is that, if the Fund never exercises
or sells the option at a profit, the Fund will lose the entire purchase price of
the option (plus any related commissions). That is the maximum amount the Fund
could lose, however.
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Selling or "writing" call options: Selling an option is commonly referred
to as "writing" an option. If the Fund (or anyone else) sells ("writes") a call
option, it receives the premium (less any commission) paid by the option's
purchaser and has the obligation to sell the option's subject to the purchaser
at the exercise price if the purchaser exercises the option before it expires.
The Fund can make a profit writing a call option if the purchaser fails to
exercise the option (which usually would happen only if the value of the
option's subject were below the exercise price). In this case, the option's
purchase price (net of any commissions) would be a profit to the Fund.
Alternatively, a Fund could profit from writing a call option if it is able
to subsequently purchase an identical option that would close out the Fund's
position at a profit. This could be done only if the market price of the option
then exceeded the Fund's initial purchase price by an amount greater than any
commissions payable by the Fund on the purchase or sale transactions. There is a
risk, however, that a Fund may be unable to do this, even if the value of the
call option's subject has declined. This is because, as noted above, the value
of an option does not vary in identical fashion to the value of the option's
subject.
The risk of writing a call option is that, if the value of the option's
subject exceeds the option's exercise price, the option is almost sure to be
exercised. In that case, the Fund will suffer a loss to the extent that the
premium it received for writing the option (net of any commissions), plus the
exercise price it receives are less than the value of the option's subject at
the time of exercise. Therefore, the higher the value of the option's subject
rises, the greater the Fund's potential loss on an option it has written. A Fund
could cut off its further exposure in such a case by purchasing an identical
call option that would close out its position. The Fund would, however, probably
realize a loss on the transaction, because the purchase price it would have to
pay for that call option would probably have increased to reflect the increasing
value of the option's subject.
Writing options on a "covered" basis. One way for a Fund to limit its risk
exposure on call options it has written is to "cover." A call option may be
considered "covered" if, as long as the option is outstanding, the writer
(seller) of the option owns assets that are identical to, or have the same or
similar investment characteristics to, the option's subject. In such a case, if
the value of the option's subject increases, the losses that the Fund will incur
on the call option it has written will tend to be offset by gains that Fund
earns on the assets it is holding to "cover" the option.
Naturally, the more similar the assets held by the fund are to the option's
subject, the more assurance the Fund will have that its losses on call options
it has written will be "covered." How similar those assets must be varies
depending on the Fund and the type of covered option involved. More details in
this regard can be found in Sections 16. - 19. below.
Purchasing and selling (writing) "put" options: A "put" option is the same
as a call option, except that a Fund (or any other person) that purchases a put
option, by paying the purchase price ("premium") has the right to sell (rather
than buy) the option's subject for a stated exercise ("strike") price.
Conversely, the seller (writer) of a put option receives the premium (net of any
commissions) but has the obligation to purchase the option's subject at its
exercise price if the option is exercised.
Thus, if a Fund purchases a put option, its maximum potential loss would
equal the purchase price (plus any commissions thereon). On the other hand, if a
Fund sells (writes) a put option, the Fund could continue to experience
continuing losses while the option is outstanding, to the extent that the value
of the subject of the option continues to decline. If the subject lost its value
entirely, the Fund's maximum loss would equal the exercise price less the
premium (net of any commissions) that the Fund received initially for writing
the option. Because of this risk exposure, a Fund that writes a put option may
seek to "cover" that option with other assets that it owns. More details about
this can be found in Section 16. - 19. below.
Accounting for options: The value of any option that the Fund has
purchased, and the amount of the Fund's obligation under any outstanding option
it has written, will vary as market prices change. These variations are
reflected daily in the Fund's calculation of its net asset value, so that such
value always reflects the estimated impact of current market conditions on all
of the Fund's option positions.
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16. Using Options on Securities in Certain Conservative Investment Strategies
Except as otherwise noted below, the general discussion of options in
Section 15. above applies to this Section 16.
Each of the Funds may write covered call options that are traded on
national securities exchanges, except for the Growth & Income, Real Estate
Equity, and Money Market Funds. By "covered" we mean that the Fund will
actually own the securities that are the subject of the option.
The same Funds may purchase "protective" put options that are traded on
national securities exchanges. By "protective", we mean that the Fund will
actually own the securities that are the subject of the option. If the market
value of such underlying securities remains above the option's exercise price,
the Fund will, in effect, lose the premium it has paid for the option. The
Fund, however, avoids the risk of loss on the underlying securities, to the
extent that the market value of the underlying securities falls below the
exercise price of the put option.
Liquidity risk: The Funds intend to write and purchase options only if the
subadviser believes that adequate liquidity exists. If for any reason a Fund
cannot, however, close out its open option position when deemed advisable, the
Fund's investment performance could be adversely affected.
17. Using Financial Futures Contracts, Options on Such Contracts and Options on
Stock Indexes (General Considerations)
Most of the Funds may, in varying degrees use financial futures contracts,
options on such futures and options on stock indexes. This Section 17 discusses
certain characteristics and risks that generally pertain to these instruments,
regardless of the specific use to which they are put. The Funds' specific uses
are discussed in Sections 7. - 8. above and 18. - 20. below, including specific
risks related to those risks.
Financial futures contracts: Financial futures contracts consist of
interest rate futures contracts, stock index futures contracts, and currency
futures contracts.
An interest rate futures contract is a contract to buy or sell specified
debt securities at a future time for a fixed price. A 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.
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. 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.
A currency futures contract is a contract to buy or sell a specified amount
of another currency at a future time for a fixed price.
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 having a specified price, if the purchaser exercises the option and
thereby assumes the opposite position in the financial futures contract. If the
option purchaser would assume the sale side of the futures contract upon
exercise of the option, the option is commonly called a "put" option. If the
option writer would assume the sale side, it is commonly called a "call" option.
As with other types of options, the party that writes the option receives a
premium for doing so, and the party that purchases an option pays a premium
therefor. However, there is no exercise (or strike) price, as such. Rather, if
the value of the futures contract moves
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against the writer of the option, so that the option is (or is likely to be)
exercised, the option writer, in effect, has the obligation to pay those losses.
More specifically, an option written by a Fund on a financial futures
contract requires the Fund to pay any amount by which the fluctuating price of
the underlying debt instrument or index exceeds (in the case of a call option)
or is less than (in the case of a put option) the price specified in the futures
contract to which the option relates. Therefore, if the price of the debt
instrument or stock index on which the futures contract is based increases (in
the case of a call option written by a Fund) or decreases (in the case of a put
option written by a Fund), the Fund may incur losses that exceed the amount of
the premium received by the Fund for writing the option.
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. Thus, if the price of the stock index
on which an index option is based increases (in the case of a call option
written by a Fund) or decreases (in the case of a put option written by a Fund),
the Fund may incur losses that exceed the premium it received for writing the
option.
Stock indexes for which options are currently traded include the Standard &
Poor's 100 and Standard & Poor's 500 Indexes.
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
U.S. 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 Trust,
so that a Fund has a net loss on its outstanding futures contracts for a given
day, the Fund generally will be required to post additional margin to that
extent. The margin deposit is returned, assuming the Trust's obligations have
been met, when the futures contract is terminated.
Similar margin requirements will apply in connection with any transactions
in which a Fund writes any options. This includes options on indexes and
futures contracts, as well as other types of options.
Certain risks: Financial futures, options thereon, and stock index
options, if used by a 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 the Fund 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 Funds 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
Funds necessarily take delivery of or deliver currencies in connection with
currency futures contracts. Instead, a Fund will more typically close out such
futures positions by entering into closing futures contract transactions.
Similarly, a Fund may wish to close out an option on a futures contract or an
option on an index by entering into an offsetting position in those instruments.
Generally speaking, entering into closing transactions such as described
immediately above would not affect gains and losses of the Fund resulting from
market action prior to such closing transactions. Moreover, there is a risk
that, at the time a Fund wishes to enter into such a closing transaction,
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.
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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 subadvisers will seek to avoid
situations where these factors would be likely to cause a problem for the Trust,
in some cases they could adversely affect particular Fund transactions in these
instruments.
Asset segregation requirement for certain futures and options positions: A
Fund will maintain at all times in a segregated account with its custodian cash
or high-grade liquid debt securities at least equal to the sum of the purchase
prices of all of the Fund's open futures purchase positions, plus the current
value of the securities underlying all of the Fund's open futures sales
positions that are maintained for purposes other than bona fide hedging, plus
the exercise price of all outstanding put options on futures contracts written
by the Fund, minus the amount of margin deposits with respect thereto as marked
to market each day.
18. Using Financial Futures, Options Thereon, and Stock Index Options for
Certain Hedging-Type Strategies
This Section 18. should be read against the background of the generally
applicable information about options, futures and related risks that appears in
Sections 15. and 17. above.
This Section 18. covers all Funds, except the Growth & Income, Real Estate
Equity, and Money Market Funds. Specifically, with those exceptions, all Funds
may use exchange-traded financial futures contracts thereon, and, except for the
Active Bond Fun, they also may purchase exchange-traded put or call options on
stock indexes, for the purposes discussed below.
It should be emphasized that none of the Funds is required to use any of
these strategies, and doing so is not a principal investment strategy of any of
the Portfolios. Therefore, it should not be assumed that any particular Fund
will ever necessarily use any of these strategies to a significant extent.
Hedging with financial futures contracts against market changes: All Funds
covered by this Section 18. (except the Equity Index Fund) may use financial
futures contracts as a hedge to protect against possible changes in interest
rates and security prices.
Thus, for example, 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 Funds (other than the Equity Index Fund) may sell
stock index futures contracts. Similarly, to hedge against the possibility that
increases in interest rates may adversely affect the market values of debt
securities held by them, these Funds (other than the Equity Index and Large Cap
Value CORE Funds) may enter into interest rate futures sale contracts.
Establishing market exposure and managing cash flow with financial futures
contracts: On the other hand, purchasing futures contracts could enable a Fund
to take the approximate economic equivalent of a substantial position in bonds
or equity securities. Thus, the following Funds may purchase and sell stock
index and interest rate futures to maintain market exposure and manage cash
flows: the Managed, Aggressive Balanced, Equity Index, Large Cap Value CORE,
Large Cap Growth, Large Cap Aggressive Growth, Large/Mid Cap Value, Mid Cap
Growth, Fundamental Mid Cap Growth, Mid Cap Blend, Mid Cap Value, Small/Mid Cap
CORE, Small/Mid Cap Value, Small/Mid Cap Growth, Small Cap Growth, Global
Equity, Global Balanced, International Equity Index, International Equity,
International Opportunities, Emerging Market Equity, Short-Term Bond, Bond
Index, Active Bond, Global Bond, and High Yield Bond Funds.
Managing foreign currency exposure with foreign currency futures contracts:
Any Fund may use foreign currency futures contracts to the same extent and in
the same manner as it is authorized to use forward foreign exchange contracts in
Section 6. above.
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Using options on futures contracts and options on stock indexes for the
foregoing purposes: Each Fund that this Section 18. authorizes to use financial
futures contracts also may purchase options on appropriate financial futures
contracts and (except for the Active Bond Fund) stock indexes for any purpose
and to the extent that it could use financial futures contracts as discussed
above.
Limitations on "long" positions for certain Funds: The Large Cap Value CORE
Portfolio may not purchase financial futures contracts, except for currency
futures. The following limitation applies to the Managed, Aggressive Balanced,
Equity Index, Large Cap Aggressive Growth, Large/Mid Cap Value Fundamental Mid
Cap Growth and Mid Cap Blend Funds. These Funds may purchase financial futures
contracts, purchase call options on financial futures options or purchase call
options on equity indexes only if (a) they intend to purchase securities (or, in
the case of the Aggressive Balanced, Equity Index, Large Cap Aggressive Growth,
Large/Mid Cap Value, Fundamental Mid Cap Growth, and Mid Cap Blend Funds, wish
to establish or maintain market exposure to securities that the Fund 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 or options
contracts being used to hedge them.
Risks of hedging-type strategies: If, after a Fund establishes a hedge
position, the value of the securities or currencies being hedged moves in the
opposite direction from that anticipated, the Fund as a whole will perform less
well than it would have had it not entered into the futures or option
transaction.
The success of the Funds in using hedging-type techniques depends, among
other things, on the subadviser'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 subadviser's
ability to select the proper type, time and duration of option or futures
contracts. Certain of the subadvisers have limited experience in utilizing
these hedging-type techniques, and there can be no assurance that these
techniques will produce their intended result.
The prices of the futures and options contracts used for hedging-type
strategies 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 Fund, 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 Fund which
would not be offset by gains with respect to corresponding portfolio securities
owned or to be purchased by that Fund. Hedging-type transactions also may be
more, rather than less, favorable to a Fund than originally anticipated.
19. Using Options and Futures In Potentially More Aggressive Strategies
This Section 19. should be read against the background of the generally
applicable information about options, futures, and related risks that appears in
Section 15., 17. and 18. above.
This Section 19. applies only to the Managed, Aggressive Balanced, Large
Cap Value CORE, Mid Cap Growth, Small/Mid Cap CORE, Small/Mid Cap Growth, Small
Cap Growth, Global Equity, Global Balanced, International Equity Index,
International Equity, Emerging Markets Equity, Short-Term Bond, Bond Index, l
Global Bond, and High Yield Bond Funds. The option and futures strategies
discussed in this Section are in addition to those discussed for those (and
other) Funds in Sections 7., 8., 16., and 18. above.
Writing certain types of options: The Managed, Aggressive Balanced, Large
Cap Value CORE, Mid Cap Growth, Small/Mid Cap CORE, , Small/Mid Cap Growth,
Small Cap Growth, Global Equity, Global Balanced, International Equity Index,
International Equity, Emerging Markets Equity, Short-Term Bond, Bond Index,
Global Bond, and High Yield Bond Funds may write "covered" put options on
securities. In addition, the Managed, Aggressive Balanced, Large Cap Value
CORE, Mid Cap Growth, Small/Mid Cap CORE, , Small/Mid Cap Growth, Small Cap
Growth, Global Equity, Global Balanced, International Equity Index,
International Equity, Short-Term Bond, Bond Index, Global Bond, and High Yield
Bond Funds may also write covered put and call options on indexes composed of
securities in which the Fund may invest. Such index options may be written in
any manner that the Fund in question is authorized to write options on specific
securities it owns.
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A put option written by a Fund will be deemed to be "covered" if the Fund
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 Funds will also be considered to be "covered" to the extent that the Fund's
liabilities under these options are fully offset by its rights under put or call
options purchased by the Fund.
Purchasing certain types of options. The Managed, Aggressive Balanced,
Large Cap Value CORE, Mid Cap Growth, Small/Mid Cap CORE, Small Cap Growth,
Global Equity, Global Balanced, International Equity Index, International
Equity, Emerging Markets Equity, , Global Bond, and High Yield Bond Funds may
purchase put and call options on securities in which it may invest, without
specific restriction as to the circumstances of such purchases. Similarly, each
of these Funds, as well as the Small/Mid Cap Growth and Short-Term Bond Funds,
may purchase put and call options on indexes composed of securities in which the
Fund may invest, without specific restriction on the circumstances of such
purchases.
Option purchases of the type covered in the preceding paragraph would have
to be consistent with the Fund's investment objective. Also, each of the above-
listed Funds is subject to the limitation on certain futures and options
transactions described in Section 20.
Using options traded over-the-counter or on foreign exchanges: The
Managed, Aggressive Balanced, Large Cap Value CORE, Mid Cap Growth, Small/Mid
Cap CORE, Small/Mid Cap Growth, Small Cap Growth, Global Equity, Global
Balanced, International Equity Index, International Equity, Emerging Markets
Equity, Short-Term Bond, Bond Index, Global Bond, and High Yield Bond Funds may
also use options on securities and options on indexes that are traded "over-the-
counter" or on foreign exchanges, in any manner that they would be permitted to
use such options that were traded on domestic exchanges. These Funds 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 Funds will
treat over-the-counter options they have purchased and assets used to cover
over-the-counter options they have written 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 for certain
purposes: The Managed, Aggressive Balanced, Large Cap Value CORE, Mid Cap
Growth, Small/Mid Cap CORE, Small/Mid Cap Value, Small/Mid Cap Growth, Small Cap
Growth, Global Equity, Global Balanced, International Equity Index,
International Equity, Emerging Markets Equity, Short-Term Bond, Bond Index,
Active Bond, Global Bond, and High Yield Bond Funds may use futures contracts on
securities or on market indexes, and options on such futures contracts, without
specific restriction on the purposes of such transactions. Nevertheless, such
transactions would have to be consistent with the Fund's investment objective.
There is no specific overall limit on the amount of the assets these Funds
may devote to financial futures contracts and options thereon, even if such
contracts are not limited to hedging-type transactions. Nevertheless (except
through the purchase of options, as discussed below) the Funds will not use
these techniques for purpose of "leveraging" the Fund'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 Fund, the total amount of premiums
paid by a Fund for such options that are not used for bona fide hedging is
(pursuant to the restrictions set forth in Section 20. below) limited to 5% of
the Fund's net assets.
Risks of potentially more aggressive options and futures strategies: As
outlined above, the Funds discussed in this Section 19. may engage in types of
options and futures transactions not permitted to the other Funds, including
over-the-counter options, writing covered put options, and more types of
transactions that are not solely for hedging-type purposes or that other may be
more speculative. Also, even as to options and futures transactions of a type
that are permitted to other Funds, these Funds are, in certain cases, not as
limited regarding the amount of their assets that may be so employed.
Accordingly, to the extent that these Funds exercise their broader authority to
enter into options and futures transactions, they may incur greater risks than
the other Funds.
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20. Limiting the Funds' Exposure to Certain Futures and Option Transactions.
The Equity Index, Large Cap Value, Large Cap Growth, Mid Cap Value, Small
Cap Value, and International Opportunities Funds will not 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 Fund for outstanding options to purchase
futures contracts, exceeds 5% of the market value of the Fund's total assets.
The following limitation applies to all of the Funds that can invest in
financial futures contracts or options thereon, other than the Equity Index,
Large Cap Value, Large Cap Growth, Mid Cap Value, Small Cap Value and
International Opportunities Funds: No such other Fund may purchase, sell or
write futures contracts or options thereon other than for "bonafide" hedging
purposes (as defined by the U.S. Commodity Futures Trading Commission) if
immediately thereafter the Fund's initial margin deposits on such outstanding
non-hedging futures and options positions, plus the amount of premiums paid by
the Fund for such outstanding non-hedging options on futures contracts, exceeds
5% of the market value of the Fund'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.
Nor will any of the Large Cap Value, Large Cap Value CORE, Large Cap
Growth, Mid Cap Value, Small Cap Value or International Equity Funds 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 Fund's total assets. Nor will any Fund consider as "hedging"
any transaction that is intended to leverage the Fund's investment exposure to
the type of security being hedged or to leverage the Fund's currency exposure.
