<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON October 27, 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. 28 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
AMENDMENT NO. 28 [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)
[_] On May 1, 2000 pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[X] On November 1, 2000 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>
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
NOVEMBER 1, 2000
Managed Fund
Aggressive Balanced Fund
Growth & Income Fund
Equity Index Fund
Large Cap Value Fund
American Leaders Large Cap Value Fund
Large Cap Value CORE SM Fund
Large Cap Growth Fund
Large Cap Aggressive Growth Fund
Large/Mid Cap Value Fund
Fundamental Growth Fund
Mid Cap Blend Fund
Mid Cap Value Fund
Mid Cap Growth Fund
Real Estate Equity Fund
Small/Mid Cap CORE SM Fund
Small/Mid Cap Value Fund
Small/Mid Cap Growth Fund
Small Cap Equity Fund
Small Cap Growth Fund
Global Balanced Fund
International Equity Index Fund
International Equity Fund
International Opportunities Fund
International Opportunities II Fund
Emerging Markets Equity Fund
Short-Term Bond Fund
Bond Index Fund
Active Bond Fund
Core 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
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John Hancock Variable Series Trust I ("Trust")
A fund-by-fund summary of goals, strategies and risks.
Policies and instructions for opening, maintaining and closing an account in
any fund
Further information on the funds
Further information on the Trust
Additional performance information
<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
American Leaders Large Cap Value Fund 16
Large Cap Value CORE SM Fund 18
Large Cap Growth Fund 20
Large Cap Aggressive Growth Fund 22
Large/Mid Cap Value Fund 24
Fundamental Growth Fund 26
Mid Cap Blend Fund 28
Mid Cap Value Fund 30
Mid Cap Growth Fund 32
Real Estate Equity Fund 34
Small/Mid Cap CORE SM Fund 36
Small/Mid Cap Value Fund 38
Small/Mid Cap Growth Fund 40
Small Cap Equity Fund 42
Small Cap Growth Fund 44
Global Balanced Fund 46
International Equity Index Fund 48
International Equity Fund 50
International Opportunities Fund 52
International Opportunities II Fund 54
Emerging Markets Equity Fund 56
Short-Term Bond Fund 58
Bond Index Fund 60
Active Bond Fund 62
Core Bond Fund 64
Global Bond Fund 66
High Yield Bond Fund 68
Money Market Fund 70
Your Account 72
Investments in shares of the funds 72
Share price 72
Valuation 72
Conflicts 72
Funds' Expenses 73
Dividends and Taxes 73
Dividends 73
Taxes 73
Trust Business Structure 74
Appendix A 75
Appendix B 81
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.
1
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Your Investment Choices
--------------------------------------------------------------------------------
The Trust offers a number of investment choices, or funds, to suit a variety of
objectives under variable contracts. There are 33 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-
. Equity Index Fund panies that typically are very actively traded and
provide more stable investment returns over time.
. Large Cap Value Fund Large cap companies represent the 300 largest
stocks in the Russell 3000(R) Index. Each of those
. American Leaders Large companies has a market capitalization greater than
Cap Value Fund $7.9 billion as of the end of 1999. Large cap funds
are appropriate for investors who want the least
. Large Cap Value CORE SM volatile investment returns within the overall
Fund equity markets.
. Large Cap Growth Fund
. Large Cap Aggressive
Growth Fund
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
. Fundamental Growth Fund 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 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
.Real Estate Equity Fund 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 SM These funds invest in mid cap and small cap compa-
Fund nies. The capitalization of these funds can shift
over time from primarily mid cap to primarily small
. Small/Mid Cap Value 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.
2
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Small Cap Funds:
. Small Cap Equity Fund These funds invest in small newly established compa-
nies that are less actively traded and have a high
. Small Cap Growth Fund 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 appropri-
ately 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
. American Leaders history. These stocks typically pay above average
Large Cap Value dividends and have low stock prices relative to mea-
Fund sures of earnings and book value. Value funds are
appropriate for investors who want some dividend
. Large Cap Value CORE income and the potential for capital gains, but are
SM Fund less tolerant of share-price fluctuations.
. Large/Mid Cap Value
Fund
. Mid Cap Value Fund
. Small Mid/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 Fund stocks typically have high stock prices relative to
measures of earnings and book value. Growth funds
. Fundamental Growth are appropriate for investors who are willing to
Fund accept more share-price volatility for the potential
reward of higher long-term returns.
. Mid Cap Growth Fund
. Small Mid/Cap Growth
Fund
. Small Cap Growth Fund
. Growth & Income
Fund
. Equity Index Fund
. Mid Cap Blend Fund
Blend Funds:
. Small/Mid Cap Blend funds invest in both value and growth compa-
CORE SM Fund nies. Blend funds are appropriate for investors who
seek both dividend and capital appreciation charac-
. Small Cap Equity teristics.
Fund
Balanced Funds
. Managed Fund Balanced funds invest in a combination of stocks and
bonds and actively manage the mix of stock and bonds
. Aggressive Bal- within a target range. Domestic balanced funds
anced invest in U.S. stocks and bonds. Global balanced
funds invest in foreign and U.S. stocks and bonds.
. Global Balanced
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
. Short Term Bond maturities, typically less than four years. These
Fund 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
. Active 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.
. Core Bond Fund
. 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 credit-
. Bond Index Fund worthy bonds and typically maintain an average
credit quality rating of AAA/Aaa or AA/Aa.
. Global Bond Fund
Medium:
. Short Term Bond
Fund
These funds invest in bonds of all credit quality
. Active Bond 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.
. Core Bond Fund
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:
. International
Equity Index Fund
These funds invest primarily in the larger, well-
. International established developed or industralized markets
Equity Fund around the world. These funds have less foreign
securities risk than emerging market funds.
. International
Opportunities Fund
. International
Opportunities II
Fund
Emerging Markets:
. Emerging Markets These funds invest primarily in developing or emerg-
Equity Fund ing markets and have more foreign securities risk
than funds that invest primarily in well-estab-
lished, 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 non-diversified 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 and mid sized U.S. companies, and
. bonds with maturities generally greater than 12 months.
The Fund will seek to maintain an intermediate term average maturity.
The Fund employs two subadvisers, each of which employs its own investment
approach and independently manages its portion of the Fund. On or about Novem-
ber 1, 2000, the assets of the Fund were allocated between the two subadvisers
with Capital Guardian receiving $500 million (approximately 16% of the Fund's
assets as of September 30, 2000) and IIA the remainder. All subsequent invest-
ments in the Fund will be allocated equally between the two subadvisers, while
redemptions will be allocated on an asset-weighted basis.
Independence Investment Associates, Inc. ("IIA") selects stocks and bonds using
a combination of proprietary equity research and quantitative tools. Stocks are
purchased that are undervalued relative to the stock's history and have improv-
ing earnings growth prospects. Bonds are purchased that are attractively priced
and have cheap, predictable cash flows. IIA seeks to maintain risk and industry
characteristics of the Fund similar to those of the overall market.
IIA's portion of the Fund has a target mix of 60% equities and 40% bonds, but
IIA actively manages the mix within +/- 10 percentage points of the target mix.
IIA normally invests its equity portion in 80 to 150 stocks, with at least 65%
(usually higher) in large cap companies. IIA may invest up to 20% of its bond
assets in foreign bonds of developed countries (denominated in foreign curren-
cies) and up to 15% of its bond assets in high yield bonds.
Capital Guardian Trust Company ("Capital Guardian") selects stocks and bonds
using proprietary fundamental research that focuses on identifying securities
that are believed to be undervalued (i.e., with current prices below long-term
value).
Capital Guardian's portion of the Fund has a target mix of 70% equities and 30%
bonds, but Capital Guardian actively manages the mix within +/- 15 percentage
points of the target mix.
Capital Guardian uses a multiple portfolio manager system in which the stock
and bond portions of the Fund are each managed by multiple portfolio managers
and/or research analysts. Capital Guardian's strategy is normally broadly
diversified since its exposures reflect the aggregate decisions of the multiple
portfolio managers and research analysts.
Capital Guardian's equity sector exposures are a result of stock selection as
opposed to prede termined allocations. Capital Guardian normally invests its
equity portion in 80 to 150 stocks, with at least 65% (usually higher) in large
and mid cap companies. Capital Guardian may invest up to 20% of its bond assets
in high yield bonds and up to 10% of its bond assets in foreign bonds of devel-
oped countries (denominated in foreign currencies).
The Fund is "non-diversified," which means that it can take larger positions in
individual issuers. However, the Fund overall normally invests in at least 80
stocks within the equity component.
Each portion of the Fund normally has 5% or less of its assets in cash and cash
equivalents. Each portion of the Fund may purchase other types of securities
that are not primary investment vehicles, for example: American Depository
Receipts (ADRs), and certain derivatives (investments whose value is based on
indices or other securities). Each portion of the Fund may use derivatives,
such as futures and forwards, to manage the Fund's average maturity and to
implement foreign currencystrategies.