21. Using Other Types of Derivative Instruments
The Global Balanced, International Equity Index, and High Yield Bond Funds
may engage in "swap" transactions (specifically interest rate, currency and
index swaps) and in the purchase or sale of related "caps," "floors," or
"collars." The Emerging Markets Equity Fund may also engage in those
transactions and, in addition, may engage in equity swap transactions. The
Managed and Aggressive Balanced Funds may each invest up to 10% of the
respective Fund's total assets (at the time the swap is entered into) in
currency and equity swaps for hedging purposes or for currency management
strategies as discussed in Section 6 above. The International Equity Fund may
invest up to 10% of its total assets (at the time the swap is entered into) in
currency and equity swaps, although it will use currency swaps only for hedging
purposes. The Global Bond Fund may also use these derivative instruments, but
only for currency management strategies as discussed in Section 6. above.
The nature and risks of these types of transactions are discussed further
in the paragraphs that follow.
Interest rate swaps: 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.
Provided the contract so permits, a Fund 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
Fund receiving or paying, as the case may be, only the net amount of the two
payments.
Interest rate caps, floors and collars: The purchaser of an interest rate
cap or floor, upon payment of a fee, has the right to receive payments (and the
seller of the cap is obligated to make payments) to the extent a specified
interest rate exceeds (in the case of a cap) or is less than (in the case of a
floor) a specified level over a specified period of time or at specified dates.
The purchaser of an interest rate collar, upon payment of a fee, has the right
to receive payments (and the seller of the collar is obligated to make payments)
to the extent that a specified interest rate falls outside an agreed upon range
over a specified period of time or at specified dates.
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Currency, index and equity swaps, caps, floors and collars: Currency,
index, and equity swaps, caps, floors, and collars are similar to those for
interest rates described in the two preceding paragraphs above, except that,
rather than being determined by variations in specified interest rates, the
obligations of the parties are determined by variations in a specified currency,
interest rate index, or equity index, as the case may be.
Risks and purposes of these other derivatives: The amount of a Fund's
potential gain or loss on any swap transaction is not subject to any fixed
limit. Nor is there any fixed limit on the Fund's potential loss if it sells a
cap, floor or collar. If a Fund buys a cap, floor or collar, however, the
Fund'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 Fund will use these techniques only as a
risk management tool and not for purposes of leveraging the Fund's market
exposure or its exposure to changing interest rates, security values or currency
values. Rather, a Fund 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 Fund anticipates purchasing
at a later date, or to gain exposure to certain markets in the most economical
way possible. Nor will a Fund sell interest rate caps, floors or collars if it
does not own securities providing the interest that the Fund may be required to
pay under such derivative instruments. Finally, of course, a Fund may use these
derivative instruments only in ways that are consistent with its investment
objective.
The use of swaps, caps, floors and collars involves investment techniques
and risks different from those associated with other portfolio security
transactions. If the subadviser is incorrect in its forecasts of market values,
interest rates, currency rates and other applicable factors, the investment
performance of a Fund will be less favorable than if these techniques had not
been used.
These instruments are typically not traded on exchanges. Accordingly,
there is a heightened risk that the other party to certain of these instruments
will not perform its obligations to the Fund. None of the Funds will enter into
any swap, cap, floor, or collar, unless the other party to the transaction is
deemed creditworthy by the subadviser.
There also is a risk that a Fund 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 Fund. In recent years, the swap market has become relatively
liquid. Caps, floors and collars are more recent innovations for which
standardized documentation has not yet been fully developed and, for that
reason, they are less liquid than swaps.
The liquidity of swaps, caps, floors and collars will be determined by the
subadviser based on various factors, including (1) the frequency of trades and
quotations, (2) the number of dealers and prospective purchasers in the
marketplace, (3) dealer undertakings to make a market, (4) the nature of the
instrument (including any demand or tender features) and (5) the nature of the
marketplace for trades (including the ability to assign or offset a Fund's
rights and obligations relating to the investment). Such determinations will
govern whether the instrument will be deemed within the Fund's 15% restriction
on investments in securities that are not readily marketable.
Segregation requirements for these derivatives: Each Fund 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 Fund 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 Fund's accrued obligations under the swap agreement
over the accrued amount the Fund is entitled to receive under the agreement. If
a Fund 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 Fund's accrued obligations under the agreement.
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22. Investing in Other Investment Companies
Each Fund may invest up to 10% of its total assets in shares of other
investment companies investing exclusively in securities in which that Fund may
otherwise invest. As a shareholder in an investment company, a Fund would bear
its ratable share of that investment company's expenses, including advisory and
administration fees, except as specifically stated otherwise in the paragraphs
that follow.
Using other investment companies to gain exposure to certain foreign
securities: 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 Fund 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 of 1940. A Fund 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 Fund.
The Emerging Markets Equity Fund is the most likely to make significant
investments in other investment companies to gain exposure to foreign
securities; and John Hancock and the subadviser have agreed to waive their own
management fees with respect to the portion of that Fund's assets invested in
other open-end (but not closed-end) investment companies. (An "open end"
company is one whose shares are freely redeemable. A "closed end" company is
one whose shares can generally be disposed of only in market transactions, as
opposed to redemptions.)
The International Equity Index Fund is likely to invest in closed-end
investment companies known as "country funds" or passive foreign investment
companies. The International Equity Fund may also purchase shares of investment
companies investing primarily in foreign securities, including country funds.
The Large Cap Value CORE and International Equity Funds may invest in World
Equity Benchmark Shares ("WEBS") and other investment company securities that
represent a similar interest in securities included in a foreign securities
index. (These securities are similar in structure to the SPDR's discussed
below.)
Investing in Standard & Poor's Depository Receipts (SPDR's): The Equity
Index, Large Cap Value CORE, and Small/Mid Cap CORE Funds may, consistent with
their investment 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 a regulated
investment company that 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.
Investing in money market fund shares: A Fund may also invest in money
market funds managed by its subadviser in reliance upon an exemptive order
received by its subadviser from the SEC. Such exemptive orders may permit funds
managed by the subadviser to invest in money market funds managed by it, to an
extent in excess of amounts otherwise permitted by the Investment Company Act.
The subadviser to the Mid Cap Growth Fund will remit the fees it receives from
money market funds it manages, to the extent such fees are based on the Mid Cap
Growth Fund's assets, to the Mid Cap Growth Fund. Nor are the Large Cap Value
and International Opportunities Funds charged any investment management fees for
investments in money market funds managed by their subadvisers.
23. Purchasing "When Issued" Securities and Forward Commitments
All Funds (other than the Growth & Income and Money Market Funds) 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 accrues to the
purchaser during this period.
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In addition, these Funds 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 Fund's other
assets. Although a Fund will enter into such contracts with the intention of
acquiring the securities, the Fund may dispose of a commitment prior to
settlement if its subadviser deems it appropriate to do so.
Asset segregation requirement for these transactions. Each Fund 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.
24. Short-Term Trading
All Funds can 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 Fund may engage in short-term trading to the extent
that the subadviser believes the transactions, net of costs (including
commissions, if any), will benefit the Fund. Generally speaking, short-term
trading can be expected to generate expenses for a Fund that would not be
incurred by a Fund that did not engage in that practice.
25. Entering Into Repurchase Agreements
All of the Funds may enter into repurchase agreements.
A repurchase agreement is a contract under which a Fund 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 Fund's cost plus interest). Repurchase agreements will be entered into only
with member banks of the Federal Reserve System and with "primary dealers" in
U.S. Government securities.
The Managed, Aggressive Balanced, Growth & Income, Large Cap Growth, Real
Estate Equity, Active Bond and Money Market Funds may not invest in repurchase
agreements maturing in more than 7 days. No other Fund will invest in
repurchase agreements maturing in more than 7 days if that investment, together
with any other investments deemed "illiquid," would exceed 15% of the Fund's net
assets.
Each Fund has a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund'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, however, the Fund 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 Fund 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).
26. Participating in Joint Trading Accounts
John Hancock has established a "joint trading account" that all Funds, in
the discretion of their subadvisers, can use to invest relatively small amounts
of cash on a more favorable basis than they could do individually. John Hancock
is responsible for investing the aggregate cash balances in the joint trading
account into one or more repurchase agreements, as described in Section 25.
above, or in other money market instruments. The joint trading account was
established pursuant to an order of the SEC and the following Funds regularly
participate in it: the Managed, Aggressive Balanced, Growth & Income, Large Cap
Growth, Large/Mid Cap Value, Small/Mid Cap Growth, Real Estate Equity, Small Cap
Value, International Equity Index, High Yield Bond and Money Market Funds.
Each Fund is also free to participate in any similar joint trading account
that their subadviser operates for mutual fund assets managed by it. These
other joint trading accounts would be operated pursuant to their own SEC
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exemptive orders, and the following Funds currently participate in such other
joint trading accounts: the Large Cap Value CORE, Mid Cap Growth, Small/Mid Cap
CORE, Small/Mid Cap Growth, Small Cap Growth, International Equity, and Active
Bond Funds.
In each case, the subadviser that operates one of these joint trading
accounts is responsible for ensuring that all repurchase agreements acquired
through these accounts are at all times fully collateralized.
27. Lending of Fund Securities
In order to generate additional income, all Funds may, and most do, lend
securities from their portfolios 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 Fund receives the income (if
any) on the loaned securities, as well as additional compensation for making the
loan. Cash collateral may be invested in short-term securities, which will
increase the current income of the Fund. Such loans will not be for more than 60
days and will be terminable by the Fund at any time. The Fund 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 Fund may pay reasonable fees to persons
unaffiliated with the Fund for services in arranging such loans.
Lending of portfolio securities involves a risk of failure by the borrower
to return the loaned securities, in which event the Fund may incur a loss.
However, most of the Funds' loans of securities are pursuant to an arrangement
with State Street Bank & Trust Company, the Trust's primary custodian. Under
these arrangements, State Street Bank & Trust Company guarantees the Trust
against any loss or damages that any Fund incurs as a result of the borrower
failing to return the Fund's securities in accordance with the terms of the
loan. No Fund will lend portfolio securities having a total value in excess of
33 1/3% of its total assets.
28. Using Reverse Repurchase Agreements and Mortgage "Dollar Rolls"
The Short-Term Bond and Money Market Funds may enter into 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 Fund sells a security and enters into an
agreement to repurchase the security at a specified future date, but at a lower
price. The Fund generally retains the right to interest and principal payments
on the security, as well as use of the proceeds while the repurchase agreement
is outstanding.
The Managed, Aggressive Balanced, Short-Term Bond, Bond Index, Active Bond,
and Global Bond Funds may enter into mortgage dollar rolls, in which the Fund
sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to purchase substantially similar securities at a
specified future date and price. While the Fund foregoes principal and interest
paid on the mortgage-backed securities during the "roll" period, the Fund is
compensated by the difference between the current sale price and the lower price
for the future purchase as well as by any return earned on the proceeds of the
initial sale.
The mortgage dollar rolls and reverse repurchase agreements entered into by
a Fund may be used as arbitrage transactions in which the Fund 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 Fund will receive
interest on the securities or repurchase agreements in which it invests the
transaction proceeds, such transactions could be considered to 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 Trust does not believe that such arbitrage
transactions present the risks to the Fund that are associated with other types
of leverage.
Asset segregation requirements for reverse repurchase agreements and
mortgage dollar rolls: Each Fund will set aside in a segregated account with
its custodian liquid assets that at all times are at least equal to its
obligations under outstanding reverse repurchase agreements and mortgage dollar
rolls it has entered into.
27
<PAGE>
29. Investing in Rule 144A and Illiquid Securities
All Funds, other than the Growth & Income, Large Cap Growth and Real Estate
Equity Funds, may purchase unregistered securities that are eligible for resale
to "qualified institutional buyers" pursuant to Rule 144A under the Securities
Act of 1933. Case-by-case determinations are made whether each issue of Rule
144A securities owned by the Fund is an illiquid security.
If illiquid, a Rule 144A security may not be purchased by the Money Market
Fund. Nor may the Money Market Fund purchase any other investments that are
deemed to be illiquid, if the total of all its illiquid assets would be more
than 10% of its net assets. Each Fund other than the Money Market Fund,
however, may purchase illiquid Rule 144A securities, or other illiquid assets
if, and only if, the total of all the Fund's illiquid assets would not thereby
be made to exceed 15% of the Fund's net assets.
THE FUNDS' FUNDAMENTAL INVESTMENT RESTRICTIONS
The Funds' investment objectives and strategies may, in general, be changed
without the approval of shareholders.
In a few cases, however, the Investment Company Act requires such approval. In
addition, the Trust has adopted as "fundamental" the below-listed restrictions
relating to the investment of each Fund's assets. That these restrictions are
"fundamental" policies means that they may not be changed for any Fund without
the approval of a majority of the outstanding voting shares of each affected
Fund. (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.)
To the extent the Trust's prospectus or this Statement of Additional
Information anywhere sets forth investment restrictions more restrictive than
the fundamental restrictions described below, the more restrictive limitation
controls; but any such more restrictive limitation may be changed without any
shareholder approval, subject to the below fundamental restrictions.
As a matter of fundamental policy, no Fund 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. Investments of the type permitted in the Real Estate Equity Fund are
not deemed interests in real estate for the purposes of this restriction.
(2) Make loans, other than through the acquisition of obligations in which
the Fund may invest consistent with its objective and investment policies,
except that each Fund may lend portfolio securities not having a value in excess
of 33 1/3% of the Fund'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, Aggressive Balanced, Equity Index, Large Cap Value,
Large Cap Growth, Large Cap Value CORE, Large Cap Aggressive Growth,
Large/Mid Cap Value, Mid Cap Value, Mid Cap Growth, Fundamental Mid Cap
Growth, Mid Cap Blend, Small/Mid Cap Value, Small/Mid Cap Growth, Small/Mid
Cap CORE, Small Cap Value, Small Cap Growth, Global Equity, Global
Balanced, International Equity Index, International Equity, International
Opportunities, Emerging Markets Equity, Short-Term Bond, Bond Index, Global
Bond, and High Yield Bond Funds 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
28
<PAGE>
covered call or put option position will be established in the Large
Cap Growth Fund if more than one-third of the Fund'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 Funds,
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 Fund which are hedged by such instruments exceeds one-third of
the value of its total assets and (b) as to such Funds, and as to the
Equity Index and International Opportunities Funds, 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
Fund's total assets;
(B) with respect to the Managed, Aggressive Balanced, Equity Index,
Large Cap Value, Large Cap Value CORE, Large Cap Aggressive Growth,
Large/Mid Cap Value, Mid Cap Value, Mid Cap Growth, Fundamental Mid Cap
Growth, Mid Cap Blend, Small/Mid Cap Value, Small/Mid Cap Growth, Small/Mid
Cap CORE, Small Cap Value, Small Cap Growth, Global Equity, Global
Balanced, International Equity Index, International Equity, International
Opportunities, Emerging Markets Equity, Short-Term Bond, Bond Index, Active
Bond, Global Bond, and High Yield Bond Funds, 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, Aggressive Balanced, Mid Cap Growth, Large Cap Value
CORE, Large Cap Aggressive Growth, Large/Mid Cap Value, Small/Mid Cap
Growth, Small/Mid Cap CORE, Small Cap Growth, Global Equity, Global
Balanced, International Equity Index, International Equity, Emerging
Markets Equity, Short-Term Bond, Bond Index, Global Bond, and High Yield
Bond Funds 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 Funds may purchase, sell or
write such futures or options other than for bona fide hedging purposes
if immediately thereafter the Fund'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 Fund's net
assets;
(D) the Active Bond Fund 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 Funds listed therein; and
(E) the Managed, Aggressive Balanced, Equity Index, Large Cap Value,
Large Cap Value CORE, Large Cap Aggressive Growth, Large/Mid Cap Value, Mid
Cap Value, Mid Cap Growth, Fundamental Growth, Mid Cap Blend, Small/Mid Cap
Value, Small/Mid Cap CORE, Small Cap Value, Small Cap Growth, Global
Equity, Global Balanced, International Equity Index, International Equity,
International Opportunities, Emerging Markets Equity, Global Bond, and High
Yield Bond Funds may
29
<PAGE>
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 Fund 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 Fund
as of the time each such borrowing is made, or 10% as to the Aggressive
Balanced, Large Cap Value CORE, Large Cap Aggressive Growth, Large/Mid Cap
Value, Fundamental Growth, Mid Cap Blend, Small/Mid Cap Value, Small/Mid Cap
CORE, Global Equity, International Equity Index, International Equity, Emerging
Markets Equity, Bond Index and High Yield Bond Funds, subject to a non-
fundamental policy that none of these Funds will make additional investments at
any time when such borrowings plus any amounts payable by the Fund under reverse
repurchase agreements exceed 5% of that Fund's total assets.
(6) Except as set forth in the following sentence, neither the Managed and
Active Bond Funds, nor the Growth & Income, Large Cap Growth, Real Estate
Equity, or Money Market Funds may purchase securities which are subject to legal
or contractual delays in or restrictions on resale. The Managed and Active Bond
Funds 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 non fundamental restriction limiting all
illiquid securities held by each Fund to not more than 15% of the Trust'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 ("SEC") or of a plan of
reorganization, purchase or otherwise acquire any security issued by an
investment company if the Fund 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 Fund's total
assets, (c) securities of investment companies having an aggregate value in
excess of 10% of the Fund's total assets, or (d) together with investment
companies having the same investment adviser as the Fund (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 (9) does not apply to the Aggressive Balanced, Equity Index, Large
Cap Value, Large Cap Value CORE, Large Cap Aggressive Growth, Large/Mid Cap
Value, Mid Cap Value, Mid Cap Growth, Fundamental Growth, Mid Cap Blend,
Small/Mid Cap Value, Small/Mid Cap CORE, Small Cap Value, Small Cap Growth,
Global Equity, International Equity, Global Balanced, International
Opportunities, Emerging Markets Equity, Bond Index, Global Bond, or High Yield
Bond Funds.
(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 Fund'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 result in more than 10% of the
outstanding voting securities of such issuer being held by the Fund. This
restriction (10) does not apply to the Large Cap Aggressive Growth, Mid Cap
Growth or Global Balanced Funds.
(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.
30
<PAGE>
The Aggressive Balanced, Equity Index, Large Cap Value, Large Cap Value
CORE, Large Cap Aggressive Growth, Large/Mid Cap Value, Mid Cap Value, Mid Cap
Growth, Fundamental Mid Cap Growth, Mid Cap Blend, Small/Mid Cap Value,
Small/Mid Cap Growth, Small/Mid Cap CORE, Small Cap Value, Small Cap Growth,
Global Equity, Global Balanced, International Equity Index, International
Equity, International Opportunities, Emerging Markets Equity, Short-Term Bond,
Bond Index, Active Bond, Global Bond, and High Yield Bond Funds 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
Trust'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
Investment Company Act by the staff of the SEC, the Trust, 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
government entities. If these interpretations change, however, the Trust may
modify its practices to conform to such changes.
For purposes of any restrictions or limitation to which the Trust is
subject, no Fund, 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 Fund does
not hold directly in its portfolio.
BOARD OF TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees of the Trust is responsible for overall management of
the Trust. The Board may exercise all powers of the Trust, except those powers
which are conferred solely upon or reserved to the shareholders. The following
table provides information about the members of the Board of Trustees and the
officers of the Trust:
<TABLE>
<CAPTION>
Name, Address and Age Positions Held With Trust Principal Occupation(s) During Past Five Years
- --------------------- ------------------------- ----------------------------------------------
<S> <C> <C>
Michele G. Van Leer* (age 42) Senior Vice President, Product Management, John
John Hancock Place Chairman and Trustee Hancock Life Insurance Company; President &
Boston, Massachusetts 02117 Director, John Hancock Variable Life Insurance
Company
Senior Vice President, Product Management, John
Hancock Life Insurance Company; President &
Director, John Hancock Variable Life Insurance
Company
Thomas J. Lee* (age 45) Vice Chairman, President Vice President, Life and Annuity Services, John
John Hancock Place and Trustee Hancock Life Insurance Company; Director, John
Boston, Massachusetts 02117 Hancock Variable Life Insurance Company
Elizabeth G. Cook (age 62) Trustee Expressive Arts Therapist, Dana-Farber Cancer
85 East India Row Institute; President, The Advertising Club of
Boston, Massachusetts 02110 Greater Boston
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Name, Address and Age Positions Held With Trust Principal Occupation(s) During Past Five Years
- --------------------- ------------------------- ----------------------------------------------
<S> <C> <C>
Diane C. Kessler (age 53) Trustee Executive Director, Massachusetts Council of Churches
325 Parker Street
Newton Centre
Massachusetts 02159
Robert Verdonck (age 54) Trustee President and Chief Executive Officer, East
One Bennington Street Boston Savings Bank
East Boston
Massachusetts 02128
Hassell H. McClellan (age 54) Trustee Professor and Graduate Dean, The Graduate
Boston College School of the
Graduate School of Management Wallace E. Carroll School of Management, Boston
Fulton 320 College
140 Commonwealth Avenue
Chestnut Hill, Massachusetts
02467
Raymond F. Skiba (age 54) Treasurer Director, Fund Operations, John Hancock Life
John Hancock Place Insurance Company
Boston, Massachusetts 02117
Karen Q. Visconti (age 47) Secretary Senior Marketing Consultant,
John Hancock Place Life Product Management
Boston, Massachusetts 02117
</TABLE>
* Ms. Van Leer and Mr. Lee are the only Trustees who are "interested persons" as
defined in the Investment Company Act. They also constitute the Trust's
Executive Committee. The Executive Committee may from time to time be delegated
power to act on behalf of the Board of Trustees, except with repect to
declarations of dividends or distributions, recommendations to the shareholders
on actions requiring shareholder approval, changes to the Trust's bylaws, or
mergers or share exchanges which do not require shareholder approval.
Certain members of the Trust's Board of Trustees may own either variable
annuity contracts or variable life insurance policies that are supported by one
of the Separate Accounts and, in that sense, have an interest in shares of the
Trust.
The combined interest of all the Trust's officers and Trustees, however, does
not aggregate as much as 1% of any Fund's net assets.
Compensation paid by the Trust to its current disinterested Trustees during
1999 was as follows:
Ms. Cook $46,600.00
Ms. Kessler $30,550.00
Mr. Verdonk $30,250.00
The Trust paid no compensation to any other officer or Trustee.
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<PAGE>
INVESTMENT ADVISORY ARRANGEMENTS
The Trust's Investment Advisory Arrangements With John Hancock
John Hancock, the Trust's investment adviser, is a Massachusetts
corporation. Until February 1, 2000, John Hancock was a mutual life insurance
company. Now, it is a subsidiary of John Hancock Financial Services, Inc., a
publicly-traded holding company. John Hancock provides advisory services to the
Fund pursuant to several investment advisory agreements. Each Fund is party to
one of these investment advisory agreements with John Hancock.
The Trust pays John Hancock investment advisory fees at the following
rates:
<TABLE>
<CAPTION>
John Hancock's Investment Advisory Fee
as an Annual Percentage of Each Portion
Fund of the Fund's Average Daily Net Assets
- ---- --------------------------------------
<S> <C>
Managed .40% of first $500 million; .35% of next $500 million; .30% above $1
Large Cap Growth billion
Growth & Income .25%
Aggressive Balanced .675% of first $250 million; .625% of next $250 million; .60% above $500
million
Large Cap Value CORE .75% of first $50 million; .65% 0f next $150 million; .60% above $200
million
Large Cap Aggressive Growth 1.00% of first $10 million; .875% of next $10 million; .75% above $20
million
Active Bond .25%
Money Market .25%
Small Cap Growth .75%
Large Cap Value .75% of first $100 million; .70% of next $150 million; .65% above $250
million
Equity Index .15% of first $75 million; .14% of next $50 million; .13% above $125
million
Large/Mid Cap Value .95% of first $25 million; .85% of next $25 million; .75% of next $50
million; 65% above $100 million
Small Cap Value .80% of first $100 million; .75% of next $100 million; .65% above $200
million
Mid Cap Value .80% of first $100 million; .775% of next $150 million; .75% of next
$250 million; .725% of next $250 million; .70% above $750 million
Mid Cap Growth .85% of first $100 million; .80% above $100 million
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
John Hancock's Investment Advisory Fee
as an Annual Percentage of Each Portion
Fund - continued of the Fund's Average Daily Net Assets - continued
- ---------------- --------------------------------------------------
<S> <C>
Fundamental Mid Cap Growth .85% of first $50 million; .80% of next $50 million; .75% of next $50
million; .70% above $150 million
Real Estate Equity .60% of first $300 million; .50% of next $500 million; .40% above $800
million
Mid Cap Blend .85% of first $250 million; .80% of next $250 million; .75% above $500
million
Small/Mid Cap Growth .75% of first $250 million; .70% of next $250 million; .65% above $500
million
Small/Mid Cap Value .95% of first $100 million; .90% of next $150 million; .85% over $250
million
Small/Mid Cap CORE .80% of first $50 million; .70% above $50 million
Global Equity .90% of first $50 million; .80% of next $100 million; .70% above $150
million
Global Balanced .85% of first $100 million; .70% above $100 million
International Equity Index .18% of first $100 million; .15% of next $100 million; .11% above $200
million
International Equity 1.00% of first $50 million; .95% of next $150 million; .90% above $200
million
International Opportunities 1.00% of first $20 million; .85% of next $30 million; .75% above $50
million
Emerging Markets Equity 1.30% of first $10 million; 1.20% of next $140 million; 1.10% above $150
million
Short-Term Bond .30%
Bond Index .15% of first $100 million; .13% of next $150 million; .11% above $250
million
Global Bond .75% of first $25 million; .65% of next $50 million; .55 of next $75
million; .50% above $150 million
High Yield Bond .65% of first $100 million; .60% of next $100 million; .50% above $200
million
</TABLE>
Under its investment advisory agreements with the Trust, John Hancock
advises the Trust in connection with policy and strategy decisions; provides
administration of much of the Trust's day-to-day operations; serves as the
Trust's transfer agent and dividend disbursing agent; prepares the Trust's
financial statements; maintains records required by the Investment Company Act
of 1940; and supervises activities of the subadvisers (discussed below) and
34
<PAGE>
of other service providers to the Trust. John Hancock also provides the Trust
with office space, supplies and other facilities required for the business of
the Trust. John Hancock pays the compensation of Trust officers and employees
and the expenses of clerical services relating to the administration of the
Trust. To the extent that any administrative or legal services for the Trust are
provided by John Hancock's Law Department, however, John Hancock charges the
Trust separately, and the Trust pays such charges in accordance with the terms
of the investment advisory agreements.
All other expenses not expressly assumed by John Hancock under the
investment advisory agreements are paid by the Trust. These include, but are not
limited to, the Trust's taxes (if any); custodian fees; auditing fees; brokerage
commissions; advisory fees; the compensation of Trustees who are not affiliated
with John Hancock; the Trust's fidelity bond coverage; the costs of printing and
distributing annual and semi-annual reports and voting materials to holders of
variable annuity contracts and variable life insurance policies that participate
in the Trust; tabulating votes; fees for certain accounting, valuation, and
compliance services; legal fees; SEC registration costs; proxy costs; costs of
organizing any new Funds; and other expenses related to the Trust's operations.
The Trust's Arrangements With Subadvisers
Set forth below are the names to the Funds' subadvisers and certain persons
who may control them.
<TABLE>
<CAPTION>
Subadviser General Nature
and the Funds Subadviser's of
It Manages Controlling Person Basis of Control Control Person's Business
---------- ------------------ ---------------- -------------------------
<S> <C> <C> <C>
1. Independence Investment John Hancock Indirectly owns 100% Financial services holding
Associates, Inc. (Managed, Financial Services of voting stock company
Growth & Income, Large Cap Inc.
Growth, Real Estate Equity,
Short-Term Bond, Aggressive John Hancock Life Indirectly owns 100% Life insurance and other
Balanced, and Mid-Cap Blend Insurance Company of voting stock financial services provided
Funds) directly or through subsidiaries
2. John Hancock Advisers, Inc. Same as 1. above.
(Small Cap Growth and Active
Bond Funds)
3. State Street Bank & Trust State Street Owns 100% of the Financial services holding
Company (Equity Index Fund) Corporation subadviser company
4. T. Rowe Price Associates, Inc. None Publicly traded investment
(Large Cap Value Fund) adviser and financial services
company
5. Neuberger & Berman, LLC (Mid Neuberger Berman Owns 100% of the Financial services holding
Cap Value Fund) Inc. subadviser company
6. Janus Capital Corporation Kansas City Indirectly owns 82% of Publicly traded transportation
(Mid Cap Growth Fund) Southern the subadviser and financial services company
Industries, Inc.
Thomas H. Bailey Owns 12% of the Private Investor
subadviser and, by
contract, may elect
majority of the
subadviser's directors
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Subadviser General Nature
and the Funds Subadviser's of
It Manages - continued Controlling Person Basis of Control Control Person's Business
---------------------- ------------------ ---------------- -------------------------
<S> <C> <C> <C>
7. Goldman Sachs Asset Management Goldman Sachs & Co. The subadviser is a Publicly traded investment
(Small/Mid Cap CORE, Large Cap unit of the Investment banking and financial services
Value CORE, and International Management Division of company
Equity Funds Goldman Sachs & Co.
8. INVESCO Management & Research, AMVESCAP, Inc. Indirectly owns 100% Financial services holding
Inc. (Small Cap Value Fund) of voting stock company
9. Scudder Kemper Investments Inc. Zurich Financial Indirectly owns 72.7% Insurance and other financial
(Global Equity Fund) Services of the subadviser services
10. Brinson Partners, Inc. (Global UBS AG Indirectly owns 100% Full service global financial
Balanced Fund) of voting stock services company
11. Independence Inter-national John Hancock Indirectly owns 100% Financial services holding
Associates, Inc. (International Financial Services of voting stock company
Equity Index Fund) Inc.
John Hancock Life Indirectly owns 100% Life insurance and other
Insurance Company of voting stock financial services provided
directly or through subsidiaries
Independence Owns 100% of voting Investment manager and adviser
Investment stock
Associates, Inc.
12. Rowe Price Fleming T. Rowe Price Owns 50% of the Publicly traded investment
International, Inc. Asociates, Inc. subadviser adviser and financial services
(International Opportunities company;
Fund) Robert Fleming Financial services company
Holdings, Ltd. Owns, directly and
indirectly, 50% of the
subadviser
13. Morgan Stanley Dean Witter Morgan Stanley Directly owns 100% of
Investment Management Inc. Dean Witter & Co. voting stock
(Emerging Markets Equity Fund)
14. Mellon Bond Associates, LLP Mellon Financial Directly owns 100% of Bank holding company
(Bond Index Fund) Corporation the subadviser
15. J.P. Morgan Investment J.P.Morgan & Co. Owns 100% of the Financial services holding
Management Inc. (Global Bond Incorporated subadviser company
Fund)
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Subadviser Subadviser's General Nature
and the Funds Controlling Person of
It Manages - continued Basis of Control Control Person's Business
---------------------- ---------------- -------------------------
<S> <C> <C> <C>
16. Wellington Management Company, Laurie A. Gabriel; Managing Partners Investment management
LLP (High Yield Bond, Small/Mid Duncan M.
Cap Growth, and Large/Mid Cap McFarland;
Value Funds) John R. Ryan
17. Alliance Capital Management, The Equitable Life ELAS and its Life insurance and other
LLP (Large Cap Aggressive Assurance Society subsidiaries owned (as financial services
Growth) of the U.S. of 11/1/99) 55.38%
("ELAS") partnership interest
in the subadviser
18. The Boston Company Asset Mellon Financial The subadviser is an Financial services holding
Management, LLC (Small/Mid Cap Corporation indirect wholly owned company
Value Fund) ("Mellon") subsidiary of Mellon
19. OppenheimerFunds, Inc. Massachusetts MML indirectly owns a Life insurance and other
(Fundamental Mid Cap Growth Mutual Life majority of the financial services
Fund) Insurance Company subadviser's voting
("MML") stock
</TABLE>
Set forth below are the sub-advisory fees that John Hancock pays the
subadvisers for each Fund. The below fees are paid by John Hancock and not by
the Funds.
Subadvisory Fees Payable by John Hancock, as a
Fund Percentage of Each Fund's Average Daily Net Assets
---- --------------------------------------------------
Large Cap Growth .30% of first $500 million; .2625% of next $500
Managed million; and .225% above $1 billion
Growth & Income .1875%
Active Bond
Real Estate Equity .30% of first $300 million; .25% of next $500
million; and .20% above $800 million
Short-Term Bond .19% of first $250 million; .17% of next $250
million; and .15% above $500 million
Aggressive Balanced .325% of first $250 million; .275% of next $250
million; and .25% above $500 million
Mid Cap Blend .40% of first $250 million; .35% of next $250
million; and .30% above $500 million
Small Cap Growth .50%
Equity Index .07% of first $75 million; .06% of next $50
million; .05% of next $275 million; and .03%
above $400 million
37
<PAGE>
Subadvisory Fees Payable by John Hancock, as a Percentage
Fund - continued of Each Fund's Average Daily Net Assets - continued
- ---------------- ---------------------------------------------------
Large Cap Value .50% of first $100 million; .45% of next $150
Fund million; and .40% above $250 million
Mid Cap Value Fund .50% of first $100 million; .475% of next $150
million; .45% of next $250 million; .425% of next
$250 million; and .40% above $750 million
Mid Cap Growth .60% of first $100 million; .55% of the next
$400 million; and .45% above $500 million
Small/Mid Cap .60% of first $50 million; and .50% above $50
CORE million
Large Cap Value .40% of first $50 million; .30% of next $150
CORE million; and .25% above $200 million
International Equity .60% of first $50 million; .55% of next $150
million; and .50% above $200 million
Small Cap Value .55% of first $100 million; .50% of next $100
million; and .40% above $200 million
Global Equity .70% of first $50 million; .60% of next $100
million; and .50% above $150 million
Global Balanced .50% of first $100 million; and .35% above $100
million
International Equity .125% of first $100 million; .10% of next $100
Index million; and .06% above $200 million
International .75% of first $20 million; .60% of next $30
Opportunities million; .50% of next $150 million; and .50% of
all assets if the Fund reaches $200 million of net
assets
Emerging Markets 1.10% of first $10 million; .90% of next $140
Equity million; and .80% above $150 million.
Bond Index .08% of first $100 million; .06% of next $150
million; and .04% above $250 million
Global Bond .50% of first $25 million; .40% of next $50
million; .30% of next $75 million; and .25% above
$150 million
High Yield Bond .50% of first $100 million; .45% of next $100
million; and .35% above $200 million.
Small/Mid Cap .55% of first $100 million; .45% of next $100
Growth million; and .40% above $200 million
Large/Mid Cap .60% of first $25 million; .50% of next $25
Value million; .40% of next $50 million; and .30% above
$100 million
Large Cap .75% of first $10 million; .625% of next $10
Aggressive Growth million; and .50% above $20 million
Small/Mid Cap .65% of first $100 million; .60% of next $150
Value million; and .55% above $250 million
Fundamental Mid .50% of the first $50 million; .45% of next $50
Cap Growth million; .40% of next $50 million; and .35% above
$150 million
38
<PAGE>
Dollar Amounts of Advisory Fees, Subadvisory Fees, and Expense Reimbursements
Set out below are the dollar amounts of advisory fees that the Trust paid
to John Hancock and the subadvisory fees that John Hancock paid to subadvisers
for the past three years:
<TABLE>
<CAPTION>
Fund Investment Adviser Subadvisers*
- ---- ----------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Aggressive Balanced ............. $ 23,956 -- -- $ 11,118 -- --
Managed ......................... 10,789,553 9,825,708 8,515,377 8,001,416 7,369,096 6,386,533
Growth & Income ................. 9,806,770 7,959,851 6,125,461 7,269,220 5,970,179 4,532,841
Equity Index .................... 448,044 270,965 95,900 181,624 134,418 33,565
Large Cap Value ................. 1,087,807 746,229 328,969 710,068 497,498 219,423
Large Cap Value CORE ............ 13,622 -- -- 6,990 -- --
Large Cap Growth ................ 4,378,106 3,445,963 2,520,205 3,250,179 2,584,378 1,890,154
Large Cap Aggressive
Growth ....................... 38,421 -- -- 27,498 -- --
Large/Mid Cap Value ............. 16,857 -- -- 10,259 -- --
Mid Cap Value ................... 735,223 708,164 251,970 469,451 486,843 173,229
Mid Cap Growth .................. 1,646,277 506,917 230,304 1,119,977 357,811 162,595
Real Estate Equity .............. 835,184 1,071,226 1,052,761 413,496 535,611 526,381
Small/Mid Cap Value ............. 15,837 -- -- 10,454 -- --
Small/Mid Cap Growth ............ 1,360,053 1,490,558 1,564,619 902,527 993,730 1,043,601
Fundamental Mid Cap
Growth ....................... 17,491 -- -- 9,805 -- --
Mid Cap Blend ................... 13,034 -- -- 6,703 -- --
Small/Mid Cap CORE .............. 47,616 24,490 -- 35,177 18,367 --
Small Cap Value ................. 512,633 444,992 187,062 348,363 305,920 128,605
Small Cap Growth ................ 732,594 420,449 251,331 478,916 280,306 167,638
Global Equity ................... 157,808 87,055 -- 121,054 67,708 --
International Balanced .......... 253,044 235,511 214,682 147,136 138,538 126,233
International Equity Index ...... 313,649 503,992 968,010 210,822 339,357 645,663
International Equity ............ 35,992 -- -- 20,788 -- --
International
Opportunities ................ 582,128 440,905 234,405 409,561 821,925 175,804
Emerging Markets
Equity ....................... 182,265 67,915 -- 145,114 57,466 --
Short-Term Bond ................. 216,170 192,680 220,493 135,464 122,022 83,787
Bond Index ...................... 48,433 26,490 -- 25,498 14,128 --
Active Bond ..................... 2,214,912 2,127,466 4,243,027 1,643,765 1,595,666 1,410,726
Global Bond ..................... 488,070 328,177 142,441 306,570 211,575 95,008
High Yield Bond ................. 111,177 49,428 -- 84,425 38,023 --
Money Market .................... 965,427 748,405 564,173 953,183 -- --
</TABLE>
- -------------------------
* Paying these fees to the sub-advisers is solely the responsibility of John
Hancock and not the Trust.