In abnormal market conditions, each portion of 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 measures, 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
Jay C. Leu, CFA (fixed income)
---------------------------------
Senior Vice President of subadviser
Joined team in 1998
Joined subadvisor in 1997
Portfolio Manager, Pacific Capital Asset Management (1995-1997)
SUBADVISER
Capital Guardian Trust Company
333 South Hope Street
Los Angeles, California 90071
Managing since 1968
Managed approximately $130 billion in assets at the end of 1999
FUND MANAGERS
Equity
Managed by team of 23 research analysts
Average of 10 years with Capital Guardian
Average of 14 years industry experience
Fixed Income
Team managed by 3 portfolio managers
Average of 15 years with Capital Guardian
Average of 18 years industry experience
See Appendix B for more details
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 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 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 "large/mid cap" approach carries the risk that in certain markets
large/mid cap stocks will underperform 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 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.
Non-Diversified Fund Risk: The Fund's larger position in individual 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 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.
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.
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 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 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 manager seeks to 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 that are not primary investment
vehicles, for example: American Depository Receipts (ADRs), and certain deriva-
tives (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
Jay C. Leu, CFA
-----------------
Senior Vice President of subadviser
Joined team in 1998
Joined subadvisor in 1997
Portfolio Manager, Pacific Capital Asset
Management (1995-1997)
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, Appendix A to this prospectus contains certain
performance information that is relevant to this Fund. Appendix A starts on
page 75.
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 non-diversified large and mid-cap stock fund that seeks long-term
growth in income and capital.
The Fund invests primarily in a diversified mix of common stocks of large and
mid-sized U.S. companies.
The Fund employs two subadvisers, each of which employs its own investment
approach and independently manages its portion of the Fund. On or about Novem-
ber 1, 2000, the assets of the Fund were allocated between the two subadvisers
with Putnam receiving $1 billion (approximately 26% of the Fund's assets as of
September 30, 2000) and IIA the remainder. All subsequent investments in the
Fund will be allocated equally between the two subadvisers, while redemptions
will be allocated on an asset-weighted basis.
Independence Investment Associated, Inc. ("IIA") selects stocks using a combi-
nation of proprietary equity research and quantitative tools. Stocks are pur-
chased that are undervalued relative to the stock's history and have improving
earnings growth prospects.
IIA seeks to maintain risk and industry characteristics similar to the market
benchmark for its portion of the Fund. IIA normally invests in 80 to 150
stocks, with at least 65% (usually higher) of its assets in large cap compa-
nies.
Putnam Investment Management, Inc. ("Putnam") selects stocks using a combina-
tion of:
. a systematic screening approach to rank stocks based on: fundamental cata-
lyst (such as earnings surprise and momentum); valuation (such as price-to-
sales ratio); and financial strength (such as superior cash flow); and
. proprietary fundamental equity research to identify companies with strong
and innovative management teams, opportunities for above average growth
within their industry and strong competitive positioning relative to peers
and suppliers.
Putnam seeks broad diversification by security and industry and uses risk man-
agement tools and qualitative judgement to determine sector, industry and
stock-specific weightings. Putnam normally invests in 70 to 100 stocks, with at
least 65% (usually higher) of its assets in large and mid cap companies.
The Fund is "non-diversified", which means that it can take larger positions in
individual issuers. However, the Fund overall normally invests in at least 80
stocks.
Each portion of the Fund normally has 5% or less of its assets in cash and cash
equivalents. Each portion of the Fund may purchase other types of securities
that are not primary investment vehicles, for example: American Depository
Receipts (ADRs), and certain derivatives (investments whose value is based on
indices or other securities).
In abnormal market conditions, each portion of 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 measures, 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 end of 1999
FUND MANAGERS
Management by investment team overseen by:
Paul F. McManus
-----------------
Senior Vice President of subadviser
Joined team in 1996
Joined subadviser in 1982
SUBADVISER
Putnam Investment Management, Inc.
One Post Office Square
Boston, Massachusetts 02109
Managing since 1937
Managed approximately $391 Billion in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
C. Beth Cotner, CFA
-----------------
Managing Director and Chief Investment Officer of subadviser
Joined subadviser in 1995
Began career in 1976
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
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 "large/mid cap" approach carries the risk that in certain markets
large/mid cap stocks will underperform small cap stocks.
Non-Diversified Fund Risk: The Fund's larger position in individual 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.
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.
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> <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 that are not primary investment
vehicles, for example: Standard & Poor's Depository Receipts (SPDRs), American
Depository Receipts (ADRs), cash equivalents, and certain derivatives (invest-
ments 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.
--------------------------------------------------------------------------------
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.
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
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
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.
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 that are not primary investment
vehicles, for example: American Depository 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 billion in 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.
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>
American Leaders 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 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 screening tools
and fundamental equity research.
The manager employs quantitative screening tools to identify companies that
are:
. leading their industries in terms of sales earnings and/or market capitaliza-
tion;
. exhibiting low price-to-earnings ratios relative to historical levels;
. trading at reasonable prices relative to growth expectations;
. generating strong cash flow relative to stock price; and
. not experiencing negative earnings revision trends or poor stock price momen-
tum.
The manager employs fundamental equity research to confirm the screening proc-
ess and to examine the company's:
. financial health;
. business and product strength;
. competitive position; and
. management strength.
The Fund's sector weightings are broadly diversified and managed relative to
the broad large-cap equity market.
The Fund normally invests in 70 to 120 stocks, with at least 65% (usually high-
er) of its assets in U.S. 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 that are not primary investment
vehicles, for example: American Depository Receipts (ADRs), and certain deriva-
tives (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
Federated Investment Management Company
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222
Owned by Federated Investors, Inc.
Managing since 1955
Managed approximately $125 billion in assets at the end of 1999
FUND MANAGERS
Michael P. Donnelly, CFA
-----------------------------------
Senior Vice President of subadviser
Joined subadviser in 1989
Began career in 1985
Kevin R. McCloskey, CFA
-----------------------------------
Vice President of subadviser
Joined subadviser in 1999
Portfolio Manager at Killian Asset Management
Corp. (1994-1999)
Began career in 1994
PAST PERFORMANCE
This is a new Fund. It was not in operation as of December 31, 1999.
--------------------------------------------------------------------------------
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 investment cate-
gory 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 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--This is a new Fund. It was not in operation as of
December 31, 1999.
17
<PAGE>
Large Cap Value CORE SM 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. "CORE SM" is a service mark of Goldman, Sachs & Co. The manager
identifies stocks that have strong expected earnings growth
and momentum and better valuation and risk characteristics than the Russell
1000(R) 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 that are not primary investment
vehicles, for example: American Depository Receipts (ADRs), Standard & Poor's
Depository Receipts (SPDRs), 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
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, Appendix A to this prospectus contains certain
performance information that is relevant to this Fund. Appendix A starts on
page 75.
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 "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.
19
<PAGE>
Large Cap Growth Fund
GOAL AND STRATEGY
This is a non-diversified 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 manager
seeks to maintain risk and industry characteristics similar to the Russell
1000(R) Growth Index.
The Fund is "non-diversified", which means it can take larger positions in
individual issuers. However, the Fund normally invests in 80 to 150 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 that are not primary investment
vehicles, for example: American Depository Receipts (ADRs), and certain deriva-
tives (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)
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
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 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>
Period ended December
31: 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
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.
21
<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 "non-diversified", which means it can take larger positions in
individual 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 that are not primary investment
vehicles, for example: American Depository Receipts (ADRs), and certain deriva-
tives (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, Appendix A to this prospectus contains certain
performance information that is relevant to this Fund. Appendix A starts on
page 75.
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.
Non-Diversified Fund Risk: The Fund's larger position in individual 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.
23
<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 that are not primary investment
vehicles, for example: American Depository Receipts (ADRs), and certain deriva-
tives (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, Appendix A to this prospectus contains certain
performance information that is relevant to this Fund. Appendix A starts on
page 75.
24
<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.
25
<PAGE>
Fundamental Growth Fund
(Formerly Fundamental Mid Cap Growth Fund)
GOAL AND STRATEGY
This is a stock fund with a growth emphasis that seeks long-term growth in cap-
ital.
The Fund invests primarily in the common stocks of large-sized and 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 fundamental equity research and a
systematic screening approach. The manager screens the universe for stocks that
meet minimum size and earnings growth criteria. The manager employs a proprie-
tary quantitative model to rank stocks based on:
. fundamental catalyst (such as earnings surprise and momentum);
. valuation (such as price-to sales ratio); and
. financial strength (such as superior cash flow).
The manager uses fundamental equity research with a global equity research team
to identify companies with characteristics such as:
. strong and innovative management teams;
. opportunities for above average growth within its industry;
. strong competitive positioning relative to peers and suppliers;
. sufficient financial strength to grow the business; and
. reasonable valuations relative to earnings expectations.
The manager uses risk management tools and qualitative judgement to determine
the Fund's sector, industry and stock-specific weightings. The Fund is broadly
diversified by industry sector. The Fund normally invests in 90 to 150 stocks,
with at least 65% (usually higher) of its assets in large and mid 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 that are not primary investment
vehicles, for example: American Depository Receipts (ADRs) and other U.S. dol-
lar denominated 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.
--------------------------------------------------------------------------------
SUBADVISER
Putnam Investment Management, Inc.
One Post Office Square
Boston, Massachusetts 02119
Managing since 1937
Managed approximately $391 billion
in assets at the end of 1999
FUND MANAGERS
Management by investment team overseen by:
Eric M. Wetlaufer, CFA
-----------------
Managing Director and Chief Investment Officer of subadviser
Joined subadviser in 1997
Managing Director and Portfolio Manager at Cadence Capital Management (1991 --
1997)
Began career in 1985
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.
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 "large/mid cap"
approach carries the risk that large/mid cap stocks will underperform small 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>
Fundamental Growth Fund (formerly Fundamental Mid Cap Growth Fund)--
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.
27
<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 manager
seeks to maintain risk and industry characteristics 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 that are not primary investment
vehicles, for example: American Depository Receipts (ADRs), and certain deriva-
tives (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, Appendix A to this prospectus contains certain
performance information that is relevant to this Fund. Appendix A starts on
page 75.
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 "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.
29
<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 125 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 that are not primary investment
vehicles, for example: American Depository Receipts (ADRs), and certain deriva-
tives (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.
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 "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>
Period ended December 31: 1996** 1997 1998 1999
<S> <C> <C> <C> <C>
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.
31
<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
individual 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 companies. The
Fund normally has 15% or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities that are not primary investment
vehicles, for example: American Depository 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 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.
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.
Non-Diversified Fund Risk: The Fund's larger position in individual 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>
Period ended December 31: 1996** 1997 1998 1999
<S> <C> <C> <C> <C>
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.
33
<PAGE>
Real Estate Equity Fund
GOAL AND STRATEGY
This is a non-diversified 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 Fund employs two subadvisers, each of which employs its own investment
approach and independently manages its portion of the Fund. On or about June
30, 2000, the assets of the Fund were evenly divided between the subadvisers.
All subsequent investments in and redemptions from
the Fund will be evenly divided between the subadvisers.
Independence Investment Associates, Inc. ("IIA") 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 improving earnings growth prospects.
IIA seeks to maintain risk, style and industry characteristics similar to the
public equity real estate market. IIA will normally invest in 30 to 60 securi-
ties in its portion of the Fund.
Morgan Stanley Dean Witter Investment Management Inc. ("MSDW") selects real
estate stocks using a combination of:
. top-down, market overview to identify undervalued property sectors and geo-
graphic regions; and
. proprietary, fundamental equity research to select companies that are attrac-
tively
priced relative to the value of their underlying real estate assets.
MSDW seeks to maintain broad exposure to key property sectors (i.e., apart-
ments, retail and office/industrial). MSDW will normally invest in 30 to 50
securities in its portion of the Fund.
The Fund is "non-diversified", which means that it can take larger positions in
individual issuers. Each portion of the Fund normally has at least 65% (usually
higher) of its assets invested in real estate equity securities and 5% or less
of its assets in cash and cash equivalents.
Each portion of the Fund also may purchase other types of securities that are
not primary investment vehicles, for example: American Depository Receipts
(ADRs), convertible securities, equity securities of non-real estate businesses
whose real estate holdings are significant in relation to their market capital-
ization, and certain derivatives (investments whose value is based on indices
and other securities).
In abnormal market conditions, each portion of 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 measures, the Fund may not achieve its investment goal.
--------------------------------------------------------------------------------
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 -21.00%
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
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
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
Fund Managers
Theodore R. Bigman
-----------------
Managing Director, Global Real Estate, of subadviser
Joined subadviser in 1995
Douglas A. Funke
-----------------
Vice President of subadviser
Joined subadviser in 1995
34
<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 a REIT 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. Because the Fund's investments are concen-
trated in the real estate sector, the Fund's performance could be worse than
the overall market.
Manager Risk: The managers and their respective strategies may fail to produce
the intended results. The Fund could underperform its peers or lose money if
the managers' investment strategies do not perform as expected.
Non-Diversified Fund Risk: The Fund's larger position in individual 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.
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.
Interest Rate Risk: The Fund is subject to interest rate risk, which is the
possibility that changes in interest rates could hurt REIT performance. In gen-
eral, during periods of high interest rates, REITs may lose some of their
appeal for investors who may be able to obtain higher yields from other income-
producing investments, such as long-term bonds. Higher interest rates also mean
that financing for property purchases and improvements is more costly and dif-
ficult to obtain.
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>
Period ended December 31: 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
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.
35
<PAGE>
Small/Mid Cap CORE SM 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. "CORE SM" is a service mark of Goldman, Sachs & Co. 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 that are not primary investment
vehicles, for example: American Depository Receipts (ADRs), Standard & Poor's
Depository Receipts (SPDRs), 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 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
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 Appendix A to this prospectus for further performance information
relevant to this Fund.
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 "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.
37
<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 that are not primary investment
vehicles, for example: American Depository Receipts (ADRs), and certain deriva-
tives (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, Appendix A to this prospectus contains perfor-
mance information that is relevant to this Fund. Appendix A starts on page 75.
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 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>
Period ended December 31: 1999**
<S> <C>
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.
39
<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 that are not primary investment
vehicles, for example: American Depository Receipts (ADRs), and certain deriva-
tives (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 Appendix A to this prospectus for further performance information
relevant to this Fund.
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 41 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>
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% 172.58%
</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 Equity Fund
GOAL AND STRATEGY
This is a small cap stock fund 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 be undervalued relative to long-term earn-
ings growth potential.
The manager selects stocks using proprietary fundamental equity research.
Research focuses on identifying companies that are believed to be:
. undervalued (i.e., with current stock price below long-term value);
. asset rich with strong balance sheets and able to generate internal cash
flows to meet capital needs; and
. dynamic and growing with realistic payback periods for any price premium.
The manager employs a research intensive approach using extensive field
research and direct company contact to determine the fundamental value of a
company. A company's future prospects are determined from analyzing a company's
products, markets, management, suppliers, and competitors.
The Fund is managed using a multiple portfolio manager system in which the Fund
is managed by multiple portfolio managers and/or research analysts. The Fund is
normally broadly diversified since its exposures reflect the aggregate deci-
sions of the multiple portfolio managers and research analysts managing the
Fund.
The Fund's industry exposures are a result of stock selection as opposed to
predetermined allocations. The Fund normally invests in 150 to 300 stocks, with
at least 65% (usually 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 that are not primary investment
vehicles, for example: American Depository Receipts (ADRs), and certain deriva-
tives (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
Capital Guardian Trust Company
333 South Hope Street
Los Angeles, California 90071
Managing since 1968
Managed approximately $130 billion in assets at the end of 1999
FUND MANAGERS
Team managed by 5 Portfolio Managers
Average 17 years with Capital Guardian
Average 21 years industry experience
See Appendix B for more details
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 12/31/99(/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.
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 "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.
Although the Fund's turnover rate has been high in recent years, the current
manager anticipates that the Fund's turnover rate will normally 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>
Period ended December 31: 1996** 1997 1998 1999
<S> <C> <C> <C> <C>
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.
43
<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 that are not primary investment
vehicles, for example: American Depository Receipts (ADRs), and certain deriva-
tives (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.
44
<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>
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.
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 and mid sized companies within devel-
oped markets; and
. U.S. and foreign investment grade bonds of issuers within developed markets
with maturities generally greater than 12 months.
The Fund has a target mix of 60% stocks and 40% bonds, but the manager actively
manages the mix within (+/-) 15 percentage points of the target mix.
The Fund invests:
. in at least 3 different countries, but normally in 20 to 30 countries; and
. no more than 10% of its assets in emerging market stocks and bonds.
Capital Guardian uses a multiple portfolio manager system in which the stock
and bond portions of the Fund are each managed by multiple portfolio managers
and/or research analysts. Therefore, the Fund normally has broad country, cur-
rency, sector and individual security exposures, reflecting the aggregate deci-
sions of the multiple portfolio managers and research analysts managing the
Fund.
The managers make ongoing decisions regarding the Fund's country, currency,
sector and individual security exposures. Each manager selects stocks and bonds
using proprietary fundamental research that focuses on indentifying securities
that are believed to be undervalued (i.e., with current prices below long-term
value).
The Fund is "non-diversified", which means that it can take larger positions in
individual issuers. However, the Fund normally invests in 150 to 250 stocks
within the equity portion. The bond portion of the Fund normally has an average
credit rating of "A" or higher.
The Fund normally has 5% or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities that are not primary investment
vehicles, for example: U.S. and foreign common stocks of small companies within
developed markets, American Depository Receipts (ADRs), Global Depository
Receipts (GDRs), European Depository Receipts (EDRs), high yield debt securi-
ties, and certain derivatives (investments whose value is based on indices or
other securities). The Fund may use derivatives, such as futures and forwards,
to manage the Fund's average maturity and to implement foreign currency strate-
gies. Currency management 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
Capital Guardian Trust Company
333 South Hope Street
Los Angeles, California 90071
Managing since 1968
Managed approximately $130 billion in assets at the end of 1999
FUND MANAGERS
Team managed by 14 Portfolio Managers
Average 17 years with Capital Guardian
Average 21 years industry experience
See Appendix B for more details
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.
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.
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 "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.
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.
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.
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.
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.
Although the Fund's turnover rate has been high in recent years, the current
manager anticipates that the Fund's turnover rate will normally 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.