39
<PAGE>
Under the investment advisory agreements, for any fiscal year in which the
normal operating costs and expenses of any Fund, exclusive of the investment
advisory fee, interest, brokerage commissions, taxes and extraordinary expenses
outside the control of John Hancock exceed 0.10% (.25% prior to April 23, 1999)
of that Fund's average daily net assets, John Hancock will reimburse that Fund
in an amount equal to such excess. These reimbursements have been as follows for
the past three years (rounded to the nearest $1,000):
1999 1998 1997
---- ---- ----
Aggressive Balanced ................... $ 6,609 -- --
Equity Index .......................... 275,336 543,000 217,000
Large Cap Value ....................... -- -- 25,000
Large Cap Value CORE .................. 5,824 -- --
Large Cap Aggressive Growth ........... 3,504 -- --
Large/Mid Cap Value ................... 6,512 -- --
Mid Cap Value ......................... -- -- 29,000
Mid Cap Growth ........................ -- 15,000 86,000
Small/Mid Cap Growth .................. 1,790 -- --
Small Cap Value ....................... 6,224 17,000 57,000
Small Cap Growth ...................... 27,000 38,000
Global Balanced ....................... 91,146 199,000 116,000
International Equity Index ............ 21,900 124,000 --
International Equity .................. 21,901 -- --
International Opportunities ........... 92,017 145,000 86,000
Global Bond ........................... 1,445 31,000 61,000
Fundamental Mid Cap Growth ............ 2,888 -- --
Mid Cap Blend ......................... 6,011 -- --
Small/Mid Cap CORE .................... 77,179 107,000 --
Small/Mid Cap Value ................... 9,254 -- --
Global Equity ......................... 62,210 126,000 --
Emerging Markets Equity ............... 294,354 111,000 --
Bond Index ............................ 17,185 56,000 --
High Yield Bond ....................... 42,314 85,000 --
ARRANGEMENTS WITH OTHER SERVICE PROVIDERS
TO THE TRUST
Underwriting and Indemnity Agreement
Pursuant to an Underwriting and Indemnity Agreement, Signator Investors,
Inc. ("Signator") serves as the Trust's principal underwriter, and John Hancock
provides certain indemnities to the Trust and its Trustees. Neither Signator nor
John Hancock receives any additional compensation from the Trust for the
services and indemnities they provide pursuant to the Underwriting and Indemnity
Agreement. The offering of the Trust's shares through Signator is a continuous
offering on a "best efforts" basis. Signator is a wholly-owned subsidiary of
John Hancock and is located at 197 Clarendon Street, Boston, MA 02117.
Custody of the Trust's Assets
State Street Bank and Trust Company ("State Street Bank") is the primary
custodian of the assets of all Funds. State Street Bank's principal business
address is 225 Franklin Street, Boston MA 02110. The primary custodian's duties
include safeguarding and controlling the Trust's cash and investments, handling
the receipt and delivery of securities, and collecting interest and dividends on
the Trust's investments. Fund 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, with
Depository Trust Company, or with other qualified domestic book- entry systems
or depositories. Also, pursuant to its agreement with the Trust, State Street
Bank
40
<PAGE>
provides certain accounting and recordkeeping services to the Trust and
generally values the Trust's assets by computing each Fund's net asset value
each day. The Trust compensates State Street Bank for these functions through
the payment ofan annual custody asset fee of .01% of the total net assets of the
Trust, allocated to each Fund based on the percentage of that Fund's total net
asssets to the total net asets of the Trust; miscellaneous trasaction charges
ranging from $7.00 to $25.00; global asset and transaction fees that vary by the
country in which a Fund's assets are held or traded; a monthly accounting fee
charge that is allocated to each Fund based on the percentage of that Fund's
total net assets to the total net assets of the Trust; valuation and monthly
quote charge; special service fees for activities of a non-recurring nature; and
reimbursement of specified out-of-pocket expenses.
Foreign securities are generally held through subcustodian banks and
depositories around the world with whom State Street Bank has relationships. In
some cases, Funds whose securities are held in this manner may be exposed to
greater risks of loss. This is because the soundness of such foreign entities,
as well as foreign regulatory practices and procedures, may provide less
protection to security holders than is available in the U.S.
In certain circumstances, brokers may have access to assets that a Fund
posts as "margin" in connection with futures and options transactions. In the
event of a broker's insolvency or bankruptcy, a Fund could experience a delay or
incur costs in recovering such assets or might recover less than the full amount
due. Also the value of such assets could decline by the time the Trust could
effect such recovery.
If on any day a Fund 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 Trust 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 Trust's general or segregated account with its primary custodian, as
appropriate.
Subadministration Agreement With State Street Bank
Pursuant to a subadministration agreement, with the Trust, State Street
Bank also provides assistance to John Hancock and the subadvisers in computing
total return information for the Trust and in monitoring each Fund's compliance
with the Fund's investment objectives and restrictions, as well as compliance
with certain other applicable legal requirements, . The Trust compensates State
Street Bank for these services through payment of an annual fee that accrues
daily and is billed monthly in arrears. The annual fee is based on the average
net assets of the Trust and is 0.012% of the first $1 billion of average net
assets, 0.0075% of the next $1 of average net assets, and 0.0025% of average net
assets after that. Each Fund is allocated the greater of a minimum monthly Fund
fee or the basis point annual fee, based on the pro- rata total net asset value
of that Fund. The minimum monthly Fund fee is phased-in for new Funds at the
rate of 1/12 in month one, 2/12th in month two, increasing incrementally per
month until the full monthly minimum is in effect in month 12 ($1,333).
Independent Auditors
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts, are the
independent auditors of the Trust. Ernst & Young audits the financial statements
of the Trust, prepares the Trust's tax returns, and renders other advice to the
Trust concerning accounting and tax matters. Ernst & Young also meets
periodically with the Trust's Board and with the Audit Committee of the Board to
discuss matters within the scope of Ernst & Young's activities with respect to
the Trust.
41
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Funds pay brokers' commissions, transfer taxes, and other fees relating
to their specific portfolio transactions. (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 most such transactions, although the price to the
Trust usually reflects a dealer "spread" or "mark- up.")
Amounts of Brokerage Paid
Brokerage commissions paid by the Funds were as follows for the past three
years:
1999 1998 1997
---- ---- ----
Aggressive Balanced ....... $ 4,424 $ -- $ --
Managed ................... 2,385,643 1,843,929 1,626,154
Growth & Income ........... 4,741,953 2,673,170 1,646,997
Equity Index .............. 61,865 33,797 31,076
Large Cap Value ........... 110,393 63,944 45,619
Large Cap Value CORE ...... 3,240 -- --
Large Cap Growth .......... 1,389,454 815,587 680,933
Large Cap Aggressive Growth 11,885 -- --
Large/Mid Cap Value ....... 6,876 -- --
Mid Cap Value ............. 383,634 495,154 122,108
Mid Cap Growth ............ 245,913 146,033 71,998
Real Estate Equity ........ 122,021 177,186 122,897
Fundamental Mid Cap Growth 3,082 -- --
Mid Cap Blend ............. 5,586 -- --
Small/Mid Cap Value ....... 21,848 -- --
Small/Mid Cap CORE ........ 12,371 7,225 --
Small/Mid Cap Growth ...... 621,068 893,945 1,876,203
Small Cap Value ........... 284,381 176,549 138,114
Small Cap Growth .......... 146,206 103,248 67,492
Global Equity ............. 25,925 37,426 --
Global Balanced ........... 47,678 51,205 27,745
International Equity Index 133,746 730,529 750,416
International Equity ...... 16,561 -- --
International Opportunities 74,940 117,083 63,138
Emerging Markets Equity ... 189,025 10,018 --
Bond Index ................ 598 -- --
High Yield Bond ........... 200 -- --
How Brokers and Dealers are Selected
Orders for the purchase and sale of Fund portfolio investments are placed
by John Hancock with respect to the Money Market Fund and by the respective
subadvisers to the other Funds. All of these subadvisers place orders in such
manner as, in their opinion, will offer the best overall price and 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 subadvisers 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's or
dealer's services. Although some weight is given to the availability and value
of research and statistical assistance (discussed immediately below) furnished
by the broker or dealer to the subadviser, it is not always possible to place a
dollar value on such information and services. Because it is only supplementary
to the
42
<PAGE>
subadvisers' own research efforts, the receipt of research information and
statistical assistance is not expected to reduce their expenses measurably.
Research and Statistical Services Furnished by Brokers and Dealers
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 subadviser. 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 subadviser as part of the services. In any case in which the
foregoing systems can be used for both research and non-research purposes, the
subadviser makes an appropriate allocation of those uses and will permit brokers
and dealers to provide only the portion of the systems to be used for research
services.
Research and statistical services furnished by brokers and dealers handling
the Funds' transactions may be used by the subadvisers 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 subadvisers in connection with the Funds.
Relationship Between Brokerage Commissions and Research and Statistical Services
Furnished by Brokers and Dealers
Except as to the Global Balanced Fund, the subadvisers or the Funds will
not at any time make a commitment pursuant to an agreement with a broker because
of research services provided. Nor, except as set forth below, will John Hancock
or the subadvisers direct brokerage upon any prescribed basis to a broker
because of research services provided.The subadviser for each of the Small Cap
Value, Small/Mid Cap Value, Mid Cap Growth, and Mid Cap Value Funds 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 Fund. In certain cases, the subadviser of the
Global Balanced Fund directs securities transactions for that Fund 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 subadviser's
own internal allocation procedures.
Evaluations of the overall reasonableness of any broker's commissions are
made by the subadvisers' traders for the Funds 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. Such
authority is generally expected to be used very infrequently. The Mid Cap
Growth, Small/Mid Cap Value, Mid Cap Value, and Global Balanced Funds, however,
may be more likely to use such authority.
Brokerage Transactions in Foreign Markets
Brokerage transactions 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.
43
<PAGE>
Simultaneous Transactions with Other Accounts
The subadvisers also perform investment advisory services for a number of
other accounts and clients, none of which is given preference over the Trust 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 subadviser to avoid favoring any one account over another.
Accordingly, investment opportunities in such cases are allocated in a manner
deemed equitable by the subadvisers to the particular accounts involved. The
allocation may be based, for example, on such factors as the accounts'r
respective investment objectives and then current investment and cash positions.
Subject to these requirements, Trust orders may be combined with orders of other
accounts or clients advised by any of the subadvisers at prices which are
approximately averaged.
Use of Brokers Who are Affiliated With a Subadviser
A Fund may place portfolio transactions through certain brokers who are
affiliated with the Fund's subadviser. The Trust has implemented special
procedures governing the circumstances of these transactions. In addition to
complying with any applicable provisions of the Trust's procedures, these
transactions must comply with all applicable legal requirements, including,
where applicable, Rule 17e-1 under the Investment Company Act. Among other
things, that rule requires the commissions or other compensation paid to the
affiliated broker to be reasonable and fair compared to those in similar
transactions between unrelated parties.
Set forth below is information about transactions by each Fund with
affiliated brokers in reliance on Rule 17e-1 for each of the past three years:
<TABLE>
<CAPTION>
Amount of Commissions
Name Nature of Broker's Paid by Fund
of Affiliation with -------------------------------------
Fund Affiliated Broker Fund's Sub-Adviser 1999 1998 1997
- ---- ----------------- ------------------ ---- ---- ----
<S> <C> <C> <C> <C> <C>
International Ord Minnett Group Wholly-owned subsidiary of $ 34 $ 263 $ 122
Opportunities Ltd. sub-adviser's parent
International Jardine Fleming & Co. Wholly-owned subsidiary of $ 710 $ 311 $ 295
Opportunities sub-adviser's parent
International Robert Fleming Wholly-owned subsidiary of $ 1,166 $ 1,018 $ 741
Opportunities Securities, Ltd. sub-adviser's parent
Mid Cap Value Neuberger Berman, LLC Dual operating division of $80,598 $366,985 $68,000
sub-adviser's parent
Large Cap Value CORE Goldman, Sachs & Co. Dual operating division of $ 96 - 0 - - 0 -
sub-adviser's parent
Small/Mid Cap CORE Goldman, Sachs & Co. Dual operating division of $ 120 - 0 - - 0 -
parent of sub-adviser
Emerging Markets Equity Morgan Stanley Asia Wholly-owned subsidiary of $ 2,779 - 0 - - 0 -
Limited sub-adviser's parent
Emerging Markets Equity Morgan Stanley Wholly-owned subsidiary of $ 3,276 - 0 - - 0 -
International Limited sub-adviser's parent
</TABLE>
For 1999, the total dollar amount of such transactions through affiliated
brokers as a percentage of all brokerage-type transactions was 4.9% for the
International Opportunities Fund, 15.8% for the Mid Cap Value Fund, .18% for the
Large Cap Value CORE Fund, .07% for the International Equity Fund, .02% for the
Small/Mid Cap CORE Fund, and 1.2% of the Emerging Markets Equity Fund. For 1999,
the total brokerage commissions on such transactions through affiliated brokers,
as a percentage of commissions paid on all brokerage-type transactions was 3.2%
for the International Opportunities Fund, 26.5% for the Mid Cap Value Fund, 3%
for the Large Cap Value CORE Fund, 1% for the Small/Mid Cap CORE Fund, and 3.3%
for the Emerging Markets Equity Fund.
44
<PAGE>
CODES OF PERSONAL CONDUCT
The Funds (other than the Money Market Fund), John Hancock, and the Trust's
principal underwriter have adopted, and the Trustees have approved, codes of
conduct for their officers, directors and other personnel. Among other things
these codes regulate (although they do not absolutely prohibit) transactions by
such persons in securities of a type in which the Funds may and do invest. The
subadvisers have adopted codes of conduct that are similar to the Fund's except
that certain subadvisers may prohibit certain of their key personnel from
personal trading in certain types of securities such as initial public offerings
or private offerings.
FEATURES OF THE TRUST'S SHARES
The shares of beneficial interest of the Trust currently are divided into
31 series, each corresponding to one of the Trust's 31 Funds. The Trust has the
right to establish additional series and issue additional shares without the
consent of its shareholders.
If the holders of variable annuity contracts and variable life insurance
policies show minimal interest in any Fund, the Trust's Board of Trustees, by
majority vote, may eliminate the Fund 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 holders of variable annuity contracts and variable life insurance
policies participating in any such Fund will be notified in writing of the
Trust's intention to eliminate the Fund and given 30 days to transfer amounts
from such Fund to other Funds without incurring any transaction fee. Amounts not
transferred or withdrawn would automatically be transferred, at the discretion
of the Fund's management.
The assets received by the Trust for the issuance or sale of shares of each
Fund and all income, earnings, profits, and proceeds thereof are specifically
allocated to that Fund. They constitute the underlying assets of each Fund, are
segregated on the books of the Trust, and are to be charged with the expenses of
such Fund. Any assets which are not clearly allocable to a particular Fund or
Funds are allocated in a manner determined by the Board of Trustees. Accrued
liabilities which are not clearly allocable to one or more Funds would generally
be allocated among the Funds in proportion to their relative net assets before
adjustment for such unallocated liabilities.
Each issued and outstanding share in a Fund is entitled to participate
equally in dividends and distributions declared with respect to such Fund and in
the net assets of such Fund upon liquidation or dissolution remaining after
satisfaction of outstanding liabilities.
A dividend from the net investment income of the Money Market Fund will be
declared and distributed daily. Dividends from net investment income of the
other Funds will be declared and distributed monthly. The Trust 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 Fund to which they relate and will be appropriately credited to
investment performance under the variable life insurance policies and variable
annuity contracts participating in that Fund.
The shares of each Fund, 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.
SHAREHOLDER MEETINGS AND VOTING RIGHTS
Under the Trust's Declaration of Trust, the Trust is not required to hold
an annual shareholders' meeting. Normally, for example, there will be no
shareholders meetings for the purpose of electing Trustees.
In addition, it is expected that the Trustees generally will elect their
own successors and appoint Trustees to fill any vacancy, so long as, after
filling the vacancy, at least two-thirds of the Trustees then in office have
been elected by the shareholders.
45
<PAGE>
Notwithstanding the above 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. Also the Trustees will promptly call a
meeting of shareholders for the purpose of voting upon the question of removal
of any Trustee or all of the Trustees, if requested in writing to do so by
holders of 10% or more of the outstanding shares. In this regard, 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 Trust'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 SEC, 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.
At any shareholders' meeting, all shares of the Trust 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 Funds differ. Where the
interests of the Funds differ, the voting is on a Fund-by-Fund basis. Approval
or disapproval by the shareholders in one Fund on such a matter would not
generally be a prerequisite of approval or disapproval by shareholders in
another Fund; and shareholders in a Fund not affected by a matter generally
would not be entitled to vote on that matter. Examples of matters which would
require a Fund-by-Fund vote are changes in the fundamental investment policy of
a particular Fund and approval of investment management or sub-investment
management agreements.
SALES AND REDEMPTIONS OF FUND SHARES
"Seed Money" Shares
Typically, when a new Fund is added to the Trust, John Hancock (or one of
its affiliates) initially purchases a substantial amount of that Fund's shares
to provide the new fund with a reasonable asset base with which to commence
operations. For example, the most recent such contributions of "seed money" have
been as follows:
"Seed Money" Date
Shares Purchased by of
Fund John Hancock Purchase
- ---- ------------ --------
Aggressive Balanced $10,000,000 8/31/99
Equity Index 15,000,000 5/1/98
Large Cap Value CORE 5,000,000 8/31/99
Large Cap Aggressive Growth 10,000,000 8/31/99
Large/Mid Cap Value 5,000,000 8/31/99
Fundamental Mid Cap Growth 5,000,000 8/31/99
Mid Cap Blend 5,000,000 8/31/99
Small/Mid Cap CORE 5,000,000 5/1/98
Global Equity 15,000,000 5/1/98
Global Balanced 20,000,000 5/1/96
InternationalEquity 10,000,000 8/31/99
Emerging Markets Equity 10,000,000 5/1/98
Bond Index 2,500,000 5/1/98
High Yield Bond 10,000,000 5/1/98
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John Hancock (or its affiliate) may redeem these shares (and thus withdraw
its seed money investment) at some time. However, before withdrawing any part of
their interests in any Fund, John Hancock (or its affiliate) will consider any
possible adverse impact the withdrawal might have on that Fund.
Purchases and redemptions of seed money shares are made at the applicable
Fund's net asset value per share (with no additions or deductions for charges)
next computed after the purchase or redemption order is placed.
Shares Sold and Redeemed In Connection With Transactions Under Variable
Annuity Contracts and Variable Life Insurance Policies
Fund shares are sold at their net asset value as next determined after
receipt of net premiums 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 net surrender requests 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. Redemptions are normally made in cash, but the Trust 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.
Trust shares are also sold 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 or at the net asset value per share
computed for the day as of which such Separate Account transactions are
effected.
COMPUTING THE FUNDS' NET ASSET VALUE
The net asset value per share of each Fund 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 regular
trading. For this purpose, however, certain derivative instruments may be valued
using prices as late as 4:15 p.m.
The net asset value per share of each Fund 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 Trust
expenses will be accrued daily for this purpose.
Short-term investment with a remaining maturity of 60 days or less, and all
investments of the Money Market Fund, are valued at "amortized cost," which
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 Fund would receive upon the sale of the instrument.