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 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>
Global Balanced Fund (formerly
International Balanced Fund)--Period
ended December 31: 1996** 1997 1998 1999
<S> <C> <C> <C> <C>
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. Themanager 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 that are not primary investment
vehicles, for example: American Depository Receipts (ADRs), Global Depository
Receipts (GDRs), European Depository Receipts (EDRs), cash equivalents, and
certain derivatives (investments whose value is based on indices or other secu-
rities).
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)
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>
Period ended December 31: 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
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 other than the U.S., but
normally invests in 10 to 20 countries, with at least 65% of its assets in
securities of non-U.S. entities.
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 that are not primary
investment vehicles, for example: American Depository 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
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 other than the U.S., 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 150 to 250 stocks in 15 to 20 countries, with at
least 65% of its assets in securities of non-U.S. entities. The Fund normally
has 10% or less of its assets in cash and cashequivalents.
The Fund also may purchase other types of securities that are not primary
investment vehicles, for example: American Depository 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
T. Rowe Price 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 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>
Period ended December 31: 1996** 1997 1998 1999
<S> <C> <C> <C> <C>
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>
International Opportunities II Fund
(Formerly Global 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 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 other than the U.S., 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 150 to 250 stocks in 15 to 20 countries, with at
least 65% of its assets in securities of non-U.S. entities. The Fund normally
has 10% or less of its assets in cash and cashequivalents.
The Fund also may purchase other types of securities that are not primary
investment vehicles, for example: American Depository 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
T. Rowe Price International, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Managing since 1979
Managed approximately $42 billion in assets at the end of 1999
Managing Fund since June 13, 2000
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 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.
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, 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>
International Opportunities II Fund (Formerly Global Equity
Fund) -- Period ended December 31; 1998** 1999
<S> <C> <C>
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.
55
<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 that are not primary investment
vehicles, for example: American Depository 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 Appendix A to this prospectus for further performance information
relevant to this Fund.
56
<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>
Period ended December 31: 1998** 1999
<S> <C> <C>
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.
57
<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 that are not primary investment
vehicles, for example: certain derivatives (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
Jay C. Leu, CFA
-----------------
Senior Vice President of subadviser
Joined team in 1998
Joined subadviser in 1997
Portfolio Manager, Pacific Capital Asset Management (1995-1997)
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.
58
<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>
Period ended December 31: 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
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.
59
<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 Appendix A to this prospectus for further performance information
relevant to this Fund.
60
<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>
Period ended December 31: 1998** 1999
<S> <C> <C>
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.
61
<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 of "A" or high-
er.
The Fund normally has 10% or less of its assets in cash and cash equivalents.
The Fund may purchase other types of securities that are not primary investment
vehicles, 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 matu-
rity 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)
62
<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>
<CAPTION>
Active Bond Fund (Formerly
Sovereign Bond Fund)
Period ended December 31: 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
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.
63
<PAGE>
Core Bond Fund
GOAL AND STRATEGY
This ia a bond fund that seeks income and growth in capital.
This is considered an "intermediate" bond fund in that it maintains an average
bond maturity which is typically between four and ten years.
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 15% of its assets in high yield bonds; and
. no more than 25% of its assets in U.S. dollar denominated foreign securities,
excluding Canadian securities.
The manager makes ongoing decisions regarding the Fund's average maturity, sec-
tor exposures and yield curve exposures. The manager uses proprietary research
and economic analysis to try to anticipate interest rate movements and to iden-
tify sectors and specific bonds that are undervalued. The manager examines a
variety of factors, including macroeconomic analysis and corporate earnings
analyses, to determine which business sectors and credit ratings are most
advantageous for investment. The manager evaluates bonds of all quality levels
and maturities from many different sectors and issuers. The Fund normally has
an average credit quality rating of "A" or higher.
The manager actively manages the Fund's interest rate sensitivity by adjusting
the Fund's average bond maturity. The Fund's average bond maturity may there-
fore differ from that of the overall bond market (as represented by such indi-
ces as the Lehman Brothers Aggregate Bond Index). The Fund normally invests at
least 65% (usually higher) of its assets in bonds. The Fund normally has 10% or
less of its assets in cash and cash equivalents.
The manager may use derivatives (investments whose value is based on indices or
other securities) such as futures to manage the Fund's average maturity and
interest rate volatility.
The Fund may purchase other types of securities that are not primary investment
vehicles, for example: foreign bonds of developed markets denominated in for-
eign currencies, 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
Federated Investment Management Company
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222
Owned by Federated Investors, Inc.
Managing since 1955
Managed approximately $125 billion in assets at the end of 1999
FUND MANAGERS
Joseph M. Balestrino, CFA
--------------------------------
Senior Vice President of subadviser
Joined subadviser in 1986
Began career in 1986
Donald T. Ellenberger, CFA
--------------------------------
Vice President of subadviser
Joined subadviser in 1996
Portfolio Manager/Trader at Mellon Bank N.A. (1986-1996)
Began career in 1984
Mark E. Durbiano, CFA
--------------------------------
Senior Vice President of subadviser
Joined subadviser in 1982
Began career in 1982
PAST PERFORMANCE
This is a new Fund. It was not in operation as of December 31, 1999.
64
<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 Trust would fall. All bonds have some credit risk, but in general low-
er-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.
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.
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 fixed income investments. Also, in a down mar-
ket, derivatives could become harder to value or sell at a fair price.
-------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--This is a new Fund. It was not in operation as of
December 31, 1999.
65
<PAGE>
Global Bond Fund
GOAL AND STRATEGY
This is a non-diversified global bond fund that seeks income and growth in cap-
ital.
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 Fund has a target mix of 25% U.S. bonds and 75% non-U.S. bonds (denominated
in foreign currencies), but the manager actively manages the mix within (+/-)
15 percentage points of the target mix.
The Fund normally:
. invests in at least 3 countries, but normally in 10 to 20 countries;
. has an average credit quality rating of "A" or higher; and
. invests up to 15% in emerging market and high yield debt securities.
The Fund is managed using a multiple portfolio manager system in which the Fund
is managed by multiple portfolio managers and/or research analysts. Therefore,
the Fund normally has broad country, currency, sector and individual security
exposures, reflecting the aggregate decisions of the multiple portfolio manag-
ers and research analysts managing the Fund.
The managers make ongoing decisions regarding the Fund's average maturity and
the Fund's country, sector and foreign currency exposures. The manager uses
proprietary research and economic analysis to identify attractive markets and
currencies and undervalued sectors and securities.
The Fund is "non-diversified", which means that it can take larger positions in
individual issuers. However, the Fund normally invests in 25 to 75 bond
issuers. The Fund normally has 5% or less of its assets in cash and cash equiv-
alents.
The Fund may purchase other types of securities that are not primary investment
vehicles, for example: certain derivatives (investments whose value is based on
indices or other securities). The Fund may use derivatives, such as futures and
forwards, to manage the Fund's average maturity relative to the benchmark and
to implement foreign currency strategies. Currency management 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
Capital Guardian Trust Company
333 South Hope Street
Los Angeles, California 90071
Managing since 1968
Managed approximately $130 billion in assets at the end of 1999
FUND MANAGERS
Team managed by 4 Portfolio Managers
Average 11 years with Capital Guardian
Average 17 years industry experience
See Appendix B for more details
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.
66
<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.
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.
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.
Although the Fund's turnover rate has been high in recent years, the current
manager anticipates that the Fund's turnover rate will normally 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.
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>
<CAPTION>
Global Bond Fund (formerly Strategic Bond
Portfolio)-Period ended December 31: 1996** 1997 1998 1999
<S> <C> <C> <C> <C>
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.
67
<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 that are not primary investment
vehicles, for example: equity securities, high quality debt securities (short-
term and otherwise), certain derivatives (investments whose value is based on
indices or other securities), and debt securities denominated in foreign cur-
rencies.
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 Appendix A to this prospectus for further performance information rel-
evant to this Fund.
68
<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>
<CAPTION>
Period ended December 31: 1998** 1999
<S> <C> <C>
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.
69
<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>
1 year 5.05%
5 years 5.40%
10 years 5.18%
Life of fund 5.81%
</TABLE>
70
<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>
<CAPTION>
Period ended December 31: 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
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.
71
<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.
72
<PAGE>
Funds' Expenses
The advisory fee paid by each fund to the adviser in 1999 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 SM 0.75%
Large Cap Growth 0.36%
Large Cap Aggressive Growth 0.98%
Large/Mid Cap Value 0.95%
Fundamental Growth* 0.85%
Mid Cap Blend 0.75%
Mid Cap Value 0.80%
Mid Cap Growth 0.83%
Real Estate Equity 0.60%
Small/Mid Cap CORE SM 0.80%
Small/Mid Cap Value 0.95%
Small/Mid Cap Growth 0.75%
Small Cap Equity** 0.80%
Small Cap Growth 0.75%
Global Balanced*** 0.85%
International Equity Index 0.16%
International Equity 1.00%
International Opportunities 0.87%
International Opportunities
II**** 0.90%
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 Fundamental Mid Cap Growth
** Formerly Small Cap Value
*** Formerly International Balanced
**** Formerly Global Equity
*****Formerly Sovereign Bond
The American Leaders Large Cap Value Fund and the Core Bond Fund were not in
operation in 1999. Those funds pay fees to the advisor (as a percentage of net
assets) as follows:
. American Leaders Large Cap Value: 0.80% of first $50 million; 0.65% of next
$200 million; 0.60% of next $250 million; 0.55% above $500 million.