The Board of Trustees has established procedures designed to stabilize the
Money Market Fund's price per share, as computed for the purpose of sales and
redemptions, at $10. There can be no assurance, however, that the Fund will at
all times be able to maintain a constant $10 net asset value per share. Such
procedures include review of the Fund's holdings at such intervals as is deemed
appropriate to determine whether the Fund's net asset value, calculated by using
available market quotations, deviates from $10 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 cause losses or gains to be recorded
for the Fund, including decreases or increases in the Fund's net asset value per
share.
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Securities and covered all 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.
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 generally is used which is established by the exchange on
which the instrument is traded.
Trading in 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 normally
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. The Trust 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 Funds'
securities used in such calculation. If events affecting the value of such
securities occur between the time when their price is determined and the time as
of which the Fund's net asset value is calculated, such securities may be valued
at fair value by or under the direction of the Board of Trustees.
TAXES
The Trust intends that each Fund qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code ("Code"). This requires that
each Fund comply with certain requirements as to the nature of its income and
amounts of dividends and other distributions it pays. Also, in order to qualify
under Subchapter M, at the end of each quarter of a Fund's taxable year, (i) at
least 50% of the market value of the Fund's assets must be represented by cash
and cash items, U.S. Government securities, securities of other regulated
investment companies, 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 Fund'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 Fund controls and which are
engaged in the same, similar or related trades or businesses.
The Trust also intends that each Fund comply with certain other
diversification requirements, promulgated under Section 817(h) of the Code.
Under these requirements, no more than 55% of the total value of the assets of
each Fund may 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 these purposes, 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.
Assuming the Funds qualify as regulated investment companies under
Subchapter M, they will not owe any income taxes. On the other hand, if a Fund
fails to qualify under Subchapter M, it may incur income tax liabilities, which
will negatively affect its investment performance.
Also, qualification under Subchapter M, as well as compliance with the
Section 817(h) diversification requirements, (among other things) are necessary
to secure the tax treatment intended for holders of variable annuity
48
<PAGE>
contracts and variable life insurance policies that are supported by the Trust.
Therefore, any such failure to qualify under Subchapter M or to meet the
diversification standards under Section 817(h) could have serious adverse
consequences for such investors.
For a discussion of these and other 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 Funds that invest substantial amounts of their assets in foreign
securities may be able to make an election to pass through to John Hancock,
JHVLICO or IPL 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.
INFORMATION ABOUT FUND PERFORMANCE
How Money Market Fund Yields Are Calculated
The Money Market Fund may advertise investment performance figures,
including its current yield and its effective yield.
The Money Market Fund'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 Fund will be computed by dividing the
seven-day annualized yield (determined as 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, 1999, the Money Market Fund's
current yield was 5.74%; its effective yield was 5.91%.
The Fund's yield will fluctuate depending upon market conditions, the type,
quality, and maturity of the instruments in the Fund, and its expenses.
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 the variable life insurance
policies and variable annuity contracts that are supported by the Funds. (Those
charges are discussed in the prospectus for such policies or contracts.)
Therefore, the yield or total return of any Fund is not comparable to that of a
publicly available fund. Nor should yield or total return quotations be
considered representative of the Fund's yield or total return in any future
period.
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<PAGE>
LEGAL MATTERS
Freedman, Levy, Kroll & Simonds of Washington, D.C., advises the Trust on
certain legal matters relating to the Federal securities laws.
REPORTS TO CONTRACTHOLDERS
Annual and semi-annual reports containing financial statements of the
Trust, as well as any materials soliciting voting instructions for Trust shares,
will be sent to variable life insurance and annuity contractowners having an
interest in the Trust.
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APPENDIX A
- ----------
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
protection 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.
. 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.
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. 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 is
being paid.
. D -- Bonds rated D are in default and payment of interest and/or repayment
of principal is in arrears.
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PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
(a) 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.
(b) 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.
(c) Not Applicable.
(d) (1) 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 Funds, included in Post-
Effective Amendment No. 4 to this File No. 33-2081, filed in April, 1989.
(2) 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 Funds, included in
Post-Effective Amendment No. 4 to this File No. 33-2081, filed in
April, 1989.
(3) 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 Fund,
included in Post-Effective Amendment No. 9 to this File No. 33-2081,
filed on March 1, 1994.
(4) 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 Funds, included in Post-Effective Amendment
No. 3 to this File No. 33-2081, filed in April, 1988.
(5) 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 Funds, included in
Post-Effective Amendment No. 19 to this File No. 33-2081, filed on May
1, 1998.
(6) 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 Small/Mid Cap Growth Funds, included in
Post- Effective Amendment No. 9 to this File No. 33-2081, filed on
March 1, 1994.
(7) 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 Fund,
included in Post- Effective Amendment No. 9 to this File No. 33-2081,
filed on March 1, 1994.
(8) Form of 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 Small/Mid Cap
Growth Fund, included in Post-Effective Amendment No. 21 to this File
No. 33-2081, filed on May 3, 1999.
(9) 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 Fund, included in
Post-Effective Amendment No. 11 to this File No. 33-2081, filed on
April 29, 1995.
(10) 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, Global Bond, International
Opportunities, and International Balanced Funds, included in
Post-Effective Amendment No. 13 to this File No. 33-2081, filed on
April 30, 1996.
(11) 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 Fund and the Equity Index Fund, included in
Post-Effective Amendment No. 16 to this File No. 33-2081, filed on May
1, 1997.
(12) 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 Fund, included in
Post-Effective Amendment No. 13 to this File No. 33-2081, filed on
April 30, 1996.
(13) 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 Fund, included in
Post-Effective Amendment No. 13 to this File No. 33-2081, filed on
April 30, 1996.
(14) 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 Fund, included
in Post-Effective Amendment No. 13 to this File No. 33-2081, filed on
April 30, 1996.
<PAGE>
(15) 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 Fund, included in
Post-Effective Amendment No. 13 to this File No. 33-2081, filed on
April 30, 1996.
(16) 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 Fund, included in
Post-Effective Amendment No. 13 to this File No. 33-2081, filed on
April 30, 1996.
(17) 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 Global Bond Fund,
included in Post-Effective Amendment No. 13 to this File No. 33-2081,
filed on April 30, 1996.
(18) 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 Fund, included in Post-Effective Amendment No. 13 to
this File No. 33-2081, filed on April 30, 1996.
(19) 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 Fund,
included in Post-Effective Amendment No. 13 to this File No. 33-2081,
filed on April 30, 1996.
(20) 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 Fund, included in
Post- Effective Amendment No. 16 to this File No. 33-2081, filed on
May 1, 1997.
(21) 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, included in Post-Effective
Amendment No. 19 to this File No. 33-2081, filed on May 1, 1998.
(22) 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 Fund, included in Post-Effective Amendment
No. 19 to this File No. 33-2081, filed on May 1, 1998.
(23) 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 Fund, included
in Post-Effective Amendment No. 21 to this File No. 33-2081, filed on
May 3, 1999.
(24) 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 Fund, included
in Post- Effective Amendment No. 21 to this File No. 33-2081, filed on
May 3, 1999.
(25) 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 Fund, included in Post-Effective Amendment No. 21 to this File
No. 33- 02081, filed on May 3, 1999.
(26) 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 Fund, included in
Post-Effective Amendment No. 19 to this File No. 33-2081, filed on May
1, 1998.
(27) 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 Fund, included
in Post-Effective Amendment No. 19 to this File No. 33-2081, filed on
May 1, 1998.
(28) Amendment No. 2 to the Investment Management Agreement dated as of
March 14, 1996 By and Between John Hancock Variable Series Trust I and
John Hancock Mutual Life Insurance Company included in Post-Effective
Amendment No. 21 to this File No. 33-2081 filed on May 3, 1999.
(29) Amendment No. 3 to the Investment Management Agreement dated as of
March 14, 1996 By and Between John Hancock Variable Series Trust I and
John Hancock Mutual Life Insurance Company included in Post-Effective
Amendment No. 21 to this File No. 33-2081 filed on May 3, 1999.
(30) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, Morgan Stanley Dean Witter Advisors, Inc.,
and John Hancock Mutual Life Insurance Company, relating to the
Emerging Markets Equity Fund included in Post-Effective Amendment No.
23 to this File No. 33-2081 filed on August 9, 1999.
(31) Investment Management Agreement By and Between John Hancock Variable
Series Trust I and John Hancock Mutual Life Insurance Company relating
to the Large Cap Aggressive Growth, Fundamental Mid Cap Growth,
International Equity, Aggressive Balanced, Large Cap Value CORE,
Large/Mid Cap Value, Mid Cap Blend, and Small/Mid Cap Value Funds
included in Post-Effective Amendment No. 23 to this File No. 33-2081
filed on August 9, 1999.
<PAGE>
(32) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, Alliance Capital Management L.P., and John
Hancock Mutual Life Insurance Company relating to the Large Cap
Aggressive Growth Fund, included in Post-Effective Amendment No. 23 to
this File No. 33-2081 filed on August 9, 1999.
(33) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, OppenheimerFunds, Inc., and John Hancock
Mutual Life Insurance Company relating to the Fundamental Mid Cap
Growth Fund included in Post-Effective Amendment No. 23 to this File
No. 33-2081 filed on August 9, 1999.
(34) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, Golman Sachs Asset Management, and John
Hancock Mutual Life Insurance Company relating to the International
Equity Fund included in Post-Effective Amendment No. 23 to this File
No. 33-2081 filed on August 9, 1999.
(35) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, Golman Sachs Asset Management, and John
Hancock Mutual Life Insurance Company relating to the Large Cap Value
CORE Fund included in Post-Effective Amendment No. 23 to this File No.
33-2081 filed on August 9, 1999.
(36) Form of 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 Aggressive
Balanced Fund included in Post-Effective Amendment No. 23 to this File
No. 33-2081 filed on August 9, 1999.
(37) Form of 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 Mid Cap
Blend Fund included in Post-Effective Amendment No. 23 to this File
No. 33-2081 filed on August 9, 1999.
(38) Form of 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 Large/Mid Cap
Value Fund included in Post-Effective Amendment No. 23 to this File
No. 33-2081 filed on August 9, 1999.
(39) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, The Boston Company Asset Management Company,
LLC, and John Hancock Mutual Life Insurance Company relating to the
Small/Mid Cap Value Fund included in Post-Effective Amendment No. 23
to this File No. 33-2081 filed on August 9, 1999.
(e) (1) 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.
(2) 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.
(f) Not Applicable.
(g) (1) 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
Fund, included in Post-Effective Amendment No. 10 to this File No.
33-2081, filed on March 2, 1995.
(2) 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 Funds, included in Post-Effective Amendment No. 13 to this
File No. 33-2081, filed on April 30, 1996.
(3) 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 Funds, included in Post-Effective Amendment No. 19 to this
File No. 33-2081, filed on May 1, 1998.
(4) Form of Amendment dated as of July 28, 1999 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 Funds included in Post-Effective Amendment No. 23 to
this File No. 33-2081 filed on August 9, 1999.
(5) Amendment dated as of December 18, 1998 to Custodian Agreement
dated January 30, 1995, between John Hancock Variable Series Trust I
and State Street Bank and Trust Company, addressing "eligible foreign
custodians" within the meaning of Rule 17f-5, as amended, filed
herewith.
(h) 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.
(i) Opinion and Consent of Counsel regarding the legality of the securities
being registered (filed herewith).
(j) (1) Consent of Ernst & Young LLP, independent auditors (filed
herewith).
<PAGE>
(j) (2) Not Applicable.
(k) Not Applicable.
(l) Not Applicable.
(m) Not Applicable.
(n) Not Applicable.
(o) Not Applicable.
(p) Code of Ethics, revised February 16, 2000, adopted by the John Hancock
Variable Series Trust I, its Investment Adviser and Principal Underwriter,
filed herewith.
(q) Diagram of Subsidiaries of John Hancock Mutual Life Insurance Company
(incorporated by reference from Exhibit 13 to Post-Effective Amendment No.
5 to Form N-4 Registration Statement of John Hancock Variable Annuity
Account H (File No. 333-08345) filed April 29, 1999).
(r) 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 Mr. Dykstra, included
in Post-Effective Amendment No. 3 to this Form N-1A Registration Statement
(File No. 33-2081), filed in April, 1988. Power of Attorney for Ms. Van
Leer included in Post-Effective Amendment No. 21 to this Form N-1A
Registration Statement (File No. 33-2081), filed in May, 1999. Powers of
Attorney for Ms. Kessler and Mr. Verdonck, included in Post-Effective
Amendment No. 23 to this File No. 33-2081 filed on August 9, 1999.
ITEM 24. 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 H, U and V, separate investment accounts created pursuant to
Massachusetts law to fund variable annuity contracts issued by John Hancock Life
Insurance Company, ("John Hancock"), a life insurance company organized under
the laws of Massachusetts; (3) John Hancock Variable Life Insurance Account UV,
a separate investment account created pursuant to Massachusetts law to fund
variable life insurance policies issued by John Hancock; (4) John Hancock
Variable Annuity Account I and JF, separate investment accounts created pursuant
to Massachusetts law to fund variable annuity contracts issued by JHVLICO; and
(5) Separate Account IPL-1, a separate investment account created pursuant to
Delaware law to fund variable life insurance policies issued by Investors
Partner Life Insurance Company, ("IPL"), a life insurance company organized
under the laws of Delaware. (The ten 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, John Hancock and IPL,
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, JHVLICO and IPL 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, JHVLICO and IPL. A diagram of the subsidiaries of John
Hancock is attached as Exhibit (q) to this Form N-1A Registration Statement.
ITEM 25. 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.
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.
<PAGE>
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,
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 26. 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)]. Information pertaining to any business and
other connections of Registrant's sub-investment advisers, Independence
Investment Associates, Inc. ("IIA"), John Hancock Advisers Inc. ("Advisers"), T.
Rowe Price Associates, Inc. ("T. Rowe Price"), Janus Capital Corporation
("Janus"), Neuberger Berman, LLC ("Neuberger Berman"), INVESCO, Inc.
("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"), Morgan Stanley Dean Witter Investment
Management, Inc. ("Morgan Stanley"), Mellon Bond Associates, LLP ("Mellon"),
Alliance Capital Management L.P. ("Alliance"), OppenheimerFunds, Inc.
("Oppenheimer"), The Boston Company Asset Management, LLC ("Boston"), 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. 801-15908), Advisers (File No. 801-
8124), 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. 801-16048), Scudder Kemper (File No.
801-252), Independence International (File No. 801-28785), Morgan Stanley (File
No. 801-15757), Mellon (File No. 801-50865), Alliance (File No. 801-56720),
Oppenheimer (File No. 801-8253), Boston (File No. 801-6829), Wellington (File
No. 801-15908) 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, T. Rowe
Price, Janus, Neuberger Berman, INVESCO, JPMIM, Rowe Price-Fleming, Brinson
Goldman Sachs, Scudder Kemper, Independence International, Morgan Stanley,
Mellon, Alliance, Oppenheimer, Boston, 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 27. PRINCIPAL UNDERWRITERS
(a) Signator Investors, Inc. ("Signator") 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.
Signator does not act as a principal underwriter, distributor, or
investment advisor for any other investment company, except that Signator
serves as the principal underwriter for the separate accounts referred to
in the response to Item 24 above.
(b) The name and principal business address of each officer, director, or
partner of Signator as well as their positions and offices with Signator
are hereby incorporated by reference from Schedules A and D of Signator's
Form BD [filed separately with the Commission (Firm CRD No. 468)]. None of
the directors or partners of Signator hold positions with the Registrant.
(c) Not Applicable.
ITEM 28. 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:
<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 and investment adviser, 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 Money Market Fund.
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, Aggressive Balanced, Mid Cap Blend, and Short-Term
Bond Funds.
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 Sovereign Bond and Small
Cap Growth Funds.
Alliance, 1345 Avenue of the Americas, New York, New York 10105, 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 Aggressive
Growth Fund.
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 Funds.
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 Fund.
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 Fund.
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 Fund.
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 Fund.
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 Fund.
JPMIM, King Street, London, England SW1Y6XA, will serve as Registrant's
sub-investment manager and, in such capacity, will keep records related to
transactions in portfolio securities of the Global Bond Fund.
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 Fund.
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
Fund.
Goldman Sachs, 32 Old Slip, New York, New York 10005, 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,
International Equity, and Large Cap Value CORE Funds.
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 Fund.
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 Fund.
Morgan Stanley, 1221 Avenue of the Americas, New York, New York 10020, 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 Fund.
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 Bond
Index Fund.
Oppenheimer, Two World Trade Center, New York, New York, 10048, will serve as
Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the Fundamental Mid Cap
Growth Fund.
Boston, One Boston Place, Boston, Massachusetts 02108, will serve as
Registrant's sub-investment manager and, in such capacity, will keep records
related to transactions in portfolio securities of the Small/Mid Cap Value Fund.
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 Small/Mid Cap Growth,
High Yield Bond, and Large/Mid Cap Value Funds.
ITEM 29. MANAGEMENT SERVICES
<PAGE>
Not applicable.
ITEM 30. 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.
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND THE
INVESTMENT COMPANY ACT OF 1940, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS
AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHLAF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BOSTON, AND THE
COMMONWEALTH OF MASSACHUSETTS, ON THE 4TH DAY OF APRIL, 2000.
John Hancock Variable Series Trust I
By: /s/ Thomas J. Lee
-----------------
Thomas J. Lee, Vice Chairman, President and Trustee
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST-EFFECTIVE
AMENDMENT TO ITS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLWOIING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE DATE
By: /s/ Raymond F. Skiba April 5, 2000
--------------------
Raymond F. Skiba
Treasurer (Principal Financial
and Accounting Officer)
By: /s/ Thomas J. Lee April 5, 2000
-----------------
Thomas J. Lee
Vice Chairman, President and
Trustee (Acting Principal
Executive Officer)
For himself and as attorney-in-fact for:
Michele G. Van Leer, Chairman
Elizabeth G. Cook, Chairman
Diane C. Kessler, Trustee
Robert Verdonck, Trustee
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND THE
INVESTMENT COMPANY ACT OF 1940, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS
AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BOSTON, AND THE
COMMONWEALTH OF MASSACHUSETTS, ON THE 4TH DAY OF APRIL, 2000.
John Hancock Variable Series Trust I
By: /s/ Thomas J. Lee
-----------------
Thomas J. Lee, Vice Chairman, President and Trustee
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 4, 2000
--------------------
Raymond F. Skiba
Treasurer (Principal Financial and
Accounting Officer)
By: /s/ Thomas J. Lee April 4, 2000
-----------------
Thomas J. Lee
Vice Chairman, President and Trustee
(Acting Principal Executive Officer)
For himself and as attorney-in-fact for:
Michele G. Van Leer, Chairman
Elizabeth G. Cook, Trustee
Diane C. Kessler, Trustee
Robert Verdonck, Trustee
<PAGE>
Exhibit G.4
AMENDMENT TO CUSTODIAN AGREEMENT
This Amendment to the Custodian Agreement is made as of December 18, 1998
by and between the John Hancock Variable Series Trust I (the "Fund") and State
Street Bank and Trust Company (the "Custodian"). Capitalized terms used in this
Amendment without definition shall have the respective meanings given to such
terms in the Custodian Agreement referred to below.
WHEREAS, the Fund and the Custodian entered into an Amended and Restated
Custodian Agreement dated as of January 30, 1995 (as amended and in effect from
time to time, "Contract"); and
WHEREAS, the Fund is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets, and the Fund has made twenty-three (23) series subject to the
Contract (each such series, together with all other series subsequently
established by the Fund and made subject to the Contract in accordance with the
terms thereof, shall be referred to as a "Portfolio", and, collectively, the
"Portfolios"); and
WHEREAS, the Fund and the Custodian desire to amend certain provisions of
the Contract to reflect revisions to Rule 17f-5 ("Rule 17f-5") promulgated under
the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund and the Custodian desire to amend and restate certain
other provisions of the Contract relating to the custody of assets of each of
the Portfolios held outside of the United States.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter contained, the parties hereby agree to amend the
Contract, pursuant to the terms thereof, as follows:
I. Articles 4 through 15 of the Contract are hereby renumbered, as of the
effective date of this Amendment, as Articles 6 through 17, respectively,
and all cross-references therein are hereby renumbered accordingly.
II. New Articles 4 and 5 of the Contract are hereby added, as of the effective
date of this Amendment, as set forth below. Said new Articles 4 and 5
shall govern matters relating to (a) the responsibilities of the Custodian
as "Foreign Custody Manager" (as hereinafter defined) for each Portfolio
of the Fund that is subject to the Contract, and (b) the responsibilities
of the Custodian with respect to property of any such Portfolio that is
held outside the United States. In the event of any conflict between the
provisions of new Articles 4 and 5, on the one hand, and any
<PAGE>
other provision of the Contract, on the other hand, the provisions of new
Articles 4 and 5 shall prevail.
III. Except as specifically superseded or modified herein, the terms and
provisions of the Contract shall continue to apply with full force and
effect. If the Custodian is delegated the responsibilities of Foreign
Custody Manager pursuant to the terms of Article 4 hereof, in the event of
any conflict between the provisions of Articles 4 and 5 hereof, the
provisions of Article 4 shall prevail.
4. The Custodian as Foreign Custody Manager.
----------------------------------------
4.1. Definitions.
-----------
Capitalized terms in this Article 4 shall have the following meanings:
"Country Risk" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure
(including any Mandatory Securities Depositories operating in the country);
prevailing or developing custody and settlement practices; and laws and
regulations applicable to the safekeeping and recovery of Foreign Assets held in
custody in that country.
"Eligible Foreign Custodian" has the meaning set forth in section (a)(1) of Rule
17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as
defined in Rule 17f-5), a bank holding company meeting the requirements of an
Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate
action of the U.S. Securities and Exchange Commission (the "SEC")), or a foreign
branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the
requirements of a custodian under Section 17(f) of the 1940 Act, except that the
term does not include Mandatory Securities Depositories.
"Foreign Assets" means any of the Portfolios' investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Portfolios'
transactions in such investments.
"Foreign Custody Manager" has the meaning set forth in section (a)(2) of Rule
17f-5.
"Mandatory Securities Depository" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if the
Fund, on the Portfolio's behalf, determines to place Foreign Assets in a country
outside the United States (i) because required by law or regulation; (ii)
because securities cannot be withdrawn from such foreign securities depository
or clearing agency; or (iii) because maintaining or effecting trades in
securities outside the foreign securities depository or
2
<PAGE>
clearing agency is not consistent with prevailing or developing custodial or
market practices.
4.2. Delegation to the Custodian as Foreign Custody Manager.
------------------------------------------------------
The Fund, by resolution adopted by its Board of Trustees (the "Board"), hereby
delegates to the Custodian, with respect to the Portfolios, subject to Section
(b) of Rule 17f-5, the responsibilities set forth in this Article 4 with respect
to Foreign Assets of the Portfolios held outside the United States, and the
Custodian hereby accepts such delegation, as Foreign Custody Manager with
respect to the Portfolios.
4.3. Countries Covered.
-----------------
The Foreign Custody Manager shall be responsible for performing the delegated
responsibilities defined below only with respect to the countries and custody
arrangements for each such country listed on Schedule A to this Contract, which
list of countries may be amended from time to time by the Fund with the
agreement of the Foreign Custody Manager. The Foreign Custody Manger shall list
on Schedule A the Eligible Foreign Custodians selected by the Foreign Custody
Manager to maintain the assets of the Portfolios which list of Eligible Foreign
Custodians may be amended from time to time in the sole discretion of the
Foreign Custody Manager. Mandatory Securities Depositories are listed on
Schedule B to this Contract, which Schedule B may be amended from time to time
by the Foreign Custody Manager. The Foreign Custody Manager will provide amended
versions of Schedules A and B in accordance with Section 4,7 of this Article 4.
Upon the receipt by the Foreign Custody Manager of Proper Instructions to open
an account or to place or maintain Foreign Assets in a country listed on
Schedule A, and the fulfillment by the Fund on behalf of the Portfolios of the
applicable account opening requirements for such country, the Foreign Custody
Manager shall be deemed to have been delegated by the Board on behalf of the
Portfolios responsibility as Foreign Custody Manager with respect to that
country and to have accepted such delegation. Execution of this Amendment by the
Fund shall be deemed to be a Proper Instruction to open an account, or to place
or maintain Foreign Assets, in each country listed on Schedule A in which the
Custodian has previously placed on currently maintains Foreign Assets pursuant
to the terms of the Contract. Following the receipt of Proper Instructions
directing the Foreign Custody Manager to close the account of a Portfolio with
the Eligible Foreign Custodian selected by the Foreign Custody Manager in a
designated country, the delegation by the Board on behalf of the Portfolios to
the Custodian as Foreign Custody Manager for that country shall be deemed to
have been withdrawn and the Custodian shall immediately cease to be the Foreign
Custody Manager of the Portfolios with respect to that country.
3
<PAGE>
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to the
Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect to
the country as to which the Custodian's acceptance of delegation is withdrawn.
4.4. Scope of Delegated Responsibilities.
-----------------------------------
4.4.1. Selection of Eligible Foreign Custodians.
----------------------------------------
Subject to the provisions of this Article 4, the Portfolio's Foreign Custody
Manager may place and maintain the Foreign Assets in the care of the Eligible
Foreign Custodian selected by the Foreign Custody Manager in each country listed
on Schedule A, as amended from time to time.
In performing its delegated responsibilities as Foreign Custody Manager to place
or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign
Custody Manager shall determine that the Foreign Assets will be subject to
reasonable care, based on the standards applicable to custodians in the country
in which the Foreign Assets will be held by that Eligible Foreign Custodian,
after considering all factors relevant to the safekeeping of such assets,
including, without limitation the factors specified in Rule 17f-5(c)(1).
4.4.2. Contracts With Eligible Foreign Custodians.
------------------------------------------
The Foreign Custody Manager shall determine that the contract (or the rules or
established practices or procedures in the case of an Eligible Foreign Custodian
that is a foreign securities depository or clearing agency) governing the
foreign custody arrangements with each Eligible Foreign Custodian selected by
the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).
4.4.3. Monitoring.
----------
In each case in which the Foreign Custody Manager maintains Foreign Assets with
an Eligible Foreign Custodian Selected by the Foreign Custody Manager, the
Foreign Custody Manager shall establish a system to monitor (i) the
appropriateness of maintaining the Foreign Assets with such Eligible Foreign
Custodian and (ii) the contract governing the custody arrangements established
by the Foreign Custody Manager with the Eligible Foreign Custodian (or the rules
or established practices and procedures in the case of an Eligible Foreign
Custodian selected by the Foreign Custody Manager which is a foreign securities
depository or clearing agency that is not a Mandatory Securities Depository).
In the event the Foreign Custody Manager determines that the custody
arrangements with an Eligible Foreign Custodian it has selected are no longer
4
<PAGE>
appropriate, the Foreign Custody Manager shall notify the Board in accordance
with Section 4.7 hereunder.
4.5. Guidelines for the Exercise of Delegated Authority.
--------------------------------------------------
For purposes of this Article 4, the Board shall be deemed to have considered and
determined to accept such Country Risk as is incurred by placing and maintaining
the Foreign Assets in each country for which the Custodian is serving as Foreign
Custody Manager of the Portfolios. The Fund, on behalf of the Portfolios, and
the Board shall be deemed to be monitoring on a continuing basis such Country
Risk to the extent that the Board considers necessary or appropriate. The Fund
and the Custodian each expressly acknowledge that under this Article 4 the
Foreign Custody Manager shall not be delegated any of the responsibilities set
forth in paragraphs (c)(1), (c)(2) or (c)(3) of Rule 17f-5 with respect to
Mandatory Securities Depositories.
4.6. Standard of Care as Foreign Custody Manager of a Portfolio.
----------------------------------------------------------
In performing the responsibilities delegated to it, the Foreign Custody Manager
agrees to exercise reasonable care, prudence and diligence such as a person
having responsibility for the safekeeping of assets of management investment
companies registered under the 1940 Act would exercise.
4.7. Reporting Requirements.
----------------------
The Foreign Custody Manager shall report the withdrawal of the Foreign Assets
from an Eligible Foreign Custodian and the placement of such Foreign Assets with
another Eligible Foreign Custodian by providing to the Board amended Schedules A
or B at the end of the calendar quarter in which an amendment to either Schedule
has occurred. The Foreign Custody Manager shall make written reports notifying
the Board of any other material change in the foreign custody arrangements of
the Portfolios described in this Article 3 after the occurrence of the material
change.
4.8. Representations with Respect to Rule 17f-5.
------------------------------------------
The Foreign Custody Manager represents to the Fund that it is a U.S. Bank as
defined in section (a)(7) of Rule 17f-5.
The Fund represents to the Custodian that the Board has determined that it is
reasonable for the Board to rely on the Custodian to perform the
responsibilities delegated pursuant to this Contract to the Custodian as the
Foreign Custody Manager of the Portfolios.
5
<PAGE>
4.9. Effective Date and Termination of the Custodian as Foreign Custody
------------------------------------------------------------------
Manager.
-------
The Board's delegation to the Custodian as Foreign Custody Manager of the
Portfolios shall be effective as of the date hereof and shall remain in effect
until terminated at any time, without penalty, by written notice from the
terminating party to the non-terminating party. Termination will become
effective sixty (60) days after receipt by the non-terminating party of such
notice. The provisions of Section 4.3 hereof shall govern the delegation to and
termination of the Custodian as Foreign Custody Manager of the Portfolios with
respect to designated countries.
5. Duties of the Custodian with Respect to Property of the Portfolios Held
-----------------------------------------------------------------------
Outside the United States.
-------------------------
5.1. Definitions.
-----------
Capitalized terms in this Article 5 shall have the following meanings:
"Foreign Securities System" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.
"Foreign Sub-Custodian" means a foreign banking institution serving as an
Eligible Foreign Custodian.
5.2. Holding Securities.
------------------
The Custodian shall identify on its books as belonging to the Portfolios the
foreign securities held by each Foreign Sub-Custodian or Foreign Securities
System. The Custodian may hold foreign securities for all of its customers,
including the Portfolios with any Foreign Sub-Custodian in an account that is
identified as belonging to the Custodian for the benefit of its customers,
provided however, that (i) the records of the Custodian with respect to foreign
- -------- -------
securities of the Portfolios which are maintained in such account shall identify
those securities as belonging to the Portfolios and (ii), to the extent
permitted and customary in the market in which the account is maintained, the
Custodian shall require that securities so held by the Foreign Sub-Custodian be
held separately from any assets of such Foreign Sub-Custodian or of other
customers of such Foreign Sub-Custodian.
6
<PAGE>
5.3. Foreign Securities Systems.
--------------------------
Foreign securities shall be maintained in a Foreign Securities System in a
designated country only through arrangements implemented by the Foreign
Sub-Custodian in such country pursuant to the terms of this Contract.
5.4 Transactions in Foreign Custody Account.
---------------------------------------
5.4.1. Delivery of Foreign Assets.
--------------------------
The Custodian or a Foreign Sub-Custodian shall release and deliver foreign
securities of the Portfolios held by such Foreign Sub-Custodian, or in a Foreign
Securities System account, only upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties, and only in
the following cases:
(i) upon the sale of such foreign securities for the Portfolio but only
against receipt of payment therefor, unless (as permitted by Section
5.4.3 below) settlement is effected in accordance with commercially
reasonable market practice in the country where such foreign
securities are held or traded, including, without limitation: (A)
delivery against expectation of receiving later payment; or (B) in
the case of a sale effected through a Foreign Securities System, in
accordance with the rules governing the operation of the Foreign
Securities System;
(ii) in connection with any repurchase agreement related to foreign
securities;
(iii) to the depository agent in connection with tender or other similar
offers for foreign securities of the Portfolios;
(vi) to the issuer thereof or its agent when such foreign securities are
called, redeemed, retired or otherwise became payable;
(v) to the issuer thereof, or its agent, for transfer into the name of
the Custodian (or the name of the respective Foreign Sub-Custodian or
of any nominee of the Custodian or such Foreign Sub-Custodian) or for
exchange for a different number of bonds, certificates or other
evidence representing the same aggregate face amount or number of
units;
(vi) to brokers, clearing banks or other clearing agents for examination
or trade execution in accordance with market custom; provided that in
--------
any such case the Foreign Sub-Custodian shall have no responsibility
or liability for any loss arising from the delivery of such
securities prior to receiving payment for such securities except as
may arise form the Foreign Sub-Custodian's own negligence or willful
misconduct;
7
<PAGE>
(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer of such securities, or pursuant to
provisions for conversion contained in such securities, or pursuant
to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities;
(ix) for delivery as security in connection with any borrowing by the
portfolios requiring a pledge of assets by the Portfolios;
(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other proper purpose, but only upon receipt of Proper
--- ----
Instructions specifying the foreign securities to be delivered,
setting forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper trust purpose, and naming the
person or persons to whom delivery of such securities shall be
made.
5.4.2. Payment of Portfolio Monies.
---------------------------
Upon receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out, or direct the
respective Foreign Sub-Custodian or the respective Foreign Securities System to
pay our monies of a Portfolio in the following cases only:
(i) upon the purchase of foreign securities for the Portfolio, against
delivery of such security unless otherwise directed by Proper
Instructions or unless (as permitted by Section 5.4.3 below)
settlement is effected in accordance with the customary established
securities trading or processing practices and procedures in the
country or market where the transaction occurs, including without
limitation, by (A) delivering money to the seller thereof or to a
dealer therefor (or an agent for such seller or dealer) against
expectation of receiving later delivery of such foreign securities;
or (B) in the case of a purchase effected through a Foreign
Securities System, in accordance with the rules governing the
operation of such Foreign Securities System;
8
<PAGE>
(ii) in connection with the conversion, exchange or surrender of foreign
securities of the Portfolio;
(iii) for the payment of any expense or liability of the Portfolio, including
but not limited to the following payments; interest, taxes, investment
advisory fees, transfer agency fees, fees under this contract, legal
fees, accounting fees, and other operating expenses;
(iv) for the purchase or sale of foreign exchange or foreign exchange
contracts for the Portfolio, including transactions executed with or
through the Custodian or its Foreign Sub-Custodians;
(v) in connection with trading in options and futures contracts, including
delivery as original margin and variation margin;
(vi) for payment of part or all of the dividends received in respect of
securities sold short;
(vii) in connection with the borrowing or lending of foreign securities; and
(viii) for any other proper purpose, but only upon receipt of Proper
--------
Instructions specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such purpose to
be a proper trust purpose, and naming the person or persons to whom such
payment is to be made.
5.4.3. Market Conditions: Market Information.
-------------------------------------
Notwithstanding any provision of this Contract to the contrary, settlement and
payment for Foreign Assets received for the account of the Portfolios and
delivery of Foreign Assets maintained for the account of the Portfolios may be
effected in accordance with the customary established securities trading or
processing practices and procedures in the country or market in which the
transaction occurs, including, without limitation, delivering Foreign Assets to
the purchaser thereof or to a dealer therefor (or an agent for such purchaser or
dealer) with the expectation of receiving later payment for such Foreign Assets
form such purchaser or dealer.
The Custodian shall provide to the Board the information with respect to custody
and settlement practices in countries in which the Custodian employs a Foreign
Sub-Custodian, including without limitation information relating to Foreign
Securities Systems, described on Schedule C hereto at the time or times set
forth on such Schedule. The Custodian may revise Schedule C from time to time,
provided that no such revision shall result in the Board being provided with
substantively less information than had been previously provided hereunder.
9
<PAGE>
5.5. Registration of Foreign Securities.
----------------------------------
The foreign securities maintained in the custody of a Foreign Sub-Custodian
(other than bearer securities) shall be registered in the name of the applicable
Portfolio or in the name of the Custodian or in the name of any Foreign
Sub-Custodian or in the name of any nominee of the foregoing, and the Fund on
behalf of such Portfolio agrees to hold any such nominee harmless from any
liability as a holder of record of such foreign securities. The Custodian or a
Foreign Sub-Custodian shall not be obligated to accept securities on behalf of a
Portfolio under the terms of this Contract unless the form of such securities
and the manner in which they are delivered are in accordance with reasonable
market practice.
5.6. Bank Accounts.
-------------
The Custodian shall identify on its books as belonging to the Fund cash
(including cash denominated in foreign currencies) deposited with the Custodian.
Where the Custodian is unable to maintain, or market practice does not
facilitate the maintenance of, cash on the books of the Custodian, a bank
account or bank accounts opened and maintained outside the United States on
behalf of a Portfolio with a Foreign Sub-Custodian shall be subject only to
draft or order by the Custodian or such Foreign Sub-Custodian, acting pursuant
to the terms of this Contract to hold cash received by or from or for the
account of the Portfolio.
5.7. Collection of Income.
--------------------
The Custodian shall use reasonable commercial efforts to collect all income and
other payments with respect to the Foreign Assets held hereunder to which the
Portfolios shall be entitled and shall credit such income, as collected, to the
applicable Portfolio. In the event that extraordinary measures are required to
collect such income, the Fund and the Custodian shall consult as to such
measures and as to the compensation and expenses of the Custodian relating to
such measures.
5.8. Shareholder Rights.
------------------
With respect to the foreign securities held pursuant to this Article 5, the
Custodian will use reasonable commercial efforts to facilitate the exercise of
voting and other shareholder rights, subject always to the laws, regulations and
practical constraints that may exist in the country where such securities are
issued. The Fund acknowledges that local conditions, including lack of
regulation, onerous procedural obligations, lack of notice and other factors may
have the effect of severely limiting the ability of the Fund to exercise
shareholder rights.
10
<PAGE>
5.9. Communications Relating to Foreign Securities.
---------------------------------------------
The Custodian shall transmit promptly to the Fund written information
(including, without limitation, pendency of calls and maturities of foreign
securities and expirations of rights in connection therewith) received by the
Custodian via the Foreign Sub-Custodians from issuers of the foreign securities
being held for the account of the portfolios. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund written information so
received by the Custodian from issuers of the foreign securities whose tender or
exchange is sought or from the party (or its agents) making the tender or
exchange offer. The Custodian shall not be liable for any untimely exercise of
any tender, exchange or other right or power in connection with foreign
securities or other property of the Portfolios at any time held by it unless (i)
the Custodian or the respective Foreign Sub-Custodian is in actual possession of
such foreign securities or property and (ii) the Custodian receives Proper
Instructions with regard to the exercise of any such right or power, and both
(i) and (ii) occur at least three business days prior to the date on which the
Custodian is to take action to exercise such right or power.