. Core Bond: 0.70% of first $25 million; 0.65% of next $25 million; 0.60 of
next $100 million; 0.55% above $150 million.
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 0.10 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 Small/Mid Cap
Growth Fund does so annually and 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.
73
<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, LLC Morgan Stanley Dean Witter In-
Capital Guardian Trust Company vestment Management Inc.
Federated Investment Management Company Neuberger Berman, LLC
Goldman Sachs Asset Management. Putnam Investment Management, Inc.
Independence International Associates, Inc.
Independence Investment Associates, Inc. State Street Bank and Trust Company
Janus Capital Corporation T. Rowe Price Associates, Inc.
John Hancock Advisers, Inc. T. Rowe Price International, Inc.
Wellington Management Company, LLP
Provide management to various funds.
74
<PAGE>
APPENDIX A
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 SM 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 SM Fund, the Emerging Markets Equity Fund, the Bond Index Fund, and the
High Yield Bond Fund only began operations on May 1, 1998. Lastly, the
Small/Mid Cap Growth Fund implemented a significant change in strategy as of
May 1, 1999.
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
75
<PAGE>
Large Cap Value CORE SM Composite (Corresponding to Large Cap Value CORE SM
Fund)
The Large Cap Value CORE SM Composite is an asset-weighted composite of all
fully discretionary accounts managed using a substantially similar investment
strategy. 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
76
<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%
Since inception 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 35.39%
1996 16.07%
1997 33.92%
1998 14.35%
1999 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
77
<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
[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
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
78
<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
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%, third 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
79
<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.
80
<PAGE>
APPENDIX B
Capital Guardian Trust Company uses a multiple portfolio manager system in
which each Fund it subadvises is divided into segments that are managed by
individual portfolio managers and/or research analysts. This multiple manager
approach seeks to deliver the best ideas of individual portfolio managers and
analysts within each Fund. Each portfolio manager and research analyst decides
how their respective segment will be invested within the limits provided by the
Fund's goal and strategy and investment policies. Capital Guardian's Investment
Committee determines the specific allocation to individual portfolio managers
and the research analyst team. Set forth below are details regarding the multi-
ple portfolio managers of Capital Guardian who are involved in the management
of the Funds indicated:
MANAGED FUND
U.S. Equity Investments:
The Research Team, consisting of the following 23 research analysts, has an
average of 10 years experience with Capital Guardian and 14 years of industry
experience.
Gene Barron Reed H. Lowenstein
Andrew F. Barth, D. James Martin
Research Portfolio Coordinator
Karen A. Miller
Terry Berkemeier
Jason M. Pilalas
Steven Connell
Lars Reierson
Caroline E. Ford
Suzanne Rheault
Zachary E. Guevara
Carlos Schonfeld
Todd S. James
Lawrence R. Solomon
Nancy Kamei
Eric H. Stern
James S. Kang
Steven R. Wanek
Karin L. Larson
Alan J. Wilson
Jin Lee
John A. Longhurst
U.S. Fixed Income Investments:
James S. Baker John W. Ressner
-------------- ---------------
Vice President of subadviser Executive Vice President of subadviser
Joined subadviser in 1987 Joined subadviser in 1988
Began career in 1981 Began career in 1988
James R. Mulally
----------------
Senior Vice President of
subadviser
Joined subadviser in 1980
Began career in 1977
SMALL CAP EQUITY FUND
Michael R. Ericksen Karen A. Miller
------------------- ---------------
Senior Vice President of Senior Vice President of subadviser
subadviser Joined subadviser in 1990
Joined subadviser in 1987 Began career in 1989
Began career in 1981
James S. Kang Lawrence R. Solomon
------------- -------------------
Senior Vice President of Senior Vice President of subadviser
subadviser Joined subadviser in 1985
Joined subadviser in 1988 Began career in 1984
Began career in 1987
Robert G. Kirby
---------------
Chairman Emeritus of subadviser
Joined subadviser in 1966
Began career in 1953
81
<PAGE>
GLOBAL BALANCED FUND
Global Equity Investments:
Michael R. Ericksen Robert Ronus
------------------- ------------
Senior Vice President of President of subadviser
subadviser Joined subadviser in 1972
Joined subadviser in 1987 Began career in 1969
Began career in 1981
David I. Fisher Lionel M. Sauvage
--------------- -----------------
Chairman of subadviser Senior Vice President of
Joined subadviser in 1969 subadviser
Began career in 1966 Joined subadviser in 1987
Began career in 1987
Richard N. Havas Nilly Sikorsky
---------------- --------------
Senior Vice President of President of subadviser
subadviser Joined subadviser in 1962
Joined subadviser in 1986 Began career in 1963
Began career in 1982
Nancy I. Kyle Rudolf M. Staehelin
------------- -------------------
Senior Vice President of Senior Vice President of
subadviser subadviser
Joined subadviser in 1991 Joined subadviser in 1981
Began career in 1974 Began career in 1978
Christopher A. Reed Eugene P. Stein
------------------- ---------------
Vice President of subadviser Executive Vice President of
Joined subadviser in 1994 subadviser
Began career in 1994 Joined subadviser in 1973
Began career in 1972
Global Fixed Income Investments:
Mark A. Brett James R. Mulally
------------- ----------------
Senior Vice President of Senior Vice President of
subadviser subadviser
Joined subadviser in 1993 Joined subadviser in 1980
Began career in 1980 Began career in 1977
Laurentius Harrer John W. Ressner
----------------- ---------------
Vice President of subadviser Executive Vice President of subadviser
Joined subadviser in 1993 Joined subadviser in 1988
Began career in 1988 Began career in 1988
GLOBAL BOND FUND
Mark A. Brett James R. Mulally
------------- ----------------
Senior Vice President of Senior Vice President of
subadviser subadviser
Joined subadviser in 1993 Joined subadviser in 1980
Began career in 1980
Began career in 1977
Laurentius Harrer John W. Ressner
----------------- ---------------
Vice President Executive Vice President of
Joined subadviser in 1993 subadviser
Began career in 1988 Joined subadviser in 1988
Began career in 1988
82
<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 or to make share-
Trust I: holder inquiries,
please contact:
Annual/Semiannual
Report to shareholders
By mail:
Includes financial John Hancock Variable
statements, a dis- Series Trust I
cussion of the mar- John Hancock Place
ket conditions and Boston, MA 02117
investment strate-
gies that signifi- By phone: 1-800-732-
cantly affected per- 5543
formance, and the
auditors' report (in Or you may view or
the annual report obtain these docu-
only). ments from the SEC:
Statement of
Additional In person: at the
Information (SAI) SEC's Public Refer-
ence Room in Wash-
ington, DC
The SAI contains
more detailed infor- By phone: 1-202-942-
mation on all 8090
aspects of the
funds. By mail: Office of
Public Reference Secu-
John Hancock A current SAI has rities and Exchange
Variable been filed with the Commission
Series Trust I Securities and
John Hancock Exchange Commission
Place and is incorporated
Boston, Massachu- by reference into 450 5th Street,
setts 02117 (i.e., is legally a N.W., Room 1300
part of) this pro- Washington, DC
spectus. 20549-0102
(duplicating fee
required)
By e-
mail: [email protected]
On the
Internet: www.sec.gov
SEC File Num-
ber: 811-4490
VSTPRO
<PAGE>
JOHN HANCOCK
VARIABLE SERIES TRUST I
STATEMENT OF ADDITIONAL INFORMATION
November 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
and November 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-three 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.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in this
Statement of
Additional
Information
-----------
<S> <C>
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 11
Exposure
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 2
</TABLE>
2
<PAGE>
TABLE OF CONTENTS - continued
<TABLE>
<CAPTION>
Page in this
Statement of
Additional
Information
-----------
<S> <C>
Investment Advisory Arrangements 34
The Trust's Investment Advisory Arrangements With
John Hancock 34
The Trust's Arrangements With Subadvisers 36
Dollar Amounts of Advisory Fees, Subadvisory Fees, and
Expense Reimbursements 39
Arrangements With Other Service Providers 43
Underwriting and Indemnity Agreement 43
Custody of the Trust's Assets 43
Subadministration Agreement With State Street Bank 44
Independent Auditors 44
Portfolio Transactions and Brokerage Allocation 44
Codes of Ethics 47
Features of the Trust's Shares 48
Shareholder Meetings and Voting Rights 48
Sales and Redemptions of Fund Shares 49
Computing the Funds' Net Asset Value 50
Taxes 51
Information About Fund Performance 52
Legal Matters 52
Reports to Contractholders 52
Appendix A - Corporate Bond Ratings 53
</TABLE>
3
<PAGE>
WHAT IS THE TRUST?
John Hancock Variable Series Trust I, (the "Trust") is an open-end
management investment company. With the exception of the Managed, Growth &
Income, Large Cap Growth, Large Cap Aggressive Growth, Mid Cap Growth, Real
Estate Equity, 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
Accounts I and JF 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:
<TABLE>
<CAPTION>
Year of
Current Fund Name Prior Name(s) Change
----------------- ------------- ------
<S> <C> <C>
International Opportunities II Global Equity 2000
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
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Year of
Current Fund Name - continued Prior Name(s) - continued Change
----------------------------- ------------------------- ------
<S> <C> <C>
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
Small Cap Equity Small Cap Value 2000
Fundamental Growth Fundamental Mid Cap Growth 2000
</TABLE>
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, Core
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.
5
<PAGE>
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 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 and Core 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.
6
<PAGE>
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.
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, Core Bond, Bond Index, Active
Bond, Global Bond and High Yield Bond Funds. The Managed, Aggressive Balanced,
and Global Balanced 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, Core 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, Core 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.
7
<PAGE>
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.
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, American Leaders Large Cap Value, Large Cap Value
CORE, Large Cap Growth, Large Cap Aggressive Growth, 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, Fundamental Growth,
International Equity, International Opportunities, and International
Opportunities II 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, 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.
---------
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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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.
The Small Cap Equity 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").
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The International Equity Index, International Equity, International
Opportunities, International Opportunities II, 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, Core Bond, Large Cap Value 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, American Leaders Large
Cap Value, 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 Equity, and Equity Index
Funds may invest in ADRs and other U.S. dollar denominated foreign securities 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 Balanced,
International Equity Index, International Equity, International Opportunities,
International Opportunities II, Core Bond, 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.
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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.
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 Balanced, International Equity Index, International Equity,
International Opportunities, International Opportunities II, Emerging Markets
Equity, Global Bond, Core 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 Balanced, Global Bond, Core Bond,
International Equity Index, International Equity, Emerging Markets Equity,
International Opportunities, and International Opportunities II 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 Balanced, International Equity Index,
International Equity, International Opportunities, International Opportunities
II, Emerging Markets Equity, Core Bond 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.
11
<PAGE>
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 desirable balance. For similar purposes, the
Managed, Aggressive Balanced, Global Balanced, Emerging Markets Equity,
International Opportunities, International Opportunities II, International
Equity, Mid Cap Growth, Core Bond 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 Balanced,
International Equity Index, International Equity, International Opportunities,
International Opportunities II, 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.
12
<PAGE>
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 Balanced, International Equity
Index, International Equity, International Opportunities, International
Opportunities II, 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 Fund intends 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.
13
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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(R)," "S&P(R) ," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of McGraw-Hill, Inc. and have been licensed for use by the
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
14
<PAGE>
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"), the Lehman Commercial Mortgage-Backed Securities
(ERISA Eligible) Index ("CMBS (ERISA Eligible) 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 CMBS (ERISA Eligible) Index covers
ERISA-Eligible CMBS securities. 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
15
<PAGE>
WARRANTIES, AND MSCI HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEX OR
ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT
SHALL MSCI OR ANY OTHER PARTY HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT,
SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS)
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
14. Investing on a Non-Diversified Basis
The Managed, Growth & Income, Large Cap Growth, Large Cap Aggressive
Growth, Mid Cap Growth, Real Estate Equity, Global Balanced and Global Bond
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 single issuer or 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 Money Market Fund.
Specifically, except for the Money Market Fund, all Funds may use
exchange-traded financial futures contracts and options thereon, and, except for
the Large Cap Growtrh, Real Estate Equity, and Active Bond Funds, 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 certain
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, Growth & Income, Equity Index, American
Leaders Large Cap Value, Large Cap Value CORE, Large Cap Growth, Large Cap
Aggressive Growth, Large/Mid Cap Value, Mid Cap Growth, Fundamental Growth, Mid
Cap Blend, Mid Cap Value, Real Estate Equity, Small/Mid Cap CORE, Small/Mid Cap
Value, Small/Mid Cap Growth, Small Cap Growth, Global Balanced, International
Equity Index, International Equity, International Opportunities, International
Opportunities II, Emerging Market Equity, Short-Term Bond, Core 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 Growth & Income, Real Estate Equity, and Active
Bond Funds) 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,
Growth & Income, Equity Index, Large Cap Aggressive Growth, Large/Mid Cap Value,
Fundamental Growth, Mid Cap Blend, and Real Estate Equity 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, Growth &
Income, Equity Index, Large Cap Aggressive Growth, Large/Mid Cap Value,
Fundamental Growth, Mid Cap Blend, and Real Estate Equity 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, Growth &
Income, Large Cap Value CORE, Large Cap Growth, Mid Cap Growth, Real Estate
Equity, Small/Mid Cap CORE, Small/Mid Cap Growth, Small Cap Growth, Global
Balanced, International Equity Index, International Equity, Emerging Markets
Equity, Short-Term Bond, Bond Index, 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 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
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
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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.
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 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, Growth & Income, Large Cap Value CORE, Mid Cap Growth, Real
Estate Equity, Small/Mid Cap CORE, Small/Mid Cap Growth, Small Cap Growth,
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, Growth & Income, American Leaders
Large Cap Value, Large Cap Value CORE, Large Cap Growth, Mid Cap Growth, Real
Estate Equity, Small/Mid Cap CORE, Small/Mid Cap Value, Small/Mid Cap Growth,
Small Cap Growth, Global Balanced, International Equity Index, International
Equity, Emerging Markets Equity, Short-Term Bond, Bond Index, Active Bond, Core
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
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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.
20. Limiting the Funds' Exposure to Certain Futures and Option Transactions.
The Equity Index, Large Cap Value, Mid Cap Value, Small Cap Equity, 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, Mid Cap Value, Small Cap Equity, 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, Mid Cap Value,
Small Cap Equity 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
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right to receive payments (and the seller of the collar is obligated to make
payments) to the extent that a specified interest rate falls outside an agreed
upon range over a specified period of time or at specified dates.
Currency, index and equity swaps, caps, floors and collars: 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, American Leaders Large Cap Value, 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,
International Opportunities, and International Opportunities II 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
Equity, 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, Core Bond,
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.
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29. Investing in Rule 144A and Illiquid Securities
All 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,
American Leaders 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 Growth, Mid Cap Blend, Small/Mid Cap Value, Small/Mid
Cap Growth, Small/Mid Cap CORE, Small Cap Equity, Small Cap Growth, Global
Balanced, International Equity Index, International Equity, International
Opportunities, International Opportunities II, Emerging Markets Equity,
Short-Term Bond, Core 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
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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 Equity
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 the Large Cap Value,
Equity Index, Mid Cap Value, Small Cap Equity, 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, American Leaders 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 Growth, Small/Mid Cap CORE, Small Cap Equity, Small Cap Growth, Global
Balanced, International Equity Index, International Equity, International
Opportunities, International Opportunities II, Emerging Markets Equity,
Short-Term Bond, Bond Index, Active Bond, Core 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, American Leaders
Large Cap Value, Large Cap Value CORE, Large Cap Aggressive Growth,
Large/Mid Cap Value, Small/Mid Cap Growth, Small/Mid Cap CORE, Small Cap
Growth, Global Balanced, International Equity Index, International Equity,
International Opportunities II, 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 Large Cap Growth, Active Bond and Core Bond Funds may enter
into futures contracts and purchase or write options thereon to the same
extent as is permitted in (C)(ii), above, with respect to the Funds listed
therein, and the Growth & Income and Real Estate Equity Funds may enter
into futures contracts and purchase or write options thereon to the same
extent as if permitted in (A)(iii) and (C)(ii) above; and
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(E) the Managed, Aggressive Balanced, Equity Index, Large Cap Value,
American Leaders 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 Equity, Small Cap Growth, Global Balanced, International Equity
Index, International Equity, International Opportunities, International
Opportunities II, Emerging Markets Equity, Core Bond, Global Bond, and High
Yield Bond Funds may purchase or write put or call options on foreign
currencies, may purchase put or call options on securities, and may enter
into closing transactions with respect to any of such options.
(4) Engage in the underwriting of securities of other issuers, except to
the extent the 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, American Leaders Large Cap Value, 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, International Equity Index,
International Equity, Emerging Markets Equity, Bond Index, Core Bond 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, Growth &
Income, Large Cap Growth, Real Estate Equity, 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, American Leaders 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 Equity, Small Cap Growth, International Equity, Global Balanced,
International Opportunities, International Opportunities II, Emerging Markets
Equity, Bond Index, Core Bond, 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
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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 Managed, Growth & Income, Large Cap
Growth, Large Cap Aggressive Growth, Mid Cap Growth, Global Balanced, or Global
Bond 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.
The Aggressive Balanced, Equity Index, Large Cap Value, American Leaders
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 Growth, Small/Mid Cap CORE, Small Cap Equity,
Small Cap Growth, Global Balanced, International Equity Index, International
Equity, International Opportunities, International Opportunities II, Emerging
Markets Equity, Short-Term Bond, Bond Index, Active Bond, Core 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.
31
<PAGE>
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>
Positions Held With Principal Occupation(s) During Past Five
------------------- ----------------------------------------
Name, Address and Age Trust Years
--------------------- ----- -----
<S> <C> <C>
Michele G. Van Leer* (age 42) Senior Vice President, Product Management,
John Hancock Place Chairman and Trustee John Hancock Life Insurance Company; President
Boston, Massachusetts 02117 & Director, John Hancock Variable Life
Insurance Company
Thomas J. Lee* (age 45) Vice Chairman, President Vice President, Life and Annuity Services,
John Hancock Place and Trustee John Hancock Life Insurance Company; Director,
Boston, Massachusetts 02117 John 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
Diane C. Kessler (age 53) Trustee Executive Director, Massachusetts Council of
325 Parker Street Churches
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,
Fulton 320 Boston 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.