5.10. Liability of Foreign Sub-Custodians and Foreign Securities Systems.
------------------------------------------------------------------
Each agreement pursuant to which the Custodian employs a Foreign Sub-Custodian
shall to the extent possible, require the Foreign Sub-Custodian to exercise
reasonable care in the performance of its duties and, to the extent possible to
indemnify, and hold harmless, the Custodian from and against any loss, damage,
cost, expense, liability or claim arising out of or in connection with the
Foreign Sub-Custodian's performance of such obligations. At the Fund's
election, the Portfolios shall be entitled to be subrogated to the rights of
the Custodian with respect to any claims against a Foreign Sub-Custodian as a
consequence of any loss, damage, cost, expense, liability or claim if and to the
extent that the Portfolios have not been made whole for any such loss, damage,
cost, expense, liability or claim. At the Fund's request, the Custodian shall
use reasonable efforts to process and advance any such claim on behalf of the
Fund against any Foreign Sub-Custodian or Foreign Securities System.
5.11. Tax Law.
-------
The Custodian shall have no responsibility or liability for any obligations now
or hereafter imposed on the Fund, the Portfolios or the Custodian as custodian
of the Portfolios by the tax law of the United States or of any6 state or
political subdivision thereof. It shall be the responsibility of the Fund to
notify the Custodian of the obligations imposed on the Fund with respect to the
Portfolios or the Custodian as custodian of the Portfolios by the tax law of
countries other than those mentioned in the above sentence, including
responsibility for withholding and other taxes, assessments or other
governmental charges, certifications and governmental reporting. The sole
responsibility of the Custodian with regard to such tax law shall be to promptly
notify the Fund of any claim or other notice received by the Custodian relating
to taxes owed by the
11
<PAGE>
Fund (or any report relating thereto), and to use reasonable efforts to assist
the Fund with respect to any claim for exemption or refund under the tax law of
countries for which the Fund has provided such information. Subject to the
foregoing, it shall be the responsibility of the Custodian to use reasonable
efforts to perform such ministerial steps as are required to collect any tax
refund, to ascertain the appropriate rate of tax withholding and to provide such
documents as may be required to enable the Company to receive appropriate tax
treatment under applicable tax laws and treaty provisions, if any.
5.12. Liability of Custodian.
----------------------
Except as may arise from the Custodian's own negligence or willful misconduct or
the negligence or willful misconduct of a Foreign Sub-Custodian, the Custodian
shall be without liability to the Fund for any loss, liability, claim or expense
resulting from or caused by anything which is (A) part of Country Risk or (B)
part of the "prevailing country risk" of the Fund and the Portfolios, as such
term is used in SEC Release Nos. IC-22658; IS-1080 (May 12, 1997) or as such
term or other similar terms are now or in the future interpreted by the SEC or
by the staff of the Division of Investment Management of the SEC.
The Custodian shall be liable for the acts or omissions of a Foreign
Sub-Custodian or a Foreign Securities System to the same extent as set forth
with respect to sub-custodians and Securities Systems generally in the Contract
provided however that regardless of whether Foreign Assets are maintained in the
custody of a Foreign Sub-Custodian or a Foreign Securities System, the Custodian
shall not be liable for any loss, damage, cost, expense, liability or claim
resulting from nationalization, expropriation, currency restrictions, or acts of
war or terrorism, or any other loss where the Foreign Sub-Custodian has
otherwise acted with reasonable care. Nothing herein shall be deemed to relieve
the Custodian from liability for its own negligent or willful acts and
omissions, or other breach of this Contract.
12
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed in its name and behalf by its duly authorized representative as of the
date first above written.
Witnessed By: STATE STREET BANK AND TRUST
COMPANY
/s/ MARC L. PARSONS
- -------------------
Marc L. Parsons By: /s/ RONALD E. LOGUE
Associate Counsel -------------------------
Name: Ronald E. Logue
Title: Executive Vice President
Witnessed By: JOHN HANCOCK VARIABLE SERIES TRUST I
/s/ J.E. ENTERKIN, JR.
- ----------------------
Name: J.E. Enterkin, Jr. By: /s/ MICHELE G. VAN LEER
Title: Senior Counsel -------------------------
Name: Michele G. Van Leer
Title: Chairman and CEO
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
Country Subcustodian Non-Mandatory Depositories
Argentina Citibank, N.A. --
Australia Westpac Banking Corporation --
Austria Erste Bank der Osterreichischen --
Sparkassen AG
Bahrain British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation
Limited)
Bangladesh Standard Chartered Bank --
Belgium Generale de Banque --
Bermuda The Bank of Bermuda Limited --
Bolivia Banco Boliviano Americano S.A. --
Botswana Barclays Bank of Botswana Limited --
Brazil Citibank, N.A. --
Bulgaria ING Bank N.V. --
Canada Canada Trustco Mortgage Company --
Chile Citibank, N.A. --
People's Republic The Hongkong and Shanghai --
of China Banking Corporation Limited,
Shanghai and Shenzhen branches
Colombia Cititrust Colombia S.A. --
Sociedad Fiduciaria
11/20/98
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
Country Subcustodian Non-Mandatory Depositories
Costa Rica Banco BCT S.A. --
Croatia Privredna Banka Zagreb d.d --
Cyprus Barclays Bank Plc. --
Cyprus Offshore Banking Unit --
Czech Republic Ceskoslovenska Obehodni --
Banka, A.S.
Denmark Den Danske Bank --
Ecuador Citibank N.A. --
Egypt National Bank of Egypt --
Estonia Hansabank --
Finland Merita Bank Limited --
France Banque Paribas --
Germany Dresdner Bank AG --
Ghana Barclays Bank of Ghana Limited --
Greece National Bank of Greece S.A. The Bank of Greece, System for
Monitoring Transactions in
Securities in Book-Entry Form
Hong Kong Standard Chartered Bank --
Hungary Citibank Budapest Rt. --
2
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
Iceland Icebank Ltd.
India Deutsche Bank AG --
The Hongkong and Shanghai
Banking Corporation Limited
Indonesia Standard Chartered Bank --
Ireland Bank of Ireland --
Israel Bank Hapoalim B.M. --
Italy Banque Paribas --
Ivory Coast Societe Generale de Banques --
en Cote d'Ivoire
Jamaica Scotiabank Jamaica Trust and Merchant --
Bank Ltd.
Japan The Daiwa Bank, Limited Japan Securities Depository
Center
The Fuji Bank, Limited
Jordan British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Kenya Barclays Bank of Kenya Limited --
Republic of Korea The Hongkong and Shanghai Banking
Corporation Limited
Latvia JSC Hansabank-Latvija --
</TABLE>
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
Lebanon British Bank of the Middle East
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Lithuania Vilniaus Bankas AB --
Malaysia Standard Chartered Bank --
Malaysia Berhad
Mauritius The Hongkong and Shanghai --
Banking Corporation Limited
Mexico Citibank Mexico, S.A. --
Morocco Banque Commerciale du Maroc --
Namibia (via) Standard Bank of South Africa --
The Netherlands MeesPierson N.V. --
(New Zealand) Limited
New Zealand ANZ Banking Group --
Norway Christiania bank og --
Kreditkasse
Oman British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Pakistan Deutsche Bank AG --
Peru Citibank, N.A.
Philippines Standard Chartered Bank --
</TABLE>
<PAGE>
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
Country Subcustodian Non-Mandatory Depositories
<S> <C> <C>
Poland Citibank (Poland) S.A. --
Bank Polska Kasa Opieki S.A.
Portugal Banco Comercial Portugues --
Romania ING Bank, N.V. --
Russia Credit Suisse First Boston AO. Moscow --
(as delegate of Credit Suisse
First Boston, Zurich)
Singapore The Development Bank --
of Singapore Limited
Slovak Republic Ceskoslovenska Obchodna --
Banka, A.S.
Slovenia Bank Austria d.d. --
South Africa Standard Bank of South Africa Limited --
Spain Banco Santander, S.A. --
Sri Lanka The Hongkong and Shanghai --
Banking Corporation Limited
Swaziland Standard Bank Swaziland Limited --
Sweden Skandinaviska Enskilda Banken --
Switzerland UBS AG --
Taiwan - R.O.C. Central Trust of China --
Thailand Standard Chartered Bank --
11/20/98
</TABLE>
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
Country Subcustodian Non-Mandatory Depositories
Trinidad & Tobago Republic Bank Limited --
Tunisia Banque Internationale Arabe --
de Tunisie
Turkey Citibank, N.A. --
Ottoman Bank
Ukraine ING Bank, Ukraine --
United Kingdom State Street Bank and Trust --
Company, London Branch
Uruguay Citibank, N.A. --
Venezuela Citibank, N.A. --
Zambia Barclays Bank of Zambia --
Limited
Zimbabwe Barclays Bank of Zimbabwe --
Limited
Euroclear (The Euroclear System)/State Street London Limited
Cedel, S.A. (Cedel Bank, societe anonyme)/State Street London Limited
INTERSETTLE (for EASDAQ Securities)
11/20/98
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Argentina Caja de Valores S.A.
Australia Austraclear Limited
Reserve Bank Information and
Transfer System
Austria Oesterreichische Kontrollbank AG
(Wertpapiersammelbank Division)
Belgium Caisse Interprofessionnelle de Depot et
de Virement de Tirres S.A.
Banque Nationale de Belgique
Brazil Companhia Brasileira de Liquidacao e
Custodia (CBLC)
Bolsa de Valores de Rio de Janeiro
All SSB clients presently use CBLC
Central de Custodia e de Liquidacao Financeira
de Titulos
Bulgaria Central Depository AD
Bulgarian National Bank
Canada The Canadian Depository
for Securities Limited
People's Republic Shanghai Securities Central Clearing and
of China Registration Corporation
Shenzhen Securities Central Clearing
Co., Ltd.
Costa Rica Central de Valores S.A. (CEVAL)
* Mandatory depositories include entities for which use is mandatory as a 1
matter of law or effectively mandatory as a matter of market practice.
11/20/98
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Croatia Ministry of Finance
National Bank of Croatia
Czech Republic Stedisko cennyeh papiro
Czech National Bank
Denmark Vaedipapircentralen (the Danish
Securities Center)
Egypt Misr Company for Clearing, Settlement,
and Central Depository
Estonia Eesti Vaartpaberite Keskdepositoorium
Finland The Finnish Central Securities Depository
France Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres (SICOVAM)
Germany Deutsche Borse Clearing AG
Greece The Central Securities Depository
(Apothetirion Titlon AE)
Hong Kong The Central Clearing and
Settlement System
Central Money Markets Unit
Hungary The Central Depository and Clearing
House (Budapest) Ltd. (KELER)
(Mandatory for Gov't Bonds only;
SSB does not use for other securities)
India The National Securities Depository Limited
* Mandatory depositories include entities for which use is mandatory as a 2
matter of law or effectively mandatory as a matter of market practice.
11/20/98
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Indonesia Bank Indonesia
Ireland Central Bank of Ireland
Securities Settlement Office
Israel The Tel Aviv Stock Exchange Clearing
House Ltd.
Bank of Israel
Italy Monte Tiroli S.p.A.
Banca d'Italia
Jamaica The Jamaican Central Securities Depository
Japan Bank of Japan Net System
Kenya Central Bank of Kenya
Republic of Korea Korea Securities Depository Corporation
Latvia The Latvian Central Depository
Lebanon The Custodian and Clearing Center of
Financial Instruments for Lebanon
and the Middle East (MIDCLEAR) S.A.L.
The Central Bank of Lebanon
Lithuania The Central Securities Depository of Lithuania
Malaysia The Malaysian Central Depository Sdn. Bhd.
* Mandatory depositories include entities for which use is mandatory as a 3
matter of law or effectively mandatory as a matter of market practice.
11/20/98
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Malaysia (cont.) Bank Negara Malaysia,
Scripless Securities Trading and Safekeeping
System
Mauritius The Central Depository & Settlement
Co. Ltd.
Mexico S.D. INDEVEL, S.A. de C.V.
(Instituto para el Deposito de
Valores)
Morocco Maroclear
The Netherlands Nederlands Cetraal Instituut voor
Giraal Effectenverkcer B.V. (NECIGEF)
De Nederlandsche Bank N.V.
New Zealand New Zealand Central Securities
Depository Limited
Norway Verdipapirsentralen (the Norwegian
Registry of Securities)
Oman Muscat Securities Market
Pakistan Central Depository Company of Pakistan Limited
Peru Caja de Valores y Liquidaciones S.A.
(CAVALI)
* Mandatory depositories include entities for which use is mandatory as a 4
matter of law or effectively mandatory as a matter of market practice.
11/20/98
<PAGE>
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Philippines The Philippines Central Depository, Inc.
The Registry of Scripless Securities
(ROSS) of the Bureau of the Treasury
Poland The National Depository of Securities
(Krajowy Depozyt Papierow Wartosciowych)
Central Treasury Bills Registrar
Portugal Central de Valores Mobiliarios (Central)
Romania National Securities Clearing, Settlement and
Depository Co.
Bucharest Stock Exchange Registry Division
Singapore The Central Depository (Ptc) Limited
Monetary Authority of Singapore
Slovak Republic Stredisko Cennych Papierov
National Bank of Slovakia
Slovenia Klirinsko Deporna Druzba d.d.
South Africa The Central Depository Limited
Spain Servicio de Compensacion y Liquidacion de Valores,
S.A.
Banco de Espana Central de Anotaciones en Cuenta
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
11/20/98
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Sri Lanka Central Depository System
(Pvt) Limitied
Sweden Vardepapperscentralen AB
(the Swedish Central Securities Depository)
Switzerland Schweizerische Effekten - Giro AG
Taiwan - R.O.C. The Taiwan Securities Central
Depository Co., Ltd.
Thailand Thailand Securities Depository
Company Limited
Tunisia Societe Tunisienne interprofessionelle de
Compensation et de Depot de
Valeurs Mobilieres
Central Bank of Tunisia
Tunisian Treasury
Turkey Takas ve Saklama Bankasi A.S.
(TAKASBANK)
Central Bank of Turkey
Ukraine The National Bank of Ukraine
United Kingdom The Bank of England,
The Central Gilts Office and
The Central Moneymarkets Office
Uruguay Central Bank of Uruguay
* Mandatory depositories include entities for which use is mandatory as a 6
matter of law or effectively mandatory as a matter of market practice.
11/20/98
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
Country Mandatory Depositories
Venezuela Central Bank of Venezuela
Zambia Lusaka Central Depository Limited
Bank of Zambia
* Mandatory depositories include entities for which use is mandatory as a 7
matter of law or effectively mandatory as a matter of market practice.
11/20/98
<PAGE>
SCHEDULE C
MARKET INFORMATION
Publication/Type of Information Brief Description
- ------------------------------- -----------------
(Frequency)
The Guide to Custody in World Markets An overview of safekeeping and
- ------------------------------------- settlement practices and
(annually) procedures in each market in which
State Street Bank and Trust
Company offers custodial services.
Global Custody Network Review Information relating to the
- ----------------------------- operating history and structure of
(annually) depositories and subcustodians
located in the markets in which
State Street Bank and Trust
Company offers custodial services,
including transnational
depositories.
Global Legal Survey With respect to each market in
- ------------------- which State Street Bank and Trust
(annually) Company offers custodial services,
opinions relating to whether local
law restricts (i) access of a
fund's independent public
accountants to books and records
of a Foreign Sub-Custodian or
Foreign Securities System, (ii)
the Fund's ability to recover in
the event of bankruptcy or
insolvency of a Foreign Sub-
Custodian or Foreign Securities
System, (iii) the Fund's ability
to recover in the event of a loss
by a Foreign Sub-Custodian or
Foreign Securities System, and
(iv) the ability of a foreign
investor to convert cash and cash
equivalents to U.S. dollars.
Subcustodian Agreements Copies of the subcustodian
- ----------------------- contracts State Street Bank and
(annually) Trust Company has entered into
with each subcustodian in the
markets in which State Street Bank
and Trust Company offers
subcustody services to its US
mutual fund clients.
Network Bulletins (weekly): Developments of interest to
investors in the markets in which
State Street Bank and Trust
Company offers custodial services.
Foreign Custody Advisories (as With respect to markets in which
necessary) State Street Bank and Trust
Company offers custodial services
which exhibit special custody
risks, developments which may
impact State Street's ability to
deliver expected levels of
service.
<PAGE>
EXHIBIT (i)
[John Hancock Mutual Life Insurance Company Letterhead]
April 5, 2000
John Hancock Variable Series Trust I
John Hancock Place
P.O. Box 111
Boston, MA 02117
Trustees:
This opinion is given in connection with the filing by John Hancock
Variable Series Trust I, a Massachusetts business trust (the "Trust") of its
Post-Effective Amendment No. 24 to its Registration Statement on Form N-1A (File
No. 33-2081; the "Registration Statement") under the Securities Act of 1933 and
the Investment Company Act of 1940, relating to an indefinite amount of its
shares of beneficial interest, which includes thirty-one separate series (i.e.,
the Managed, Growth & Income, Equity Index, Large Cap Value, Large Cap Growth,
Mid Cap Value, Mid Cap Growth, Small/Mid Cap Growth, Real Estate Equity,
Small/Mid Cap CORE Equity, 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, Global
Bond, High Yield Bond, Large Cap Aggressive Growth, Fundamental Mid Cap Growth,
International Equity, Aggressive Balanced, Large Cap Value CORE, Large/Mid Cap
Value, Mid Cap Blend, Small/Mid Cap Value, and Money Market Funds). The Trust's
shares of beneficial interest, including the thirty-one series of shares, are
hereinafter referred to as the "shares".
I have examined the Trust's Declaration of Trust, its By-Laws, the
Registration Statement of its predecessor as originally filed on December
11, 1985, subsequent post-effective amendments and this Post-Effective Amendment
No. 24, and such other records, certificates, documents and statutes that I have
deemed relevant in order to render the opinion expressed herein.
Based on such examination, I am of the opinion that:
1. The Trust is a business trust duly organized, validly existing and in
good standing under the laws of the Commonwealth of Massachusetts.
2. The shares offered for sale by the Trust, when issued in the manner
contemplated by this Post-Effective Amendment to its Registration
Statement, will be legally issued, fully-paid and non-assessable.
<PAGE>
I consent to the use of this opinion as Exhibit (i) to the Post-Effective
Amendment to the Registration Statement and to the use of my name in the
Statement of Additional Information incorporated by reference into the
Prospectus comprising a part of the Registration Statement.
Very truly yours,
/s/ RONALD J. BOCAGE
Ronald J. Bocage
Vice President and Counsel
<PAGE>
EXHIBIT J(1)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in the Prospectus and under the captions "Independent Auditors" and
"The Trust's Financial Statements and Investment Perforamce Information" in the
Statement of Additional Information in Post-Effective Amendment Number 24 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 10, 2000 on the financial
statements included in the Annual Report of the John Hancock Variable Series
Trust I for the year ended December 31, 1999.