32
<PAGE>
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. Mr McClellan did
not become a Trustee until February 16, 2000.
33
<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 .74% of first $500 million; .68% of next $500 million; .65% above $1
billion
Large Cap Growth .40% of first $500 million; .35% of next $500 million; .30% above $1
billion
Growth & Income .71% of first $150 million; .69% of next $150 million; .67% above $300
million
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
American Leaders Large Cap Value .80% of first $50 million; .65% of next $200 million; .60% of next $250
million; .55% above $500 million
Large Cap Aggressive Growth 1.00% of first $10 million; .875% of next $10 million; .75% above $20
million
Active Bond .70% of first $100 million; .65% of next $150 million; .61% of next $250
million; .58% of next $500 million; .55% above $1 billion
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 Equity .90% of first $150 million; .75% of next $150 million; .65% of next $200
million; .60% above $500 million
</TABLE>
34
<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>
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
Fundamental Growth .90% of first $250 million; .85% above $250 million
Real Estate Equity 1.10% of first $50 million; 1.00% of the next $50 million; .90% of the
next $100 million; .80% above $200 million
Mid Cap Blend .75% of first $250 million; .70% of next $250 million; .65% 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 Balanced 1.05% of first $150 million; .95% of next $150 million; .80% of next
$200 million; .75% above $500 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
International Opportunities II 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
Core Bond .70% of first $25 million; .65% of next $25 million; .60% of next $100
million; .55% above $150 million
Global Bond .85% of first $150 million; .80% of next $150 million; .75 of next $200
million; .70% above $500 million
High Yield Bond .65% of first $100 million; .60% of next $100 million; .50% above $200
million
</TABLE>
35
<PAGE>
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 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 Subadviser's General Nature
and the Funds Controlling of
It Manages 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 of voting stock company
Growth & Income, Large Cap Services Inc.
Growth, Real Estate Equity,
Short-Term Bond, Aggressive John Indirectly owns Life insurance and other
Balanced, and Mid-Cap Blend Hancock 100% of voting stock financial services provided
Funds) Life Insurance directly or through
Company 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
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Subadviser Subadviser's General Nature
and the Funds Controlling of
It Manages - continued Person Basis of Control Control Person's Business
---------------------- ------ ---------------- -------------------------
<S> <C> <C> <C>
6. Janus Capital Corporation Kansas City Indirectly owns 82% Publicly traded transportation
(Mid Cap Growth Fund) Southern of the subadviser and financial services company
Industries, Inc.
Private Investor
Thomas H. Bailey Owns 12% of the
subadviser and, by
contract, may elect
majority of the
subadviser's directors
7. Goldman Sachs Asset Management Goldman Sachs & The subadviser is a Publicly traded investment
(Small/Mid Cap CORE, Large Cap Co. unit of the banking and financial services
Value CORE, and International Investment Management company
Equity Funds Division of Goldman
Sachs & Co.
8. Independence International John Hancock Indirectly owns 100% Financial services holding
Associates, Inc. Financial of voting stock company
(International Equity Index Services Inc.
Fund)
John Hancock Indirectly owns Life insurance and other
Life Insurance 100% of voting stock financial services provided
Company directly or through subsidiaries
Independence
Investment Owns 100% of voting
Associates, Inc. stock Investment manager and adviser
9. T. Rowe Price International, T. Rowe Price Owns 100% of the Publicly traded investment
Inc. (International Associates, Inc. subadviser adviser and financial services
Opportunities Fund and company;
International Opportunities II
Fund)
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Subadviser Subadviser's General Nature
and the Funds Controlling of
It Manages - continued Person Basis of Control Control Person's Business
---------------------- ------ ---------------- -------------------------
<S> <C> <C> <C>
10. Morgan Stanley Dean Witter Morgan Stanley Directly owns 100% of
Investment Management Inc. Dean Witter & Co. voting stock
(Emerging Markets Equity and
Real Estate Equity Funds)
11. Mellon Bond Associates, LLP Mellon Financial Directly owns 100% of Bank holding company
(Bond Index Fund) Corporation the subadviser
12. Wellington Management Company, Laurie A. Gabriel; Managing Partners Investment management
LLP (High Yield Bond, Duncan M.
Small/Mid Cap Growth, and McFarland;
Large/Mid Cap Value Funds) John R. Ryan
13. Alliance Capital Management, The Equitable ELAS and its Life insurance and other
LLP (Large Cap Aggressive Life Assurance subsidiaries owned financial services
Growth) Society of the (as of 11/1/99)
U.S. ("ELAS") 55.38% partnership
interest in the
subadviser
14. 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
15. Federated Investment Federated The subadviser is a Investment management and
Management Company Investors, Inc. subsidiary of related financial services
(American Leaders Large Cap Federated Investors,
Value and Core Bond Funds) Inc.
16. Capital Guardian Trust Company The Capital Group The subadviser is an Financial services holding
(Managed, Small Cap Equity, Companies, Inc. indirect wholly owned company
Global Balanced and Global ("CGCI") subsidiary of CGCI
Bond Funds)
17. Putnam Investment management, Marsh & McLennan The subadviser is an Publicly owned holding company
Inc. Companies, Inc indirect wholly owned whose principal businesses are
(Growth & Income and (Marsh") subsidiary of Marsh international insurance and
Fundamental Growth Funds) reinsurance brokerage,
employment benefit counseling
and investment management
</TABLE>
38
<PAGE>
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.
<TABLE>
<CAPTION>
Subadvisory Fees Payable by John Hancock,
Fund as a Percentage of Each Fund's Average Daily Net Assets
---- -------------------------------------------------------
<S> <C>
Managed Assets managed by Independence Investment Associates, Inc.: .30% of first $500
million; .2625% of next $500 million; and .2250% above $1 billion
Assets managed by Capital Guardian Trust Company: .50% of first $150 million; .45%
of next $150 million; .30% of next $200 million; and .25% above $500 million
Large Cap Growth, .30% of first $500 million; .2625% of next $500 million; and .225% above $1 billion
Growth & Income Assets managed by Independence Investment Associates, Inc.: .1875%
Assets managed by Putnam Investment Management, Inc.: .50% of first $150 million;
.45% of next $150 million; and .35% above $300 million
Active Bond .1875%
Real Estate Equity Assets managed by Independence Investment Associates, Inc.: .30% of first $300
million; .25% of next $500 million; and .20% above $800 million
Assets managed by Morgan Stanley Dean Witter Investment Management Inc.: .70% of
first $50 million; .60% of next $50 million; .50% of next $100 million; and .40%
above $200 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
Large Cap Value .50% of first $100 million; .45% of next $150 million; and .40% above $250 million
American Leaders Large .40% of first $50 million; .25% of next $200 million; .20% of next $250 million; .15%
Cap Value above $500 million
Mid Cap Value .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 million
CORE
Large Cap Value .40% of first $50 million; .30% of next $150 million; and .25% above $200 million
CORE
International Equity .60% of first $50 million; .55% of next $150 million; and .50% above $200 million
Small Cap Equity .65% of first $150 million; .50% of next $150 million; .40% of next $200 million; and
.35% above $500 million
Global Balanced .65% of first $150 million; .55% of next $150 million; .40 of next $200 million; and
.35% above $500 million
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Subadvisory Fees Payable by John Hancock,
Fund - continued as a Percentage of Each Fund's Average Daily Net Assets - continued
---------------- -------------------------------------------------------------------
<S> <C>
International Equity .125% of first $100 million; .10% of next $100 million; and .06% above $200 million
Index
International .75% of first $20 million; .60% of next $30 million; .50% of next $150 million; and
Opportunities .50% of all assets if the Fund reaches $200 million of net assets
---
International .75% of first $20 million; .60% of next $30 million;.50% of next $150 million; and
Opportunities II .50% of all assets if Fund reaches $200 million of net assets
---
Emerging Markets 1.10% of first $10 million; .90% of next $140 million; and .80% above $150 million.
Equity
Core Bond .30% of first $25 million; .25% of next $25 million; .20% of next $100 million; .15%
above $150 million
Bond Index .08% of first $100 million; .06% of next $150 million; and .04% above $250 million
Global Bond .40% of first $150 million; .35% of next $150 million; .30% of next $200 million; and
.25% above $500 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 million; and .40% above $200 million
Growth
Large/Mid Cap .60% of first $25 million; .50% of next $25 million; .40% of next $50 million; and
Value .30% above $100 million
Large Cap .75% of first $10 million; .625% of next $10 million; and .50% above $20 million
Aggressive Growth
Small/Mid Cap .65% of first $100 million; .60% of next $150 million; and .55% above $250 million
Value
Fundamental Growth .50% of the first $250 million; and .45% above $250 million
</TABLE>
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 -- --
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Fund - continued Investment Adviser Subadvisers*
----------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
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 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 Equity............. 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
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
International Opportunities
II........................... 157,808 87,055 -- 121,054 67,708 --
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.
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):
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
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 Equity..................................... 6,224 17,000 57,000
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Fund - continued 1999 1998 1997
---------------- ---- ---- ----
<S> <C> <C> <C>
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
International Opportunities II....................... 62,210 126,000 --
Global Bond.......................................... 1,445 31,000 61,000
Fundamental Growth................................... 2,888 -- --
Mid Cap Blend........................................ 6,011 -- --
Small/Mid Cap CORE................................... 77,179 107,000 --
Small/Mid Cap Value.................................. 9,254 -- --
Emerging Markets Equity.............................. 294,354 111,000 --
Bond Index........................................... 17,185 56,000 --
High Yield Bond...................................... 42,314 85,000 --
</TABLE>
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
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
42
<PAGE>
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.
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:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Fund - continued 1999 1998 1997
---------------- ---- ---- ----
<S> <C> <C> <C>
Fundamental 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 Equity..................................... 284,381 176,549 138,114
Small Cap Growth..................................... 146,206 103,248 67,492
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
International Opportunities II....................... 25,925 37,426 --
Emerging Markets Equity.............................. 189,025 10,018 --
Bond Index........................................... 598 -- --
High Yield Bond...................................... 200 -- --
</TABLE>
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 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.
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<PAGE>
Relationship Between Brokerage Commissions and Research and Statistical Services
Furnished by Brokers and Dealers
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/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.
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, and Mid Cap Value 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.
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.
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<PAGE>
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 Opportunities Ord Minnett Group Wholly-owned subsidiary of $ 34 $ 263 $ 122
Ltd. sub-adviser's parent
International Opportunities Jardine Fleming & Wholly-owned subsidiary of $ 710 $ 311 $ 295
Co. sub-adviser's parent
International Opportunities Robert Fleming Wholly-owned subsidiary of $ 1,166 $ 1,018 $ 741
Securities, Ltd. sub-adviser's parent
Mid Cap Value Neuberger Berman, Dual operating division of $ 80,598 $ 366,985 $ 68,000
LLC 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 & Dual operating division of $ 120 - 0 - - 0 -
Co. 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 sub-adviser's parent
Limited
</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.
CODES OF ETHICS
Employees of John Hancock Life Insurance Company, the Trust, and the
sub-advisers to the Trust and officers and Trustees of the Trust are subject to
restrictions on engaging in personal securities transactions. These restrictions
are set forth in the John Hancock Insider Information Policy and Procedures, the
Variable Series Trust Code of Ethics, and the Codes of Ethics of the
sub-advisers to the various funds of the Trust ("Sub-Advisers' Codes of
Ethics"), (combined, "Codes"). The Codes, in accordance with rule 17j-1 of the
Investment Company Act of 1940, as amended, contain provisions and requirements
designed to identify and address certain conflicts of interest between personal
investment activities of employees of the adviser and sub-advisers to the funds
and the interests of the funds. These Codes do not prohibit personnel from
investing in securities that may be purchased or held by the funds within the
Trust. However, the Codes, consistent with standards recommended by the
Investment Company Institute's Advisory Group on Personal Investing and
requirements established by rule 17j-1, among other things, prohibit personal
securities investments without pre-clearance for certain employees, impose time
periods during which personal transactions may not be made in certain securities
by employees with access to investment information, and require the timely
submission of broker confirmations and quarterly reporting of personal
securities transactions. Additional restrictions apply to portfolio managers,
traders, research analysts and others involved in the investment advisory
process. The Variable Series Trust Code of Ethics incorporates and applies its
restrictions to officers and Trustees of the Trust who are affiliated with John
Hancock Life Insurance Company. The Variable Series Trust Code of Ethics does
not prohibit unaffiliated officers and Trustees from investing in securities
that may be held by the Trust; however, the Variable Series Trust Code of Ethics
regulates the personal securities transactions of unaffiliated Trustees of the
fund, including limiting the time periods during which they may personally buy
and sell certain securities about which they may receive information. The
Trust's Trustees, in compliance with rule 17j-1, approve the Variable Series
Trust's Codes of Ethics and the Sub-Advisers' Codes of Ethics and are required
to approve any material changes to the Variable Series Trust Code of Ethics as
well as to the Sub-Advisers' Codes of Ethics. The Trustees also provide
continuing oversight of personal investment policies and annually evaluate the
implementation and effectiveness of the Codes.
FEATURES OF THE TRUST'S SHARES
The shares of beneficial interest of the Trust currently are divided into
33 series, each corresponding to one of the Trust's 33 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
46
<PAGE>
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.
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
47
<PAGE>
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 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
International Opportunities II 15,000,000 5/1/98
Global Balanced 20,000,000 5/1/96
International Equity 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
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.
48
<PAGE>
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 investments 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.
Securities and covered call and put options that are listed on a stock
exchange are normally valued at the closing sales price. If there were no sales
during the day, they are normally valued at the last previous sale or bid price
reported, as are equity securities that are traded in the over-the-counter
market.
Non-exchange traded debt securities (other than certain short-term
investments) are valued on the basis of valuations furnished by a pricing
service which uses electronic data processing techniques, without exclusive
reliance upon quoted prices.
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.
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<PAGE>
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 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.
50
<PAGE>
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.
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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<PAGE>
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.
52
<PAGE>
. 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.
53
<PAGE>
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
Large Cap Growth Fund, included in Post-Effective Amendment No. 4 to
this File No. 33-2081 filed in April, 1989. Form of Sub-Investment
Agreement among John Hancock Variable Series Trust I, Independence
Investment Associates, Inc., and John Hancock Mutual Life Insurance
Company, relating to the Managed and growth & Income incorporated by
reference to this File No. 33-2081, filed in a definitive proxy
statement on September 14, 2000.
(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,
incorporated by reference to this File No. 33-2081, filed in the
definitive proxy statement on September 14, 2000.
(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 (now named
Active 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, Capital Guardian Trust Company, and John Hancock Mutual Life
Insurance Company, relating to the Small Cap Value Fund, incorporated
by reference to this File No. 33-2081, filed in the definitive proxy
statement on September 14, 2000.
(17) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Capital Guardian Trust Company, and John Hancock Mutual Life
Insurance Company, relating to the Global Bond Fund, incorporated by
reference to this File No. 33-2081, filed in the definitive proxy
statement on September 14, 2000.
(18) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, T. Rowe Price International, Inc., and John Hancock Mutual
Life Insurance Company, relating to the International Opportunities
Fund, incorporated by reference to this File No. 33-2081, filed in the
definitive proxy statement on August 24, 2000.
(19) Sub-Investment Management Agreement Among John Hancock Variable Series
Trust I, Capital Guardian Trust Company, and John Hancock Mutual Life
Insurance Company, relating to the Global Balanced Fund, incorporated
by reference to this File No. 33-2081, filed in the definitive proxy
statement on September 14, 2000.
(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 (now
named Fundamental Growth) 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, Putnam Investment Management, Inc., and John
Hancock Mutual Life Insurance Company relating to the Fundamental
Growth Fund incorporated by reference to this File No. 33-2081 filed
in the definitive proxy statement on August 24, 2000.
(34) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, Goldman Sachs Asset Management, and John
Hancock Mutual Life Insurance Company relating to the 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, Goldman 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.
(40) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, Federated Investment Management Company and
John Hancock Life Insurance Company relating to the American Leaders
Large Cap Value Fund and the Core Bond Fund, filed included in Post-
Effective Amendment No. 26, to this File No. 33-081 filed on June 23,
2000.
(41) Form of Sub-Investment Management Agreement Among John Hancock
Variable Series Trust I, Morgan Stanley Dean Witter Investment
Management Inc., and John Hancock Life Insurance Company relating to
the Real Estate Equity Fund, to be Filed by amendment.
(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, incorporated
by reference to Post-Effective Amendment No. 24 to this File No. 33-
2081, Filed on April 6, 2000.
(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, 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,
incorporated by reference to Post-Effective Amendment No. 24 to this File
No. 33-2081, Filed on April 6, 2000.
(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 Elizabeth G. Cook, Diane C. Kessler, Michele G.
Van Leer, Hassell H. McClellan and Robert F. Verdonck, included in
Post-Effective Amenement No. 25, to this File No. 33-2081 on
May 11, 2000.
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 incorporated by reference to File No. 333-08345, Post-Effective
Amendment No. 5, Filed on April 28, 1999.
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"),
Capital Guardian Trust Company ("Capital Guardian")(to be filed by amendment),
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"), T. Rowe Price
International, Inc. ("Price International"), 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"), Putnam Investment Management
("Putnam")(to be filed by amendment), The Boston Company Asset Management, LLC
("Boston"), and Wellington Management Company, LLP ("Wellington"), and Federated
Investment Company ("Federated") 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), Price
International (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), Boston (File No. 801-6829),
Wellington (File No. 801-15908) and Federated (File No. 801-34612) 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 and the Real Estate 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.
Federated, Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222,
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
American Leaders Large Cap Value Fund and the Core Bond Fund.
ITEM 29. MANAGEMENT SERVICES
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 27TH DAY OF OCTOBER, 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 October 27, 2000
--------------------
Raymond F. Skiba
Treasurer (Principal Financial
and Accounting Officer)
By: /s/ Thomas J. Lee October 27, 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 F. Verdonck, Trustee
Hassell H. McClellan, Trustee