/s/ ERNST & YOUNG, LLP
ERNST & YOUNG, LLP
Boston Massachusetts
March 30, 2000
<PAGE>
Exhibit (P)
CODE OF ETHICS
JOHN HANCOCK VARIABLE SERIES TRUST I
Revised February, 2000
<PAGE>
CODE OF ETHICS
(Revised February16, 2000)
JOHN HANCOCK VARIABLE SERIES TRUST I
The conduct of each "Access Person" to the John Hancock Variable
Series Trust I (the "Trust"), a registered investment company, is governed by
one basic principle: the interests of investors in the Trust are paramount. In
recognition of the applicable fiduciary principles, the personal interests of
each "Access Person" must be subordinated to those of the investors. Thus, no
Access Person may make personal use of information available by reason of his or
her position with the Trust until after investment transactions of the Funds
within the Trust' have been completed.
Each investment opportunity which comes to the attention of any
Access Person which is appropriate for consideration by the Trust must first be
made available to the Trust before he or she can take any personal advantage of
the opportunity. A conflict between the interest of an individual and that of
the Trust can arise when the individual by reason of his or her position
anticipates a portfolio transaction by the investing entity and places himself
or herself in a position to profit by the Trust's action. A conflict can also
arise when an individual who has an existing securities position in his or her
personal account can benefit from the purchase, sale or retention of the same
security by the Trust.
The following requirements set forth below are designed to assist
those individuals subject to this Code in their personal securities transactions
by clearly specifying some, but not all, of the areas where personal
transactions might raise questions of conflict with the best interests of
investors in the Trust.
1. DEFINITIONS
-----------
For purposes of this Code of Ethics:
(a) "Access Person" means any natural person who is:
. a trustee and/or officer of the Trust; and/or
. a director or officer of the Trust's investment adviser, John Hancock
Life Insurance Company("JHLICO") who, in the performance of his or her
regular functions or duties makes, participates in or obtains
information regarding the purchase or sale of a Covered Security by the
Trust (excluding the Money Market Fund), or whose functions relate to
the making of any recommendations with respect to such purchases or
sales; and/or
. a director or officer of the Trust's principal underwriter, Signator
Investors, Inc. who, in the performance of his or her regular functions
or duties makes, participates in or obtains information regarding the
purchase or sale of a Covered Security by the Trust (excluding the
Money Market Fund), or whose functions relate to the making of any
recommendations with respect to such purchases or sales;
and/or
2
<PAGE>
. any employee of JHLICO or the Trust (or any company in a control
relationship to the Trust or JHLICO) who, in connection with his or her
regular functions or duties, makes, participates in, or obtains
information regarding the purchase or sale of Covered Securities by any
portfolio within the Trust, or whose functions relate to the making of
any recommendations with respect to the purchases or sales; and/or
. deemed an Access Person by the Trust's compliance officer in accordance
with section 7 of this Code of Ethics.
(b) "Beneficial Interest/Ownership" means any interest/ownership by which an
Access Person or any member of his or her immediate family (relative by
blood or marriage Or otherwise, living in the same household), can directly
or indirectly derive a monetary benefit from the purchase, sale or
ownership of a Covered Security, obtain from such Covered Security benefits
substantially similar to those of ownership or obtain title to the Covered
Security now or in the future.
(c) "Covered Security" means a security as defined in section 2(a)(9) of the
Investment Company Act of 1940, including without limitation: equity and
----------------------------
debt securities; derivative securities including options on and warrants to
purchase equity or debt securities; shares of closed-end mutual funds;
investments in unit investment trusts. Covered Security shall also include
futures, swaps and other derivative contracts.
Covered Security does not mean: direct obligations of the Government of
-------------
the United States (regardless of their maturities); bankers' acceptances;
bank certificates of deposit; commercial papers; high quality short-term
debt, including repurchase agreements; shares of open-end mutual funds
(open-end investment companies); and securities acquired as part of an
automatic dividend reinvestment plan.
Any questions regarding whether a security is a Covered Security should be
directed to the Compliance Officer of the Trust.
(d) "Disinterested trustee" means a member of the Board of Trustees of the
Trust who is not an "interested person" within the meaning of Section
2(a)(19) of the Investment Company Act of 1940. In essence, a disinterested
trustee is a trustee not affiliated with JHLICO or the Trust except by
reason of being a Trustee of the Trust.
(e) "Family member" or "family" means a trustee's, director's, officer's or
employee's companion, spouse, or other relative, whether related by blood,
marriage or otherwise, who either (i) shares the same home, or (ii) is
financially dependent upon the trustee, director or employee, or (iii)
whose investments are controlled by the trustee, director, officer or
employee. The term also includes any unrelated individual whose investments
are controlled by and to whose financial support the trustee, director,
officer or employee contributes.
(f) "Investment Personnel" means an Access Person who is an employee of the
Trust or of JHLICO (or of any company in a control relationship to the
Trust or to JHLICO) who,
3
<PAGE>
in connection with his or her regular functions or duties makes or
participates in making recommendations regarding the purchase or sale of
Covered Security by the Trust (excluding the Money Market Fund).
(g) "Security Transaction of the Trust" means a Covered Security which (i)
within the most recent 15 days, is or has been held by the Trust, or (ii)
within the most recent 15 days, is being or has been considered by the
Trust or its investment adviser for purchase by the Trust, or (iii) is an
option to purchase or sell, or is a Covered Security convertible into or
exchangeable for, a Covered Security described in (i) or (ii).
(h) "Sub-adviser's Access Person" means (i) a sub-adviser's officers,
directors, or general partners (if any), or (ii) any employee of the
sub-adviser (or any company in a control relationship with the sub-adviser)
who, in connection with his or her regular functions or duties, makes,
participates in, or obtains information regarding the purchase or sale of
Covered Security by a Fund or whose functions relate to the making of any
recommendations with respect to such purchases or sales.
2. PROHIBITED ACTIVITIES
---------------------
No Access Person, in connection with a Covered Security Transaction of the
Trust, shall:
(a) employ any device, scheme or artifice to defraud the Trust;
(b) make any untrue statement of a material fact to the Trust or omit to state
a material fact necessary in order to make the statements made to the
Trust, in light of the circumstances under which they are made, not
misleading;
(c) engage in any act practice or course of business that operates or would
operate as a fraud or deceit on the Trust; or
(d) engage in any manipulative practice with respect to the Trust.
3. PRIOR APPROVAL OF ANY PRIVATE PLACEMENT ACQUISITION
---------------------------------------------------
Investment Personnel and their family members must not acquire any securities in
a private placement without advance written approval from the Trust's Compliance
Officer. In evaluating a request for approval, the Compliance Officer will
consider whether the investment opportunity is appropriate for the Trust and
whether the private placement is being offered because of the individual's
access to the Trust. If approval is granted, the individual must disclose his or
her investment if they play a part in the Trust's subsequent consideration of an
investment in the issuer.
4
<PAGE>
4. PRIOR APPROVAL OF INITIAL PUBLIC OFFERINGS
------------------------------------------
Investment Personnel and their family members must not acquire any securities in
an initial public offering without advance written approval from the Trust's
Compliance Officer. In evaluating a request for approval, the Compliance Officer
will consider whether the investment opportunity is appropriate for the Trust
and whether the initial public offering is being offered because of the
individual's access to the Trust. If approval is granted, the individual must
disclose his or her investment if they play a part in the Trust's subsequent
consideration of an investment in the issuer.
5. PROPRIETARY INFORMATION
-----------------------
Investment Personnel have an obligation to share any proprietary information in
their possession with the appropriate members of the investment staff prior to
effecting a personal securities transaction on the basis of such information.
All written credit or company reports or analyses produced by members of the
investment staff are also considered proprietary. This information should not be
used for personal trading.
6. DUTIES OF SUB-ADVISERS
----------------------
Each sub-adviser to the Trust (excluding a sub-adviser that provides services
solely to the Money Market Fund) shall:
(a) provide a copy of its Code of Conduct and each amendment thereto to the
Trust's Compliance Officer; and each such code or amendment shall be
submitted to the Trustees for their approval. The Trustees will give such
approval only if they (including a majority of disinterested Trustees)
determine that the code (including any applicable amendments) (i) contains
provisions reasonably necessary to prevent the Sub-adviser's Access Persons
from engaging in any conduct that is prohibited by Rule 17j-1(b); (ii)
provides for such Sub-adviser's Access Persons to make reports to at least
the extent required in Rule 17j-1(d); (iii) requires the sub-advisers to
institute appropriate procedures for review of these reports by management
or compliance personnel (as contemplated by Rule 17j-1(d)(3)); (iv)
provides for notification of the Sub-adviser's Access Persons in accordance
with Rule 17j- 1(d)(4); and (v) requires the Sub-adviser's Access Persons
who are Investment Personnel to obtain the pre-clearances required by Rule
17j-1(e);
(b) provide periodic reports to the Trust's Compliance Officer, at such time
and frequency as the Trust's Compliance Officer shall select, on compliance
matters related to the sub- adviser's Code of Conduct. These reports shall
include an annual report that specifically describes any issues concerning
the Sub-adviser's Access Persons that have arisen under the sub-adviser's
code since the last such report, including (but not limited to) information
about material violations of its code or procedures by the Sub-adviser's
Access Persons. These reports shall be furnished to and considered by the
Trustees, together with such summary or analysis thereof as JHLICO believes
the Trustees may find useful;
5
<PAGE>
(c) provide written certification to the Trust's Compliance Officer no less
frequently than annually, as well as at the time of any Trustee approval
under 7(a) above, that it has adopted procedures in accordance with Rule
17j-1 under Investment Company Act of 1940, as amended, that are reasonably
necessary to prevent any of the Sub-adviser's Access from violating any
provisions of its Code of Conduct with respect to any Fund-Related Matter.
These certifications shall as provided to and considered by the Trustees;
and
(d) agree to maintain records in accordance with Section 18 and 19 of this Code
of Ethics.
In the event a sub-adviser fails to comply with the requirements of this section
6, the Trust's Compliance Officer may deem directors, officers or employees of
the sub-adviser to be Access Persons and/or Investment Personnel for purposes of
this Code of Ethics.
7. INITIAL REPORTS
---------------
Unless and to the extent exempted under section 11, each Access Person shall
report the following information to the Trust's Compliance Officer no later than
10 days after he or she first becomes an Access Person:
(a) the title, number or shares and principal amount of each Covered Security
in which the Access Person had any direct or indirect beneficial ownership
when the person became an Access Person;
(b) the name of any broker, dealer or bank with whom the Access Person
maintained an account in which any Covered Security were held for the
direct or indirect benefit of the Access Person as of the date the person
became an Access Person; and
(c) the date that the report is submitted by the Access Person
8. QUARTERLY REPORTS
-----------------
Unless and to the extent exempted under section 10, each Access Person shall
report the following information to the Trust's Compliance Officer no later than
10 days after the end of each calendar quarter with respect to Covered Security
transactions and accounts established by the Access Person or any family member
during the quarter:
(a) the date of each Covered Security transaction, the title, the interest date
and maturity date (if applicable), the number of shares and the principal
amount of each Covered Security involved;
(b) the nature of each Covered Security transaction (i.e. purchase, sale or any
other type of acquisition or disposition);
(c) the price at which each Covered Security transaction was effected;
(d) the name of the broker, dealer or bank with or through whom each Covered
Security transaction was effected;
(e) the date of any account established by the Access Person in which any
Covered Security were held during the quarter for the direct or indirect
benefit of the Access Person;
(f) the name of the broker, dealer or bank with whom the Access Person
established the account; and (g) the date that the report is submitted by
the Access Person.
6
<PAGE>
(g) the date that the repot is submitted by the Access Person.
9. ANNUAL HOLDING REPORTS
----------------------
Unless and to the extent exempted under section 10, each Access Person shall
report the following information to the Trust's Compliance Officer (which
information shall be current as of a date no more than 30 days before the report
is submitted):
(a) the title, number of shares and principal amount of each Covered Security
in which the Access Person had any direct or indirect beneficial ownership;
(b) the name of any broker, dealer or bank with whom the Access Person
maintains an account in which any Covered Security are held for the direct
or indirect benefit of the Access Person; and
(c) the date that the report is submitted by the Access Person.
10. EXEMPTIONS FROM REPORTING REQUIREMENTS
--------------------------------------
Access Persons are exempted from the following reporting requirements under
sections 7, 8, 9 of this Code:
(a) an initial holdings report under section 7 unless he or she first becomes
an Access Person on or after March 1, 2000;
(b) quarterly reports under section 8 if (i) all the information in the report
would duplicate information contained in broker trade confirmations or
account statements received by the Trust, investment adviser or principal
underwriter within 10 days at the end of each calendar quarter to which it
applies and (ii) in the case of information received by the investment
adviser or principal underwriter, such information is promptly furnished to
the Trust's Compliance Officer;
(c) any report with respect to transactions effected for, and Covered
Security held in, any account over which he or she has no direct or
indirect influence or control. Alternatively, any such report may contain
a statement that the report shall not be construed as an admission by the
person making such report that he has any direct or indirect beneficial
ownership in the Covered Security to which the report relates.
(d) if the Access Person is a disinterested trustee of the Trust who would be
required to make a report solely by reason of being a Trustee, an initial
report under section 7 and an annual holdings report under section 9 are
not required, but a report of a transaction in a Covered Security under
section 8 is required only if the trustee, at the time of that
transaction, knew or, in the ordinary course of fulfilling his or her
official duties as a trustee of the Trust, should have known that, during
the 15-day period immediately preceding the date of the transaction by
the trustee, such Covered Security was purchased or sold by the Trust or
was being considered for purchase or sale by its investment adviser or
any sub-investment adviser;
7
<PAGE>
(e) if the principal underwriter ceases to be an affiliated person of JHLICO
or of the Trust, no report under section 7,8 or 9 will be required of any
Access Person of the principal underwriter, unless the Access Person also
serves as an officer, director, trustee or general partner to the Trust
or any investment adviser of the Trust that is subject to this Code of
Ethics;
(f) an Access Person of the Trust's investment adviser need not make a
quarterly transaction report if (i) all the information in the report
would duplicate information required to be reported by that investment
adviser pursuant to Rule 204-2(a)(12) or (13) of the Investment Advisers
Act of 1940 and (ii) such information is made available to the Trust's
compliance officer.
11. NOTIFICATION OF REPORTING OBLIGATION AND REVIEW OF REPORTS
----------------------------------------------------------
(a) The Trust's Compliance Officer shall, from time to time and upon due
inquiry to JHLICO and Signator Investors, Inc., identify all Access Persons
who are required to make reports and inform those Access Persons of their
reporting obligation.
(b) The Trust's Compliance Officer shall, from time to time and with notice to
JHLICO and Signator Investors, Inc., promulgate and implement appropriate
procedures to review the reports submitted under sections 8, 9, and 10 and
the information received under section 11, and shall immediately report any
adverse findings to appropriate officers and directors of the Trust, JHLICO
and Signator Investors, Inc.
12. REPORT OF BOARD, TRUSTEE OR LEADERSHIP POSITIONS IN COMPANIES ISSUING
---------------------------------------------------------------------
SECURITIES
----------
All Investment Personnel must report promptly to the Compliance Officer any
board, trustee or leadership position he or she may hold in a public, private or
non-profit company which issues or plans to issue any security. The Compliance
Officer will present the matter to the Trustees of the Trust or JHLICO's Chief
Investment Officer, whichever is appropriate.
13. BLACKOUT PERIOD FOR FUND MANAGERS
---------------------------------
Investment Personnel who are Fund managers are prohibited from buying or selling
any Covered Security within seven calendar days before or after a Fund which he
or she manages trades in the same Covered Security. In the event of a violation
of this provision through mistake or otherwise, any profit on the trade must be
disgorged and contributed to charity. The names of any Fund managers subject to
this provision will be submitted annually by the JHLICO Chief Investment Officer
to the Compliance Officer and updated more frequently as needed.
14. PROHIBITED PURCHASES OR SALES
-----------------------------
8
<PAGE>
No person subject to this Code nor any family member shall purchase or sell,
directly or indirectly, any Covered Security in which he or she has, or by
reason of such transaction acquires, any direct or indirect beneficial ownership
and which to his or her actual knowledge at the time of such purchase or sale:
(a) is being considered for purchase or sale by the Trust; or
(b) is being purchased or sold by the Trust.
15. INSIDE INFORMATION
------------------
All officers and employees of the Trust and JHLCIO are subject to the John
Hancock Inside Information Policy and Procedures.
16. AMENDMENT
---------
(a) No amendment to this Code of Ethics shall be effective unless the Trust's
Board of Trustees has received certifications from the Trust's Compliance
Officer, the Trust's investment adviser and the Trust's principal
underwriter that they have each adopted procedures reasonably necessary
to prevent Access Persons from violating the investment adviser's or
principal underwriter's code of ethics.
(b) A material change to this Code of Ethics must be approved by the Trust's
Board of Trustees, including a majority of Trustees who are not
interested persons, within six months after adoption of such change.
17. INTERPRETATION AND ENFORCEMENT
------------------------------
This Code of Ethics cannot anticipate every situation in which personal
interests may be in conflict with the interests of the investors in the Trust.
Attention should be given to the spirit and intent of the Code as well as its
specific provisions.
When any doubt exists regarding any provision of the Code or whether a conflict
of interest might exist, the transaction should be discussed beforehand with the
Trust's Compliance Officer.
The Code of Ethics is designed to detect and prevent fraud against investors,
and to avoid the appearance of impropriety. To provide assurance that policies
are effective, personal securities transaction reports will be monitored and
checked against the Fund's and Accounts' portfolio transactions. Any deviations
from the policies will be reported to the Compliance Officer. In addition, other
internal auditing procedures may be adopted from time to time.
Violations of the Code will be referred by the Trust's Compliance Officer to
JHLICO's General Counsel for review and appropriate action. Sanctions for
violations could include fines, suspension, letter of reprimand or termination
of the violator's position and/or a report to the appropriate regulatory
authority.
18. JHLICO'S MAINTENANCE OF RECORDS
-------------------------------
9
<PAGE>
As part of the Trust's records, JHLICO shall maintain the following:
a. a copy of each Code of Ethics of the Trust and each sub-adviser's Code of
Conduct and (any amendments thereto) that has been approved by the Trustees
at any time within the most recent five years, all of which shall be
maintained in an easily accessible place;
b. a copy of each report furnished to the Trustees concerning the Trust's Code
of Ethics or any sub-adviser's Code of Conduct, which copies shall be
maintained for five years, the first two of which shall be in an easily
accessible place; and
c. all records required by Rule 17j-1(f)(1)(B), (C) and (D) and Rule 17j -
1(f)(2) with respect to the Trust's Access Persons, which records shall be
maintained for the periods and in the manner specified in those provisions
of the Rule.
19. SUB-ADVISER'S RECORDS
---------------------
Each sub-adviser shall maintain the following as part of the Trust's
records pursuant to Section 6 of its sub-investment management agreement
with the Trust (or shall deliver such records to JHLICO to be maintained as
part of the Trust's records): all records required by Rule 17j -
1(f)(1)(B), (C) and (D) and Rule 17j - 1(f)(2) with respect to the
Sub-adviser's Access Persons, which records shall be maintained for the
periods and in the manner specified in those provisions of the Rule.
20. RECORDS LOCATION
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The records required by Sections 18 and 19 above shall be maintained at the
JHLICO and/or the sub-adviser's office, as the case may be, and made
available to the SEC or any representative of the SEC at any time and from
time to time for reasonable periodic, special or other inspection.
10
